# How Workday makes money

CXProWealth Business Lens · Workday (WDAY) · Q2 FY2027

Read from the 10-Q for the period 2026-05-01 to 2026-07-31, filed 2026-08-27 with the SEC (accession 0001327811-26-000044): https://www.sec.gov/Archives/edgar/data/1327811/000132781126000044/

Business Lens explains how a company earns, spends and keeps its money, from its own filings. It is insight and context, never a view on the shares, a target, or advice. Figures are raw units as filed; percentages are percentage points.

## Headline figures

- Revenue: $2.6B (+12.8% on the year)
- Operating income: $313.0M (operating margin 11.8%)
- Net income: $632.0M (net margin 23.9%)
- Gross margin: not reported (the company reports expenses by nature: no cost of revenue or gross profit line exists)
- Free cash flow: $460.0M (17.4% of revenue)
- Cash conversion (operating cash flow / net income): 0.82x
- Capital expenditure: 2.2% of revenue

## Where the money goes (Q2 FY2027)

- Subscription services → Total revenues: $2.5B
- Professional services → Total revenues: $178.0M
- Total revenues → Total costs and expenses: $2.3B
- Total costs and expenses → Cost of goods and services sold: $652.0M
- Total costs and expenses → Sales and marketing: $706.0M
- Total costs and expenses → Product development: $747.0M
- Total costs and expenses → General and administrative: $231.0M
- Total revenues → Operating income: $313.0M
- Operating income → Income before provision for (benefit from) income taxes: $313.0M
- Other income, net → Income before provision for (benefit from) income taxes: $14.0M
- Income before provision for (benefit from) income taxes → Net income: $327.0M
- Provision for (benefit from) income taxes → Net income: $305.0M

## Where the revenue comes from

### Products and services (Condensed Consolidated Statements of Operations)

| Member | Value | Share |
|---|---:|---:|
| Subscription services | $2.5B | 93.3% |
| Professional services | $178.0M | 6.7% |

The members sum to total revenue.

## Income statement, as filed

| Line | Q2 FY2027 | Of revenue |
|---|---:|---:|
| Total revenues | $2.6B | 100% |
|   Subscription services | $2.5B | 93.3% |
|   Professional services | $178.0M | 6.7% |
| Subscription services | $436.0M | 16.5% |
| Professional services | $216.0M | 8.2% |
| Product development | $747.0M | 28.2% |
| Sales and marketing | $706.0M | 26.7% |
| General and administrative | $231.0M | 8.7% |
| Restructuring | $0 | 0.0% |
| **Total costs and expenses** | $2.3B | 88.2% |
| **Operating income** | $313.0M | 11.8% |
| Other income, net | $14.0M | 0.5% |
| **Income before provision for (benefit from) income taxes** | $327.0M | 12.3% |
| Provision for (benefit from) income taxes | -$305.0M | 11.5% |
| **Net income** | $632.0M | 23.9% |
| Net income per share, basic (in dollars per share) | $3 | 0.0% |
| Net income per share, diluted (in dollars per share) | $3 | 0.0% |
| Weighted-average shares used to compute net income per share, basic (in shares) | 245,181,000 |  |
| Weighted-average shares used to compute net income per share, diluted (in shares) | 246,307,000 |  |

