Workday's net income jumped 177% to $632 million, but almost none of that came from selling more software. A $305 million income tax benefit — the result of moving intellectual property between its own subsidiaries — did the heavy lifting. Strip it out and the quarter looks like what it actually is: revenue up 13% to $2.65 billion, operating income up 26% to $313 million, and an operating margin that gained 1.21 percentage points. That margin gain matters, but it is a marked slowdown from the prior year's 5.2-point (524 bps) leap, and it arrived alongside a $2.9 billion buyback that cut net cash — cash and marketable securities less the $2.99 billion carrying value of debt — from $2.45 billion to roughly $414 million. The prior programs were fully exhausted as of July 31, and in August the board authorized another $4.0 billion of repurchases.
1. Balance Sheet
1-1. Key Asset Items
| Item | Jan 31, 2026 ($M) | Jul 31, 2026 ($M) | Change |
|---|---|---|---|
| Cash and cash equivalents | 1,501 | 661 | -56.0% |
| Marketable securities | 3,942 | 2,742 | -30.4% |
| Trade and other receivables, net | 2,332 | 1,895 | -18.7% |
| Property and equipment, net | 1,093 | 1,126 | +3.0% |
| Acquisition-related intangibles, net | 681 | 611 | -10.3% |
| Goodwill | 5,229 | 5,227 | -0.0% |
| Deferred tax assets | 829 | 1,129 | +36.2% |
| Total assets | 18,074 | 15,857 | -12.3% |
The balance sheet shrank by $2.2 billion in six months. This was a deliberate choice, not a business problem.
Cash and marketable securities together fell from $5,443 million to $3,403 million, a 37.5% decline. The company spent $2,931 million buying back its own stock over the same period. That single line more than fully accounts for the drawdown; operating cash flows of roughly $884 million provided a partial offset.
Deferred tax assets rose $300 million to $1,129 million. This is the balance-sheet footprint of the tax benefit discussed below — over the six months, Workday recognized $374 million of new deferred tax assets from an internal transfer of intellectual property rights. The recognized amount exceeds the net balance-sheet increase because ordinary utilization and other movements ran the other way.
The 18.7% drop in receivables is seasonal. Workday bills most subscription customers annually in advance, and January 31 is its fiscal year end, when billings peak. The 12.4% decline in current unearned revenue ($5,010 million to $4,387 million) confirms the same cycle. Neither figure signals demand weakness — and backlog disclosures in the filing support that reading directly.
Goodwill was essentially unchanged at $5,227 million, and there were no asset impairments in the first half. The prior-year period carried $34 million of impairments tied to restructuring.
1-2. Debt Structure — Financial vs. Operating Liabilities
Financial debt is $3,000 million of principal ($2,989 million net carrying amount after unamortized discount and issuance costs), unchanged from January. It consists of three tranches of senior notes issued in fiscal 2023: $1.0 billion at 3.500% due April 2027, $750 million at 3.700% due April 2029, and $1.25 billion at 3.800% due April 2032. Effective rates including issuance costs are 3.67%, 3.82%, and 3.90%. Workday was in compliance with all covenants.
One maturity item deserves attention. $999 million moved from non-current to current debt, because the 2027 Notes now come due inside twelve months. Cash on hand is $661 million — less than the amount due. Cash plus marketable securities of $3,403 million covers it comfortably, so this is a liquidity-management question rather than a solvency one. Still, a third of total principal matures within the year.
A note on valuation, since it is easy to over-read: the filing puts the total estimated fair value of all three tranches at $2.9 billion, against a $2,989 million carrying amount — and at the same $2.9 billion as of January 31, so nothing moved this half. The modest discount is a blended figure across three maturities and cannot be attributed to the 3.500% 2027 Notes, which mature in roughly eight months and would trade near par; it is driven mainly by the long-dated 2032 tranche. The reasonable inference is only that prevailing yields on Workday's longer paper exceed its 2022-vintage coupons — refinancing the 2027 maturity would likely cost more than 3.500%, but the fair-value line is not by itself evidence of how much more.
Operating liabilities are dominated by unearned revenue — $4,387 million current plus $72 million non-current. For a subscription business this is not a burden but a prepayment from customers, and Workday notes that subscription services represented 97% of total unearned revenue. Accounts payable fell to $102 million from $142 million, and accrued compensation dropped to $493 million from $642 million, again a fiscal-year-end timing effect. Operating lease liabilities under ASC 842 total $783 million across current and non-current, against $680 million of right-of-use assets.
1-3. Capital Structure
Total equity fell 17.2% to $6,460 million from $7,805 million, even though the company earned $854 million in the half. The mechanism is visible in three lines.
Additional paid-in capital rose $692 million to $13,365 million from $12,673 million. The gross inputs were larger than that: $871 million of share-based compensation plus $98 million of employee stock plan proceeds, less $273 million of taxes paid on net share settlement of equity awards. Treasury stock went the other way, deepening to negative $7,151 million from negative $4,220 million — a $2,931 million increase in buybacks. And retained earnings crossed into positive territory for the first time in the periods shown, reaching $342 million from an accumulated deficit of $512 million.
That last item is a genuine milestone. Workday has now earned back its cumulative historical losses. Accumulated other comprehensive loss narrowed to $96 million from $136 million; a $72 million half-year gain on cash flow hedges was the driver, partly offset by a $32 million unrealized loss on available-for-sale debt securities.
The quality of this capital base is mixed. Paid-in capital of $13.4 billion still dwarfs retained earnings of $0.3 billion, meaning the equity was overwhelmingly contributed by shareholders and by stock issued to employees rather than generated by the business. Buybacks are now retiring that stock faster than it is being created.
