Workday, Inc.

Welcome to Workday's Fiscal 2024 Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of the call. During the Q&A, please limit your questions to one. I will now hand it over to Justin Furby, Vice President of Investor Relations. Justin, you may begin.

Thank you, Operator. Welcome to Workday's Third 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 gap results, in our earnings press release, in our investor presentation, and on the investor relations page of our website. The webcast replay of this call will be available for the next 90 days on our company website under the investor relations link. Additionally, 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 fourth quarter fiscal 2024 quiet period begins on January 15, 2024. 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.

Thank you, Justin, and thank you, everyone, for joining our Q3 FY24 earnings call. I'm pleased to share that Workday delivered another strong quarter, achieving 18% subscription revenue growth, 22% 12-month backlog growth, and non-GAAP operating margin of 25%. These results were driven by broad base strength across net new and customer-based teams, medium and large enterprise, and across regions, notably the U.S. and EMEA. I want to thank the more than 18,300 workmates around the globe 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, delivered 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 weeks ago in Barcelona, we followed up with our largest ever EMEA rising event with over 4,500 people in attendance. In speaking with customers, prospects, and partners at these events, a few things stood out to me. First, talent continues to be a top C-suite priority. In this macro environment, businesses are looking to scale and drive productivity. They can't 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. That helps them reduce attrition and ultimately drives productivity. Second, leaders are continuing to consolidate their technology footprint on a true platform to realize total cost of ownership benefits while also accelerating their operations. Workday is perfectly positioned to benefit as the intelligent digital backbone 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 million users under contract, we can uniquely drive efficiencies and improve the employee experience. And Neil will share more, but I will say that it is what we are doing and not just saying that is resonating with our customers. Simply put, our value proposition has never been so relevant and powerful. That's clear in the results our team delivered in Q3 and in the first half of FY24. 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. From a net new customer perspective, we once again saw strength in full platform deals. We welcome customers like AdventHealth, Bentley Systems, Houston Methodist, and Lifespan as new full-platform HCM and financials customers. And new HCM customers such as Green King Brewing, Group One Automotive, Minor Hotel Group, and the U.S. Department of Energy helped us surpass 5,000 core HCM customers on Workday. Alongside helping new customer activity, We had several strategic expansions and renewals in the quarter, including Magna International, Mondelez Global, Sunoco Products Company, and Southwest Airlines. 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-based 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 billion ARR mark in the region. 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 Tullis 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. 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 and new ACV. 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. State and local government also continues to outperform with strategic full-platform WINS at County of Kern, County of Chesterfield, and the Pennsylvania General Assembly. Our back-to-base motion in financials also delivered in Q3. WINS included Clearwater Analytics, Ochsner Clinic Foundation, and Concentrix, which expanded their Workday HR footprint to include Core Financials when it combined with Web Health, 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 Storrs Kogan 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. HCM Go Lives this quarter included American Electric Power, Dave & Buster's, and Iberdrola, along with Financials Go Lives at North Shore 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, which we announced at EMEA Rising, is a great example. Accenture will be reselling our skills solution, providing their own services expertise 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. And we announced AI Marketplace at Rising. which allows us to innovate with our ecosystem of partners to deliver trusted and responsible AI solutions for 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 pipeline. 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. 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 in 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. 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. And Neil, over to you.

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 longstanding 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. 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 extent. Another way we're infusing generative AI into our platform is through our investment in conversational AI. While we're still in 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. 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 Extend 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. 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 interests 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, and native AI-powered Workday Xtend apps. 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 Lannan, 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 trustworthy and responsible manner. At the application level, Workday products continue to be recognized for the innovation that we deliver to customers. 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 eighth consecutive year we were recognized as a leader. Additionally, Workday Venley was named a 2023 Top HR Product of the Year by Human Resource Executive. The award recognized Venley'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. This is the second 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 Rowe. Over to you, Zane.

