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spk13: Welcome to Workday's fiscal 2024 second quarter earnings call. At this time, all participants are in listen-only mode. We will conduct a question and answer session towards the end of the call. During the Q&A, please limit yourself to one question only. I will now hand it over to Justin Furby, Vice President of Investor Relations.
spk03: Workday's second quarter fiscal 2024 earnings conference call. On the call, we have Anil Bushri and Carl 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. 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 2023 annual report on Form 10-K, and our most recent quarterly report on Form 10-Q 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 GAAP results. 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. The webcast replay of this call will be available for the next 90 days on our company website under the investor relations link. Additionally, our quarterly investor presentation will be posted on our investor relations website following this call. Also, the customers page of our website includes a list of selected customers and is updated monthly. Our third quarter fiscal 2024 quiet period begins on October 15th, 2023. Unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal 2023. With that, I'll hand the call over to Carl.
spk14: Thank you, Justin, and welcome to Workday's second quarter fiscal 24 earnings call. I am pleased to report that we delivered another solid quarter, achieving subscription revenue growth of 19%, 24-month backlog growth of 23%, and non-GAAP operating margin of 24%. While we continue to see deal scrutiny, our workmates around the world did a remarkable job staying close to our customers and driving this quarter's results in positioning us for strength in the second half of the year and beyond. Workday continues to stand out from the crowd for a few key reasons. First, the mission critical nature of our platform. Our customers, now representing more than 65 million users under contract, are all in on Workday because they trust us to manage their two most important assets, their people and their money. Trust is at the core of our customer relationships and we will always work to earn it. Second, our value proposition is strengthening as businesses consolidate their technology footprint from best of breed solutions to a true platform. Workday is a trusted platform they can turn to to drive productivity gains, agility, skills-based talent strategies, and a great employee experience all at the same time. Third is our unique approach to AI and ML. And Neil will share more on our progress here shortly. And finally, our winning culture and talent, which is only getting stronger as we continue to attract our industry's best talent. We recently welcomed Emma Chawlin as Chief Marketing Officer. Emma is not only a great culture fit, but she has extensive global experience across all facets of marketing at companies like Salesforce and Adobe. We also recently hired an incredible head of our U.S. federal government team and a senior executive in sales operations and another in our services organization to help us scale our go-to-market efforts. And of course, you all know our CFO, Zane Rowe, who is joining us today for his first earnings call. I could not be more excited to welcome these leaders who, along with our existing team, will help us achieve our next phase of growth. Turning to the highlights of the quarter, I will focus on five key areas, land, expand, global, industries, and partners. Starting with land... We see full financials and HCM platform wins on the rise, illustrating the trust customers have in Workday. Wins this quarter include Advocate Health, Assured Partners, Carilion Services, Fortrea, KinderCare, and University of Florida. And we continue to build on our market leadership position in HCM with new customer wins, including Prusanius, Digital Technologies, Stellantis, and Rio Tinto. Once we land customers, we immediately turn our efforts to successful deployments. In Q2, notable HCM Go Lives include A1 Telecom Austria, Korean Airlines, Nike, and Rite Aid. Strategic Financial Go Lives include Fitness International, MultiCare Health Systems, Wintrust, and the University of Washington. We also celebrated our first FedRAMP Go Live which was a full platform rollout at a well-known civilian agency. Expanding our existing business with customers is key to our growth strategy. In addition to strong renewals this quarter, we had a number of expansions at companies such as Airbus, Dell Technologies, Lloyds Bank, Lowe's Companies, and 7-Eleven. Our faster time-to-value solutions, which includes Planning, Pecan, Xtend, Health and talent optimization continue to gain traction, with many deals created and closed within the quarter. This year, we've put increased focus on financials go to market, and it's starting to bear fruit, with healthy customer growth in Q2. Beyond the full platform deals I mentioned earlier, we had a number of financial expansion wins in the quarter, including the Medical College of Wisconsin, Nordic Consulting, and Rakuten. Given our momentum, we continue to invest in financials targeted sellers to lay the foundation for durable growth. From a geographic perspective, the U.S. continues to be our largest market, representing 75% of our revenue. The U.S. team drove solid results in Q2, with particular strength coming from our customer base and industry teams. We have a significant runway for growth in this market and a healthy pipeline looking forward. Expanding our footprint globally is among our largest untapped opportunities and is a top priority. During Q2, we held 20 Elevate customer events across EMEA and APJ, attracting over 5,000 attendees and generating hundreds of leads in net new opportunities. Not only are we building pipeline, we're starting to see more consistent execution in certain regions, notably EMEA. We saw strength in key markets such as Germany, UK, and France, where wins included Rhenus Assets, Simrise, National Westminster Bank, and ALD Automotive SA. Our industry-first approach is paying off. This quarter, retail and hospitality became our second industry joining financial services to exceed $1 billion in annual recurring revenue. And we continue to have strong momentum in financial services, which outperformed in Q2. The healthcare team also delivered another strong performance with three large hospital systems going all in on work-based platform in Q2. A great example is Advocate Health, which as part of their merger with Atrium Health, selected Workday to replace a competitor's cloud HCM financials and supply chain management solution. Workday's supply chain continues to contribute to our traction in healthcare, with more than 220 healthcare organizations investing in it to reduce costs, promote standardization, and boost resiliency. Finally, our education and government team followed up a strong start to the year with an impressive Q2, with wins such as West Virginia University, DePaul University, and Metropolitan Community College, to name a few. The potential we have to accelerate our growth through our partner community is huge. We are seeing early signs that our partner referral program will positively impact new logos And our partnership with the AWS Marketplace led to multiple strategic wins in Q2. In EMEA, our recently announced payroll partnership with Alight is beginning to drive pipeline. And at APJ, our strategic partnership expansion with Samsung SDS is not only helping us drive overall business in South Korea, it also is enabling the development of region-specific applications built on Workday Extend. After spending time with many of our partners at our annual Altitude Conference this past quarter, it is clear our momentum is building. We look forward to welcoming more than 15,000 members of our Workday community at our annual Workday Rising Conference next month in San Francisco. We hope to see many of you there. As this quarter's results show, the diversity and mission-critical nature of our business continues to fuel our success. We are the clear market leader for Cloud HCM in finance, and our value proposition has never been more relevant or powerful. We are investing across our product portfolio, geographies, industries, and through partnerships to drive durable long-term growth. It is an incredible and exciting time to be a workmate, and I truly believe our future has never been brighter. With that, I will turn it over to my co-CEO and good friend, Anil. who will share more about our AI and ML strategy and innovation highlights from the quarter. Anil, over to you.
