Workday Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 28, 2023

There are 16 speakers on the call.

Operator

Welcome to Workday's Fiscal 20 24 Third Quarter Earnings Call. At this time, all participants are in a listen only mode. We will conduct I will now hand it over to Justin Furby, Vice President of Investor Relations. Justin, you may begin.

Speaker 1

Thank you, operator. Welcome to Workday's 3rd quarter fiscal 20 a Q4 Earnings Conference Call. On the call, we have Anil Bushri and Karl Eschenbach, our Co CEOs Zane Rowe, our CFO and Doug Robinson, our Co President. 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.

Speaker 1

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 and documents we file with the Securities and Exchange Commission, including our fiscal 2023 annual report on Form 10 ks and our most recent quarterly report on Form 10 Q for additional information on risks, uncertainties and assumptions that may cause actual results to 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 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. A webcast replay of this call will be available for the next 90 days on our company website under the Investor Relations link. Additional information 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 Q4 fiscal the Q4 quiet period begins on January 15, 2024.

Speaker 1

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 2

A call.

Speaker 3

Thank you, Justin, and thank you everyone for joining our Q3 FY 2024 earnings call. I'm pleased to share that Workday delivered another strong the Q4 achieving 18% subscription revenue growth, 22% 12 month backlog growth and non GAAP operating margin of 25%. These results were driven by broad based strength across net new and customer base teams, medium and large enterprise and across regions, notably the U. S. And EMEA.

Speaker 3

I want to thank the more than 18,300 workmates around the globe a call for partnering with our customers to help drive these impressive results. There is a clear sense of momentum across our business, And it was on full display at Workday Rising in September. There we unleashed new AI innovation, deliver product and partnership announcements and drew a record 28,000 attendees in person and online. In fact, over half of our active pipeline was touched by our rising event in San Francisco. And just a couple of weeks ago in Barcelona, We followed up with our largest ever EMEA rising event with over 4,500 people in attendance.

Speaker 3

In speaking with customers, prospects and partners at these events, a few things stood out to me. 1st, Talent continues to be a top C suite priority. In this macro environment, businesses are looking to scale and drive productivity. They can achieve both outcomes by simply hiring more. Leaders are turning to Workday to help them reskill and upskill their workforce, All while delivering a great employee experience.

Speaker 3

That helps them reduce attrition and ultimately drives productivity. 2nd, leaders are continuing to consolidate their technology footprint on a true platform to realize total cost of ownership benefits, a call to whom businesses can rely on to manage their most precious assets, their people and their money. And finally, AI, and in particular, generative AI is becoming a business imperative. As a trusted partner and a market leader with over 65,000,000 users under contract, we can uniquely drive efficiencies and improve the employee experience. Anil will share more, but I will say that it is what we are doing And not just saying that is resonating with our customers.

Speaker 3

Simply put, our value proposition has never been so relevant and powerful. Call. That's clear in the results our team delivered in Q3 and in the first half of FY twenty twenty four. At our recent Financial Analyst Day, we talked about the diversity and durability of our business and how it helps us grow during times of headwinds And times of tailwinds. This theme was evident in the wins we had this quarter.

Speaker 3

From a net new customer perspective, We once again saw strength in full platform deals. We welcome customers like AdventHealth, Dentley Systems, Houston Methodist and LifeSpan as new full platform HCM and Financials customers And new HCM customers such as Green King Brewing, Group 1 Automotive, Minor Hotel Group and the U. S. Department of Energy Helped us surpass 5,000 core HCM customers on Workday. Alongside healthy new customer activity, We had several strategic expansions and renewals in the quarter, including Magna International, Mondelez Global, Sunoco Products Company and Southwest Airlines.

Speaker 3

And I'm pleased to share that our Create and Close business had another great quarter and is becoming a meaningful driver of our customer base sales team's growth. Now I want to highlight some of the key growth areas we discussed with you at Financial Analyst Day. Starting with international, which represents over half our addressable opportunity. In EMEA, I'm pleased to say that our leadership additions are driving improved and more consistent results. The team here once again delivered strong new ACV, particularly in the UK, Germany, France and Spain and helped us eclipse the $1,000,000,000 ARR mark in the region.

Speaker 3

Win rates were robust against our competitors even in their own backyards. We had important new wins like AXA UK, Aurelius Group and International Schools, Along with expansions at BBVA, Carl Zeiss and Tullus Global Services among others. And in the Asia Pacific region, Australia performed well with wins such as Ramsey Healthcare and Wesley Mission Queensland. We still have work to do in APAC, but we're focused on it, and I'm delighted Simon Tate has joined us to run the region. We're also making important investments in Japan to help expand our opportunity within one of the world's largest economies.

Speaker 3

As part of this, our leader in Japan will now report directly to Patrick Blair, our President of Global Sales. Moving to financials, we're seeing proof that our go to market investments are continuing to pay off with healthy growth in both core financial customers new full platform wins are on the rise and our industry approach is contributing to this momentum. Healthcare, for example, grew new ACV over 50% in Q3 and roughly half of the healthcare deals we landed in the quarter were full platform. A formal presentation. State and local government also continues to outperform with strategic full platform wins at County of Kern, the county of Chesterfield and the Pennsylvania General Assembly.

