Q3 2025 Workday Inc Earnings Call

Mhm

Um

Mhm

Mhm.

Hello, welcome to Workdays fiscal 2025, 3rd quarter earnings call.

At this time all participants are in a listen only mode. We will conduct a question answer session towards the end of the call. During Q and A, please limit your questions to one.

I will now hand it over to Justin Furby, vice president of Investor relations. Mr. Furby, you may begin.

Thank you operator.

Welcome to Workday's 3rd quarter fiscal 2025 earnings conference call.

On the call we have Carl Eschenbach, our CEO, Zane Rowe, our CFO, Doug Robinson, our co-president, and David Sommers, our chief product officer.

Following prepared remarks, we will take questions.

Our press release was issued after close of market and is posted on our website where this call is being simultaneously webcast.

Before we get started, we want to emphasize that some of our statements on this call, particularly our guidance, are based on the information we have as of today.

And include forward looking statements regarding our financial results, applications, customer demand, operations, and other matters.

These statements are subject to risks, uncertainties, and assumptions that could cause actual results to differ materially.

Please refer to the press release and the risk factors in documents we file with the Securities and Exchange Commission, including our fiscal 2024 annual report on Form 10K and our most recent quarterly report on Form 10Q for additional information on risks, uncertainties, and assumptions that may cause actual results to differ materially from those set forth 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. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from gap results.

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

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

Additionally, the transcript of this call and our quarterly investor presentation will be posted on our investor relations website following this call.

Also, the customer's page of our website includes a list of selected customers and is updated monthly.

Our 4th quarter fiscal 2025 quiet period begins on January 15, 2025.

Unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal 2024.

With that, I'll hand the call over to Carl.

Thank you, Justin, and thank you all for joining us today. I'm pleased to report another quarter of solid financial performance in Q3 with 16% subscription revenue growth in non-GAAP operating margins of 26%.

These results are a testament to the strong customer relationships we have across industries. The growing demand of our AI innovation and the power of our ecosystem around the world.

More and more organizations are consolidating on the workday platform for a few key reasons. They want to reduce total cost of ownership, simplify their operations and harness the power of AI across our best in class, HR and finance solutions and provide employees with an amazing user experience. Workday gives them the ultimate advantage.

That was evident in Q3 by the growth we had in full suite and in our net new wins,

Customer expansions across geographies in segments along with industries.

Several industries were strong in the quarter in government and higher education were two of the standouts.

Roughly 90% of the winds in these industries were full suit in Q3, the Defense Intelligence Agency expanded its business with Workday.

In Lake County, Illinois, Maryland General Assembly, New Jersey Institute of Technology and university system of Georgia all chose workday to modernize their systems and meet the rising expectations of their constituents.

This quarter, professional and business services became the 3rd industry to exceed $1 billion in annual recurring revenue. Alongside financial services and retail and hospitality.

Advantage solutions Connells Limited in Flight Center travel group all selected Workday.

And in health care we had a huge full suite win with Common Spirit Health, one of the largest nonprofit health care systems in the US as well as community health system in Valley Children's Healthcare.

From a product perspective, our HCM solutions are really setting the pace when it comes to the future of work. In the quarter, we had wins with Brookshire Grocery Company, IOI Group, Promo, Royal Mail, Team Health, just to name a few.

We're also continuing to invest in our financials business, and that's driving demand for our full suite. More than 35% of our new core customers in Q3 were full sweet.

And in Q3 we were again named a leader in the 2024 Gartner Magic Quadrant for cloud HCM suites for 1,000+ employee enterprises, cloud ERP for service-centric enterprises and financial planning software.

And speaking of planning, that business had a great Q3.

We either expanded or form new relationships with some fantastic organizations like Deloitte, the Fitness and Lifestyle Group.

Motion picture association in Tenant Healthcare.

And we were thrilled to have AWS go live on planning in Q3.

AI is top of mind for every CEO right now. And they're all looking for the right partner to guide them through this transformation.

That's where Workday comes in.

Our customers know that an investment in workday is an investment in AI and we're seeing a ton of excitement and demand for our AI solutions.

In Q3 alone, more than 30% of our customer expansions involved one or more AI solutions, including talent optimization, extend Pro and recruiter agent powered by higher score.

Talent optimization remains one of our fastest growing skews in its driving tangible value.

Customers have experienced up to 39% reduction in turnover.

recruiter agent in particular had a huge quarter with wins that Johnson controls, Cox Enterprises, and UFL Health. In fact, the team closed more new logos in Q3, then in its 12-year history and our new ACV more than quadrupled compared to Q2.

And what's awesome is that recruiter agent is boosting the average selling price of our core recruiting solution by almost 150%.

It's clear that customers are ready to invest in AI that's built for their very specific needs and delivers real results.

They want solutions that are easy to implement, quickly provide value without the need of a ton of IT support. This growing demand shows a huge opportunity we have to grow and monetize this part of our business.