spk00: Thank you, Carl, and to everyone joining today's call, and especially to our nearly 17,900 workmates around the world for helping deliver another solid quarter. I couldn't agree more with the sentiment that our future is extremely bright. I've been on the road a lot recently to meet with current and prospective customers, and one thing is abundantly clear. More and more organizations are looking to Workday to be their trusted partner to help them navigate today's business landscape and thrive in this new world of work. Critical to our ability to be that trusted partner is our continued focus on artificial intelligence and machine learning, including generative AI. Last quarter, I highlighted Workday's unique approach to AI and ML, which began in earnest in 2014, with a focus on three key aspects. AI and ML are embedded into the core of our platform, We place an emphasis on being human-centric with our AI and ML strategy, and we continue to believe the true potential of AI and ML can only be met by ensuring that it's leveraged in a trustworthy and ethical way. Looking ahead, journey of AI will continue to be a major focus for us. Despite the recent hype cycle, Workday has been using large language models for years, and we're continuing to invest in a big way. What helps further set Workday apart is our unrivaled data set quality, which is fueled by our more than 65 million users under contract and 600 billion annual transactions to create data models that provide accurate, meaningful, and most importantly, trustworthy results. We're currently building product capabilities that leverage generative AI for a variety of tasks. Examples include natural language generation, content search, content summarization, content augmentation, and document understanding. and we're looking beyond those use cases at how we can also leverage co-pilots, agents, and conversational UI. Each will help our customers redefine the way they work, and we look forward to previewing these new capabilities along with the rest of our latest AI developments at Workday Rising in September. All told, our differentiated approach is working as we are seeing continued momentum across the board with our over 3,000 customers having opted into sharing their data with our ML models. And we know they are realizing value once they have opted in as we are processing more than 50 million ML inferences per day, an increase of more than 60% year over year. Furthermore, we believe that the enhanced value that AI and generative AI provide to our customers will also create economic benefits to Workday by positively influencing competitive win rates, renewal rates, and our already industry-leading customer satisfaction. We plan to offer most AI capabilities to our customers who opt in as part of their current product subscription with generous base usage entitlements. We also expect AI to open up new market opportunities with direct monetization that are wholly based on AI technologies, similar to our talent optimization solution that leverages Skills Cloud, one of our fastest growing SKUs. Last quarter, I also shared our perspective on the growing importance of AI safeguards and the active role we're playing in driving the development of smart regulations. Since then, the EU has entered final negotiations on its AI Act, which we expect to shape AI regulation globally. We've worked closely with policymakers in Europe over the last two years, and we're pleased to see many of our suggestions accepted in the Parliament's version that was recently approved. In the US, under the leadership of Cheyenne Chakraborty, our co-president, we've played a leading role in helping develop the AI framework for the National Institute of Standards and Technology, or NIST, which is a how-to guide for organizations to develop and use trustworthy AI. We're leading by example by implementing the NIST AI framework, and we're working with Congress to encourage adoption of it throughout the federal government. We're also helping to drive the conversation with lawmakers at the state level, including California, as they look to find a path forward for new AI regulations. We're helping them develop legislative frameworks that build trust in AI tools while driving innovation across the enterprise. As we continue to drive thoughtful and concrete policy approaches to responsible AI, you'll hear more from us on our work in the EU, the US, and around the world at this pivotal moment for AI policy. On the application front, we're continuing to see our innovation story resonate with customers who are increasingly selecting Workday over the competition. According to Gartner Enterprise Application Software as a Service, market share research, which was published in Q2, Workday had the highest worldwide market share in 2022 for SaaS ERP at 21%. Additionally, we crossed another milestone in Q2 with more than 5,000 core HCM and finance customers, a testament to the power of the Workday platform. For the office of the CFO, we enhanced Workday adaptive planning with the next generation of our patented elastic hypercube technology. Powered by new AI and performance improvements, Workday Adaptive Planning can now support our customers' most complex planning requirements, scaling automatically without sacrificing speed or performance. Further proof to the continued momentum we are seeing with this application, Workday Adaptive Planning was named Best Financial Management Solution in the 2023 SIIA Cody Awards. Workday was also named a Customer's Choice in the 2023 Gartner Peer Insights Voice of the Customer for financial planning software report. Additionally, Workday Accounting Center is proving to be a true difference maker for the Office of the CFO, as shown by the 70% year-over-year growth it experienced in Q2. Today, Accounting Center is helping more than 150 customers across a dozen industries to pull from a larger, more diverse spectrum of operational data sources to deliver increased granular insights and allow them to better understand their profitability, all in one system. And for the Office of the CHRO, Workday HCM was named a leader in the Forrester Wave Human Capital Management Q2 2023 report, which highlighted our investments in Venly and Workday Pecan Employee Voice, as well as our use of embedded AI and ML to reduce user friction. In closing, I'm confident that our continued focus on driving innovation across the entire Workday platform will not only position us for future growth on our path to $10 billion in revenue, but also play an integral role in helping us continue to build the highest levels of trust with our more than 10,000 customers. I'm excited to see many of you next month for Workday Rising, which is back in the Bay Area for 2023. With that, I'll turn it over to our CFO, Zane Rowe. As Carl pointed out earlier, Zane has been a perfect fit since joining Workday last quarter, and I'm thrilled to have him on board. Over to you, Zane.