Speaker 3

Our back to base motion in financials also delivered in Q3. Wins including Clearwater Analytics, Ochsner Clinic Foundation and Concentrix, which expanded their Workday HR footprint to include core financials when it combined with Webhelp, a Workday core financials customer in EMEA. Our planning business also had a strong Q3 and we welcomed AWS as a planning customer along with NPR and Storz Koggan Group. And finally, our win rates remain strong and we see a growing pipeline of opportunities to replace our legacy ERP competitors. On the partner front, we've always recognized the vital role our ecosystem plays in our customer success and it starts with go lives.

Speaker 3

HCM go lives this quarter included American Electric Power, Dave and Buster's and Iberdrola, Along with financials go live at NorthShore University Health System, Solution Health and Wise Markets. Increasingly, we're leaning into our partner ecosystem in other strategic ways. Our skills accelerator partnership with Accenture, a call to questions, which we announced at EMEA Rising is a great example. Accenture will be reselling our skills solution providing their own services expertise a call on top of the Workday Skills Cloud. We also announced a partnership with ADP to extend the capability of Workday HCM with ADP's payroll and smart compliance solutions in key global markets.

Speaker 3

And we announced AI Marketplace at Rising, our customers' most compelling use cases. Finally, we see strong momentum from our partner referral program we launched earlier this year. We've already exceeded our full year targets for the number of partners that have signed on. And while it's early, we are starting to see a positive impact to our another key investment area is around AI, which we've been building into our platform for nearly a decade. As I mentioned, at Rising, we demonstrated our leadership with new announcements and demos that illustrated how AI will shape the future of work.

Speaker 3

I won't steal Anil's thunder. He'll be joining in just a minute to share more. In closing, we had another quarter of strong and consistent performance amidst a dynamic environment. The diversity and mission critical nature of our business continues to fuel our success. As we move through Q4, We have a solid pipeline and clear momentum for our solutions.

Speaker 3

And while we are clearly focused on delivering in the near term, We have our sights set on delivering durable 17% to 19% subscription revenue growth over the long term, while expanding margins. With that, I'll turn it over to my co CEO and good friend, Anil, who will share more about our AI strategy and innovation highlights from the quarter. Anil, over to you.

Speaker 4

Thank you, Carl, and to everyone joining today's call. As you heard Carl mention, an increasing number of organizations across all industries and geographies are continuing to place their trust in Workday, which is why we remain focused on delivering the innovation our customers need to thrive in today's environment. For the last couple of quarters, we've highlighted our long standing and differentiated approach to AI, including generative AI that is driven by our platform strategy, unrivaled data set, emphasis on being human centric and commitment to delivering responsible and trustworthy solutions. At Workday Rising in September, our leadership in the space was showcased in a big way as we unveiled a series of new AI capabilities that will help redefine the way our customers work. On the generative AI front, we announced several new capabilities that will benefit all users with an emphasis on increasing productivity, growing and retaining talent, streamlining business processes and driving better decision making.

Speaker 4

Examples of the use cases we previewed, which we expect to be available next year include the ability to generate job descriptions in minutes versus hours, analyze and correct contracts for faster, more accurate revenue recognition, create employee growth plans to foster and retain talent and provide text to code generation capabilities to increase productivity of app development and Workday Extend. Another way we're infusing generative AI into our platform is through our investment in conversational AI. While we're still in the an exploratory phase with this technology. We believe conversational AI will fundamentally change how users interact with Workday by enabling them to easily surface information they need and interact with data through simple conversation. We're also leveraging generative AI to create a conversational experience for Workday Adaptive Planning customers.

Speaker 4

The use of conversational text will simplify the process of surfacing key planning insights, enabling users to make quicker, more strategic decisions about their businesses. Additionally, we announced enhancements to Workday Extend, which continues to be a critical solution to help bring the Workday platform to life for our customers and partners. In fact, we've seen an increase of more than 70% in the number of apps built by customers and partners with Xtend in the last year alone. At Rising, we unveiled Workday AI Gateway, which is available in Workday Extend. Our AI gateway provides developers with access to Workday's AI services to enhance their ability to build intelligent and responsible apps on the Workday platform.

Speaker 4

Turning to the office of the CHRO, we introduced several new features within Workday HCM that leverage AI, many with a focus on elevating the manager experience by providing them with the tools and insights they need to effectively lead and foster the career growth of their teams. One example is Manager Insights Hub, which leverages AI to surface personalized recommendations and make it easier for managers to identify the best opportunities for their employees based on skills and trust to improve talent mobility and employee engagement. And While we will continue to deliver on the promise of AI for our customers, many of our partners and other enterprise companies are delivering on the promise of AI as well. As Carl mentioned, we announced our AI marketplace to help harness the AI innovation happening across our ecosystem. To date, we have 15 early adopters And that number will increase over time as we expand to include tailored solutions delivered by our partner ecosystem, Workday related capabilities and third party products a native AI powered Workday Extend apps.

Speaker 4

Of course, none of these AI advancements can truly be effective without the right safeguards and regulations in place. Building on our continued efforts to advocate for smart AI policy at the federal level, Workday's Josh Lannon, Vice President of Productivity Technology was invited to testify before Congress on AI and the future of work. Josh spoke to the potential of AI to enhance how workers collaborate and amplify human potential and the steps Workday is taking to deploy these technologies in a worthy and responsible manner. At the application level, Workday products continue to be recognized for the innovation that we deliver to customers. A call.