So let's talk about how we're going to capture this opportunity with our innovation.

With more than 70 million users under contract generating more than 800 billion transactions a year on our platform. Our AI leverages the world's largest and cleanest HR and finance data set.

In our industry where decisions are high stakes and complex.

The quality and quantity of our data is a critical differentiator in the combination of this data with our ability to understand the context behind it.

Enables Workday to unlock value in a way that no competitor can do.

At rising, we unveiled illuminate the next generation of Workday AI with illuminate where unlocking a whole new level of productivity in human potential by accelerating manual task, assisting every employee and ultimately transforming entire business processes.

As part of Illuminate, we launched a set of new AI agents that uniquely transform some of the most complex business processes in HR and finance, such as recruiting, expense management and succession planning.

Recruiter agent is available now. Expense agent is expected to become available by the end of the year in several more will soon follow.

We believe optimize agent, which is coming out next year is going to be a true game changer.

It pinpoints bottlenecks, inefficiencies in areas where processes aren't running as smoothly as they could be.

The possibilities with this are endless, and I'm fired up about it.

Beyond the agent's workday is delivering. We're collaborating with our partners to support agent to agent communication for employee self-service needs.

Salesforce is a great example here.

So is our recent partnership with Microsoft on its M365 co-pilot employee self-service agent.

We also updated workday assistance with our Gen AI co-pilot.

Employees can use it to ask questions in natural language about anything from their pay and benefits to company policies and get quick personalized answers.

More than 2000 of our HCM customers are using the currently available workday assistant to improve efficiencies, including one of our customers who has been able to cut down HR case volumes by almost 30%.

We believe the new co-pilot will help drive even further increase in productivity, allowing employees and HR departments to focus on more strategic work.

CIOs get super excited when we talk about workday assistant.

Other solutions out there require organizations to take sensitive data like payroll information and move it outside their core systems.

That is a big risk and no one wants to take it.

With Workday, everything stays secure within our trusted platform.

Continuing to accelerate our AI roadmap. We closed our acquisition of Evisor, a leading document intelligence platform.

Consider this. Over 80% of business data is unstructured, making it difficult to search, analyze, or use effectively.

This includes critical information locked away in contracts, invoices, and policy documents, just to name a few.

With Eort's powerful AI, our customers can now unlock critical insights from this untapped data, empowering them to make faster, more informed business decisions.

The strength of the workday platform continues to draw interest from customers and partners alike.

We've now got over 1000 customers building their own custom applications on our workday platform using extend.

Making it one of our fastest growing products ever.

In fact, new ACV for extend more than doubled within a quarter compared to last year.

with our AI gateway and developer co-pilot is having an even greater impact with its average selling price double that of extend Essentials.

Our partner ecosystem has grown nearly 5 X in just 18 months and it's more diverse than ever.

Our partners are becoming increasingly critical to our growth, sourcing over 10% of our net new ACB in Q3 and a similar percentage of our new pipeline.

We've seen rapid adoption of our bill on workday program, which we launched less than 6 months ago.

We've already got over 40 partners on board and partners like Cano's are generating revenue from it.

At rising, we announced Workday wellness, which gives companies real-time insights into how their employees are using their benefits.

This helps them design more tailored benefits programs right within Workday 8CM to improve the overall employee experience.

We're excited to have Guardian, the Hartford, Mutual of Omaha in Unum already signed on as strategic partners.

International growth continues to be one of Workday's most compelling opportunities. This past quarter, I spent time with customers and our amazing workmates in the UK, Ireland, Germany, France, and Japan.

The energy and excitement is incredible. In Q3, we formed a new strategic partnership with NTT Data, one of the most influential system integrators in Japan.

And in AIPAC we form new relationships with SDA, a major Australian aged care provider in flight center, a leading Australian travel and leisure brand. We also expanded our footprint with united overseas Bank, one of the largest banks in Singapore.

Over in AIA we face the same deal scrutiny we've called out the last few quarters, but we had our largest ever public sector win with the Department for Science, Innovation and Technology in the UK.

That's generating a lot of interest from other UK public agencies.

We also had major wins with big enterprises like Decathlon in France and Goldbeck in Germany.

And we're gearing up for rising AI and Amsterdam in just a few weeks.

The relationship we are building around the world point to the significant long-term potential of our international business.

While only 25% of our revenue comes outside the US today. We're laying the groundwork for something much bigger.

Before I wrap up, I wanted to give you a quick update on the team.

We recently announced that Doug Robinson, who has been an incredible leader over the past 14 years, will be retiring at the end of the fiscal year.

I can't thank Doug enough for the tremendous impact he's had on Workday.

We're excited to have him continue in an advisory role to the company.

With Doug's retirement, I'm thrilled to welcome Robinsland to Workday as our new president, chief commercial Officer.

