Q2 2024 Workday Inc Earnings Call

Speaker 1: in such statements. In addition, during today's call, we will discuss non-GAAP financial measures, which we believe are useful as supplemental measures of Workday's performance.

Speaker 1: These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results.

Speaker 1: You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results, in our earnings press release, in our investor presentation, and on the investor relations page of our website.

Speaker 1: The webcast replay of this call will be available for the next 90 days on our company website under the investor relations link.

Speaker 1: Additionally, our quarterly investor presentation will be posted on our investor relations website following this call. Also, the customers page of our website includes a list of selected customers and is updated monthly. Our third quarter fiscal 2024 quiet period begins on October 15, 2023. Unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal 2023.

Speaker 1: Additionally, our quarterly investor presentation will be posted on our Investor Relations website following this call. Also, the Customers page of our website includes a list of selected customers and is updated monthly. Our third quarter fiscal 2024 quiet period begins on October 15, 2023. Unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal 2023. With that, I'll hand the call over to Carl.

Speaker 1: Thank you Justin and welcome to Workday's second quarter fiscal 24 earnings call. I am pleased to report that we delivered another solid quarter, achieving subscription revenue growth of 19%, 24 month backlog growth of 23% and non-GAAP operating margin of 24%.

Speaker 1: While we continue to see deal scrutiny, our workmates around the world did a remarkable job staying close to our customers and driving this quarter's results in positioning us for strength in the second half of the year and beyond.

Speaker 2: Workday continues to stand out from the crowd for a few key reasons.

Speaker 2: First, the mission critical nature of our platform. Our customers, now representing more than 65 million users under contract, are all in on Workday because they trust us to manage their two most important assets, their people and their money. Workday just is at the core of our customer relationships and we will always work to earn it.

Speaker 2: Second, our value proposition is strengthening as businesses consolidate their technology footprint from best-of-breed solutions to a true platform. Workday is a trusted platform they can turn to to drive productivity gains, agility, skills-based talent strategies, and a great employee experience all at the same time. Third, is our unique approach to AI and ML.

Speaker 2: And Neil will share more on our progress here shortly. And finally, our winning culture and talent, which is only getting stronger as we continue to attract our industry's best talent.

Speaker 2: We recently welcomed Emma Chawlin as Chief Marketing Officer.

Speaker 2: Emma is not only a great culture fit, but she has extensive global experience across all facets of marketing at companies like Salesforce and Adobe.

Speaker 2: We also recently hired an incredible head of our US federal government team and a senior executive in sales operations and another in our service organization to help us scale our go-to-market efforts.

Speaker 2: And of course, you all know our CFO , Zane Rowe, who is joining us today for his first earnings call. I could not be more excited to welcome these leaders who, along with our existing team, will help us achieve our next phase of growth.

Speaker 2: Turning to the highlights of the quarter, I will focus on five key areas, land, expand, global, industries, and partners.

Speaker 2: Starting with LAN, we see full financials and HCM platform wins on the rise, illustrating the trust customers have in Workday. Wins this quarter include Advocate Health, Assured Partners, Carilion Services, Portraya, KinderCare and University of Florida. And we continue to build on our market leadership position in HCM with new customer wins including Fusanias, Digital Technologies, Stellantis and Rio Tinto.

Speaker 2: Once we land customers, we immediately turn our efforts to successful deployments. In Q2, notable HCM go-lives include A1 Telecom Austria, A1

Speaker 2: Korean Airlines, Nike and Rite Aid.

Speaker 2: Strategic financial go-lives include Fitness International, MultiCare Health Systems, Wintrust, and the University of Washington.

Speaker 2: We also celebrated our first FedRAMP Go Live, which was a full platform rollout at a well-known civilian agency.

Speaker 2: Expanding our existing business with customers is key to our growth strategy.

Speaker 2: In addition to strong renewals this quarter, we had a number of expansions at companies such as Airbus, Dell Technologies, Lloyds Bank, Lowe's Companies, and 7-Eleven.

Speaker 2: Our faster time-to-value solution, which includes planning, pecon, extend, help, and talent optimization continue to gain traction, with many deals created and closed within the quarter.

Speaker 2: This year, we've put increased focus on financials go to market and it's starting to bear fruit with healthy customer growth in Q2.

Speaker 2: Beyond the full platform deals I mentioned earlier, we had a number of financial expansion wins in the quarter, including the Medical College of Wisconsin, Nordic Consulting, and Rakuten.

Speaker 2: Given our momentum, we continue to invest in financials' targeted sellers to lay the foundation for durable growth.

Speaker 2: From a geographic perspective, the U.S. continues to be our largest market, representing 75 percent of our revenue.

Speaker 2: The US team drove solid results in Q2, with particular strength coming from our customer base and industry teams.