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 $1.69 billion, up 18% year-over-year. Professional services revenue was $175 million, leading to total revenue of $1.87 billion, growth of 17%. U.S. revenue totaled $1.4 billion, growing 17%, and international revenue totaled $462 million, growing at the same rate. As we have highlighted, we see significant long-term international opportunities, which we expect over time 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 $6.05 billion at the end of Q3, representing growth of 22%. The result was driven by strong new ACV bookings and healthy renewals, 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 backlogs and early renewals from prior quarters also continued to benefit backlog growth in Q3. 24-month subscription revenue backlog was $10.58 billion at the end of Q3, up 23%. Early renewals in the quarter added nearly two points of growth to the results. Total subscription revenue backlog at the end of the quarter was $18.45 billion, up 31%. Backlog benefits from increased contract duration, which speaks to our customers' continued commitment to our platform. Our non-GAAP operating income for the third quarter was $462 million, 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 fourth quarter. Q3 operating cash flow was $451 million, growing 10%. During Q3, we repurchased $148 million of our shares at an average price of $218.35 per share, and we had $139 million in remaining authorization under our buyback program as of quarter end. We intend to execute on the remaining authorization of our buyback during Q4. We ended the quarter with $6.9 billion in cash and marketable securities. We continued to invest in growth areas in the business, and we ended October with over 18,300 workmates around the globe. Now turning to guidance. Following our continued momentum in Q3, we are raising our full-year FY24 subscription revenue guidance to $6.598 billion, representing 19% year-over-year growth. We expect Q4 subscription revenue to be $1.755 billion, representing 17% year-over-year growth. We now expect professional services revenue of $158 million in Q4 and $652 million 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. 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 FY24 non-GAAP operating margin guidance to 23.8%, and for Q4, we expect a non-GAAP operating margin of approximately 23.5% as we ramp up our key investment areas. Gap operating margins for the fourth quarter and full year are expected to be approximately 20 and 22 percentage points lower than the non-gap margins, respectively. The FY24 non-gap tax rate remains at 19%. We're raising our FY24 operating cash flow outlook to $1.975 billion, growth of 19% year-over-year. In addition, we now expect FY24 capital expenditures of approximately $250 million. 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. In light of the continued uncertain macro and incorporating our Q4 outlook, we currently expect FY25 subscription revenue of approximately $7.725 billion to $7.775 billion, representing growth of 17% to 18%. We also expect to expand our FY25 non-GAAP operating margins from FY24 levels. Our outlook contemplates incremental investments across our key growth initiatives while delivering continued margin expansion as we scale and optimize the business. The confidence in our outlook is supported by the advocacy and support of our customers, partners, and workmates who are all key contributors to our success. With that, I'll turn it back over to the operator to begin Q&A.

Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please 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'd 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 keys. In the interest of time, we ask that participants limit themselves to one question. One moment, please, while we poll for questions.

Thank you. Our first question is from Mark Murphy with J.P.

Morgan. Please proceed with your question.

Thank you very much. Congrats on a great result. Thinking back on the RISING 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 Fin's dedicated sales reps can drive some bookings traction as they begin to ramp up in the next couple of quarters?

Yeah, let me start, and then, Doug, I'll ask you 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 third consecutive outstanding quarter here in FY24. 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. Directly to answer your question, Mark, as it relates to Verizon, yeah, 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, we've talked multiple 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 one, our pipeline around Fins continues to grow. Number two, we continue to sell both to net new logos, our financials, and back into our customer base. Number three... All of the hiring we've done on our FINS go-to-market sales reps are actually impacting not just FINS 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 a strength of our financials in conjunction with what we already have as a strong HCM business. And lastly, I would say planning continues to do quite well. We did announce last quarter we talked about Exxon landing a large, you know, financials deal, and this quarter we talked about AWS, which is a very significant, you know, land for us as well. So, overall, we see the FINS 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.

Thank you very much.

Thank you. Our next question is from Cash Rangan with Goldman Sachs. Please proceed with your question.

Hi, thank you very much. Congratulations on a wonderful finish for third quarter. Carl, you've been in the seed for a little under a year, actually close to a year. You've cycled through one full rising conference. You've had a chance to speak with partners, check the pulse of the customer. You went through a tough year of macro. Everybody predicted a recession. Thankfully, we didn't have one. So where does that leave you with respect to your refreshed assessment of the next three to four years versus where we started? Thank you so much. And congrats to the entire team.