Workday continues to be a magnet for great talent, and Rob is another great example.

He's a world-class executive with more than 30 years of experience in the enterprise space. He brings fantastic customer and partner relationships in a proven track record of success.

He's a perfect person to lead our go to market efforts as we move into the next phase of growth.

As you can see, it's been a busy quarter.

We have a clear target between now and FY 27 of driving mid-teen subscription revenue growth while expanding non-GAAP operating margins to 30%.

We plan to achieve this by continuing to innovate and take share in our core markets, while also streamlining operations across the company.

But what really excites me is the opportunity we have ahead of us as we lead our customers through the AI revolution and helped them transform their organizations for the future of work.

I'm incredibly grateful to my workmates for their contributions this quarter.

With our amazing culture, continuous innovation.

In the trust of our customers. Workday isn't a fantastic position to drive sustainable, profitable growth as scale.

Thanks again and to those of you joining us in the US, Happy Thanksgiving.

With that, I'll hand it over to Zane.

Thanks, Carl, and thank you to everyone for joining today's call. In Q3, we continue to make progress across a number of our key growth areas as we lay the foundation for durable, profitable growth at scale.

Subscription revenue in the 3rd quarter was $1.959 billion up 16%.

Professional services revenue was $201 million resulting in total revenue of $2.160 billion growth of 16%.

US revenue in Q3 totaled $1.62 billion and international revenue totaled $537 million. Both growing 16%.

12 month subscription revenue backlog or CRPO was $6.98 billion at the end of Q3, increasing 15%.

Total subscription revenue backlog at the end of the quarter was $22.19 billion up 20%.

Gross revenue retention rates remain strong at 98%.

Our non-GAAP operating income for the 3rd quarter was $569 million resulting in a non-GAAP operating margin of 26.3%.

Q3 operating cash flow was $406 million in line with our expectations, though down year over year, impacted by the stronger than expected collections activity we called out in Q2.

During the quarter, we repurchased $157 million of our shares at an average price of $242.42 per share.

We had $902 million in remaining authorization under our buyback program as of quarter end.

We ended Q3 with $7.2 billion in cash and marketable securities.

As of October 31st, headcount stood at nearly 20,500 workmates around the globe as we continue to hire talent across targeted growth areas.

A few of our strategic wins in Q3 have future product deliverables in FY 26. This slightly impacts our near term results as these ones don't fully benefit subscription revenue until next year.

We expect Q4 FY25 subscription revenue to be $2.025 billion growth of 15%.

And full your subscription revenue of $7.703 billion an increase of 17%.

We expect Q4 CRPO growth to be between 13.5 and 14.5%.

We expect Q4 professional services revenue of approximately $155 million resulting in full year professional services revenue of $712 million.

We continue to balance targeted investments in key growth areas with increased focus on company-wide efficiencies.

As a result, we are raising our FY 25 non-GAAP operating margin guidance to 25.5%.

And we anticipate a non-GAAP operating margin of approximately 25% in Q4.

Gap operating margin for both 4th quarter and full year is expected to be approximately 20% points lower than the non-GAAP rate.

The estimated FY 25 non-GAAP tax rate remains at 19%.

We are maintaining our FI 25 operating cash flow expectations of $2.350 billion and we now expect capital expenditures of approximately $300 million.

We're making good progress across our key growth initiatives, in particular with our partner ecosystem and developing AI opportunities, supporting our medium-term target of mid-teens growth.

As an early view, we anticipate FY 26 subscription revenue of approximately $8.8 billion or about 14% growth.

We expect our first quarter subscription revenue growth to be slightly lower than our overall growth rate for FY 26. This is largely due to the impact of the leap year, which creates just over 1 point headwind to Q1 subscription revenue growth.

We expect a slightly higher growth rate in the second half, driven in part by emerging AI opportunities and deliverables tied to the strategic wins from the 3rd quarter, which I referenced earlier.

We're investing for growth while at the same time focused on driving efficiencies across the business.

This includes the continued expansion of our global workforce, integrating AI across the company and improving processes and systems.

We expect FI 26 non-GAAP operating margin of approximately 27.5% as we demonstrate progress towards long term margin expansion.

In addition, we are actively managing share-based compensation expense and expect it to continue to trend lower as a percentage of revenue.

As we enter Q4, we are focused on executing for both the short and long term as we build a foundation for durable top line growth and margin accretion. With that, I'll turn it back over to the operator to begin Q and A.

Thank you. We'll now be conducting a question and answer session.

If you would like to ask a question, please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You may press 2 to remove yourself from the queue for participants using speaker equipment it may be necessary to pick up the handset before pressing the start start keys. One moment while I pull for questions.

And our first question comes from Kirk Matern, Evercorn Evercore S I S I. Please proceed with your question.