Speaker 4

For the office of the CHRO, Workday was named a leader in the Gartner Magic Quadrant for cloud HCM suites for 1,000 plus employee enterprises. Workday was positioned highest for ability to execute and it marked the 8th consecutive year we were recognized as a leader. Additionally, Workday Venli was named a 2023 Top HR Product of the Year by Human Resource Executive. The award recognized Finley's ability to provide organizations with the full set of capabilities for end to end lifecycle management of external workers and its ability to integrate with Workday HCM to support full visibility into headcount spend and more. And for the office of the CFO, Workday was named a leader in the 2023 Gartner Magic Quadrant for cloud ERP, for service centric enterprises based on completeness of vision and ability to execute.

Speaker 4

This is the 2nd year in a row that Workday was recognized as a leader. In closing, I want to thank the entire Workday team for their incredible efforts in Q3. We have an amazing opportunity in front of us And I remain confident in our ability to capitalize on it, thanks in large part to our more than 18,300 workmates. They are relentlessly focused on driving innovation across the entire Workday platform to actively address our customers' finance and HR needs. With that, I'll turn it over to our CFO, Zane Roe.

Speaker 4

Over to you, Zane.

Speaker 5

Thanks, Anil, and thank you to everyone for joining today's call. As Colin and Neil mentioned, Q3 was a strong quarter, highlighting the durability of our business and ongoing market adoption for cloud financials and HCM. Turning to results. Subscription revenue in Q3 was $1,690,000,000 up 18% year over year. Professional services revenue was $175,000,000 leading to total revenue of $1,870,000,000 a growth of 17%.

Speaker 5

U. S. Revenue totaled $1,400,000,000 growing 17% and international revenue totaled $462,000,000 growing at the same rate. As we have highlighted, we see significant long term international opportunities,

Speaker 2

a call to discuss our financial results, which we expect over time

Speaker 5

will become a more meaningful driver of our growth. As we discussed at our recent Financial Analyst Day, We are providing our 12 month subscription revenue backlog or CRPO, which was $6,050,000,000 at the end of Q3, a call to call for questions.

Speaker 2

Representing growth of 22%.

Speaker 5

The result was driven by strong new ACV bookings and healthy renewals, a

Speaker 2

replay of our quarterly dividend.

Speaker 5

With gross and net revenue retention rates of over 95% and over 100%, respectively. Early renewals in the quarter exceeded our expectations, adding more than a point of growth to 12 month backlog and early renewals from prior quarters also continue to benefit backlog growth in Q3. 24 month subscription revenue backlog was $10,580,000,000 at the end of Q3, Up 23%. Early renewals in the quarter added nearly 2 points of growth to the results. A total subscription revenue backlog at the end of the quarter was $18,450,000,000 up 31%.

Speaker 5

Backlog benefits from increased contract duration, which speaks to our customers' continued commitment to our platform. Our non GAAP operating income for the Q3 was $462,000,000 resulting in a non GAAP operating margin of 24.8%. Margin strength relative to our guidance was driven by revenue outperformance and the timing of certain expenses and investments, which we expect to build in the 4th quarter. Q3 operating cash flow was $451,000,000 growing 10%. During Q3, we repurchased $148,000,000 of our shares at an average price of $218.35 per share, and we had $139,000,000 in remaining authorization under our buyback program as of quarter end.

Speaker 5

We intend to execute on the takita on the remaining authorization of our buyback during Q4. We ended the quarter with $6,900,000,000 in cash and marketable securities. We continue to invest in growth areas in the business, and we ended October with over 18,300 workmates around the globe. A listen only mode. Now turning to guidance.

Speaker 5

Following our continued momentum in Q3, we are raising our full year FY 2024 subscription revenue guidance a reconciliation of $6,598,000,000 representing 19% year over year growth. We expect Q4 subscription revenue to be $1,755,000,000 representing 17% year over year growth. We now expect professional services revenue of 100 and $58,000,000 in Q4 $652,000,000 for the full year. In Q4, we expect 12 month backlog to grow approximately 19%. This includes our current outlook for early renewals in the quarter.

Speaker 5

We plan to continue disclosing our 12 month, 24 month and total backlog, but intend to provide guidance on 12 month going forward. We are raising our FY 'twenty four non GAAP operating margin guidance to 23.8%. And for Q4, we expect a non GAAP operating margin a reconciliation of approximately 23.5 percent as we ramp up our key investment areas. GAAP operating margins for the Q4 and full year expected to be approximately 20 percentage points and 22 percentage points lower than the non GAAP margins respectively. The FY 'twenty four non GAAP tax the full year financial results.

Speaker 5

We are raising our FY 'twenty four operating cash flow outlook to $1,975,000,000 a growth of 19% year over year. In addition, we now expect FY 'twenty four capital expenditures of approximately $250,000,000

Speaker 2

a listen only mode.

Speaker 5

As we discussed at our recent Financial Analyst Day, we see considerable opportunity to drive durable, profitable growth over the longer term. The financial framework which we shared in September is further bolstered by our Q3 performance and the momentum we see building across key growth areas of our business. A discussion of the continued uncertain macro and incorporating our Q4 outlook, we currently expect FY 2025 subscription revenue of at least $7,725,000,000 to $7,775,000,000 representing growth of 17% to 18%. We also expect to expand our FY 2025 non GAAP operating margins from FY 2024 levels. Our outlook contemplates incremental investments a number of key growth initiatives, while delivering continued margin expansion as we scale and optimize the business.