spk15: Thanks, Anil. As this is my first earnings call as Workday's CFO, I want to start by saying how honored I am to partner alongside you, Anil, Carl, and all of our fellow workmates around the globe. I joined Workday because I thought it was one of the most compelling opportunities in all of enterprise software. The continued strength we saw in Q2 further reinforces that belief. Turning to the quarter, subscription revenue in Q2 was $1.62 billion, up 19% year over year. Professional services revenue was $163 million, leading to total revenue of $1.79 billion, growth of 16%. From a geographic perspective, total revenue outside the U.S. was $442 million, representing 25% of total revenue and 15% growth in Q2. As Carl mentioned, we see significant long-term international growth opportunities, which we expect over time will become a more meaningful portion of our revenue mix. The 24-month subscription revenue backlog was $10.27 billion at the end of Q2, up 23%, driven by new ACV bookings and strong renewals, with gross and net revenue retention rates of over 95% and over 100% respectively. Early renewals in the quarter exceeded our expectations and added roughly a point and a half of growth to 24-month backlog. Total subscription revenue backlog at the end of the quarter was $17.85 billion, up 32%. Early renewals in the quarter added roughly three points to the growth. In addition, we continue to see longer contract duration on both net new deals and renewals, which speaks to our customers' continued commitment to our platform and is causing our total backlog growth to significantly outpace growth in the 24-month backlog. Our non-GAAP operating income for the second quarter was $421 million, resulting in a non-GAAP operating margin of 23.6%. Margin strength relative to our guidance was driven by revenue outperformance and the timing of certain expenses. Q2 operating cash flow was $425 million, which benefited from the timing of collections in the quarter. During Q2, we repurchased $139 million in shares at an average price of $218.33 per share, and we had $287 million in remaining authorization under our buyback program as of quarter end. We ended the quarter with $6.7 billion in cash and marketable securities. We continue to add key talent across strategic growth areas of the business, and we ended Q2 with nearly 17,900 global workmates. We were pleased with our financial performance in Q2 and focused on continuing to drive results in the second half while investing to support longer-term growth. Now turning to guidance. Following our momentum in the first half of the year, we are raising our full-year FY24 subscription revenue guidance to a new range of $6.57 billion to $6.59 billion, representing 18% year-over-year growth. We expect Q3 subscription revenue to be $1.678 billion to $1.68 billion, representing 17% year-over-year growth. We're maintaining our FY24 professional services revenue guidance of $630 million to $650 million, as we continue to strategically shift more deployments to our partner ecosystem as part of our channel strategy. For Q3, we expect professional services revenue of $165 million. We expect 24-month backlog to grow approximately 21% year-over-year in Q3. This includes our current outlook for early renewals in the quarter. We are raising our FY24 non-GAAP operating margin guidance to 23.5% and plan on maintaining a disciplined approach of investing in long-term growth while we expand margins. For Q3, we expect non-GAAP operating margin of approximately 23.5%. GAAP operating margins for the third quarter and the full year are expected to be approximately 20 and 22 percentage points lower than the non-GAAP margins respectively. The FY24 non-GAAP tax rate remains at 19%. We expect FY24 operating cash flow of $1.95 billion, growth of 18% year-over-year. As we mentioned last quarter, we anticipate making our first semiannual payment of our employee cash bonus plan in Q3, which impacts our annual cash flow and quarterly seasonality for FY24. In addition, we continue to expect FY24 capital expenditures of approximately $300 million. I'll close by thanking our terrific community of customers and partners for their continued support. And I look forward to seeing many of you in the investment community at our upcoming Financial Analyst Day on September 27th in San Francisco. With that, I'll turn the call back over to the operator to begin Q&A.
spk13: Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session. If you'd like to ask your question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Please limit yourself to one question so we may get to everybody's questions. Our first question comes from the line of Kash Rangan with Goldman Sachs. Please proceed with your question.