2. Income Statement
2-1. Core Profitability (Second Quarter)
| Item | Q2 FY2025 ($M) | Q2 FY2026 ($M) | Q2 FY2027 ($M) | 2Y CAGR |
|---|---|---|---|---|
| Total revenue | 2,085 | 2,348 | 2,649 | +12.7% |
| Operating income | 111 | 249 | 313 | +67.9% |
| Operating margin (%) | 5.3 | 10.6 | 11.8 | — |
| Other income, net | — | 56 | 14 | — |
| Pre-tax income | — | 305 | 327 | — |
| Net income | 132 | 228 | 632 | — |
| Net margin (%) | 6.3 | 9.7 | 23.9 | — |
Q2 FY2025 figures are not presented in this Form 10-Q; sourced from Workday's fiscal 2026 second-quarter results release (comparative period).
Revenue growth has been remarkably steady: 12.6% then 12.8% over the two years. Subscription services, 93% of the total, grew 13.9% to $2,471 million. Professional services were essentially flat at $178 million, down 1% from $179 million, as Workday continues pushing deployment work to partner firms.
Operating margin tells a more nuanced story. The three-year path runs 5.3% to 10.6% to 11.8%. The first step was a 5.2-point (524 bps) gain. The second was 1.21 points. Margin expansion has not stopped, but the pace of it has fallen by about 76% — roughly a quarter of last year's step.
Operating leverage — how much faster profit grows than sales — came in at 2.00x this quarter. Every 1% of revenue growth produced 2.00% of operating income growth. That is healthy but far below the prior year's rate.
One-time items must be separated here. The six-month figures are badly distorted. First-half operating income rose 126.8% to $651 million from $287 million. But the prior-year half carried $167 million of restructuring charges and this year carried zero. Normalizing for that, the comparison is $651 million against $454 million — a 43.4% increase. Real, but not triple-digit. The second-quarter comparison is clean at the operating line, with only $1 million of restructuring in the prior period.
Below the operating line, however, the comparison is not clean at all. Other income, net collapsed to $14 million from $56 million — a $42 million swing that ate most of the $64 million operating gain. The result is that pre-tax income rose only 7.2%, to $327 million from $305 million, while operating income rose 26%. This is the direct cost of the buyback: Workday sold down the securities portfolio that was generating that interest income, so the same decision that flattered EPS through a lower share count suppressed the pre-tax line. Any reader taking "+26% operating income" as the underlying growth rate is overstating it by more than three times.
The net income line is where the most caution is required. Workday recorded an income tax benefit of $305 million in the quarter against pre-tax income of $327 million, producing an effective tax rate of negative 93%. The income tax note discusses the drivers on a six-month basis, attributing the $250 million half-year benefit to "an intra-entity transfer of certain intellectual property rights as part of an internal legal entity restructuring," through which the company recognized $374 million of deferred tax assets. This is an accounting recognition event, not cash earned — cash paid for income taxes in the half actually rose to $131 million from $58 million. At a normalized rate near 20%, quarterly net income would have been roughly $262 million rather than $632 million.
Earnings per share was $2.57 diluted, versus $0.84. Two forces drove it. Net income rose 177%, and the diluted share count fell to 246.3 million from 270.2 million — an 8.8% reduction from buybacks. Both matter, but the tax entry is the larger contributor by far. On a non-GAAP basis, which excludes the tax item's distortion along with share-based compensation, Workday reported diluted EPS of $2.75 against a $2.61 consensus — a beat, but a far more modest one than the GAAP headline implies.
2-2. Cost Structure
| Cost line | Q2 FY2026 ($M) | Q2 FY2027 ($M) | Change | % of revenue (FY27 vs FY26) |
|---|---|---|---|---|
| Cost of subscription services | 370 | 436 | +17.8% | 16.5% vs 15.8% |
| Cost of professional services | 212 | 216 | +1.9% | 8.2% vs 9.0% |
| Product development | 660 | 747 | +13.2% | 28.2% vs 28.1% |
| Sales and marketing | 641 | 706 | +10.1% | 26.7% vs 27.3% |
| General and administrative | 216 | 231 | +6.9% | 8.7% vs 9.2% |
Two cost lines are moving in opposite directions, and the split explains the margin picture.
Sales and marketing and general and administrative are delivering leverage. S&M fell to 26.7% of revenue from 27.3%. G&A fell to 8.7% from 9.2%. These are the classic fixed-cost lines that a growing subscription business dilutes over time, and they are working as intended.
Cost of subscription services is going the other way. It grew 17.8%, faster than the 13.9% subscription revenue it supports. Subscription gross margin slipped to 82.4% from 82.9%. The filing identifies data center capacity and third-party hosted infrastructure — Workday names Amazon Web Services and Google Cloud — as the primary components of this line. It does not attribute the increase to AI, so the AI link is an inference, not a disclosure. It is a defensible inference: Workday told investors alongside these results that AI now drives more than 25% of new annual contract value and that over 5,500 customers run at least one of its agents. If that is the cause, the cost is landing here before the revenue does. But the 10-Q itself does not say so.
Professional services remain structurally unprofitable, with a gross margin of negative 21.4% against negative 18.4% a year ago. Revenue of $178 million against $216 million of cost. Workday runs this as a customer-deployment function rather than a profit center, so the negative margin is by design — but the gap widened.
Product development held roughly flat at 28.2% of revenue. Under US GAAP, general research costs are expensed as incurred, and Workday expenses substantially all of its product development spend rather than capitalizing it — although GAAP does permit capitalization of qualifying internal-use software costs under ASC 350-40, a model the FASB is revising via ASU 2025-06 (effective for Workday in fiscal 2029). This makes Workday's GAAP operating margin structurally more conservative than that of peers who capitalize a higher share of development costs.