Workday Inc. (NASDAQ: WDAY) reported a strong fiscal third quarter for 2026, with double-digit revenue growth, record subscription backlog, and robust cash flow. Despite the earnings beat, the stock fell sharply in after-hours trading, signaling investor anxiety over the company’s AI spending trajectory and subdued fourth-quarter guidance.
The enterprise cloud software provider closed regular trading on November 25 with a 3.11 percent gain, ending the session at $233.69. However, shares tumbled 6.42 percent after hours, falling to $218.69. The sudden reversal came as markets digested Workday’s full-year forecast and rising costs related to its AI platform investments.
How did Workday perform in Q3 FY26 across revenue, margins, and profit?
Workday posted total revenue of $2.432 billion for the third quarter ended October 31, 2025, marking a 12.6 percent increase from the same period a year earlier. The subscription segment remained the growth engine, delivering $2.244 billion in revenue, up 14.6 percent year-on-year. Workday continues to benefit from rising demand across its human capital management, financial planning, and AI agent platforms.
The company’s operating income rose to $259 million, compared to $165 million a year ago. On a non-GAAP basis, operating income expanded to $692 million, or 28.5 percent of revenue, improving from 26.3 percent in the previous year. Diluted earnings per share stood at $0.94 on a GAAP basis, while non-GAAP EPS jumped to $2.32 from $1.89 a year earlier.
Cash generation also saw a notable uptick. Operating cash flow climbed to $588 million, while free cash flow reached $550 million, both improving significantly year-over-year. The company ended the quarter with $6.84 billion in cash, cash equivalents, and marketable securities.
Why did Workday shares fall after market hours despite strong quarterly metrics?
Although Workday exceeded analyst expectations on revenue and profit metrics, its fourth-quarter subscription revenue guidance appeared more cautious than the market anticipated. The company projected $2.355 billion in subscription revenue for the January-ending quarter, representing 15.5 percent year-over-year growth. While this would mark an acceleration from Q3 in absolute terms, it remains below some street estimates, especially given recent product momentum and AI expansion announcements.
More broadly, the stock’s high valuation with a trailing P/E ratio of 90.92 has left investors sensitive to any signal of margin pressure or slower growth. The company reaffirmed full-year subscription revenue guidance of $8.828 billion, implying 14.4 percent growth, and a non-GAAP operating margin of approximately 29 percent. Some institutional holders may have expected Workday to lift its outlook given the strength of its current backlog.
With shares nearing the upper end of their 52-week range prior to earnings, and a current market capitalization of approximately $62.4 billion, the post-close sell-off reflects profit-taking alongside questions around the company’s AI monetization strategy.
What is Workday’s current AI strategy and how are investors reacting to it?
Workday has been positioning itself as a unified platform for people, money, and AI agents. The third quarter saw the company advance this vision with the introduction of several new features and partnerships aimed at accelerating AI adoption across its customer base.
At its flagship Workday Rising conference, the company launched Workday Illuminate AI agents, a new Workday Data Cloud layer, and Workday Flex Credits — a consumption-based pricing model designed for enterprise AI scalability. The launch of Workday Build, an open developer experience, further expanded platform extensibility.
Workday also announced a €175 million investment to establish an AI Centre of Excellence in Dublin, Ireland, over the next three years. The initiative is expected to create 200 specialized AI roles and support ongoing R&D efforts.
M&A also featured prominently. The company completed the acquisition of Paradox, a conversational AI platform focused on improving candidate experiences in hiring, and Sana, an AI-driven enterprise knowledge engine.
While these initiatives underscore Workday’s ambition to lead in enterprise AI, they also raise concerns about near-term cost pressure. Analysts following the stock said that although long-term value creation from these AI assets is likely, the increased operating expenses needed to support such rapid innovation may weigh on future quarters if topline re-acceleration does not materialize quickly.
How is Workday performing across sectors and global customer adoption?
Workday continued to expand its customer base during the third quarter. New wins included the County of San Luis Obispo, Fuji Electric Co. Ltd., Hoshino Resorts Inc., Kelly Services, and The Magnum Ice Cream Company. The company also deepened relationships with existing clients such as CommonSpirit Health, Cornell University, DBS Bank, Guardian Life Insurance Company of America, Levi Strauss & Co, and Novartis.