spk10: Thank you very much. And the energy on the call is just so palpable. It looks like there's a lot of new leadership changes. So congrats, Zain, on joining a great team here. I had one thing, or maybe two things. The importance of data in the world of AI. You have data on 65 million professional workers. at a high level, how could you possibly monetize with AI the value of this data in the years ahead, and therefore its implications for the pricing power of Workday? And if you could, are there any pent-up areas within the portfolio that might have taken a bit of a seat back because of the caution in the spending environment? If that caution goes away, where do you see maybe geographies or product segments that could do even better in the year ahead. Thank you so much, and congratulations.
spk00: So, Cash, I'll take on the first part. Good to hear your voice. You know, the data is really valuable because it lets us train the large language models, and what you'll see us do is have, with the large data sets, we can not only train the large language models, we can then do domain-specific large language models, and those are smaller and less expensive. And we turn around and use those models to either make our products more competitive or they're the basis of new SKUs like the Skills Cloud. I think you see us more in the mode of new SKUs like Skills Cloud rather than actually charging for any insight from the data. It's the customer's data. They allow us to use it in an anonymized way and we give them the results back. But I think what it allows us to do is train these large language models and then domain-specific ones that will create new SKUs.
spk14: Yeah, and just one quick add-on, then we'll talk about some of the other questions you had, Cass. Great to hear your voice. And I think it's important to know that, you know, what Anil and Dave did from the beginning is they built this platform and they built AI and ML deep into the platform. So it's been built in. And we've already seen a positive economic impact to Workday through our industry-leading customer sat. Our renewal rates and competitive win rates still remain strong because of AI and ML, and it's built in from the beginning. So I think that's a differentiator for us against those 65 million users and 600 billion transactions that we get on the platform a year. As it relates to your second question, maybe I'll start, Doug, and then you can jump in. We haven't seen any pullback due to any macro headwinds in any of the things we're selling into the market. If anything, I think our value proposition is only resonating more cash as people look to consolidate multiple products who are sometimes called best of breed onto best of suite platforms. And they're consolidating on top of Workday for both their financials and their HCM and their wrapping, our adaptive planning product around both. So we continue to see strong momentum across the board. And you mentioned geographies. Our European team continues to do quite well. We've talked about it the last couple quarters in our focus on international. And they continue to deliver for us. They're much more predictable. And they're driving strong pipeline in EMEA. And then we'll still continue to work on APJ to grow that business out. Doug, you want to add any additional color?
spk16: I think some of that I would echo as well. I think just as you coined it, sort of the lifting caution. Cash, I think that caution is still out there, and that still shows up in the additional deal scrutiny. But I would say, just to give you a little more insight, we were really pleased with the performance of U.S. Large Enterprise today. And Carl mentioned EMEA. I attribute that to execution as much as maybe a lifting caution, but it's been really nice execution across Europe in the first half.
spk02: Thanks, Doug.
spk13: Our next question comes from the line of Mark Murphy with J.P. Morgan. Please proceed with your question.
spk11: Thank you, and congrats on an absolutely stellar performance. Zane, I'm wondering if you can dimensionalize at all the Finns quota capacity increase that you're bringing on board or how much you could bring on just relative to the demand signals that you're seeing out there. And then for Carl or Neil, I'm curious if you see more opportunity out there in the mid-market or perhaps sensing an inflection up at the global 2000 level for some of the customers that might need to handle complicated currencies or legal entities, minority interests, country localizations, that type of an arrangement.
spk15: Sure, Mark. I'm happy to start and then head over to Carl. As you point out, we're bringing on some significant amount of Fins sellers as we see that opportunity, I'd say both on the domestic side and on the international side. I'd say it's still early days there as we bring them on. Obviously, it'll take some time for us to see all of those benefits, but it's clearly a focus area for us. I will tell you that the unit growth in Fins this quarter was tremendous and exceeded our expectations, so we're very pleased with the growth that we're seeing, and optimistic about what we can do in the future there on FINS with the additional go-to-market capacity.
spk14: Yeah, Zane, thanks for that color. Yeah, Mark, as you know, six months ago we decided to put a big investment in the go-to-market side specifically around FINS. And while it takes, you know, it takes, you know, six to 12 months to get your reps up and ramped, we're seeing early indications of it. providing significant leverage in the business. One of the ways it's turned up here this quarter, as Zane just talked about, is we saw a really good growth in number of new fin units sold on a year-over-year basis into the market. But it's more than just selling fins. We're also seeing the knowledge set that we have across the field now with financials is actually impacting our full platform sales. So our full platform sales are only accelerating as we sell both HCM and Finns into the market at the same time. And we saw that specifically kind of into your next question in the medium enterprise business. The medium enterprise, we see full platform sales very regularly at this point, and I think that's attributed to the build-out of our Finns sales force. And then the last thing I talk about is the Fins sales force helps us continue to drive a land sale with planning. Planning continues to be a good product for us. We're landing with it, and it opens up the door for us to go back and sell both Fins and full platform into those customers that we landed with planning. So there is no doubt at this time that the Fins build out of the sales force is paying dividends. As it relates to the medium enterprise, we had a really solid quarter in what we described the medium enterprise segment. And I think the highlight there was specifically we're seeing more and more full platform sales into that market segment. And we're very pleased with their performance, specifically here in the U.S., and we're going to replicate that internationally as we build out the medium enterprise globally.
spk02: Thank you very much.
spk13: Our next question comes from the line of Brad Sills with Bank of America. Please proceed with your question.