Speaker 2: We have a significant runway for growth in this market and a healthy pipeline looking forward.

Speaker 2: Expanding our footprint globally is among our largest untapped opportunities and is a top priority.

Speaker 2: During Q2, we held 20 Elevate Customer events across EMEA and APJ, attracting over 5,000 attendees and generating hundreds of leads in net new opportunities.

Speaker 2: Not only are we building pipeline, we're starting to see more consistent execution in certain regions, notably EMEA. We saw strength in key markets such as Germany, UK and France.

Speaker 2: where wins included Rhenus Assets, Simrise, National Westminster Bank, and ALD Automotive SA.

Speaker 2: Our industry first approach is paying off.

Speaker 2: This quarter, retail and hospitality became our second industry joining financial services.

Speaker 2: to exceed $1 billion in annual recurring revenue.

Speaker 2: And we continue to have strong momentum in financial services which outperformed in Q2.

Speaker 2: The healthcare team also delivered another strong performance with three large hospital systems going all in on work based platforming Q2.

Speaker 2: A great example is Advocate Health, which is part of their merger with Atrium Health, selected Workday to replace a competitor's cloud HCM financials and supply chain management solution. Workday supply chain continues to contribute to our traction in healthcare with more than 220 healthcare organizations investing in it to reduce costs, promote standardization, and boost resiliency. Finally, our education and government team followed up a strong start to the year with an impressive Q2 with wins such as West Virginia University, DePaul University, and Metropolitan Community College, to name a few.

Speaker 2: The potential we have to accelerate our growth to our partner community is huge. We are seeing early signs that our partner referral program will positively impact new logos and our partnership with the AWS Marketplace led to multiple strategic wins in Q2.

Speaker 2: In EMEA, our recently announced payroll partnership with Alight is beginning to drive pipeline.

Speaker 2: And at APJ, our strategic partnership expansion with Samsung SDS is not only helping us drive overall business in South Korea, it also is enabling the development of region-specific applications built on Workday Extend.

Speaker 2: After spending time with many of our partners at our annual Altitude Conference this past quarter, it is clear our momentum is building. We look forward to welcoming more than 15,000 members of our Workday community at our annual Workday Rising Conference next month in San Francisco.

Speaker 2: We hope to see many of you there.

Speaker 2: As this quarter's results show, the diversity and mission-critical nature of our business continues to fuel our success.

Speaker 2: We are the clear market leader for cloud HCM in finance and our value proposition has never been more relevant or powerful.

Speaker 2: We are investing across our product portfolio, geographies, industries, and through partnerships to drive durable long-term growth.

Speaker 2: It is an incredible and exciting time to be a workmate, and I truly believe our future has never been brighter. With that, I will turn it over to my co-CEO and good friend Anil, who will share more about our AI and ML strategy and innovation highlights from the quarter. Anil, over to you.

Speaker 3: Thank you, Carl, and to everyone joining today's call, and especially to our nearly 17,900 workmates around the world for helping deliver another solid quarter.

Speaker 3: I couldn't agree more with the sentiment that our future is extremely bright. I've been on the road a lot recently to meet with current and prospective customers, and one thing is abundantly clear. More and more organizations are looking to Workday to be their trusted partner to help them navigate today's business landscape and thrive in this new world of work.

Speaker 3: Critical to our ability to be that trusted partner is our continued focus on artificial intelligence and machine learning, including generative AI.

Speaker 3: Last quarter, I highlighted Workday's unique approach to AI and ML, which began in earnest in 2014, with a focus on three key aspects.

Turning to the quarter subscription revenue in Q2 was 162 billion up 19% year over year professional services revenue was $163 million, leading to total revenue of $1 $79 billion.

Growth of 16%.

From a geographic perspective total revenue outside the U S was $442 million representing.

Representing 25% of total revenue and 15% growth in Q2 as.

As Carl mentioned, we see significant long term international growth opportunities, which we expect over time will become a more meaningful portion of our revenue mix.

24 months subscription revenue backlog was $10 $2 7 billion at the end of Q2 up 23% driven by new ACD bookings and strong renewals with gross and net revenue retention rates of over 95% and over 100% respectively.

Early renewals in the quarter exceeded our expectations and added roughly a point and a half of growth to 24 months backlog.

Total subscription revenue backlog at the end of the quarter was $17 eight 5 billion up 32%.

Early renewals in the quarter added roughly three points to the growth.

In addition, we continue to see longer contract duration on both net new deals and renewals, which speaks to our customers' continued commitment to our platform and is causing our total backlog growth to significantly outpace growth in the 24 month backlog.

Our non-GAAP operating income for the second quarter was $421 million, resulting in a non-GAAP operating margin of 23, 6%.

Margin strength relative to our guidance was driven by revenue outperformance and the timing of certain expenses.