## History

| Period | Revenue | Operating income | Net income | Operating cash flow | Capital expenditure | Free cash flow |
|---|---:|---:|---:|---:|---:|---:|
| FY2011 | $68.1M | -$56.1M | -$56.2M | -$15.3M | $3.7M | -$19.0M |
| FY2012 | $134.4M | -$78.4M | -$80.0M | -$13.8M | $5.0M | -$18.8M |
| FY2013 | $273.7M | -$117.9M | -$119.8M | $11.2M | $15.9M | -$4.7M |
| FY2014 | $468.9M | -$153.3M | -$172.5M | $46.3M | $60.7M | -$14.5M |
| FY2015 | $787.9M | -$215.7M | -$248.0M | $102.0M | $103.6M | -$1.6M |
| FY2016 | $1.2B | -$249.8M | -$275.0M | $258.6M | $133.7M | $125.0M |
| FY2017 | $1.6B | -$353.1M | -$384.7M | $350.6M | $120.8M | $229.8M |
| FY2018 | $2.1B | -$303.2M | -$321.2M | $465.7M | $141.5M | $324.2M |
| FY2019 | $2.8B | -$463.3M | -$418.3M | $606.7M | $202.5M | $404.2M |
| FY2020 | $3.6B | -$502.2M | -$480.7M | $864.6M | — | — |
| FY2021 | $4.3B | -$248.6M | -$282.4M | $1.3B | — | — |
| FY2022 | $5.1B | -$116.0M | $29.0M | $1.7B | — | — |
| FY2023 | $6.2B | -$222.0M | -$367.0M | $1.7B | $364.0M | $1.3B |
| FY2024 | $7.3B | $183.0M | $1.4B | $2.1B | $232.0M | $1.9B |
| FY2025 | $8.4B | $415.0M | $526.0M | $2.5B | $269.0M | $2.2B |
| FY2026 | $9.6B | $721.0M | $693.0M | $2.9B | $162.0M | $2.8B |

Latest trend (the newest full year against the year before; a reading, not a forecast):

- Revenue: +13.1% (year before +16.4%): slowing
- Operating income: +73.7% (year before +126.8%): slowing
- Net income: +31.7% (year before -61.9%): accelerating
- Free cash flow: +26.7% (year before +14.3%): accelerating

## Operating figures stated in the filing

- Customers: 11,500 customers (as of 2026-07-31). "As a result of our innovation and commitment to customer success, today we are a Fortune 500 company with more than 11,500 customers around the world." (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Gross revenue retention rate: 97.0% (as of 2026-07-31). "Our growth in subscription services revenues attributable to existing customers is further reflected by our gross revenue retention rate of approximately 97% as of July 31, 2026." (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Total subscription revenue backlog: $27.4B (as of 2026-07-31). "As of July 31, 2026, our total subscription revenue backlog was $27.4 billion, and 12-month subscription revenue backlog was $9.0 billion." (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Total subscription revenue backlog: $25.4B (as of 2025-07-31). "As of July 31, 2025, our total subscription revenue backlog was $25.4 billion, and 12-month subscription revenue backlog was $7.9 billion." (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- 12-month subscription revenue backlog: $9.0B (as of 2026-07-31). "As of July 31, 2026, our total subscription revenue backlog was $27.4 billion, and 12-month subscription revenue backlog was $9.0 billion." (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- 12-month subscription revenue backlog: $7.9B (as of 2025-07-31). "As of July 31, 2025, our total subscription revenue backlog was $25.4 billion, and 12-month subscription revenue backlog was $7.9 billion." (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Headcount: 20,896 employees (as of 2026-07-31). "Headcount 20,896 19,517 7 %" (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Headcount: 19,517 employees (as of 2025-07-31). "Headcount 20,896 19,517 7 %" (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Share of subscription revenue growth from existing customers: 60.0% (as of 2026-07-31). "Approximately 60% of the increase in subscription services revenues was attributable to expansion within our customers that existed as of the beginning of the comparable prior year period, and the remaining 40% was attributable to customers added after the beginning of the comparable prior year period." (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Share of subscription revenue growth from new customers: 40.0% (as of 2026-07-31). "Approximately 60% of the increase in subscription services revenues was attributable to expansion within our customers that existed as of the beginning of the comparable prior year period, and the remaining 40% was attributable to customers added after the beginning of the comparable prior year period." (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)

## Key insights

### A one-time tax benefit supplied 48% of net income

A $305M tax benefit from moving intellectual property inside the group lifted net income to $632M, while pre-tax income rose only 7.6%.