Speaker 5

The confidence in our outlook is supported by the advocacy and support of our customers, partners and workmates, for all key contributors to our success. With that, I'll turn it back over to the operator to begin Q and A.

Operator

Thank you. We will now be conducting a question and answer session. Thank you. Our first question is from Mark Murphy with JPMorgan. Please proceed with your question.

Speaker 6

Thank you very much. Congrats on a great result. Thinking back on the Ryzen Conference, the energy and enthusiasm was pretty remarkable. When you look back on that, how did you feel about the pipeline generation coming off of Rising And through November on the Fin side of the business, I noticed you mentioned an AWS planning win in that timeframe. And do you see any early signs that might validate that the hiring wave you've had of these FINDS dedicated sales reps can drive some booking traction as they begin to ramp up in the next couple of quarters.

Speaker 3

Yes. Let me start and then Doug, I'll ask If you have anything to add, so thanks for the question, Mark. Let me first start by saying thank you to our workmates and partners around the world For delivering our 3rd consecutive outstanding quarter here in FY 2024, we often talk about the diversity and durability of our business And it was once again on full display here in Q3. Our value proposition continues to resonate more than ever with our customers and this gives us a very resilient and durable business. So just thank you to everyone for helping achieve another outstanding quarter.

Speaker 3

Directly to answer your question, Mark, as it relates to Ryzen, yes, you're exactly right. There was a tremendous amount of energy and enthusiasm coming out of the conference And there was a lot of energy around the financials solution that we're bringing to market. And I will tell you, it wasn't just from our customers, but it was also from our partners who continue to invest on building out their practice around financials. As you know, for the last 10 months,

Speaker 2

we've talked multiple times about our investment in the financials

Speaker 3

business and we are seeing full times about our investment in the financials business. And we are seeing early dividends, and I say early because we still have a lot of opportunity to grow the business going forward, but we see early dividends that those investments are paying off. Number 1, our pipeline around Fins continues to grow. Number 2, we continue to sell both to net new logos, our financials and back into our customer base number 3, All of the hiring we've done on our Fin's go to market sales reps are actually impacting not just Fin sales, but also helping us Drive full platform sales. We talked about full platform sales being up again this quarter, and I think that is just the strength of our financials in conjunction with what we already have is a strong HCM business.

Speaker 3

And lastly, I would say planning continues to do quite well. We did announce last quarter, we talked about Exxon landing a large financials deal. In this quarter, we talked about AWS, which is a very significant land for us as well. So overall, we see the FINZ opportunity being quite large. We talked about only 25% of financials moving to the cloud, which just represents a huge opportunity for us, And we are really pleased with our win rates against our competition there.

Speaker 6

Thank you very much.

Operator

Our next question is from Kash Rangan with Goldman Sachs. Please proceed with your question.

Speaker 7

Hi, thank you very much. Congratulations on a wonderful finish to the Q3. Carl, you've been in the seats for a little under a year, actually close to a year. You've cycled through 1 full writing conference. You've had a chance to speak with partners, check the pulse of the customer.

Speaker 7

You went through a tough year of macro. Everybody protected the session. Thankfully, we had a tab one. So where does that leave you with respect to your refreshed an assessment of the next 3 to 4 years versus where we started. Thank you so much and congrats to the entire team here.

Speaker 4

Yes. I'm still here by the way.

Speaker 3

Neil, you want to answer that question? No.

Speaker 4

No, of course. So First

Speaker 3

of all, Kash, thank you for your nice words and thank you for the question. So let me start talking about Workday. I appreciate you saying almost a year. I can't wait until December hits because then it's officially a year and we no longer talk about it in terms of months. So we're almost a full year into this journey with my partner, Aneel.

Speaker 3

Let me start by telling you about Workday. One thing that I recognized when I was on the a Board for 5 years that had an incredible culture and strong values, and that is more evident to me than ever before. And that's what it continues to excite me about Workday as a whole. As it relates to, if you will, a refreshed outlook of the business and the opportunity, I see many ahead And a number of them we're already leaning into throughout this year. First, our international opportunity, we spoke in my prepared remarks around the performance of our EMEA team, growing the business significantly year over year and driving predictable results.

Speaker 3

We continue to see strong potential through the partner ecosystem that we're building and how we're getting leverage from them. So that's a huge opportunity for us. The third is I just spoke about in answering Mark's question around financials. Financials represents a large opportunity for us that we're leaning into heavily. We've hired a lot of sales reps throughout this year.

Speaker 3

And if we continue to see the early results That we're seeing, the 1st 3 quarters of this year, Zane and I will continue to fund additional growth on Fins and especially on the go to market side. And last, I think one thing that I've really come to recognize and appreciate, Anil talks about our unrivaled data set that we have compared to our competition out there and that is paying dividends for us today, especially in the terms when you think about AI and generative AI. No one has an enterprise large language model like Workday has, and it is driving tangible and productive results For our customers through generative AI.

Speaker 7

Wonderful. Thank you so much.

Operator

Thank you. Our next question is from Kirk Materne with Evercore ISI. Please proceed with your question.