spk04: Oh, wonderful. Thanks, and great to see the great results here. I wanted to ask one on the expanded success that you're seeing here. I know, Carl, it's been an initiative here to go back to the base here. Is there any color you could provide as to where you're seeing particular strength? There's so many modules within HCM and FINS that I would love to get some color from you as to where you're seeing success there. And then the second question would just be, On the macro, you mentioned that deal scrutiny is still there. Is that outsized in Office of HR versus Office of CFO? Where might we see some potential acceleration coming out of the macro? Any differences there? Thank you.
spk14: Yeah, sure. One of the things we really like about our business model is what we describe as both the diversity and the durability of our business. From a diversity perspective, we're still landing a significant portion of our business on net new deals, which is really exciting to see. And when you land net new deals, what that provides you is a platform to sell back into your customer base, and we have two different selling motions there. In this quarter, when we had a really balanced performance across selling back to the customer base and landing net new, and that's a motion that we're going to keep leaning into. And, oh, by the way, we talked about FINs. When we're adding FIN sellers, We're separating them into selling net new fins and back into the customer base. So this motion is clearly working for us. As it relates to macro, maybe I'll just do high level and then ask Doug to chime in and see what he's seeing since he's with customers daily. Nothing has changed over the last few quarters. And because of that, we continue to perform quite well because I think our sales force is very skilled at navigating the extra scrutiny they're going to get. as well as they're doing really well at understanding the sales process in their closing deals and they're getting them across the finish line. That's both a tribute to our sales force globally, but I also think it comes back to the strong value proposition we're providing customers as we continue to be, you know, the platform they're choosing to support both their people and their finances, their two most precious assets. So it's a combination of good execution, understanding the sales cycle, and us continuing to have a strong value proposition for our customers and prospects. And I'll ask Doug to call or add any additional color on the macro.
spk16: Yeah, thank you, Carl, and nice to talk to you, Brad. From a macro perspective, you asked the question whether it shows up in one area or the other, I think you meant between HCM or FINS, and I'd say not really. I think it's fair to say that the extra scrutiny is on any dollar spent, in corporate America or across the globe is getting that scrutiny. So it is sort of across the board. I would say perhaps more pronounced, I don't know if scrutiny is the right way to describe it, in net new versus customer base, which is why the customer base has been such an important part of our motion over the last two years at the company, which was your first question around expand. So in that motion, we really sort of see two key things. One is this notion of create and close or what we call speed SKUs or speed solutions. So just to highlight there, PECON, planning, talent optimization, those tend to go quick time to value and tend to be really strong in quarter, sort of create opportunities and close. But at the same time, we have our customers, the customer base doing larger, what I would describe as more strategic enterprise type agreements. We talked about The expansions across Airbus, Lloyds Bank, Lowe's, 7-Eleven this quarter, those are already big customers committed to the platform but have taken on an even more strategic approach with us as they look to consolidate vendors and standardize on our platform.
spk04: Wonderful to hear. Thank you so much.
spk13: Our next question comes from the line of Kirk Materni with Evercore. Please proceed with your questions.
spk09: Thank you very much, and I'll echo the welcome to Zane. Good to hear from you again. Carl, I was wondering if you could just double-click a little bit on international and what you're seeing in that region, maybe across some of the products. And I was wondering if you could also just talk about the investments that you're making today and sort of the opportunity for those to kind of come to fruition from a bookings perspective next year. I guess just a little bit more color in international would be helpful. Thanks.
spk14: Yes. Thanks. So I'll talk specifically about EMEA, which both Doug and I already mentioned, but this is an area that we, I think you are aware over the last couple of quarters, we've shared that we brought in a lot of new leadership across the region, both in the UK, at the entire EMEA level, in Doc, in France. So we've really built out our leadership team there, and they're actually bringing in more and more talent underneath them, and it is starting to clearly pay dividends there. We are seeing early signs of, you know, solid pipeline build that's much more predictable than we've seen in the past. We see more predictability in the business because they have their arms around it. And they are selling both HCM and FIN successfully. The other thing we're seeing, which is a little bit of replication from what we're seeing here in the U.S., is, you know, the EMEA market as a whole is very much a medium enterprise business. and they're doing really well at selling full platforms into the EMEA market where customers see the true value of combining both HCM and financials and, again, wrapping planning around it for that full platform sale. So we definitely are seeing the momentum there. And we do have some big competitors in our backyard there, but when we look at our competitive win rates across the market, including in the backyard of some of our big competitors, our competitive win rates are holding up. Our discounts are holding up, so they're really executing well and taking a really strong approach to the market. So we couldn't be more pleased with what's happening in EMEA. Internationally, if you go into APJ, we had an okay quarter. We still have some work to do there. We think there's tremendous upside in the APJ market. And we will continue to, you know, add resources both on the go-to-market and continue to internationalize and localize our products so we can have a better fit in some of the emerging markets we're going after in APJ.
spk02: Thank you.
spk13: Our next question comes from the line of Alex Zukin with Wolf Research. Please proceed with your question.
spk08: Hey, guys. Thanks for taking the question. Carl, maybe the first one for you and then a quick one for Zane. You mentioned a couple of really interesting deals in a number of different verticals, including state and local. You talked about a FedRAMP deal. I guess maybe can you dimensionalize the growth of some of these verticals relative to financial services and retail hospitality? When... When do we think that the, you know, kind of the state, local, the federal, the health and life sciences, the education verticals can start to rival that type of scale that you're seeing with thin serve and retail and hospitality? And then a quick follow-up for Zane.