Pre-tax income was $327M, against $304M a year earlier. The tax line then added $305M instead of taking money away, against a $76M tax charge a year earlier. The filing attributes the benefit to an intra-entity transfer of certain intellectual property rights as part of an internal legal entity restructuring. Net income of $632M was larger than pre-tax income of $327M, and the benefit alone equals 48.3% of net income. _(from the filing)_
That one item explains most of the headline jump. Net income rose 177.2% and the net margin reached 23.9%, above the operating margin of 11.8%. Diluted earnings per share were $2.57 against $0.84 a year earlier. _(from the filing)_
The filing also says there is a reasonable possibility of releasing a significant part of the valuation allowance on deferred tax assets in one foreign jurisdiction, which would lower tax expense in the period it is recorded. Tax may therefore keep moving net income apart from the business. _(from the filing)_
Analysis: the quarter reads more clearly through operating income and pre-tax income than through net income. The benefit comes from how the group arranged ownership of its intellectual property, not from selling more software, and a net margin above the operating margin is a sign of that. _(analysis)_

### Buybacks traded interest income for a smaller share count

Other income fell to $14M from $56M after securities were sold for buybacks, and diluted shares fell to 246.3 million from 270.2 million.

Other income, net was $14M against $56M a year earlier. The filing attributes the drop to lower interest income after the liquidation of marketable debt securities to fund acquisition activities and share repurchases. Other income was 18.4% of pre-tax income a year ago and 4.3% this quarter. _(from the filing)_
Weighted-average diluted shares were 246.3 million against 270.2 million a year earlier, 91.2% of the year-earlier count. Basic shares were 245.2 million against 266.8 million. The filing reports that the repurchase programs in effect were fully used by the end of July and that the board authorized a new program in August. _(from the filing)_
Operating income rose 26.2% but pre-tax income only 7.6%, because the lost interest absorbed much of the operating gain before tax. The diluted share count fell at the same time, which lifts every per-share figure. _(from the filing)_
Analysis: this is the trade a buyback makes. Interest the cash would have earned is given up, and each remaining share claims a larger slice of operating profit. Per-share results now reflect capital decisions as well as the business, so operating income is the cleaner read on the software itself. _(analysis)_

### Free cash flow runs far ahead of operating profit

Last fiscal year free cash flow was $2.78B against operating income of $721M, so operating profit alone undercounts the cash the business produced.

In the fiscal year to January 2026, operating cash flow was $2.94B, capital spending $162M and free cash flow $2.78B, against operating income of $721M. Capital spending took 5.5% of operating cash flow. The filing says subscription contracts typically run three years or longer and are generally invoiced annually in advance. _(from the filing)_
Cash arrives unevenly. Free cash flow in the fourth quarter of that year was $1.22B, 43.9% of the full year's $2.78B; the filing says the company signs a significantly higher share of new and renewal agreements in the fourth quarter. _(from the filing)_
A single quarter shows a smaller gap. Free cash flow was $460M against operating income of $313M, or 147%, and a 17.4% margin on revenue. It was below the $588M of a year earlier, as operating cash flow fell to $519M from $616M and capital spending rose to $59M from $28M. _(from the filing)_
Analysis: two things sit between the lines. Customers prepay, so cash comes in before revenue is recognized. Share-based compensation, a large non-cash cost the filing records in every expense line, reduces operating income without using cash. That second part is paid in shares instead, which is part of why buybacks matter for per-share results. _(analysis)_

### Margin gains came from selling and admin, not product

Operating income rose 26.2% on 12.8% revenue growth as sales, marketing and administration shrank as a share of revenue, while product development held at 28.2%.

Sales and marketing was $706M, 26.7% of revenue, against $641M and 27.3% a year earlier. General and administrative was $231M, 8.7% of revenue, against $216M and 9.2%. Product development was $747M, 28.2% of revenue, against $660M and 28.1%. Operating margin rose to 11.8% from 10.6%. _(from the filing)_
The filing credits "revenue growth outpacing headcount growth and moderation of operating expenses." Headcount rose to 20,896 from 19,517 while revenue grew 12.8%. Restructuring cost nothing this quarter against $1M a year earlier, so the gain is not a charge rolling off. _(from the filing)_
One cost line went the other way. Costs of subscription services, mainly hosting and support, rose to $436M from $370M, while subscription revenue grew 13.9%. They took 17.6% of subscription revenue this quarter. _(from the filing)_
Analysis: the company kept spending on the product at the same rate while getting more from each sales and administrative dollar. That grounds the gain in scale rather than in cutting development, but it leaves further margin dependent on delivery costs, which the filing expects to keep rising in absolute dollars. _(analysis)_

