Workday, Inc. (NASDAQ:WDAY) is beginning to show that artificial intelligence can generate measurable contract activity. Second-quarter subscription revenue increased 13.9% to $2.471 billion, while AI products produced more than $100 million of new annual contract value, or ACV. That represented more than 25% of all new ACV signed during the quarter.
Workday, Inc. (NASDAQ:WDAY) reports new ACV as an annualized measure of new subscription business, not GAAP revenue or total contract value. It therefore does not show revenue recognized during the quarter.
Twelve-month subscription revenue backlog increased 14.2% to $9.034 billion, slightly faster than the quarter’s 13.9% subscription revenue growth. However, total subscription revenue backlog grew only 8.0% to $27.403 billion.
Total subscription backlog covers contracted subscription revenue not yet recognized, including billed and unbilled amounts. Its growth depends on sales, renewals, contract duration, customer mix, and seasonality. AI can therefore account for a large share of new business without immediately accelerating the entire backlog.
Bull Case
The AI momentum at Workday, Inc. (NASDAQ:WDAY) extends beyond one quarterly bookings statistic. Company-reported annual recurring revenue from AI products, an operating metric rather than GAAP revenue, approached $600 million, up more than 200% from a year earlier and more than 20% sequentially.
More than 5,500 customers now use at least one organic AI agent, up more than 35% from the previous quarter. More than half of net new customer wins included at least one AI solution.
Near-term revenue visibility remains healthy. The 14.2% increase in twelve-month backlog was slightly ahead of subscription revenue growth, while customer expansions accounted for approximately 60% of subscription revenue growth. Gross revenue retention remained at 97%.
Workday, Inc. (NASDAQ:WDAY) expects fiscal third-quarter subscription revenue of $2.515 billion, representing 12% growth.
Bear Case
The longer-duration backlog trend remains weaker. Total subscription backlog growth has slowed from 12.2% at the end of fiscal 2026 and 10.9% in the first quarter to 8.0% in the second quarter. Workday, Inc. (NASDAQ:WDAY) attributed the latest rate partly to a greater mix of bookings from existing customers rather than net new customers, along with the industries represented in new bookings.
Some AI revenue may also arrive slowly. Workday, Inc. (NASDAQ:WDAY) is introducing Flex Credits as usage-based subscriptions, which can delay revenue recognition until customers consume the services. Management expects fiscal 2028 subscription revenue growth to be consistent with the expected second-half fiscal 2027 growth rate of approximately 11%. That does not signal an overall growth reacceleration next year.
Quarterly cash generation also weakened. Operating cash flow declined to $520 million from $616 million, while company-defined free cash flow, calculated as operating cash flow minus capital expenditures, fell to $460 million from $588 million. The additional payroll run affected the comparison, while Workday, Inc. (NASDAQ:WDAY) maintained its full-year operating and free cash flow outlooks.
GAAP diluted earnings increased to $2.57 from $0.84, but the latest figure included a $1.52-per-share tax benefit arising from an internal transfer of intellectual property rights. The underlying earnings improvement was therefore smaller than the GAAP comparison suggests.
Hedge Fund Sentiment
The filings available so far reflect positions held before Workday, Inc. (NASDAQ:WDAY) reported its fiscal 2027 second-quarter results. Insider Monkey’s database showed 57 hedge funds holding Workday, Inc. (NASDAQ:WDAY) at the end of 2Q2026, down from 63 funds three months earlier.
Conclusion
Workday, Inc. (NASDAQ:WDAY) is selling AI successfully, and the twelve-month backlog suggests that near-term subscription growth remains intact. However, AI represents a rapidly growing part of new contract activity rather than evidence that the full backlog has reaccelerated. Longer-duration commitments and cash generation still need to catch up before AI can be considered a companywide growth inflection.
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Disclosure: None. This article is originally published at Insider Monkey.
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