Q2, operating cash flow was $425 million, which benefited from the timing of collections in the quarter.

During Q2, we repurchased $139 million in shares at an average price of $218 33 per share and we had $287 million in remaining authorization under our buyback program as of quarter end.

We ended the quarter was $6 7 billion in cash and marketable securities.

We continue to add key talent across strategic growth areas of the business and we ended Q2 with nearly 17900 global Workmates.

We're pleased with our financial performance in Q2 and focused on continuing to drive results in the second half while investing to support longer term growth.

Now turning to guidance.

Following our momentum in the first half of the year, we are raising our full year FY 'twenty for subscription revenue guidance to a new range of $6 $5 7 billion to $6 $5 9 billion.

Representing 18% year over year growth.

We expect Q3 subscription revenue to be 167, $8 billion to $1 68 billion representing.

Representing 17% year over year growth.

We're maintaining our FY 'twenty for professional services revenue guidance of $630 million to $650 million as we continue to strategically shift more deployments to our partner ecosystem as part of our channel strategy.

Q3, we expect professional services revenue of $165 million.

We expect 24 month backlog to grow approximately 21% year over year. In Q3. This includes our current outlook for early renewals in the quarter.

We are raising our FY 'twenty four non-GAAP operating margin guidance to 23, 5% and plan on maintaining a disciplined approach of investing in long term growth, while we expand margins.

For Q3, we expect non-GAAP operating margin of approximately 23, 5%.

GAAP operating margins for the third quarter and the full year are expected to be approximately 20, and 22 percentage points lower than the non-GAAP margins respectively.

The FY 'twenty four non-GAAP tax rate remains at 19%.

We expect FY 'twenty for operating cash flow of $1 95 billion growth of 18% year over year.

As we mentioned last quarter, we anticipate making our first semiannual payment of our employee cash bonus plan in Q3, which impacts our annual cash flow and quarterly seasonality for FY 'twenty four.

In addition, we continue to expect FY 'twenty for capital expenditures of approximately $300 million.

I'll close by thanking our terrific community of customers and partners for their continued support and I look forward to seeing many of you in the investment community at our upcoming financial Analyst Day on September 27th in San Francisco with that I'll turn the call back over to the operator to begin Q&A.

Thank you ladies and gentlemen at this time, we will be conducting a question and answer session.

I'd like to ask a question you May press star one on your telephone keypad.

Confirmation tone will indicate your line is in the question queue.

You May press Star two if you would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the starkey.

Please limit yourself to one question. So we may get to everybody's questions.

Our first question comes from the line of Kash Rangan with Goldman Sachs. Please proceed with your question. Thank.

Thank you very much and the energy on the call is just so palpable it looks like there's a lot of new leadership changes at congrats Zane on joining a great team here I had one on one thing or maybe two things the importance of data in the world of AI, you have data on $65 million.

Professional workers.

At a high level, how could you, possibly monetize with AI the value of this data in the years ahead, and therefore its implications for the pricing power of Workday and if you could.

Are there any pent up.

Areas within the portfolio that might have taken a bit of a.

Seatback because of the caution in the spending environment that caution goes away, where do you see maybe geographies or product segments that could do even better in the year ahead. Thank you so much and congratulations.

So kash I'll take on the.

The first part and good to hear your voice.

The data is so is really valuable because it lets us train the the large language models and what Youll see US do is have.

With the large datasets, we can not only train the large language models. We can then do domain specific large language models and those are.

Our smaller and less expensive.

And we turnaround use those models to either make our products more competitive or the basis of new skus like.

<unk>.

Like.

The skills cloud.

You can see us more in the mode of <unk>.

New skus like skills cloud, rather than actually charging for any insight from the data that it's the customer's data.

They allow us to use it anonymize way and we give them the results back, but I think what it what it allows us to do is trained these large language models and then domain specific ones that will create new skus.

Yes, and just one quick add on then we'll talk about some of the other questions you had cash great to hear your voice.

Think it's important to know that.

Aneel and Dave did from the beginning as they built this platform in Naperville, AI and ml deep into the platform. So it's been built in and we've already seen a positive economic impact to workday through our industry leading <unk>.

Customer sat our renewal rates and competitive win rates still remain strong because of AI and ml and its built in from the beginning so I think that's a differentiator for us against those 65 million users and 600 billion transactions that we get on the platform a year as it relates to your second question, maybe I'll start Doug and then you can jump in.

We haven't seen any pullback due to any macro headwinds in any of the things we're selling into the market. If anything I think our value proposition is only resonating more cash as people look to consolidate multiple.

Products or sometimes called best of breed onto best of suite platforms, and they're consolidating on top of workday for both their financials and their HCM and wrapping our.