I'm still here, by the way.

Neil, you want to answer that question? No. Of course not. So first of all, Cash, thank you for your nice words and thank you for the question. So let me start talking about Workday. Okay. I appreciate you saying almost a year. I can't wait till 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 and Neil. Let me start by telling you about Workday. One thing that I recognized when I was on the board for five years that it 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. 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. And if we continue to see the early results that we're seeing, you know, the first three 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, you know, One thing that I've really come to recognize and appreciate, and Neil 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.

Wonderful. Thank you so much.

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

Yeah, thanks very much, and I'll echo the congrats on the quarter. Carl or Neil, actually, I was wondering if you guys could just talk about where Gen AI 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? I'm just kind of curious. Everybody's 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 24. Thanks.

I do think it will position us for our win rates to get stronger in 24. 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 first and foremost at running their business and moving off of crappy legacy applications into the cloud. And we're unmatched in that category. And then when we add the AI stuff, I think it just checks that AI box and 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 just 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.

I think it does come out in the sales cycle, but in a different way. So we talk 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 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. Great.

Thank you all.

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

Hi, this is Love Soda on for Brent Hill. Thank you for taking our question. Zane, this one's for you. You know, 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, you know, could you just talk about your expectations for early renewals? Will those continue to be a tailwind to backlog growth?

Yeah, thanks for the question. You know, as we've communicate 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. 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 FY25. We feel good about backlog and renewals as well and just the overall health of the business. Carl?

Yeah, 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-of-breed platform, we're not going to wait until a renewal cycle to sell them additional products. We're going to do it when the customer is ready. Last quarter we saw, you know, 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, you know, 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.

Got it. Thank you. Thank you.

Our next question is from Brad Sills with Bank of America. Please proceed with your question.

Oh, wonderful. Thanks so much for taking my question here. One of the things that stands out to me here is the strength in financials. You called out full platform wins here as a contributor, so great execution there. I'm just wondering, with these types of deals where you're seeing big organizations commit to the full platform, both FINS and HCM, Are you finding that there's just an increased comfort 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 Fins. Thank you.

Thanks for the question. This is Doug answering. I think, first 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. 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 with 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.

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 side 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.

Great to hear. Thank you so much.

Thank you. Our next question is from Alex Duncan with Wolf Research. Please proceed with your question.

Hey, guys. Thanks for taking the question. And I guess, you know, 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, you know, we're not supposed to look at, but we do. At the same time as your incremental growth on sales and marketing, actually, you know, 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 you talked about the growth algorithm, 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 temporarily anchoring margins?

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 until next year. So as they come up to speed, I think we'll see continued growth in the financials and overall business as we head into next year because of this build-out we're doing this year. 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, you know, this year when we launched our referral program, we had a goal of signing up 100 partners in our referral program. And through three 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. So we'll continue to lean into that. And then I think Anil 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. 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 continue to see the early signs. that they're producing the results we want.

Alex, I'll just add, as Carl's alluding to, obviously there's significant sales and marketing expense ahead 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. 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 FY25.

Perfect. And then maybe just if I squeeze in another one for Anil, you know, coming out of the analyst today, it did feel like at least on the macro front, there were you know, kind of gathering storm clouds, you know, whether it was the potential for government shutdown or labor strife or, you know, macro concerns. Did you feel maybe coming out 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, you know, conservative optimism that you're kind of seeing on the horizon?

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's 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.

Yeah, 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 pretty consistent with what we've seen all year long. And I'll just echo what Anil says. 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 some A lot of business the first three quarters of the year. And even when opportunities may slip, they don't leave our pipeline. They just move out a quarter or two 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 first three quarters of the year, I should say, and I think that will continue going forward. But our teams are very skilled and very good at closing business, as they call it, each quarter. I couldn't be more proud of them.

Well, definite hot tip to you guys from us here. Congratulations. Thank you.

Thank you. Our next question is from Remo Lenshow with Barclays. Please proceed with your question.

Yeah, 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? Because what's the appetite at the moment on the partner side to build out headcount around you? Obviously, economic times are tough and the SIs are usually late cycle, so they're only realizing now what's going on. 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.