Uh yeah, thanks very much, um, Zane, I was wondering can you just talk a little bit more about the deliverable issue in in the 4th quarter and how much of that is also weighing on I realize it's a preliminary guide for fiscal 26, but how much of that plays into that guide relative to sort of the mid teens guide you guys have talked about for fiscal 27 just provide a little bit more color on that as you know, and maybe when that came about just because I think people are obviously you're concerned it's more um directional in nature than perhaps one time in nature.

Thanks. Yeah, sure, Kirk, happy to start on that, and then I'm sure Carl will have some comments afterwards. There were a number of key strategic deals in the 3rd quarter, um, that, as I mentioned, had some product deliverables or otherwise we, we saw revenue recognition a little bit later on. We expect it to ramp up through the course of next year. If you think about our outlook for the 4th quarter, you know, it would put us roughly in the midpoint of our original guidance for the year, so I'd say, you know, approximately 8 to $10 million of

impact in the 4th quarter, if you think about sort of the the actual deal were we to recognize revenue as we have historically, and then on a on a sort of second half of FY 26 basis. If you look at that on a year of a year basis, it would contribute to I'd say approximately 0.5 a point on that growth, you know, as I mentioned, obviously in Q1 we lapped the leap year and that's about 1 point of growth heading into Q1 and we still believe there'll be, you know, a nice build through the course of FY 26, but we definitely see

you know, the impact of the revenue recognition impacting this part of the business. I'll point out these are key strategic deals, and there's obviously, you know, a fair amount of product that aligns with those, and that's the point at which we can recognize that revenue, but we're very excited about the momentum in this area and expect, you know, these and others to continue to grow beyond FY 26. I'll let you add to that. Yeah, I think what's really important, Kirk, is to recognize the strategic importance of a deal like the DIA or Defense Intelligence Agency.

We have to go out and build a platform for the federal government with different levels of security, and we're doing so and we can't recognize revenue on those, you know, opportunities until we can deliver it to the government, but these are critical wins for us and it's actually driving demand for us in the federal government as people recognize workdays really pushing hard into that market. The other one is wellness, workday wellness. It's another critical platform for us to engage with our wellness partners and for them to integrate into the work.

A platform and we're building that out as well so while we signed a number of key partners like Guardian, the Hartford, Mutual of Omaha, and Unum, they're ready to build on that platform. It's just not able to be delivered yet, which taints our revenue recognition for the next year.

If I can ask a quick fall just on on Rob's appointment, uh, Carl, I, I, I assume that Rob's on board. You, you've made a lot of changes since you came on board. I assume you and Rob are thinking in the same way so that as we start next year there's not necessarily uh any kind of sort of restart or or reshuffling of the decks in terms of your partner strategy, etc.

Yeah, thanks for the question. No, I've known Rob for probably 25 or 30 years. I'm sorry, I'm showing our age, but we've been around the industry for a long time. We grew up in the industry, and I have a tremendous amount of respect for him. I think his background, his experience fits us nicely, especially when you think about what we're doing in international. Rob's lived in Japan. He's lived all over Europe. He started to SAP business in China, like he's just a tremendous asset for us to pick up, and we're going to be very sad that we'll

be, uh, you know, passing the baton as Doug steps aside, but we also have almost 6 months of overlap between Doug and Rob, so I don't expect any impact at all to how we're running the business or how we're thinking about the future of our go to market strategy. In fact, if you think about Rob, because he's spent so many years at SAP, there's not a single partner that workday has today that Rod doesn't already have relationships with, so it's a, it's a great hire for us. We're super excited and energized.

he's joining the team, and I think he'll bring a great outlook for the future to us.

Thanks Carl. Happy Thanksgiving guys. Thanks, Kirk.

Thank you. Our next question comes from Mark Murphy, JP Morgan.

Oh thank you very much, um, Carl, there, there was a comment that the analyst said that the US federal business is reaching an inflection point and um you know, I understand you closed the defense agency, but uh in Q3, but I'm curious how those agencies might be interpreting, um, if you've heard anything, the, the stated plans of this department of government efficiency to try to strip 2 trillion in in in spending out we're getting a lot of questions on that and.

um, you know, whether you think that that might be impacting any of their, you know, budgeting, spending behavior going into next year and have a quick follow up.

Sure, Mark, so I'll start, as I said in my prepared remarks, we're really focusing on the federal government going forward. We think there's a huge opportunity there with probably more than 80% of HCM and ERP still on premises. It hasn't moved to the cloud, and we think we're catching it at an inflection point right now, which is why we're investing so heavily in building out a secure platform at the same time post-election and with do coming out. People are absolutely looking to drive.

More economies of scale and more efficiency, and I can tell you supporting these on-premises antiquated systems is not a way to do that, so we think this will only be a tailwind for us as we think about the federal government business going forward.