Our adaptive planning product around both so we continue to see strong momentum across the board and you mentioned geographies. Our European team continues to do quite well we've talked about at the last couple of quarters and our focus on international and they continue to deliver for us and they are much more predictable.

And they are driving strong pipeline in EMEA and then we will still continue to work on a P. J to grow that business out Doug do you want to add any additional color I think thats.

Some of that I was I would echo as well.

And just as you as you coined it sort of the lifting caution cash I think that caution is still out there and that still shows up in the additional deal scrutiny, but I would say just to give you a little more insight. We were really pleased with the performance of U S. Large enterprise and Carl mentioned EMEA I contribute I attribute that to execute.

<unk> as much as maybe a lifting caution, but it's been really nice execution across Europe in the first half.

Thanks, Doug.

Our next question comes from the line of Mark Murphy with Jpmorgan. Please proceed with your question.

Thank you and congrats on an absolutely stellar performance.

Zane I'm wondering if you can dimensionalize it all of the spin.

Quota capacity increase that youre, bringing on board or how.

How much you could bring on just relative to the demand signals.

That youre seeing out there and then for Carl or Aneel I'm curious if you see more.

CD out there in the mid market.

Or perhaps sensing an inflection up at.

The global 2000 level for some of the customers that might be to handle.

Complicated currencies or legal entities minority interests.

Localization and that type of that type of an arrangement.

Sure Mark I'm happy to start and then hand over to Carl is as you point out we're bringing on.

Some significant amount of thin sellers as we see that opportunity I'd say, both on the domestic side and on the international side I'd.

I'd say, it's still early days there as we bring them on obviously it will take some time for us to see all of those benefits, but it's clearly a focus area for us I will tell you that the unit growth and since this quarter was tremendous and exceeded our expectations. So we're very pleased with the growth that we're seeing and optimistic about what we can do in the future of their own.

With the with the additional go to market capacity.

Thanks for that color Mark as you know six months ago, we decided to put a big investment in our go to market side, specifically around things and while it takes it takes six to 12 months to get your reps up and ramped we're seeing early indications of it.

Providing significant leverage in the business one of the ways. It's turned up here this quarter as Zane just talked about is we saw really good growth in number of new thin units sold on a year over year basis.

Into the market, but it's more than just selling things. We're also seeing the knowledge set that we have across the field now with with financials is actually impacting our full platform sales. So our full platform sales are only accelerating as we sell both HCM and fins into the market.

At the same time, and we saw a specifically kind of into your next question.

In the medium enterprise business the medium enterprise, we see.

Full platform sales very regularly at this point and I think that's attributed to the build out of our our <unk> sales force and then the last thing I'd talk about is defense sales force helps us continue to drive a land sale with planning planning continues to be a good product for us we're landing with it opens up the door for us to go.

Back and sell both <unk> and full platform into those customers that we landed with planning. So there is no doubt at this time to two things.

Build out of the sales force is paying dividends as it relates to the medium enterprise, we had a really solid quarter in what we described in medium enterprise segment and I think the highlight there was specifically, we're seeing more and more full platform sales into that market segment.

And we're very pleased with their performance spin.

Specifically here in the U S and we're going to replicate that internationally as we build out the medium enterprise globally.

Thank you very much.

Our next question comes from the line of Brad Sills with Bank of America. Please proceed with your question.

Wonderful, thanks, and great to see the great results here.

Wanted to ask one on the expand success that Youre seeing here I know Carl it's been an initiative here to go back to the base here is there any color you could provide as to where you're seeing particular strength. There is so many modules within HCM and fins that I would love to get some color from you as to where Youre seeing success. There and then the second question would just be on the macro you mentioned that.

Youll scrutiny is still there is that outsized in office of HR versus office of the CFO , where might we see some potential acceleration coming out of the macro and the differences there. Thank you.

Yes, sure. So yes, we are.

One of the things, we really like about our business model is what we describe as both the diversity and durability of our business from a diversity perspective.

Still landing a significant portion of our business on net new deals, which is really exciting to see and when you land net new deals would that provide you as a platform to sell back into your customer base and we have two different selling motions. There in this quarter and we had a really balanced performance across selling back to the customer base and landing net new.

And thats emotion that we're going to keep leaning into and Oh by the way, we talked about things when we're adding things sellers, whereas you're separating them into selling net new things and back into the customer base. So this this motion is clearly working for us as it relates to macro maybe I'll just do high level, and then ask Doug to chime in and see what are you seeing.

<unk>.

Customers daily.

Nothing has changed over the last few quarters.

And because of that we continue to perform quite well because I think our sales force is very skilled at navigating the extra scrutiny, they're going to get as well as theyre doing really well at understanding the sales process and their closing deals and theyre getting them across the finish line that's both.