The healthcare vertical reached a key milestone, becoming Workday’s sixth sector to exceed $1 billion in annual recurring revenue. The company noted major go-lives from Advocate Health and Ardent Health. In the public sector, the U.S. Department of Energy successfully went live on Workday Government, becoming the first U.S. cabinet-level agency to deploy a FedRAMP-authorized cloud HR platform.
Workday also extended its ecosystem with new partners through the Workday Agent Partner Network and Workday Wellness program. New additions included Chime for financial benefits, Spring Health for mental wellness, and Strada for benefits administration.
The company also launched the Pay Transparency Analyzer, developed in collaboration with Kainos, which is designed to help employers navigate compliance with global pay equity laws such as the EU Pay Transparency Directive.
Will Workday’s cautious Q4 guidance and flat FY26 forecast stall its AI momentum?
Workday guided fourth-quarter subscription revenues to $2.355 billion, representing a 15.5 percent increase year-over-year. The non-GAAP operating margin is expected to come in at a minimum of 28.5 percent. For the full fiscal year ending January 31, 2026, Workday maintained its projection of $8.828 billion in subscription revenues and an operating margin of around 29 percent.
These figures suggest stability in the company’s execution but do not reflect upside revision despite multiple AI product launches, large customer go-lives, and a subscription backlog that grew to $25.96 billion — up 17 percent from a year ago. The 12-month subscription revenue backlog alone increased to $8.21 billion, signaling near-term visibility and potential acceleration.
Still, with ongoing macro uncertainty and prolonged enterprise sales cycles, investors may be looking for greater clarity on Workday’s ability to translate backlog strength into consistently elevated billings and margins over the next few quarters.
How are markets and analysts interpreting Workday’s valuation and earnings trajectory?
Workday’s five-day performance shows the stock up 4.37 percent heading into earnings, supported by bullish sentiment around AI leadership and enterprise cloud tailwinds. The stock reached a high of $236.80 during the November 25 session before pulling back post-earnings.
The company’s valuation has consistently reflected high growth expectations. With a 52-week high of $294.00 and a low of $205.33, shares had rebounded significantly from their mid-year dip. But the latest results suggest that without a more aggressive raise in guidance or a clearer AI monetization path, Workday may face difficulty sustaining these multiples.
Analysts covering the stock believe investor focus will now shift toward Q4 execution, particularly in monetizing new AI products, managing margin tradeoffs, and capturing upsell opportunities from large existing clients. Any indication of AI revenue contribution in the upcoming quarters could be a catalyst, but expectations around AI delivery timelines remain a key risk.
What are the key takeaways from Workday’s Q3 earnings beat and sharp after-hours decline?
- Workday reported Q3 FY26 revenue of $2.432 billion, with subscription revenue rising 14.6 percent year-over-year, reflecting continued enterprise demand across finance and HR platforms.
- Non-GAAP operating income reached $692 million with a 28.5 percent margin, and diluted non-GAAP EPS increased to $2.32 from $1.89 last year, beating analyst expectations.
- Free cash flow rose to $550 million, and Workday ended the quarter with $6.84 billion in cash, underlining strong liquidity for ongoing AI investments and share repurchases.
- Despite solid fundamentals, shares dropped 6.42 percent in after-hours trading as investors reacted to Workday’s cautious Q4 guidance and cost implications of AI expansion.
- The company maintained full-year FY26 targets of $8.828 billion in subscription revenue and a 29 percent non-GAAP operating margin, signaling no upward revision despite backlog strength.
- Workday expanded its customer base and deepened enterprise partnerships, with notable traction in healthcare, public sector, and global enterprises like Novartis and DBS Bank.
- New AI launches included Workday Illuminate agents, a Data Cloud layer, and Flex Credits pricing, along with acquisitions of Paradox and Sana to accelerate AI agent deployment.
- A €175 million investment in an AI Centre of Excellence in Dublin and growing FedRAMP adoption indicate strategic bets on long-term public sector and enterprise AI alignment.
- Analysts say near-term investor sentiment hinges on the company’s ability to convert its $25.96 billion subscription backlog into revenue while demonstrating AI monetization efficiency.
- With a high valuation and premium P/E multiple, investor focus will remain on execution, Q4 growth visibility, and whether Workday can deliver returns that justify its AI bet.
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