OK, that's great to hear, um, and then, um, Za as a quick follow up, I'm, I'm, I'm also wondering, um, subsequent to the interest rate cuts and moving past the the US election, is there any um possibility you might have detected stabilization or any uptake in in any employment indicators, um in your customer base. I know, I think generally it's been kind of sluggish and and and moving sideways, but um I wasn't sure if you might have seen any recent renewals where any of that feels different than it did a couple quarters ago or.

Or even any um payroll runs without without any of that data might look different.

Yeah, sure, Mark, you know, as we mentioned earlier in the year, it was more a moderation of expectations and what we saw earlier in the year, you know, I'm pleased to say we haven't seen, you know, any further downtick. In fact, it has moderated, you know, we haven't necessarily seen significant improvement either, so I think it's within our expectations as we, you know, as we plan ahead, but always welcome, you know, the enthusiasm around where interest rates may go and obviously the conviction around growth in business is always good for our business.

So we take that although I would caution right now, we still believe that, you know, especially in certain areas around the globe and where global business that we are still impacted in increased deal scrutiny. All that being said, we're very pleased with the momentum we've seen through the quarter and look forward to continuing that until next year, but no significant change in impact or outlook from what we've experienced through the course of the year.

OK, well understood, thank you very much. Thanks, Mark.

Thank you. Our next question comes from cash Ragan, Goldman Sachs.

Car with uh Rob showing you guys you're gonna be outnumbered with Rob and Zane, and you're gonna have to learn cricket, uh, so if you need a primer, please let me know. That's right, I may take you up on that cash, but I know a little bit about cricket, and I really enjoy it only when they're the shorter matches though.

T20, that's it. Great. Uh, so I'm moving on to business, uh, it's good to see the company reiterate the 15% growth rate, um, compounding in for 2016 and 27. I'm curious of what do you make of, as the numbers get bigger, it, it, I guess at at the margin becomes a little bit harder to maintain the same growth rate. So are we building in any inflection point with AI monetization or co getting better perhaps in 2016 and 27. Give us

Uh, a recap of why you still feel feel confident with these numbers, um, uh, over the next couple of years. Thank you so much. And that's it for me.

Yeah, thanks so much, Cash for the question and let me give you a couple salient points that I think reflect the conviction and confidence we have in our mid teen guide over the next couple of years while being able to expand operating margins. So number one, we had a really solid Q3 after delivering a solid Q2. We had our rising conference, which you attended back in September, at which we launched the workday illuminate, which is our next generation AI platform.

And I can tell you the excitement we felt at the conference continued throughout the quarter. We tried to highlight that with a number of points around our AI momentum, including our recruiter product which we had more logos in the quarter in Q3 than we did in the 12 years prior that they were running the business. We also saw an uptick in selling back to the base, our AI solutions, more than 30% of our sales back to our customer base included.

One of our AI solutions, which is our recruiter agent, talent optimization, uh, along with our extend pro platform, so we are absolutely seeing momentum in the business when it comes to AI.

If you combine that then cash with all the things we've been working on over the last few years like our focus on building out our partner ecosystem. Our focus on building out our opportunity in the US federal government. Our continued focus on industries, our focus on pushing a platform along with full suite sales, which in this quarter I think I had in my prepared remarks more than 35% of our net new lands included full suite solutions, and then you just

you, you know, what we're doing is we move down market into the medium enterprise, we feel very confident in our ability to maintain that, you know, mid-teens growth over the next couple of years. And if you think about, you know, the guide we gave you for FY 26. Let's remember we got a big quarter here in Q4, we got a nail. We're focused on nailing this quarter. We have a really strong pipeline as it looks as it relates to Q4, uh, and I'm confident we'll be able to, you know, deliver against.

Our current guide for the quarter and then we'll update you further on our FY 26 number during our Q4 earnings call.

Cash, I would just add, you know, obviously we have a lot of momentum and conviction on the work that's been done, including the strategic deals that we've already closed where we expect to see that revenue into next year and, you know, point out obviously we have line of sight until approximately $8.8 billion and as Carl said, more to come and we'll update you again next quarter on more details there.

Thank you Za and Park. Happy Thanksgiving. Thanks.

And our next question comes from Michael Turin, Wells Fargo.

Hello Michael, you there?

Oh sorry, I was on mute the old on mute trick. Apologies for that, gentlemen, uh.

Um, like, given there's a few moving pieces you're contemplating and it's not.

That that's not the case across software maybe if you could add some more context and what informs the Q4 guide given just a bigger seasonal profile for Workday there any commentary and if there's any FX impact or other layers to consider and anything you can just add around how that close to the year could inform your views on the tradeoff between growth and margin into next year as it all progresses is helpful. Thank you.