Attribute to our sales force globally, but I also think it comes back to the strong value proposition were providing customers as we continue to be you know the platform. They are choosing to support both our people and their finances are two most precious asset. So it's a combination of good execution understanding the sales cycle.

And us continuing to have a strong value proposition for our customers and prospects and I'll ask Doug to color our add any additional color on the macro yep. Thank you Carl and nice to talk to you Brad.

From a macro perspective.

I ask the question, whether it shows up in one area or the other I think you meant between HTM or fins and I'd say not really I think.

It's fair to say that the extra scrutiny is on and he taller spent in corporate America or across the globe is getting that scrutiny. So it is sort of across the board I would say, perhaps more pronounced I don't know if scrutiny is the right way to describe it in net new versus customer base, which is why the customer base has been such an.

And part of our motion over the last two years at the company and which was your first question around expand so in that motion, we really sort of see two key things. One is is this notion of creating close or what we call speed skus or speed solutions. So just to highlight their pecan.

Lanning talent optimization those tend to go quick time to value and tend to be really strong in quarter sort of create opportunities and close but at the same time, we have our customers of the customer base doing larger what I would describe as more strategic enterprise type agreements, we talked about the expansions across the Airbus.

Lloyds Bank lows 711, this quarter those are already big customers committed to the platform, but have taken on an even more strategic approach with us as they look to consolidate vendors and standardize on our platform.

Wonderful to hear thank you so much.

Our next question comes from the line of Kirk <unk> with Evercore. Please proceed with your question.

How much in.

Welcome to vein good to hear from you again, Carl I was wondering if you could just double click a little bit on international and what Youre seeing in that region.

Yes, maybe across some of the products and I was wondering if you could also just talk about the investments that youre, making today and sort of the.

The opportunity for those to kind of come to fruition from a bookings perspective next year I guess, just a little bit more color on international would be helpful. Thanks, Yeah. Thanks, So I'll talk specifically.

About EMEA, which both Doug and I already mentioned, but this is an area that we I think you are aware over the last couple of quarters. We've shared that we brought in a lot of new leadership across the region. Both in the U K at the entire EMEA level in dock in France. So we've really built out our leadership team there and they are actually bringing in more and more talent.

Underneath them and it is starting to clearly pay dividends. We are seeing early signs of solid pipeline build that's much more predictable than we've seen in the past, we see more predictability in the business because they have their arms around it and they are selling both HCM and fins successfully the other thing we're seeing which is.

A little bit of replication from what we're seeing here in the U S. As you know the EMEA market as a whole is very much in medium enterprise business, and they're doing really well selling full platforms into the EMEA market.

More customers see the true value of combining both HCM and financials and again wrapping planning around it for that full platform sales. So we definitely are seeing the momentum there.

And we do have some big competitors in our backyard, there, but when we look at our competitive win rates.

Across the market, including in the backyard of some of our big competitors or competitive win rates are holding up our discounts are holding up so they are really executing well and taken.

A really strong approach to the market. So we couldnt be more pleased with what's happening in EMEA internationally. If you go into a P. J, we had an okay quarter, we still have some work to do there. We think there's tremendous upside in a P. J market and we will continue to add resources both on the <unk>.

Go to market and continue to internationalize and localize our products. So we can have a better fit than some of the emerging markets, we're going after and APG.

Thank you.

Our next question comes from the line of Alex Zukin with Wolfe Research. Please proceed with your question.

Hey, guys. Thanks for taking my question.

Maybe the first one for you and then quick one for Zane.

You mentioned.

A couple of really interesting.

Yields in a number of different verticals, including state local and you talked about a fed ramp deal.

I guess maybe can.

Can you dimensionalize the growth of some of these <unk>.

Verticals relative to financial services and retail hospitality.

When.

When do we think that the kind of the state local and federal health and life Sciences. The education verticals can start to rival that type of scale that youre seeing.

With and serve.

<unk> and retail and hospitality.

And a quick follow up for Jay.

Yeah. So thanks for the question, Alex and as you know, we don't break out or share specific percentages on any given market segment.

Or industry, but in the case.

This time, we did highlight our second $1 billion in annual recurring revenue business in retail and hospitality, which continues to be quite strong and growing and we had another really solid quarter.

In industries as a whole and specifically in higher Ed, we called out healthcare and financial services.

In the government business listen we're still in the very early days of state and local government and I think Theres only 15 states. At this point you have decided to do a full platform replacement, which leaves you know 35% to 36 states up for opportunity for us going forward and we think we have a really good solution.

For that market and on the federal side listen we're just starting we have fed ramp moderate we said we were excited to see our first customer civilian agencies do a full platform rollout on our fed ramp cloud and we also said we were bringing in a new leader right really seasoned leader to.

Help us lead federal going forward. So this is an area, we'll continue to lean into we do see opportunity in federal even without having fed ramp high on the cloud we do have a lot of opportunity with the existing agencies and we see that as a rich market for us going forward.

