working day Shares rose 12% on Friday, a day after the financial and human resources software maker reported fiscal second-quarter results that beat analysts’ estimates and announced plans to further expand its adjusted operating margin through 2027.

Here’s how the company performed compared to the LSEG consensus:

• Earnings per share: USD 1.75 adjusted versus USD 1.65 expected
• Revenue: $2.085 billion compared to expected $2.071 billion

According to a statement, Workday’s revenue rose about 17 percent year over year in the quarter ended July 31. Growth in subscription revenue was 17 percent. Net income rose to $132 million, or 49 cents per share, from $79 million, or 30 cents per share, in the year-ago quarter.

In terms of guidance, Workday now targets an adjusted operating margin of 25.25% in fiscal 2025, up from the 25% guidance provided in May.

In a conference call with analysts on Thursday, Workday CFO Zane Rowe said he expects the company’s adjusted operating margin to increase to 30% in fiscal years 2026 and 2027, along with annual subscription revenue growth of 15%. In September 2023, Workday said it was targeting an adjusted operating margin of 25% for fiscal year 2027 and subscription revenue growth of between 17% and 19%.

“We are relentlessly focused on scaling all of our processes across the company as we review our product and go-to-market initiatives,” Rowe said. “We are also becoming more targeted in our growth investments, balancing product development with go-to-market resources.”

Deutsche Bank analysts led by Brad Zelnick have raised their price target for Workday shares over the next twelve months from $265 to $275. They rate the stock as “Hold.”

“The increased 30% operating margin target was the big positive surprise as it was now achieved both earlier and to a greater extent than most had expected,” the analysts wrote.

Analysts at Citi, Evercore ISI and Piper Sandler also raised their price targets for Workday following the company’s report.

However, conditions are not ideal for Workday. Companies are still more cautious than usual before signing contracts, Rowe said, adding that headcount growth in the existing customer base has slowed.

Many other software companies have pointed to tougher economic conditions in recent quarters. But on Friday, Federal Reserve Chairman Jerome Powell said “it’s time to adjust policy,” a hint that the central bank will cut its benchmark interest rate. That could benefit growing cloud software companies like Workday. Investors have been turning away from these assets and opting for more defensive investments in 2022, anticipating rate hikes to ward off inflation.

The WisdomTree Cloud Computing Fund, an exchange-traded fund that includes Workday, ended Friday’s trading session up 2%. The S&P 500 Index gained 1%.

However, Workday CEO Carl Eschenbach did not indicate that market conditions would improve soon.

“We actually believe that the current environment of IT spending and the environment in which we sell is not just the last few quarters,” he said. “We believe it will be the new norm going forward. We are prepared because we have a great product.”

REGARD: Software is a good investment in small caps because the returns are more regular, says Julie Biel