Yeah, thanks, Michael. We have a solid pipeline coming into Q4, 1 that is reflected in the guide that we did give you for the quarter. We also, as I said, we have a lot of momentum in the business right now, especially when you think about some of our AI solutions like the recruiter agent, what we're doing with talent optimization and extend Pro. I mean, in the quarter, selling back into our customer base where 30% of our, you know, deals now include an AIQ is a pretty rapid uptake of these.

technologies and what's really interesting is that our customers are willing to pay for these solutions because they have tangible ROI that they can get from these products. So it's, it's the momentum, it's the pipeline, it's the large deals that we have in the quarter and as you always know Q4 is historically the largest quarter of the year for us, and I don't think it will be any different this quarter as well. Yeah, Michael, I would just add, you know, obviously we feel good about the CRPO. It's just one of the elements we look at, you know.

The growth that we saw in the 3rd quarter, we believe positions as well, you know, exceeding our expected range by a number of basis points, so we feel good about the set up. um FX is an impact, but you know, obviously we're the majority of our business is still, you know, US based, so we don't see it as being that significant, this close in the 4th quarter, so we still feel good about the guide and the outlook for the quarter and then we're always balaning, balancing that top line growth opportunity with margins.

We've done, I think, a good job over the last number of years and thinking about people process and systems, and we'll continue to focus on efficiencies and continue to scale the business, so we feel great about the margin outlook, not only for the remainder of this year, but into next year and beyond that as we grow margins beyond 30% over the next two years.

Thanks very much.

Thank you.

In our next question comes from Brad Zelnik, Deutsche Bank.

Great, thank you so much and guys it's really great to hear about many of the strategic wins, seeing the partner leverage shining through, but I wanted to ask about Europe where frankly we picked up some mixed things in talking to partners, can you just talk a little bit about what's happening there in that theater, and if you could distinguish between environment and execution and, and uh any more granularity would be helpful. Thank you.

Yeah, um, thanks for the question, Brad. So let me start with the thesis that has not changed, and that is 50% of the addressable market for workday is outside the US that has not changed. Yes, while we have seen some headwinds in the economy, specifically, if you will, in EMIA, and I think a lot of people have called that out. Our business still remains intact. Our leadership team is stronger than ever. And at the same time, when people do ultimately make a decision.

on a large transformational, you know, opportunity, whether it's HCM or financials or both, we are winning a significant portion of those deals. Our win rate in Europe when these customers do decide to go forward is very strong. So while there's some headwinds, we can't control that, obviously. What we can control is continuing to innovate, continuing to work with our customers and prospects so that when they do make a decision to do a transformational uh project.

We are continuing to win rates that we've seen over the last couple quarters. I'm very confident in what we're doing in Europe and the opportunity ahead.

Excellent, thanks so much.

Now our next question comes from Brad Sills, Bank of America.

Oh great thank you so much um I wanted to ask a question around some of the strength you're seeing in government and higher ed. Obviously this has been going on for quite some time, and you cited some platform deals there that are going well. I just curious, you know what, what's working in that vertical? Is there a certain application that you found that is really driving that kind of combined, you know, fins plus HCM, um, you know, glue if you will and are there others that are kind of up and coming that we should be thinking about that you might become the next uh.

You know, source of strength across the verticals.

Yeah, thanks for the question, Brad. I think, you know, historically we've always had a pretty damn strong business in both government, state and local government, and higher ed. In this quarter we called out that 90% of our wins this quarter included full sweep and full platforms. So when you're dealing with the state and local government or even the federal government and then you do it in higher ed, these people have a tendency to make a decision for full platform, full suite at the same time. I also think

Because of the student product that continues to gain momentum in higher ed. It gives us an advantage over the competition.

The one we also called out that performed quite well. It didn't have the exact growth rate we've had over the last couple quarters that we've called out is health care. We continue to win in health care. In fact, I think it was probably the largest deal on the table over the last 12 months in the health care market, Common Spirit, we were able to win that, which is a testament to not only our platform, both our our HCM and financials, but it's also our supply.

chain product as well, so I think these are 3 industry verticals will continue to have momentum because they look a full suite and in certain industries we have products like student for higher ed, and then we have supply chain for health care.

Wonderful thanks Carl.

Thank you on our next question comes from Carl Keste, UBS.

OK, great, thanks. Maybe saying a couple for you on the uh outlook for next year. Just first of all on Q1 you mentioned that it will likely be uh sub 14%, so that would be, you know, call it a 150 plus ips D cell from the second half this year. Typically it doesn't fall that quickly, so it

It seems to me there must be some, um, you know, maybe some one time issues there. Maybe you could unpack the the Q1 performance that you expect and then secondly, on the second half acceleration. I'm just curious, you had mentioned it's a function of the strategic wins finally ramping but also emerging AI. Are you able to rank order, which is the bigger driver of that second half acceleration and if it is AI, you know, maybe help us get a little.

visibility into what you're seeing to give you the confidence that you can monetize second half next year. Thank you. Sure.

any linearity or any, any more detail into into FY 26. Carl, other than to mention that, you know, obviously we, we see the pressure there in Q1 and obviously it'll build, you know, through the course of the course of of FY 26. Yeah, as it relates to AI and and the strategic ones, you know, this is a small part of obviously the 8.8. I just wanted to highlight on the strategic, the strategic wins that is, we recognize it.