Around the early renewal dynamic that you guys are seeing this year clearly a solid benefit for.

24 months.

Backlog it sounds like Theres also some some benefit in the guide for Q3, maybe just dimensionalize that and remind us like what's the customer activity is at an incentive that you're giving is that the macro.

What's driving this and what do we think about this as a future headwind do we think about this as an opportunity for code firming that up sell.

Is the right way to think about this.

Alex Yeah, I'll start and then let Carl chime in as well as you point out we're very pleased with the.

<unk> growth on the 24 month side. This quarter was 22, 7% growth, but as we pointed out for the reasons call and Doug mentioned, we saw about a point and a half of that be early renewals coming into the quarter, which is a terrific opportunity for us to interact and interface with our customers as well as up sell them as well. So we're very pleased.

So the outcome in Q2 as we look to Q3, what we've done is taken a look at what our expectations are for Q3, which is included in that 21% increase as part of our guide I'd say approximately a point of that as we look out to the next quarter right now is included.

In that 21%. So we believe that activity will continue again, we're thrilled with the activity. It means our customers are doubling down on us they are leaning into that platform and we couldnt be more pleased with that as you point out obviously, we've been running ahead of subscription revenue for some time on our <unk>. So we would expect some variability related to subscription revenue in the future, but we will.

<unk>.

The early renewals when you think it's a terrific opportunity for our customers to continue to buy into the platform Karl that you add to that yes. Thanks Zane Yeah, Alex we did have another really good quarter of.

Selling back into our customer base, we talked about that earlier and that is what drives a lot of the early renewals, but I'd want to make sure. It's clear to everyone. We don't Incent our teams to drive early renewals, we incent our teams to work with our customers to add additional skus as they look to consolidate more and more on top of the HCM or the financials.

Platform. So the demand is being driven by our customers and then we go when we work with them and in some cases, they add new skus and when they do so they actually do early renewal in a co term their agreements, which drives the uplift that Zane talked about in our 24 month RP O. So I'm.

We're not sending people to do it its customer demand they are looking to add more and more modules and as we continue to innovate and bring new skus to market. We would expect this to continue going forward.

Our next question comes from the line of Keith Weiss with Morgan Stanley .

Please proceed with your question.

Excellent. Thank you guys for taking the question and congratulations on a really strong quarter.

I wanted to.

Extend on bread sales earlier question about kind of the <unk>.

Sell motion. It seems like you guys are having a lot of success there Carlin Zane when I think back to your guys time at Vmware.

Vmware was a machine in terms of packaging and mechanisms for selling more solution into into existing customers and it does a huge kind of successful part of that business are there sort of learnings or sort of mechanisms or improvements that you guys can make in that upsell motion that you could bring on board.

Turbocharged this upsell effort, even further from what we've been seeing thus far.

Yeah, I'll take that and thanks for the question Keith I hope you're well.

Listen the teams are doing really good at already.

Selling back into the customer base I think it has to do with the motion it Doug and Patrick are driving with two different if you will sales forces one selling only to customer base and the other selling net new.

And because we have that focus on customer base sales I think the teams are driving these new skus back into our customers.

Specifically as it relates can we do things differently.

Potentially.

Looking at different ways to price and package our products in the future to make it easier and more consumer both for our customers and make it easier for our sales reps to sell but right now we do.

Have any if you will new plays that we're running I think the team is executing well our customers clearly see the value of the additional skus that.

We have in the market and clearly see a total cost of ownership play by consolidating on top of our platform. So I don't think Youll see any short term change here Keith.

But we're always looking for ways to innovate and go to market and one of them would be through some type of pricing and packaging in the future Keith I would just add we continue to obviously invest in this area. It's one of tremendous opportunity for us and we spend a fair amount of time looking at it and thinking about what's the next best opportunity for the customer to recognize value.

And of course in turn for Us to do the same so it's a it's an area that we continue to see good progress on.

Excellent Super helpful. Thank you.

Our next question comes from the line of Brent Thill with Jefferies. Please proceed with your question.

Carl earlier in the year, you unveiled a new partner referral program may be too early to see the fruits of this new program, but curious.

What youre seeing and ultimately what you.

Over the next six to nine months with with this partner program.

Yeah sure. Thanks, Brian good to hear from you we did launch.

A new partner program, there's many facets to it <unk>.

Including technology arrangements and collaboration on the technology front, including co sell and quoted including resell and also we rolled out a referral program and I will say, we're seeing early signs of the customers really leaning into this new program and they're also getting value because they're innovating on <unk>.

Top of workday, leveraging things like extend to expand our market opportunity with us as well so.

We the resell program, that's phase II, but the co sell and referral program has kicked off and we're seeing nice uplift in referrals from our partners on a global basis. Another thing. We did is we launched a partnership if you recall Brent with AWS.