Speaker 8

Yes, thanks very much. And I'll echo the congrats on the quarter. Carl or Anil, actually, I was wondering if you guys could just talk about where Gen AII is in the decision making tree for your customers right now? Meaning, has it sort of sprung to the top so that your leadership in that category is having, I guess, an impact on win rates already. Is it something you sort of expect to continue to build?

Speaker 8

I was just kind of curious, everybody is sort of piloting AI right now, but I'm kind of curious If your leadership is actually putting you in a position for your win rates to get stronger as we head into 2024? Thanks.

Speaker 4

I do think it will position us for our win rates to get stronger in 2024. At this point, I don't think people are making decisions yet just purely on AI. I think it's something that every customer looks at to make sure that they're going to be covered with a new deployment or a customer knowing that Workday has them in a strong place, but they're still looking 1st and foremost at running their business and moving off of crappy legacy applications into the cloud. And we are unmatched in that category. And then when we add the AI stuff, I think it just checks that AI box.

Speaker 4

But I would say that despite all the hype, it's still in the early days of actual large scale deployments of AI and HR and finance. We're ready. We're waiting. I don't know Doug's with us. I don't know if Doug you want to add anything on what's happening in the sales cycles.

Speaker 9

I think it does come out in the sales cycle, but in a different way. So we talked talent optimization. In talent optimization, the entire sort of value prop of it is built off of AI and ML. So while they're not saying show me your Gen AI, they are showing they are saying show me how I'm going to move to a skills based economy, How am I going to reskill my workforce and then it gives us a chance to showcase the innovation that we've got.

Speaker 8

Great. Thank you.

Operator

Thank you. Our next question is from Brent Thill with Jefferies. Please proceed with your question.

Speaker 10

Hi, this is Love Souda on for Brent Thill. Thank you for taking our question. Zane, this one's for Early renewal activity has been fairly robust this year, and it supported backlog growth. I guess, as you look out over the next few quarters. Could you just talk about your expectations for early renewals?

Speaker 10

Will those continue to be a tailwind to backlog growth.

Speaker 5

Yes. Thanks for the question. As we've communicated over the last number of quarters, we've been very pleased with not only our backlog growth, but our new ACV growth and the renewal activity, both the scheduled renewal activities grow nicely as well as the early renewal activity. And as I mentioned in my prepared remarks, we have some of that contemplated into the upcoming quarter and candidly into next year as well. I will point out that over the last 12 months, we have seen elevated growth rates in scheduled renewals, which has obviously helped with our backlog.

Speaker 5

But we're very pleased. I'll point out that we guide to obviously subscription revenue, so we're focused on subscription revenue, and I've given you an indicator of subscription revenue growth heading into FY 2025. We feel good about backlog and renewals as well and just the overall health of the business. Carl?

Speaker 3

Yes. The only thing I'd add, Neil, is I think we always want to reiterate that our customers are driving the early renewals based on demand. And if they want to buy additional SKUs to consolidate on our best a brief platform. We're not going to wait till renewal cycle to sell them additional products. We're going to do it when the customer is ready.

Speaker 3

Last quarter, we saw a nice uptick in SKUs being sold back into our customer base that drive, if you will, these early renewals like talent optimization, accounting center, prism and extend are just four examples of where customers are demanding more from us And we're driving those early renewals more than we are. We don't incent our sales force to do early renewals. It's all based on customer demand.

Speaker 7

Got it. Thank you.

Operator

Thank you. Our next question is from Brad Stills with Bank of America. Please proceed with your question.

Speaker 11

Wonderful. Thanks so much for taking my question here. One of the things that stands out to me here is the strength in financials. Ma'am, you called out full platform wins here as a contributor. So, great execution there.

Speaker 11

I'm just wondering, with these types of deals where you're being big organizations commit to the full platform, both Fins and HCM. Are you finding that there's just an increased a level with the cloud for financials such that they're willing to make that leap now versus say in the past? Or is this simply just a function of you focusing more on those types of deals with some of the investments you've been making. Just curious to get some color on why now for that strength in full platform deals, particularly Finns? Thank you.

Speaker 9

Thanks for the question. This is Doug answering. I think 1st and foremost, We still think 25% of the market is all that's moved financials to the cloud. So it's still early innings, But the recent quarter pipeline build suggests that it's growing and that it's more consistent performance. And you look at verticals where it's really popping up.

Speaker 9

I think we even called this out, but healthcare alone grew over 50% In the quarter and over 50% of those deals were full platform. So there's enterprises like AdventHealth 80,000 employees, 46 different hospitals at sort of massive scale buying into full transformation, human capital management, financials and supply chain On the Workday platform.

Speaker 3

And one other thing I'd add is, as we have really leaned into the mid market or medium enterprise, those customers have a tendency to decide on a full platform approach between both financials and HCM and that business had a really good quarter for us in Q3 both in the U. S. And in Europe and those customers are absolutely leaning into a full platform decision at a given time when they're looking at transforming their business.

Speaker 11

Great to hear. Thank you so much.

Operator

Thank you. Our next question is from Alex Zukin with Wolfe Research. Please proceed with your question.

Speaker 12

Your remarks.

Speaker 7

Yes. Hey, guys.

Speaker 13

Thanks for taking the question. And I guess, first of all, congratulations on a really strong quarter. It looks to me like you accelerated CRPO subscription bookings, which I know is a metric we're We're not supposed to look at, but we do. At the same time as your incremental growth on sales and marketing, actually, you were way more efficient. So I guess what I want to ask about is, as I think about the matrix for next year and we talked you talked about the growth algorithm.