We expect to see 0.5 point of improvement just related to those deals for the second half, so we do expect to see slightly higher growth in the back half. And then I'll let Carl talk about some of the momentum and what we're seeing on the AI front through the course of FY 26. Yeah, so Carl, a couple things on AI. remember that we just closed earlier this year, the acquisition of higher score, and we highlighted some of the success we had in Q3 selling the recruiter agent back into our

customer base that typically gets sold back into customers who have our recruiting platform that's 4000 plus strong, so we're only in the low single digits of penetration or attach rate to our existing customer base to sell, for example, our recruiter agent. When you couple that with the momentum we're seeing around talent optimization, which is an internal workforce mobility AI platform and things like extend Pro, which has an AI API gateway and

a co-pilot for developers to write and build applications on top of us. These are all indications that the customers are seeking uh AI solutions from Workday. And then later this year and into next year, we have 3 new agents that will come out. We'll have an expense agent will have his successor agent and we'll have an optimized agent. These are all agents that will bring to market that are built deep into the core of workday. The data does.

doesn't have to be extracted. It stays within the core of the platform, which is different than most AI solutions out there, and we think they're going to have a nice impact on bookings and revenue as we go into the new year. So the momentum's there. We see it building. Customers are willing to pay for it for our AI solutions, uh, and I didn't even mention, oh by the way, Eversore, which is an AI platform for scanning and looking at documents, especially in the unstructured world of data we live in today, that's

very powerful and we're excited with the early indications and sign that that's driving too.

OK, great. That color is helpful. Thank you both. Thanks, Carl.

Thank you. Our next question comes from Brent Phil Jeffreys.

Thanks, uh, Zane on the guide, uh, are you taking the same methodology as you've had before or are you injecting a little more conservatism given the guides had to be walked down a few times now, uh, everyone's asking.

You know, and a new guide or.

Or kind of the same same pipe that you're looking at.

You can you give us any any color on on that methodology. Sure, yeah, Brent, thanks for the reminder. Um, yeah, I would say, look, this is, you know, our current line of sight as we look at FY 26, you know, for that reason, we didn't want to give sort of a broader range as we roll up now we, we are confident in approximately 8.8 billion, as I mentioned. We're very excited, but we think it's still, you know, early days in a number of these AI opportunities in particular and also, you know, I wanted to highlight

Right, you know, just that this is first off an early look and then as we look to next year, you know, we have the leap year overlap, and then the second half we've already closed a number of transactions that will impact the growth rate heading into the second half of next year, but we'll leave it there and obviously look forward to providing more color next quarter as we lay out FY 26 in more detail, but we feel good about the initial guidance, but that's what it is. It's just an initial look.

OK great and uh quickly for Carl, uh, with, with Rob coming on, uh, there have been a lot of questions about his impact usually when when you bring someone new in at his caliber they they tend to be changes and I know you've already made a lot of proactive positive changes for for the go to market.

Uh, but how do you kind of give confidence to investors that there's another, there's not another wake turbulence that comes through.

Uh, with, with another go to market exact how do, how, how do you, how should we think about that?

Yeah, thanks for the question. I am very confident that we're going to not going to have any negative impact with Rob joining. It's all going to be positive because of his experience and his knowledge of the industry. I also believe we have enough overlap with Doug for the next 6 months who will be sticking around and ensuring that it's a smooth transition, so I'm not nervous at all about, you know, any impact from him joining the team and think I, in fact, I know it's only, you know, net positives from here.

Great thanks.

Thank you, we will now take 2 more questions and our next question comes from Raymond Lestro, Barclays.

Thank you. um.

Can I go back to the AI question for the acceleration for the next half. How's your thinking in terms of monetization, changing an industry, if you think about a lot of players in in Eurospace I kind of seeing it more as an add-on solution as a kind of bundled add-on solution and it's coming in there. How do you make sure you get kind of get paid for those solutions.

Yeah, thanks for the question. As we've stated in the past, we take a multi-pronged approach to AI monetization.

It starts with number one when we meet with customers or prospects, they truly believe that an investment in Workday is an investment in their AI strategies, and that gets reflected for us in our customer win rate on new opportunities. Our expansion rates with our existing customers and our renewal rates as well as our customer satisfaction. And a lot of times our customers are leaning into us with the core platform that already has a whole bunch of AI built into it.

it. It's not bolted on.

At the same point as we bring new solutions to market like recruiter agent. It's a great example where customers are willing to pay us for that platform. Our customers are seeing upwards of 30% productivity gain in their recruiters, which is significant when you think about recruiting being one of your biggest costs associated with HR. So our customers are willing to pay for it, and we monetize it. Another example is talent optimization, where we have over 3000 customers using it.