We're selling through the marketplace and we have seen a number of opportunities in Q2 that were driven from that partnership with AWS as people are looking to burn down the credits they have with AWS today. So overall, we're very excited about the partner program. We had a big partner conference just last month.

We had over 3000 people join us at our altitude conference, where we spent more time articulating our new program and sharing with them how they can both monetize the workday platform to sell more services and innovative solutions and also help us drive net new outcomes and get paid for it.

Thank you.

Our next question comes from the line of Karl Keirstead with UBS. Please proceed with your question.

Thank you welcome aboard saying I'll direct this one to you.

As you just alluded to the gap between the 24 month backlog and the sub revs growth has historically been pretty narrow, but it's widened out a lot in recent quarters, two 3% to four points I'm. Just curious why is that and over what timeframe do you think that gap will close maybe it's partly due to the early <unk>.

Renewals you mentioned, but maybe there are other factors. Thanks for unpacking that for Us of course, Karl Great to hear from you as we mentioned, we're really pleased with the program we have behind that.

And the additional backlog and the performance we've seen on our Apio has even exceeded our expectations over the last number of quarters and it's driven by a number of variables I think both Karl and Doug talked about the relationship with the customer as well as our opportunity to expand those skus that relevance with our customers. So we're pleased with the performance there now some.

The variability, we talked about education and Gov, we tend to see longer duration with those contracts. So that'll have a natural extension and in many cases, especially if you look at the topline growth of backlog in our Po.

We see significant increases driven by that mix shift and then the other dynamic is of course, the early renewals that we talked about where it's another opportunity to engage with the customer to go deeper into the platform as well as sell more of our skus. So it's as I pointed out in the third quarter, we feel like the second quarter.

Was higher at least our current expectations at the second quarter and the activity. We saw there would be higher than what we see in the third quarter part of it is also doug's team and just where they spend their energy and we've obviously leading up to a seasonally strong fourth quarter. So we like the motion we encourage the motion it's an opportunity for us to lean in and have a longer and more durable relationship with our customer base.

<unk>.

We believe youll see that reflected in the numbers, but to your point it may create a little bit of variability. If you looked at backlog and the variance between backlog and subscription revenue, but we're solely focused on driving continued growth in the business and particularly focused on that subscription that long term subscription revenue line hopefully that helps yes. It does thank you Greg.

Our next question comes from the line of Brad Zelnick with Deutsche Bank. Please proceed with your question.

Great. Thanks, very much for taking my question Theres, a lot of goodness in the results and the message so I'll I'll.

<unk> My welcome to Zane and congrats to you all.

My question actually for you Zane is in your comments, you've said that workday plans on maintaining.

A disciplined approach of investing in long term growth, while expanding margins, which I think is music to everyone's years, but can you expand on what that means to you and if theres any sort of framework or even rule of thumb that we should consider in the years ahead.

Hey, Brad it's good to hear from you I would say generally we're at a unique opportunity here at the company to do exactly that which is to lean in and to make smart investments Karl has highlighted a number of those whether it's partners whether it's international defense product. We're at a point, where I think this is an opportunity to really lean in on our Tam opportunity in that.

Growth that we can see across the platform. So from a finance side I think we benefit because we can make thoughtful investments and help the business grow both on the product side, obviously, we talk about AI ml and the tremendous opportunity. We have there. But then also on the go to market side, when I look at that balance between 75% domestic and 25%.

I, just think it's ripe with opportunity to grow on the international side, but do it in a thoughtful way as Carl alluded to on the EMEA side.

The uncertain backdrop, we've seen great opportunities there and we've seen good growth there. So I'm just pleased when I look at the opportunity to be here to leverage the finance side and to lean in on where we make these investments and then we continue to see topline growth and as I just mentioned on the <unk> side, we can see significant ARPA growth, but along with that.

We have investments in interesting areas that create longer term revenue growth and subscription revenue growth as well around the globe. Karl that you had a few yes, no I think.

You said it well Zane we continue to invest on the go to market side, but I wanted to make sure everyone knows we're investing heavily on the <unk>.

Product and technology front as well in neil's, leading that charge with Cheyenne, we continue to invest to drive innovation.

Here at Workday, and we're leaning into the AML opportunity.

Which we think will bear fruit in the future. The other thing to think about is how do we get operating leverage from AI and ml internally, we think by using these technologies, we can actually drive better operating margin, which allows us to reinvest in go to market and product.

In the future so theres kind of a flywheel effect, we can get from the benefit of AI and ml.

Great stuff. Thanks, so much guys. Thank you.

We have time for two more questions. Our next question comes from the line of Michael <unk> with Wells Fargo. Please proceed with your question.