Speaker 13

How do you stack rank which of those priorities you need to kind of hit on to get there? And then what prevents kind of like maybe What are some of the areas that you see leaning into on an incremental spending perspective that might be And

Speaker 11

then temporarily anchoring margins. Yes.

Speaker 3

You want me to start, Zane, then you can add color. One of the biggest investments we've talked about a number of times already here is our investment in our financials go to market build out. That is paying early dividends. I do think it's important to remember that a lot of these hires that have happened over the last three quarters of this year Aren't fully ramped and don't hit full productivity till next year. So as they come up to speed, right, I think we'll see continued growth in the financials an overall business as we head into next year because of this build out we're doing this year.

Speaker 3

We do continue to lean into our partner organization. We're hiring a number of people to manage all of the partners we're bringing on. An example would be this year when we launched our referral program, we had a goal of signing up 100 partners in our a referral program and through 3 quarters we already have 150 partners who have signed up and it brought us hundreds of new leads and new opportunities both here and in our international business. We'll continue to lean into that. And then I think Aneel and Cheyenne will continue to lean into investing In the product side, as we see a great opportunity to leverage that data set and model that we talked about to drive AI solutions and new SKUs into the market.

Speaker 3

So I think it's a little bit more of the same and we'll continue to lean into the investments we made this year as long as we you to see the early signs that they're producing the results we want. Alex, I'll just add, as Carl is alluding to, obviously, there's significant sales and marketing expense ahead

Speaker 5

of this. At the same time, we're investing in other key areas just around the globe. We're also looking at the product side. We're being very disciplined about how we think about that incremental growth and that incremental investment heading into next year, which is why the outlook I gave aligns nicely with the framework that we have and we're confident that as you've seen this year, we'll be very thoughtful on where we spend and how we spend. So as you've seen, our guide increased from 23 earlier in the year to now 23.8.

Speaker 5

As we look to next year, we have the benefit of expanding not only our revenue base, but also our margins throughout the course of next year. So we feel very good about where the business is, where those investments are. I'll point out obviously that as you know in this business, The bookings come well ahead of the revenue. So we would expect to see revenue continue to build beyond FY 2025.

Speaker 13

Perfect. And then maybe just if I squeeze in another one for Aneel. Coming out of the Analyst Day, it did feel like at least on the macro front, there were You're kind of gathering storm clouds, whether it was the potential for government shutdown or labor strife or macro concerns.

Speaker 1

Did you feel maybe coming out

Speaker 13

of the quarter and as you look at into the kind of the big selling season that some of those that it has indeed ebbed and maybe there's more of a conservative optimism that you're kind of seeing on the horizon?

Speaker 4

I don't see conservative optimism. I kind of just see it's Par for the course. I mean, we've just been in this dynamic, I think dynamic is the right word, somewhat complicated world now since before COVID. And what I'm proudest of the team and I'm going to defer this question to Carl and to Doug is how they've executed through this Really challenging time. That's just very I don't want to say unpredictable, but it's not predictable.

Speaker 3

Yes. I think you said it well. I don't think we see any improvement in the macro or do we see it getting any worse. It's a pretty consistent with what we've seen all year long. And I'll just echo what Aneel says.

Speaker 3

I just want to give a hat tip to Doug and Patrick and our sales teams around the world for their understanding of how to navigate some of these choppy waters. We've said in the past, we continue to see heightening scrutiny on some deals, particularly net new, but our teams have figured out how to navigate that and close a lot of business the 1st 3 quarters of the year. And even when opportunities may slip, they don't leave our pipeline, they just move out a quarter or 2 a question and answer session. Because once people make a decision to do a transformation around HCM or their financials, it's not if they're going to do it, it's when. And I think that was very evident both this quarter, the 1st 3 quarters of the year, I should say, and I think that will continue going forward.

Speaker 3

But our teams a very skilled and very good at closing business, as they call it each quarter. I couldn't be more proud of them.

Speaker 13

We'll definite hats up to you guys from us here. Congratulations.

Speaker 3

Thank you.

Operator

Thank you. Our next question is from Raimo Lenschow with Barclays. Please proceed with your question.

Speaker 12

Perfect. Thank you. Congrats from me as well. Carl, you touched already on the partner build out. Can we just double click on that one as well?

Speaker 12

Like because like what's the appetite at the moment on a partner side to build out headcount around you. Obviously, economic times are tough and they just The SIs are usually late cycle, so they're only realizing now what's going on. Like, where are they is that kind of still like very much like in investment mode on their side or is there a pause from their side that could kind of potentially be a headwind for you going forward. But congrats from me as well there. Thank you.

Speaker 3

Thank you, Raimo, and thank you for the question. As it relates to the investments that partners are making, I do think they're investing in Workday. They already have very well established and mature HCM practices. But if you were at Rising and you spent time talking to our partners in the ecosystem there. What you would have heard is a lot of them see the opportunity just like we do in financials and they're investing heavily on building out their financials practice around Workday.

Speaker 3

And that was evident both at rising here in the U. S. And just a few weeks ago at rising in EMEA. So There is no doubt our partners are really leaning into us. And by the way, I mentioned it earlier, they're also bringing lots of opportunities to us because for the first time this share.