spk14: Yeah. So thanks for the question, Alex. And as you know, we don't break out or share specific percentages on any given market segment or industry. But in the case, you know, You know, this time we did highlight our second $1 billion in annual recurring revenue business in retail and hospitality, which continues to be quite strong and growing. And we had another really solid quarter. In industries as a whole, and specifically in higher ed, we called out healthcare and financial services. In the government business, listen, we're still in the very early days of state and local government. I think there's only 15 states at this point who have decided to do a full platform replacement, which leaves 35 or 36 states up for opportunity for us going forward. And we think we have a really good solution for that market. And on the federal side, listen, we're just starting. We have FedRAMP moderate. We said we were excited to see our first customer, a civilian agency, do a full platform replacement. roll out on our FedRAMP cloud. And we also said we were bringing in a new leader, right, a really seasoned leader to help us lead federal going forward. So this is an area we'll continue to lean into. We do see opportunity in federal. Even without having FedRAMP high on the cloud, we do have a lot of opportunity with the existing agencies. And we see that as a rich market for us going forward.
spk02: around the early renewal dynamic that you guys are seeing this year.
spk08: Clearly, a solid benefit for Q2 24-month subscription backlog. It sounds like there's also some benefit in the guide for Q3. Maybe just dimensionalize it and remind us, like, what's the customer activity? Is it an incentive that you're giving? Is it the macro? Like, what's driving this? And, like, do we think about this as a future headwind? Do we think about this as an opportunity for co-terming at upsells? what's the right way to think about this?
spk15: Alex, yeah, I'll start and then let Carl chime in as well. As you point out, we're very pleased with The RPO growth on the 24-month side this quarter is 22.7% growth. But as we pointed out, for all the reasons Carl and Doug mentioned, we saw about a point and a half of that be early renewals coming into the quarter, which is a terrific opportunity for us to interact and interface with our customers as well as upsell them as well. So we're very pleased with the outcome in Q2. As we look to Q3, what we've done is taken a look at where our expectations are for Q3, which is included in that 21% increase as part of our guide. I'd say approximately a point of that as we look out to the next quarter right now is included. in that 21%, so we believe that activity will continue. Again, we're thrilled with the activity. It means our customers are doubling down on us. They're leaning into that platform, and we couldn't be more pleased with that. As you point out, obviously, we've been running ahead of subscription revenue for some time on RPO, so we would expect some variability related to subscription revenue in the future, but we welcome the early renewals. We think it's a terrific opportunity for our customers to continue to buy into the platform. Carl, I'll let you...
spk14: Yeah, thanks, Zane. Yeah, Alex, we did have another really good quarter of selling back into our customer base. We talked about that earlier, and that is what drives a lot of the early renewals. But I want to make sure it's clear to everyone, we don't incent our teams to drive early renewals. We incent our teams to work with our customers to add additional SKUs as they look to consolidate more and more on top of the HCM or the financials platform. So the demand is being driven by our customers. And then we go and we work with them. And in some cases, they add new SKUs. And when they do so, they actually do early renewal and they co-term their agreements, which drives the uplift that Zane talked about in our 24-month RPO. So we're not incenting people to do it. It's customer demand. They're looking to add more and more modules, and as we continue to innovate and bring new SKUs to market, we would expect this to continue going forward.
spk13: Our next question comes from the line of Keith Weiss with Morgan Stanley. Please proceed with your question.
spk05: Excellent. Thank you guys for taking the question, and congratulations on a really strong quarter. I wanted to – it's sort of – extent on bread sales earlier question about kind of the upsell motion. It seems like you guys are having a lot of success there. Carl and Zane, when I think back to your guys time at VMware, VMware was a machine in terms of packaging and mechanisms for selling more solution into into existing customers. And that was a huge kind of successful part of that business. Are there sort of learnings or sort of mechanisms or improvements that you guys can make in that upsell motion that you could bring on board that could turbocharge this upsell effort even further from what we've been seeing thus far?
spk14: Yeah, I'll take that. And thanks for the question, Keith. I hope you're well. Listen, the teams are doing really good at already, you know, selling back into the customer base. I think it has to do with the motion that Doug and Patrick are driving with two different, if you will, sales forces, one selling only to customer base and the other selling net new. And because we have that focus on customer base sales, I think the teams are driving these new SKUs back into our customers. Specifically, as it relates, can we do things differently? Potentially. We are looking at different ways to price and package our products in the future to make it easier and more consumable for our customers and make it easier for our sales reps to sell. But right now, we don't have any, if you will, new plays that we're running. I think the team is executing well. Our customers clearly see the value of the additional SKUs that we have in the market and clearly see a total cost of ownership play by consolidating on top of our platform. I don't think you'll see any short-term change here, Keith, but we're always looking for ways to innovate on go-to-market, and one of them would be through some type of pricing and packaging in the future.
spk15: Keith, I would just add, you know, we continue to obviously invest in this area. It's one of tremendous opportunity for us, and we spend a fair amount of time looking at it and thinking about what's the next best opportunity for the customer to recognize value and, of course, in turn for us to do the same. So it's an area that we continue to see good progress on.
spk02: Excellent. Super helpful. Thank you.