Thank you, Remo, 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, you know, 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. 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, oh, by the way, I mentioned it earlier, they're also bringing lots of opportunities to us because for the first time this year, we're giving them an incentive to bring us those net new opportunities as part of our referral program. So, yeah, the investment's happening.

Okay, perfect. Thank you.

Thank you. Our next question is from Derek Wood with TD Cowan. Please proceed with your question.

Great. Thank you. I guess for Carl or Neil, 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, into third-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 for you guys in the medium term?

Well, so Xtend 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. Then we give them extend and they're able to develop the features that are unique to their own business. 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 around AI technologies. But the AI gateway around Xtend unleashes partners and customers to do AI things that may be very unique to their business that we would never build into our core product. So it's been huge. And I also think you'll see ISVs leverage the AI Xtend 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 in front of them. 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.

I think the best example of that is the Accenture Skills Cloud that we announced with Accenture this quarter, Neil. 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. That's just one example.

Great. Thank you.

Thank you. Our next question is from Carl Kirsten with UBS. Please proceed with your question.

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. 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 you know, 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? I'd love to get a little bit more color and to sort of contrast it to the Investor Day commentary.

Sure, Carl. Yeah, happy to answer that. I thought you were going to ask me about my first five 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, obviously increasing our margin outlook for the year and then leaning into the margin increasing into next year as well. 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. We want to have that capacity to make those investments where we believe it makes sense, and we expect to do that into FY25 and well beyond that. I've also pointed out previously that, you know, 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. So, broadly speaking, no change in our outlook. But, you know, you're right in pointing out that when we have those opportunities, we'll let it drop to the bottom line. Okay. Thank you, Zane. Thanks.

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

Oh, great, thank you. So, Anil and Carl, 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?

Wow, okay, so the second one caught me off guard a little bit. I'll answer the second one first. You know, everything is a continuum, and I still talk to Dave almost weekly. And he's still the touchstone for a lot of things that happen at Workday. But you know 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 year, We're just nine days away from the year. December 10th was the date. Carl's 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 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.

Yeah, 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 a rock star in the software industry. And just watching Anil's energy the last three or four months, diving deep into AI, driving our product and 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 a He's truly a genius when it comes to product and product strategy. He is not going anywhere, period. I know he's my boss as an executive chair, but I also want to be his boss sometimes and tell him he's not going anywhere.

Okay, great. Thank you both.

We will now take two more questions. Our next question is from Scott Berg with Needham & Company. Please proceed with your question.

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 years, but with the renewed sense of kind of customer interest in the space last six months, I guess, what are you seeing now for an appetite to actually pay for some advanced or incremental functionality around some of the gen 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 three to six months under your hat, any viewpoint there would be helpful. Thank you.

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 to attach to 45% from 35% in just 12 months. I look at the top three SKUs that sold within the quarter of Q3, and talent optimization was right in that top three. 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? 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.

If I could add one other thing, I would just say that the point solutions that are being created by startups are 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 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.

Great. Thank you for taking my question.

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

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 spend 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 IT spending for next year. Thank you.

Yeah, thanks, Brian, for the question. Doug, you want me to start, and then you go, okay. So I think there's probably three demands we're seeing right now out of the C-suite. Number one, talent. Talent is clearly a C-suite priority, and companies are all focused right now on reskilling 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 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 and their overall productivity gains they're 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.

Well, you covered mine, but I'd say I agree with you. Best of sweet 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 with 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. And so while there's all this talent and skills and employee experience focus, there's, you know, 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. Thanks, Doug.

Thank you.

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

Sure. Or Bacher, that works too. No problem. Thank you, operator, and thank you to everyone for joining today's call. And a special thanks to our workmates, customers, and partners around the globe that continue to fuel Workday's success. Q3 was another strong quarter, highlighted by durable, mission-critical nature of our platform. and it only reinforces the excitement we have both in Q4 and the opportunity we have ahead. We are all well positioned here at Workday, and we're focused on executing in Q4 and laying the foundation for a durable growth in FY25 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.

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