### Competitive edge

- **Next year's subscription revenue is largely signed already** The $9.0B of backlog due within twelve months equals 94.2% of last fiscal year's $9.55B total revenue, and it grew faster than total backlog.
- **Existing customers supply most growth and rarely leave** About 60% of subscription revenue growth came from customers already on board a year earlier, with gross revenue retention near 97%.
- **Partners do most deployments, keeping services small** Professional services were 6.7% of revenue and cost 121% of what they brought in, as third-party firms handle most implementation work.

### What to watch

- **Pricing per worker ties revenue to customer headcount** Subscription revenue depends on the number of workers at each customer, and the filing already reports slower growth in headcount commitments at renewal.
- **Delivery costs are rising faster than subscription revenue** Costs of subscription services rose to $436M from $370M while subscription revenue grew 13.9%, led by third-party hosted infrastructure.
- **General-purpose AI joins Oracle and SAP as competition** The filing now names generic language models, general-purpose agents and software built from prompts as rivals, alongside primary competitors Oracle and SAP.

## Investor view

**A one-time tax benefit supplied nearly half of Workday's $632M net income this quarter**

### How it makes money

Workday rents cloud software that runs people and money inside large organizations: human capital management, financial management, spend management and planning. Subscription fees were $2.47B of the quarter's $2.65B revenue, 93.3% of the total. The filing names what drives them: "the number of customers, the number of workers at each customer, the specific applications subscribed to by each customer, and the price of our applications." _(from the filing)_
Contracts typically run three years or longer, are generally noncancelable, and are invoiced annually in advance. That builds a long queue of revenue already signed: subscription revenue backlog was $27.4B at the end of July, and $9.0B of it, about a third, falls due over the next twelve months. _(from the filing)_
Professional services (deployment, optimization and training) brought in $178M, 6.7% of revenue, and cost $216M to deliver. Third parties provide a majority of deployments, and the filing expects partners "to increasingly contract directly with our subscription customers for services engagements." _(from the filing)_
Running the software is not the large cost. Costs of subscription services, mainly hosting and support, were $436M, against $747M for product development and $706M for sales and marketing. Building the product took 28.2% of revenue and selling it 26.7%. What remained was operating income of $313M, an 11.8% margin. _(from the filing)_
Growth comes mostly from customers already inside. About 60% of the rise in subscription revenue came from expansion at existing customers and 40% from customers added since the start of the prior-year period. Gross revenue retention, which counts only revenue kept and excludes upsell, was about 97%. The company counts more than 11,500 customers. _(from the filing)_

### What shifted

Revenue grew 12.8% to $2.65B from $2.35B. Subscription revenue grew 13.9% while professional services revenue slipped 0.6%, so subscriptions gained 0.9 points of the mix to 93.3%. The filing ties the flat services line to the company continuing "to expand and leverage our service providers." _(from the filing)_
Operating margin widened to 11.8% from 10.6%, a 1.25-point gain, and operating income rose 26.2% to $313M. The filing credits "revenue growth outpacing headcount growth and moderation of operating expenses." Headcount rose to 20,896 from 19,517. Sales and marketing fell to 26.7% of revenue from 27.3%, general and administrative to 8.7% from 9.2%, and product development stayed at 28.2% against 28.1%. _(from the filing)_
Below operating income the picture changed more. Other income fell to $14M from $56M, which the filing attributes to lower interest income after selling marketable debt securities "to fund acquisition activities and share repurchases." A $305M tax benefit, against a $76M tax charge a year earlier, came from an intra-entity transfer of intellectual property rights in an internal restructuring. Net income reached $632M on $327M of pre-tax income. _(from the filing)_
Fewer shares split that profit. Diluted weighted-average shares fell to 246.3 million from 270.2 million as the company repurchased stock, and diluted earnings per share rose to $2.57 from $0.84. Pre-tax income, before the tax benefit, rose 7.6%, to $327M from $304M. _(from the filing)_
Cash moved the other way in the quarter. Operating cash flow was $519M against $616M a year earlier, and capital spending rose to $59M from $28M, so free cash flow fell to $460M from $588M, a 17.4% margin on revenue. The filing notes that invoicing is heaviest in the fourth quarter, so cash is uneven across the year. _(from the filing)_