Speaker 3

We're giving them an incentive to bring us as net new opportunities as part of our referral program. So yes, the investment is happening.

Speaker 12

Okay, perfect. Thank you.

Operator

Thank you. Our next question is from Derrick Wood with TD Cowen. Please proceed with your question.

Speaker 11

Great. Thank you. I guess for Carl or Aneel, I wanted to ask about traction with Xtend and how that plays into the AI opportunity for you. I think you've talked about this is the platform that helps integrate into Workday models and the 3rd party AI models that helps unlock a lot of private data And that you'll look to maybe introduce new tiered pricing for Xtend. But can you just talk about how you see Xtend helping to drive AI monetization

Speaker 4

So, extend has been one of our best kept secrets before the AI gateway for the last several years. For the longest time, customers wanted extensibility and instead we had to frankly build every feature they wanted into the product and we give them extend and they're able to develop the features that are unique to their own business. And basically that same story plays out with AI where, I think we've got a great strategy for embedding AI into our products. You'll see a series of new SKUs over time that are built on that are built around AI technologies, but the AI gateway around Extend Unleashes partners and customers to do AI things that may be very unique to their business that we would never build into our core products. So it's been huge.

Speaker 4

And I also think you'll see ISVs leverage the AI extend gateway and continue to build products using that technology, which will only extend our ecosystem and make our customers even happier with the offerings that they have further. I think Extend is kind of a secret weapon for us, especially now with the AI Gateway. And we are monetizing it. And I think we'll continue to monetize it. I mean, maybe Doug wants to talk about how we're monetizing it and how much more we can do.

Speaker 9

I think the best example of that is the Accenture Skills Cloud that we announced with Accenture this quarter, Anil. So essentially, they've taken extend And build IP on top of it. And then they're also taking Workday Journeys, Workday Skills Cloud, Workday Learning and reselling it On behalf of Workday into the market to different customers. So they're packaging it up with a set of services around it and then driving revenue on our behalf. So there's lots of exciting opportunities like that.

Speaker 9

That's just one example.

Speaker 11

Great. Thank you.

Operator

Thank you. Our next question is from Karl Keirstead with UBS. Please proceed with your question.

Speaker 11

Okay, great. Maybe I'll direct this one to Zane. Zane, out of the Investor Day, there was some degree of investor angst about the margin outlook.

Speaker 2

And yet here tonight, you've raised

Speaker 11

your full year a look and yet here tonight, you've raised your full year margins and you're guiding to up margins next year. Just curious, has your thought process Changed at all in terms of the OpEx trajectory over the next several years, perhaps it's not quite as front end loaded as you were thinking. Does this imply maybe you feel a little bit better about the revenue outlook and that's flowing through to perhaps a better than expected margin outlook next year. Love to get a little bit more color and to sort of contrast it to the Investor Day commentary.

Speaker 5

Sure, Karl. Yes, happy to answer that. I thought you're going to ask me about my 1st 5 months here, but I'll go ahead with the margin question instead. I'd say no change from the framework that we discussed. But as you point out, obviously, we've been pleased with the revenue we've seen through the course of the year, the margin outlook for the year and then, leaning into the margin increasing into next year as well.

Speaker 5

So It's a little bit of all the above. We feel confident with our strategy, with the revenue growth we've seen. We're always going to be thoughtful as we articulated at our Financial Analyst Day Around those investments that we're making, that we want to have that capacity to make those investments where we believe it makes sense and we expect to do that into FY 2025 and well beyond that. I've also pointed out previously that where we see opportunities to increase that operating margin. We'll continue to do that and let it drop to the bottom line as well.

Speaker 5

So broadly speaking, no change in our outlook. But you're right in pointing out that when we have those opportunities, we'll let it drop to the bottom line.

Speaker 12

Okay.

Speaker 5

Thank you, Zane. Thanks.

Operator

Thank you. Our next question is from Pat Walravens with JMP Securities. Please proceed with your question.

Speaker 11

Great. Thank you. So, Anil and Karl, I'm wondering how you see your partnership evolving when Anil takes the executive chair role in January. And Anil, any lessons from Dave's transition to chair back in 2014.

Speaker 4

Wow. Okay. So 2nd one caught me off guard a little bit. I'll just I'll answer the second one first. Everything is a continuum and I still talk to Dave almost weekly.

Speaker 4

And he's still the touchstone for a lot of things that happen at Workday. But what he said to me when I became the CEO, there can only be one captain of the ship. And I'd say the same thing about Carl. I'm excited about Carl being the captain of the ship. And frankly, what I've seen over the last Almost a year.

Speaker 4

We're just 9 days away from the year. December 10th was the date. Carl is amazing and he is driving the business in ways that I never could have. And so I'm really happy in transitioning back to a product and innovation and strategy role, which is really how Workday got started with Dave and I, and those are my roots. So I'm very excited.

Speaker 4

And Our working relationship has been great, but I think more importantly, and I would say this is the same with Dave and I, Workday is a company built on friendship. It was first Dave and I and now it's Carl and I and I think that's really powerful and that's what makes me very confident and optimistic about the future.

Speaker 3

Yes. And the only thing I want to add is Anil is going to be sticking around. He is truly, I know we like to use the rock star term here at Workday. He is the rock a rock star in the software And just watching Aneel's energy the last 3 or 4 months diving deep into AI, driving our product new technology strategy has been amazing and I can't wait to see him continue to do that even as he steps into this new capacity. He's truly a genius when it comes to product and product strategy.

