Workday Beats — But Guidance Fuels AI Fears and Sends Shares Tumbling

Workday’s fourth-quarter results were always going to be judged less on whether they beat estimates and more on whether they could calm mounting fears that artificial intelligence will upend the SaaS business model. They did not. Despite topping consensus on earnings and roughly meeting revenue expectations, the company’s guidance and backlog figures failed to inspire confidence, sending shares down roughly 8% in after-hours trading and extending a brutal stretch that had already left the stock down 39% year to date heading into the report.

On the surface, the quarter itself was solid. Adjusted EPS came in at $2.47, comfortably ahead of the $2.32 consensus. Total revenue rose 14.5% year over year to $2.532 billion, slightly above the $2.523 billion estimate. Subscription revenue — the lifeblood of the business — increased 15.7% to $2.360 billion. Adjusted operating income reached $774 million, well ahead of expectations near $721 million, translating into a non-GAAP operating margin of 30.6%, better than projected.

Cash generation remained strong. Fourth-quarter operating cash flow totaled $1.28 billion, helping full-year operating cash flow rise 19% to $2.94 billion. Free cash flow for the quarter was $1.22 billion, and the company ended the year with $5.4 billion in cash and marketable securities after repurchasing $2.9 billion of stock during the fiscal year. Gross revenue retention held steady at 97%, while net expansion continued to account for roughly 60% of subscription growth, reinforcing the durability of the installed base.

However, investors are not paying for the past; they are discounting the future. And that’s where the disappointment set in.

For fiscal 2027, Workday guided to subscription revenue of $9.925 billion to $9.950 billion, representing 12% to 13% growth. While that growth range technically aligns with prior commentary of approximately 13%, it landed shy of Street expectations around $9.99 billion. First-quarter fiscal 2027 subscription revenue was guided to $2.335 billion, implying 13% growth, also slightly below consensus near $2.35 billion and below prior expectations of roughly 14% growth.

Margins also came in lighter than expected. Management projected a 30.5% non-GAAP operating margin for Q1 and 30% for the full fiscal year, below analyst expectations closer to 31% for the year. CFO Zane Rowe acknowledged that margin expansion would continue “at a slower pace in the near term” as the company increases AI investment, underscoring a tradeoff between profitability and positioning for the next cycle.

Backlog data did little to offset concerns. The 12-month subscription revenue backlog (cRPO) ended at $8.83 billion, up 15.8% year over year. While respectable, investors were reportedly looking for a stronger figure, and some noted that backlog came in roughly $1 billion below what analysts had modeled. In a market hypersensitive to deceleration, even minor shortfalls matter.

Leadership dynamics added another layer of uncertainty. Earlier this month, co-founder Aneel Bhusri returned as CEO after Carl Eschenbach stepped down. The company had reaffirmed Q4 and fiscal 2026 guidance at that time, but the leadership change raised questions about strategic direction and execution stability. On the call, Bhusri sought to project confidence, declaring: “You’ve all heard the narrative out there that HR and ERP will be replaced or relegated to the background by AI. I personally just don’t see that happening.” He emphasized the complexity of HR and ERP systems and argued that “no amount of vibe coding” would replicate enterprise-grade platforms.

Management leaned heavily into AI as a growth vector rather than a threat. Workday delivered 1.7 billion AI actions across its platform in fiscal 2026, generated over $100 million in new ACV from emerging AI products in Q4, and now reports more than $400 million in ARR from AI-related solutions. Expansion deals that included AI were nearly 50% larger on average, and early access customers using new self-service agents reported meaningful productivity gains.

Yet analysts on the call appeared more cautious than celebratory. Several pressed on the conservatism of fiscal 2027 guidance, the timing of agentic AI revenue contribution, and whether large enterprise deal cycles are lengthening. Management admitted some large deals are taking longer to close, particularly in federal, SLED, healthcare, and parts of the commercial market. Bhusri acknowledged that much of the incremental agent revenue opportunity is likely weighted to the second half of the year.

This tension — between long-term AI optimism and near-term revenue moderation — defines the current moment for enterprise software. Investors are increasingly asking whether AI will accelerate growth by driving expansion and new use cases, or compress growth by commoditizing core functionality. Workday’s results did not provide a definitive answer.

The company’s core business remains stable. Subscription growth remains in the mid-teens, retention is strong, margins are healthy, and cash flow is robust. But growth is clearly moderating from prior cycles, and management’s guidance signals no near-term reacceleration. In a sector where valuations are being reset on the assumption of structural deceleration, stability alone is no longer enough.

Will this report offset fears of a massive software slowdown? Not immediately. The numbers were not weak, but they were not strong enough to shift the narrative. Guidance came in slightly light, backlog underwhelmed, and margin expansion slowed — all against a backdrop of 39% year-to-date stock declines and sector-wide skepticism.

For now, Workday remains caught between two eras: defending a mature SaaS model while investing aggressively in AI to shape its next chapter. The quarter proved the business is durable. It did not yet prove that growth will reaccelerate. In this market, that distinction is everything.