Hey, great. Thanks, Congrats from me as well on the results.

Youre getting a number of questions on the backlog metrics, but it's really the consistency of those metrics that continues to impress you are guiding for low twenty's growth again next quarter. So maybe you can expand on just what's helping sustain such a consistent growth.

<unk> growth profile in an inconsistent environment, and then going back to the international side. There were some encouraging commentary around EMEA, but the growth rate there still lagging a bit. So I was just wondering if there are signs youre seeing that can help the growth rate there maybe pick back up and take some of the load off of the U S strength Youre seeing thanks sure Yeah, I'll start and then hand over to Carl.

As we pointed out with backlog, it's really that relationship with the customer and the diversity of the business and the contract lengths that have helped support that and it's been doug's team.

Interacting interfacing with those customers and leaning in more on the platform and that's what you see reflected in those <unk> numbers. Our success that we've seen on the renewals has clearly helped.

Our customers engage more create more uplift as well as extend the duration of our relationship with them. So I think it's that compounding effect that you've seen over the last number of quarters and again I would highlight that not only do we lean in there, but if you wouldn't always expect as we look out for the remainder of the year or even into next year, it's not that we're pushing the backlog.

We're focused on subscription revenue and continued subscription revenue growth and.

And the backlog just happens to be in that big <unk> increase just happens to be a byproduct of the interaction and interface that we have with those customers on a long term relationship that we've developed with them Karl that you may be give us.

I think youre asking specifically on the first question about how do we continue to do this and I think it's just the strength of the platform, we have and I think.

With some headwinds in the market that everyone continues to face people are looking to do more with less and by doing so they are looking for a total cost of ownership play and I think we provide that both on the HCM side and the financials as people consolidate what I said earlier from best of breed to best of suite.

And it's also driving a different level of employee experience, we're helping drive productivity gains for our customers, we're helping them upskill and reskill their folks, we're delivering a new level of employee experience and by doing all of those people just continue to put more and more on top of our platform and even if it is our own skew there leveraging things like.

Extend to build other solutions on top of the Workday platform. So I think you know.

This motion of selling back into the base is going to continue as people consolidate more and more on top of us as it relates to the international growth again, we're highlighting we saw really good performance out of our team in EMEA specifically.

And we're encouraged by both the consistency and predictability of their performance and a strong pipeline that we're building over there for as we head into the second half of the year, Let me say, though on the flip side, if I can Michael right. Our U S team just continues to drive really solid performance as well and they are outperforming in a number of key areas like.

Large enterprise and across some of those industries that we spoke about today.

Our education business health care and financials.

We're aiming to keep driving ray our U S business and watching them continue to perform and outperform and at the same time, China drive international growth and it's always important to remember the international growth from bookings doesn't actually get you know.

Shown in right in the same quarter Youll see it in the out quarters as we look to continue to drive that growth, we will see a slight shift over there over the coming years.

From $75 25 to something that we get more impact and more performance from the international teams.

Our next question comes from the line of Richie Deloria with RBC. Please proceed with your question.

Oh wonderful. Thank you guys. So much for taking my question.

Continued strength and resilience in the business I wanted to go back to talking about generative AI and your opportunity there clearly a big opportunity to leverage the data you have and use it to make the product and platform better, but I wanted to talk about the opportunity to maybe utilize generative AI both too.

Accelerate migrations from legacy on premise solutions in terms of making it easier for cut.

Custom applications to migrate as well, making it easier for that data to transport and maintain transfer and maintain data fidelity.

And maybe at the same time, even on your end utilized generative AI to reduce the services attach rate and bring down that services mix a little bit over time any way you could help me kind of understand.

They utilize it on that would be very helpful. Thank you so much.

The first part.

We are definitely looking at generative AI to.

Do a better job of data.

Transfer and transformation from legacy systems, and I think over time, it'll be increasingly automated with AI.

So that's already.

Already in motion on the second one it's definitely something we're exploring them and how we bring AI into our services organization to speed up implementations.

Stay tuned on that part we're very focused on.

The products that we deliver to our customers and one thing to think about is actually.

How we build AI into the products to make them easier to implement but thats.

That's a work in progress at this point.

A great question.

That is all the time, we have for questions ladies and gentlemen, Thank you for your participation on today's conference I'll now turn it over to Mr. Eschenbach for final comments.

Thank you operator, and thank you for everyone joining today's call and a special thanks to our Workmates customers and partners around the globe that continue to fuel workdays success Q2 was another solid quarter highlighted by the diversity and mission critical nature of our business. We have an exciting opportunity ahead and we are.

We're all well positioned as we think about the second half of the year and beyond I look forward to seeing many of you at our upcoming rising conference in financial Analyst day in San Francisco with that I will hand, the call back over to the operator to close today's call and I hope everyone has a great evening.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day.