spk13: Our next question comes from the line of Brent Thill with Jefferies. Please proceed with your question.
spk07: Carl, earlier in the year you unveiled a new partner referral program. Maybe too early to see the fruits of this new program, but curious what you're seeing and ultimately what you're seeing for the next six, nine months with this partner program.
spk14: Yeah, sure. Thanks, Brent. Good to hear from you. We did launch a new partner program. There's many facets to it. including technology arrangements and collaboration on the technology front, including co-sell, including resale, and also we rolled out a referral program. And I will say we're seeing early signs of the customers really leaning into this new program, and they're also getting value because they're innovating on top of Workday, leveraging things like Xtend, to expand their market opportunity with us as well. So on the resale program, that's phase two, but the co-sell and referral program has kicked off, and we're seeing nice uplift in referrals from our partners on a global basis. Another thing we did is we launched a partnership, if you recall, Brent, with AWS, and we're selling through the marketplace. And we have seen a number of opportunities in Q2 that were driven from that partnership with AWS as people are looking to burn down the credits they have with AWS today. So overall, we're very excited about the partner program. We had a big partner conference just last month. We had over 3,000 people join us at our Altitude Conference where we spent more time articulating our new program. and sharing with them how they can both monetize the Workday platform to sell more services and innovative solutions, and also help us drive net new outcomes and get paid for it. Thank you.
spk13: Our next question comes from the line of Carl Kierstad with UBS. Please proceed with your question.
spk17: Thank you. Welcome aboard, Zane. I'll direct this one to you. As you just alluded to, the gap between the 24-month backlog and the sub-REVS growth has historically been pretty narrow, but it's widened out a lot in recent quarters to three to four points. I'm just curious, why is that? And over what time frame do you think that gap will close? Maybe it's partly due to the early renewals you mentioned, but maybe there are other factors. Thanks for unpacking that for us.
spk15: Yeah, of course, Carl. Great to hear from you. As we mentioned, we're really pleased with the program we have behind that, and the additional backlog and the performance we've seen on RPO has even exceeded our expectations over the last number of quarters. And it's driven by a number of variables. I think both Carl and Doug talked about the relationship with the customer, as well as our opportunity to expand those SKUs and that relevance with our customers. So, we're pleased with the performance there. Now, some of the variability, we talked about education and Gov. we tend to see longer duration with those contracts. So, that'll have a natural extension. And in many cases, especially if you look at the top line growth of backlog and RPO, we see significant increases driven by that mix shift. And then the other dynamic is, of course, the early renewal that we talked about, where it's another opportunity to engage with the customer, to go deeper into the platform, as well as sell more of our SKUs. So, you know it's as i pointed out in the third quarter we we feel like the the second quarter um was higher at least our current expectations at the second quarter and the activity we saw there would be higher than what we see in the third quarter part of it is also doug's team and just where they spend their energy and we've obviously leading up to a seasonally strong fourth quarter so we like the motion we encourage the motion it's an opportunity for us to lean in and have a longer and more durable relationship with our customer base And we believe you'll see that reflected in the numbers. But to your point, it may create a little bit of variability if you looked at backlog and the variance between backlog and subscription revenue. But we're solely focused on driving continued growth in the business and particularly focused on that subscription, that long-term subscription revenue line. Hopefully that helps. Yep, it does, Zane. Thank you. Great.
spk13: Our next question comes from the line of Brad Zelnick with Deutsche Bank. Please proceed with your question.
spk12: Great. Thanks very much for taking my question. There's a lot of goodness in the results and the message, so I'll echo my welcome to Zane and congrats to you all. My question actually for you, Zane, is, you know, in your comments you've said that Workday plans on maintaining a disciplined approach of investing in long-term growth while expanding margins, which I think is music to everyone's ears, but can you expand on what that means to you and if there's any sort of framework or even rule of thumb that we should consider in the years ahead? Thanks.
spk15: Hey, Brad. It's good to hear from you. I'd say, generally, we're at a unique opportunity here at the company to do exactly that, which is to lean in and to make smart investments. Carl's highlighted a number of those, whether it's partners, whether it's international defense products. We're at a point where I think this is an opportunity to really lean in on our TAM opportunity and that growth that we can see across the platform. From the finance side, I think we benefit because we can make thoughtful investments and help the business grow, both on the product side. Obviously, we talk about AIML and the tremendous opportunity we have there, but then also on the go-to-market side. When I look at that balance between 75% domestic and 25% international, I just think it's ripe with opportunity to grow on the international side, but do it in a thoughtful way. As Carl alluded to, on the EMEA side, with an uncertain backdrop, we've seen great opportunities there and we've seen good growth there. So I'm just pleased when I look at the opportunity to be here to leverage the finance side and to lean in on where we make these investments. And then we continue to see top-line growth. And as I just mentioned, on the RPO side, we can see significant RPO growth. But along with that, we have investments in interesting areas that create longer-term revenue growth and subscription revenue growth as well around the globe. Carl, I'll let you add a few comments.
spk14: Yeah, no, I think you said it well, Zane. We continue to invest on the go-to-market side, but I want to make sure everyone knows we're investing heavily on the product and technology front as well. And Neil's leading that charge with Cheyenne. We continue to invest to drive innovation. you know, here at Workday, and we're leaning into the AI and ML opportunity, which we think, you know, will bear fruit in the future. The other thing to think about is how do we get operating leverage from AI and ML internally? We think by using these technologies, we can actually drive better operating margin, which allows us to reinvest and go to market in products, you know, in the future. So there's kind of a flywheel effect we can get from the benefit of AI and ML.
