The sell-off in software-as-a-service (SaaS) stocks could be creating a generational buying opportunity in the group. At least this is the view of Thoma Bravo, which is widely regarded as one of the top private equity investors in the SaaS space. It has taken many SaaS companies private over the years, and it currently owns about 80 software companies. In a recent presentation, Thoma Bravo noted that SaaS stock fundamentals have moved in the opposite direction from their valuations. It noted that fundamenta ...

Core Viewpoint - Market concerns regarding artificial intelligence (AI) as a threat to Workday's business model have negatively impacted its stock price, despite the company reporting better-than-expected fiscal results [1][2] Company Performance - Workday's Q2 revenue increased nearly 13% year over year to $2.35 billion, with subscription revenue climbing 14% to $2.17 billion, and adjusted earnings per share (EPS) rising 26% to $2.21, surpassing analyst expectations [8] - The company's 12-month subscription revenue backlog grew by 16% to $7.91 billion, while total subscription revenue backlog rose nearly 18% to $25.37 billion [8] - Workday ended the quarter with $8.19 billion in cash and marketable securities, $3 billion in debt, and generated operating cash flow of $616 million and free cash flow of $588 million [10] AI Integration - Over 75% of sales to new customers included an AI solution, and 30% of sales to existing customers did, leading to a more than doubling of new net annual contract value from AI products year over year [5] - Workday's primary AI platform, Workday Illuminate, is designed to provide customers with a comprehensive human resource and finance database, along with AI agents for various tasks [6] Strategic Moves - Workday announced its agreement to acquire Paradox, an AI company aimed at simplifying the hiring process, as part of its strategy to enhance its AI capabilities [7] Market Outlook - Management raised its fiscal 2026 guidance slightly, expecting revenue growth of 13% to approximately $9.515 billion and subscription revenue growth of about 14% to $8.815 billion, with the new figures reflecting contributions from the Paradox acquisition [11] - CEO Carl Eschenbach characterized market fears about AI disrupting seat-based SaaS models as "completely overblown," attributing slower customer headcount growth to previous over-hiring rather than AI's impact [12] Valuation - Workday's stock trades at a forward price-to-sales (P/S) ratio of 6.2 and a forward price-to-earnings (P/E) ratio of 25, which is considered attractive given projected mid-teens percentage revenue growth and strong earnings growth [15]

Financial Data and Key Metrics Changes - Workday reported a 14% growth in subscription revenue, totaling $2,169 million for Q2 2026, with total revenue reaching $2,348 million, reflecting a 13% increase [28][29] - Non-GAAP operating margin stood at 29%, with non-GAAP operating income of $680 million [30][33] - Cash and marketable securities at the end of the quarter were $8,200 million, with operating cash flow of $616 million, an 8% growth [31][32] Business Line Data and Key Metrics Changes - Approximately 30% of net new deals were full suite offerings, with this number rising to over 50% in sectors like SLED and healthcare [10][12] - More than 70% of core customers are utilizing Workday Illuminate, with over 30% of customer-based deals including AI products [12][15] - The financial services sector saw significant expansions, including new relationships with Nationwide Insurance and others [12][13] Market Data and Key Metrics Changes - U.S. revenue increased by 13% to $1,760 million, while international revenue grew by 11% to $584 million [29] - The twelve-month subscription revenue backlog (CRPO) reached $7,910 million, up 16.4% year-over-year [29][30] - Strong performance was noted in EMEA, particularly in Germany and the UK, with notable wins in APAC, including a deal in Vietnam [24][122] Company Strategy and Development Direction - Workday is focusing on AI-driven solutions and expanding its platform capabilities, including the acquisition of Paradox to enhance its recruiting suite [16][78] - The company is investing in organic innovation and strategic acquisitions to strengthen its market position and deliver greater value to customers [16][21] - Workday Government was launched to cater specifically to the needs of the U.S. government, emphasizing a commitment to modernization and AI integration [14][70] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's momentum, driven by AI innovation and a unified platform, while acknowledging macroeconomic challenges in certain sectors [25][56] - The company anticipates continued growth in subscription revenue, increasing its FY 2026 guidance to $8,815 million, reflecting a 14% growth [32][34] - Management highlighted the importance of customer trust in navigating AI transitions, positioning Workday as a key partner in this area [100][49] Other Important Information - Workday's headcount as of July 31 was approximately 19,500, with ongoing efforts to attract top talent [31][21] - The company is expanding its partner ecosystem, with over 20% of net new ACV sourced from partners in the last quarter [22] - Workday is actively pursuing growth opportunities in India, with plans to establish a local data center and expand its team [24][122] Q&A Session Summary Question: Market concerns regarding SaaS and AI startups - Management believes concerns about AI disruption to SaaS models are overblown, emphasizing Workday's strong market position and customer base [45][49] Question: Crosscurrents affecting growth - Management noted strong performance in Europe despite macroeconomic challenges, while observing some headwinds in the SLED market [56][58] Question: Workday Government subsidiary - The subsidiary was established to demonstrate commitment to the government sector and to provide a secure cloud environment [70][71] Question: Acquisition of Paradox - The acquisition is seen as a strategic move to enhance Workday's recruiting capabilities, with expected synergies and growth opportunities [78][84] Question: AI product engagement and win rates - Engagement with AI products is strong, with significant growth in adoption rates among customers [88][90] Question: International market performance - Management expressed satisfaction with growth in international markets, particularly in Europe and Japan, and highlighted plans for expansion in India [122][121]