### Risks in the filing

Competition. The company names Oracle and SAP as its primary competitors, alongside vendors such as ADP, Dayforce, UKG, ServiceNow and Microsoft. It now also names non-specialist AI: generic large language models, general-purpose agents, and software built from natural-language prompts, which the filing calls "vibe coding". It warns that losing a financial management customer means a long wait before it can compete for that customer again. _(from the filing)_
Demand and renewals. The filing describes deal scrutiny, longer sales cycles for net new business, slower growth in headcount commitments when customers renew, and more flexible payment terms for some customers. The longest cycles are in government, higher education and healthcare, tied to federal funding. Customers have no obligation to renew, and acquisitions of customers by other companies have led to cancelled contracts. _(from the filing)_
AI. The company says the markets and monetization strategies for its agentic AI solutions and Workday Data Cloud remain new and uncertain, and that success under its flexible pricing model depends on setting the right price, on adoption, and on its own cost to deliver. It is defending a lawsuit alleging that some of its AI-related products enable discrimination, and it is working to comply with the EU AI Act. _(from the filing)_
Operations and leadership. Workday serves customers from data centers run by third parties, including Amazon Web Services and Google Cloud, and has had brief outages at co-location sites from high temperatures and power failures, as well as a reporting defect it later remediated. In February, Aneel Bhusri, formerly Executive Chair, became CEO and Carl Eschenbach ceased to serve; the filing names leadership change as a possible source of disruption. _(from the filing)_
Two of these risks already show in the numbers. Slower seat growth at renewal fits subscription growth that has eased from earlier years even as retention holds. Rising hosting costs show the infrastructure risk arriving as a cost question rather than an outage question. Competition from general-purpose AI does not yet show in retention, which the company still reports as high. _(analysis)_

## Founder view: mechanisms

### Multi-year contracts billed a year ahead

Customers sign for three years or more and pay each year up front. Revenue is recognized evenly, but cash arrives in lumps when contracts are signed or renewed, which the filing says peaks in the fourth quarter. The customer funds the vendor's working capital, and the signed backlog makes most of next year's revenue known before the year begins. _(analysis)_

### Grow inside customers already won

Workday lands with one core system, usually HR or finance, then sells more applications and more workers into the same account. Each later sale costs less to win because the data, integrations and trust are already in place, and high retention means the base compounds instead of leaking. _(analysis)_

### Partners carry the implementation work

Implementing Workday is large, slow consulting work. Workday keeps a services arm but lets partner firms do most deployments, accepting a loss on its own services in exchange for a channel of consultants who recommend, install and support the software without being on its payroll. _(analysis)_

### Revenue growing faster than headcount

A software company's costs are mostly people. Once the product exists, each extra subscription adds little cost, so margin widens whenever revenue grows faster than the team. Workday turned this on deliberately, through restructurings and slower hiring, after years of spending ahead of revenue. _(analysis)_

## Member research

Signed-in members read, on the page: what Workday's numbers depend on from here, and the playbook behind each mechanism (what needs scale, what transfers, how to test it, the metric that would show it).

## Sources

- Workday 10-Q for the period to 2026-07-31: https://www.sec.gov/Archives/edgar/data/1327811/000132781126000044/ (2026-08-27)

Methodology business-lens-1.0 · schema 1.2.0 · run business-lens-2026-11-02 · as of 2026-11-02