spk02: Great stuff. Thanks so much, guys.
spk13: Thank you. We have time for two more questions. Our next question comes from the line of Michael Tarrin with Wells Fargo. Please proceed with your question.
spk06: Hey, great. Thanks. Congrats from me as well on the results. You're getting a number of questions on the backlog metrics, but it's really the consistency of those metrics that continues to impress your guidance. for low 20s growth again next quarter. So maybe you can expand on just what's helping sustain such a consistent growth profile in an inconsistent environment. And then going back to the international side, there was some encouraging commentary around EMEA, but the growth rate there is still lagging a bit. So just wondering if there are signs you're seeing that can help the growth rate there maybe pick back up and take some of the load off of the U.S. strength you're seeing.
spk15: Thanks. Sure. Yeah, I'll start and then hand over to Carl. And, you know, as we point out with backlog, it's really that relationship with the customer and the diversity of the business and the contract length that have helped support that. And it's been Doug's team interacting, interfacing with those customers and leaning in more on the platform. And that's what you see reflected in those RPO numbers. Our success that we've seen on the renewals has clearly helped our customers engage more, create more uplift, as well as extend the duration of our relationship with them. I think it's that compounding effect that you've seen over the last number of quarters. Again, I would highlight that not only do we lean in there, but we wouldn't always expect, as we look out for the remainder of the year or even into next year, it's not that we're pushing the backlog. We're focused on subscription revenue and continued subscription revenue growth. And the backlog just happens to be in that big RPO increase, just happens to be a byproduct of the interaction and interface that we have with those customers and the long-term relationship that we've developed with them. Carl, I'll let you maybe give a little more detail.
spk14: Yeah, Michael, I think you're asking specifically on the first question about how do we continue to do this. And I think it's just the strength of the platform we have. And I think, you know, with some headwinds in the market that everyone continues to face, people are looking to do more with less. And by doing so, they're looking for a total cost of ownership play. And I think we provide that both on the HCM side and the financials as people consolidate what I said earlier from best of breed to best of suite. And it's also driving a different level of employee experience. We're helping drive productivity gains for our customers. We're helping them upskill and reskill their folks. We're delivering a new level of employee experience. And by doing all of those, people just continue to put more and more on top of our platform. And even if it is our own SKU, they're leveraging things like Xtend to build other solutions on top of the Workday platform. So I think this motion of selling back into the base is going to continue as people consolidate more and more on top of us. As it relates to the international growth, again, we're highlighting we saw really good performance out of our team in EMEA specifically. and we're encouraged by both the consistency and predictability of their performance and the strong pipeline that we're building over there as we head into the second half of the year. Let me say, though, on the flip side, if I can, Michael, right, our U.S. team just continues to drive really solid performance as well, and they're outperforming in a number of key areas like large enterprise and across some of those industries that we spoke about today, you know, our education, business, health care, and financials. So we're aiming to keep driving our U.S. business and watching them continue to perform and outperform and at the same time try to drive international growth. And it's always important to remember the international growth from bookings doesn't actually get shown right in the same quarter. You'll see it in the out-quarters as we look to continue to drive that growth. We'll see a slight shift over the over the coming years from 75-25 to something that we get more impact and more performance from the international teams.
spk13: Our next question comes from the line of Rishi Jalaria with RBC. Please proceed with your question.
spk01: Oh, wonderful. Thank you guys so much for taking my question. Nice to see continued strength and resilience in the business. I want to go back to talking about generative AI and your opportunity there. Clearly a big opportunity to leverage the data you have and use it to make the product and platform better. But I want to talk about the opportunity to maybe utilize generative AI both to accelerate migrations from legacy on-premise solutions in terms of making it easier for custom applications to migrate as well, making it easier for that data to transfer and maintain data fidelity. And maybe at the same time, even on your end, utilize generative AI to reduce the services attach rate and bring down that services mix a little bit over time. Any way you could help me kind of understand the way you can utilize it on that would be very helpful. Thank you so much.
spk00: Yeah, on the first part, we are definitely looking at generative AI to do a better job of data transfer and transformation from legacy systems. And I think over time, it'll be increasingly automated with AI. So that's already in motion. On the second one, It's definitely something we're exploring and how we bring AI into our services organization to speed up implementations. You know, stay tuned on that part. We're very focused on the products that we deliver to our customers. And one thing to think about is actually how we build AI into the products to make them easier to implement. But that's, you know, that's a work in progress at this point. It's a great question.
spk13: That is all the time we have for questions. Ladies and gentlemen, thank you for your participation on today's conference. I'll now turn it over to Mr. Eschenbach for final comments.
spk14: Thank you, operator, and thank you for everyone joining today's call. And a special thanks to our workmates, customers, and partners around the globe that continue to fuel Workday's success. Q2 was another solid quarter, highlighted by the diversity and mission-critical nature of our business. We have an exciting opportunity ahead, and we are all well positioned as we think about the second half of the year and beyond. I look forward to seeing many of you at our upcoming Rising Conference and Financial Analyst Day in San Francisco. With that, I will hand the call back over to the operator to close today's call, and I hope everyone has a great evening.
spk13: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.
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