To drive internal mobility and reduce attrition.

And then lastly, our current uh example of Extend Pro, how people are leaning into it and buying it. It's actually a significant uplift from our extend essentials platform and people are paying us for it as well. And as we bring out new products and new agents, like I said earlier, we're going to bring out an expense agent as an accessory, his successor agent, as well as an optimized agent. We're going to be pricing them based on the impact and the values our customer gets.

So I think we have a good strategy around AI monetization, um, and I think it's going to continue to help drive a sustainable growth over time.

OK perfect and then uh Carl once the uh no uh Zane, sorry, one for you on on cash flow side, you kind of didn't change the cash flow guidance, um, can you talk a little bit about the puts and takes like this quarter and what drove the guidance decision. Thank you, we mentioned last quarter that collections came in really strong, so if you balance out the two quarters that, you know, gets you back to more normalized rate, and if you recall for this fiscal year, we've also mentioned that we had an additional pay period.

which actually comes into the 4th quarter, so a lot of this is expected. We haven't changed our guide for some time, obviously, you know, for FY 25. You may recall as well we had a sizable collections last fiscal year which impacted FY 25, and we called that out early in the year as well. So feel really good about OCF generation through the course of the year and in line with our expectations, even though I understand and you picking up on the variability we saw in Q3.

We were off about 10%, but net net we feel good about OCF.

Perfect, thank you. Thanks, Romo.

And our final question comes from Alex Zuckin, Wolf Research.

Hey guys, thanks for taking the question. You know, I wanna maybe just the first one on uh the quarter itself, yeah your quarter ended during a a pretty anxious time uh in in the marketplace, and I'm wondering if the election either caused any kind of late minute deal slippage or just incremental friction in the quarter itself that that maybe, you know.

Unwound if you will, post and and maybe comment both on that and and the conversation with customers as we're coming out of it, you, you got to ask the question on the federal vertical obviously in Doge, uh, but any other verticals that you, you feel incrementally more positive about would also be interesting and have a quick follow up.

Yeah, hi Alex, thanks for the question. Listen, we were pleased with our execution in Q3, and the results were in line with our expectations that we had internally. We had a good bookings quarter. We closed a number of significant deals, and we saw tremendous momentum on AI, so what I would say is we're happy to have the election behind us for any distractions that it may created. It's good to have that behind us, but we didn't see any impact one way or the other in the quarter, uh, or any, you know, change.

And, you know, you know, deal scrutiny or anything else. It was pretty consistent both pre-election and post-election.

Perfect, uh, and then as we think about the deliverables, um, kind of taking a little bit of a, a change of pace in terms of our minds, uh, for, for the impact to numbers. Was that a, like, was that a surprise in terms of you, you were able to sign these larger deals and you knew you were gonna sign them but you didn't necessarily know that they would ask for these incremental things and and or you help us understand that because it's the first time

we're kind of hearing of this.

Mm

Thing, uh, if you will, uh, impacting uh the quarter really for any of the companies at least that I cover, so I, I'd love to just understand a little bit was the mechanics and logistics of of of these of this issue.

Yeah, Alex, you know, as you get into a number of these strategic deals, you know, they're they're obviously deliverables and in some cases you recognize revenue, you know, sooner in some cases later just so happened that these two were later as as it um you know, whether or not it was a surprise, obviously we've been working these for some period of time, and you traditionally look at the accounting and and everything that you have to produce, you know, through the course of the negotiations. So, you know, obviously,

If, uh, you know, if, if you had a perfect line of sight into these, you may have either structured them differently or there may be some different elements to it, but we feel very good about these transactions are incredibly strategic. I just wanted to call it out as one of the elements, you know, as we went into, as we looked out at Q4 and into FY 26. They together were large enough where they had an impact on our revenue and to your point, traditionally you recognize revenue shortly after after signing, but we're encouraged by

the nature of these types of transactions, they're very strategic. We expect them to grow significantly over over a number of years. So we're very excited about them, you know, again, I wouldn't read too much into it, you know, it's just one part of the business that we just decided to call out this quarter.

So it doesn't basically it doesn't change the ACV it's just the timing element that that maybe moves a little bit to the, to the latter period. Correct. I mean, in some cases you can't actually capture the CRPO element because of the nature of the deal, but yeah, it's it's just a timing element. That's exactly right.

Thank you guys. Thanks, Alex.

Thank you 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 again for everyone for joining our call today. Before we go, I'd like to thank our workmates, our customers and partners around the world who continue to fuel workday success. We continue to believe Workday can be amongst the most enduring and profitable software business of our time.

We're focused on driving durable growth of scale and expanding operating margins, and we once again achieved this in Q3, all while executing on our platform strategy to deliver the world's best AI solutions for our customers. Thanks again and to those of you in the US, happy Thanksgiving. With that, I'll turn it back to the operator to close out the call. Thank you, everyone.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time.