Speaker 3

He is not going anywhere, period. I know he's my boss as Executive Chair, But I also want to be his boss sometimes and tell him he's not going anywhere.

Speaker 11

Okay, great. Thank you both.

Operator

Our next question is from Scott Berg with Needham and Company. Please proceed with your question.

Speaker 14

Hi, everyone. Congrats on the really nice quarter here and thanks for taking my question. I guess my question is Probably for Doug. I know it's early and I know that Workday has had, AI interwoven into the platform for obviously a couple of years. But with the renewed sense kind of customer interest in the space last 6 months.

Speaker 14

I guess, what are you seeing now for an appetite to actually pay for Yes, some advanced or incremental functionality around some of the InGen AI technologies out there. I think a lot of the questions we get is around from investors is, Will customers actually pay for this? Now that you have maybe 3 to 6 months under your hat, any viewpoint there would be helpful? Thank you.

Speaker 9

I'll answer it from a broader AI perspective. And I think the answer is yes. Customers will pay for where they see business value. And if you remember at Analyst Day, we highlighted that in the previous 12 months, talent optimization increased attached the 45% from 35% in just 12 months. I look at the top 3 SKUs that sold within the quarter of Q3 And talent optimization was right in those in that top 3.

Speaker 9

So I think they're willing to pay for business value. And we're seeing a lot of energy. In some ways, it feels like early days of Workday. And I was part of early days of Workday where our customers Come with great energy to co innovate with us. And what can we do together?

Speaker 9

And they share some of the things they're experimenting with, and we share some of the things we're experimenting with. But we've talked about this for several quarters in a row. There is a desire to consolidate vendors and to consolidate onto a platform and leverage that platform. So I do think there's a willingness to pay and I do think it shows up in the results.

Speaker 4

If I could add one other thing, I would just say that the point solutions that are being created by startups Are proving that customers are willing to pay for AI only, AI native, the equivalent of co pilots. These companies are getting substantial deals done and they're adding I think they're adding value and they're part of our ecosystem and it's a good proof point That customers are willing to pay for it if they see the value.

Speaker 14

Great. Thank you for taking my question.

Operator

Our final question is from Brian Schwartz with Oppenheimer and Company. Please proceed with your question.

Speaker 15

Thank you very much. This question for Carl or Doug. Just want to tap into what you're hearing in the C suite in terms of prioritizing IT this for next year. If we think about this year, clearly, there was a prioritization on technologies that drove efficiency and business cost optimization. Do you have any early read on how the C suite at large enterprises are thinking about prioritizing Thank you.

Speaker 3

Yes. Thanks, Brian, for the question. Doug, you want me to start and then you go okay. So I think there's probably 3 demands we're seeing right now out of the C suite. Number 1, talent.

Speaker 3

Talent is clearly a C suite priority And companies are all focused right now on rescaling and upskilling their workforces and they're also really focused on driving a better employee experience to keep the employees around longer and therefore drive better productivity. So I would say talent is a C suite priority. The other thing I would say is leaning into something you mentioned is they are looking to consolidate and they're looking to consolidate their IT spend and in doing so they're driving more of a platform approach. And I think we have a platform where people are consolidating on top of. And when you do that, you have a better total cost of ownership.

Speaker 3

And I know we've talked a little bit about AI on this call and we'll continue to do so for many years to Come, but I think AI is really becoming a business imperative and they're all trying to figure out how to leverage it. And I think as they do so, they're going to lean towards vendors who they trust like Workday, to be able to deliver those AI solutions and really drive impact to their employees in their overall productivity gains or seeking as a company. That's what we're seeing. But Doug, you're out there touching even more customers than I, so I'd like you to respond too.

Speaker 9

Well, you covered mine, but I'd say, yes, I agree with you. Best of suite versus best of breed. There's a desire for that, which is that consolidation play. And you touched on the other one I was going to hit, which is a renewed energy around efficiency and productivity business applications. So get employees in and out, drive great efficiency and that by the way has the side effect of driving a better employee experience.

Speaker 9

And so while there's all this talent and skills and employee experience focus, there's CIOs coming to our corporate visit center and saying, How do I get more productivity? How do I get more efficiencies? And that's where the Gen AI conversations get really interesting.

Speaker 3

Thanks, Doug.

Speaker 15

Thank you.

Operator

Ladies and gentlemen, thank you for your participation on today's conference. I'll now turn it back to Mr. Eschenbacher for Mr. Eschenbach for final comments.

Speaker 3

Sure. Orbacher, that works too. No problem. Thank you, operator, and thank you to everyone for joining today's call. A special thanks to our Workmates customers and partners around the globe that continue to fuel Workday's success.

Speaker 3

Q3 was another strong quarter, highlighted by durable mission critical nature of our platform, and it only reinforces the the excitement we have both in Q4 and the opportunity we have ahead. We are all well positioned here at Workday and we're a focus on executing in Q4 and laying the foundation for a durable growth in FY 2025 and beyond. With that, I'll hand it back over to the operator to close today's call. And I hope everyone has a great evening and a happy holiday season.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Powered by Quartr
Earnings Conference Call
Workday Q3 2024
00:00 / 00:00