Workday, Inc. Q3 FY2023 Earnings Call

Welcome to Workday's Third Quarter Fiscal Year 2023 Earnings Call. I will now hand it over to Justin Furby, Vice President of Investor Relations. Thank you. Justin, you may begin. We have Chano Fernandez and Barbara Larson, our CFO, as well as Pete Schlampp, our Chief Strategy Officer, and Doug Robinson, our co-President. After the prepared remarks, we will take questions. Our press release was issued after the market closed and is available on our website, where this call is being webcast live. Before we begin, we want to highlight that some statements made during this call, especially our guidance, are based on information available as of today and include forward-looking statements about our financial results, applications, customer demand, operations, and other matters. These statements involve risks, uncertainties, and assumptions, including those related to the ongoing COVID-19 pandemic and recent macroeconomic conditions affecting our business and the global economy. Please refer to the press release and the risk factors in documents filed with the Securities and Exchange Commission, including our 2022 annual report on Form 10-K and our most recent quarterly report on Form 10-Q, for more information regarding risks, uncertainties, and assumptions that could cause actual results to differ significantly from those mentioned. Additionally, during today’s call, we will discuss non-GAAP financial measures, which we consider useful as supplemental indicators of Workday's performance. These non-GAAP measures should be viewed in addition to GAAP results and not as a substitute or in isolation. You can find more disclosures related to these non-GAAP measures, including reconciliations with comparable GAAP results, in our earnings press release, investor presentation, and on the Investor Relations section of our website. The replay of this call will be available for 90 days on our company website under the Investor Relations link. Our quarterly investor presentation will also be posted on the Investor Relations website after this call. The customers' page on our website lists selected customers and is updated monthly. Our fourth quarter fiscal 2023 quiet period starts on January 15, 2023. Unless stated otherwise, all financial comparisons in this call will be to our results for the same period in fiscal 2022.

Thank you, Justin, and welcome to Workday's Third Quarter Fiscal '23 Earnings Conference Call. I'm happy to report that we had a solid Q3 as we once again outperformed across our key operating metrics. There is no question that the macro environment presents increased uncertainty, but as we've said before, we are well positioned in this type of environment because our cloud finance and HR solutions are truly mission-critical. As our Q3 results showed, more and more organizations are selecting Workday as their trusted partner to help them successfully navigate today's changing world. We remain confident in our ability to capitalize on the opportunity ahead and are pleased to announce our first-ever share repurchase program of up to $500 million under authorization. This program will help reduce the rate of our share dilution going forward and is driven by our belief that our share price is undervalued given the long-term growth opportunity ahead. Barbara will share details shortly, but know that we feel confident that we'll reach a scale where we can roll out this repurchase program while continuing to prioritize investing for long-term profitable growth. With that, I'd like to share some highlights from the quarter. In Q3, we further solidified our position as a leader in cloud HR with notable new HCM customers, including Intermountain Health, SGS, and Texas Roadhouse. In addition, we had several key HCM go-lives, including Best Buy, Canadian Tire Corporation, and the state of Oklahoma. For Workday Financial Management, we continue to see strong demand and momentum in Q3. Key new wins included a Fortune 200 provider of information technology solutions, Cincinnati Children's Hospital Medical Center, EZCORP, and Thomas Jefferson University. It's important to note that each of these customers have also selected us for HCM, reinforcing the power of the full Workday platform and providing further evidence that companies are going all in with us. Key financial management go-lives during the quarter included the City of Baltimore and the Medical University of South Carolina. Q3 also saw us get back in person for Workday Rising, our annual customer conference for the first time since 2019. We had nearly 16,000 in-person and virtual attendees, and it was great to experience the energy and see firsthand how our community is growing and evolving. This was highlighted by the fact that this year's event had a large percentage of senior leaders, finance and IT attendees. One big takeaway from Rising is that our innovation story is resonating with customers as we evolve to be more open and connected. While we've traditionally targeted the offices of CHRO and CFO, we have placed increased focus recently on the office of the CIO, which presents another growth opportunity for us. One solution in particular that was a popular topic among IT attendees was Workday Extend. Workday Extend lets customers and partners build their own unique solutions on top of Workday, which is a huge point of emphasis for CIOs and, in their eyes, positions us even more as a true platform player. While we announced several availability at Workday Extend in 2020, we've continued to see accelerated demand for it over the last year as the need for organizations to quickly innovate and adapt in today's business environment increases. We also announced new more personalized UX enhancements that meet every type of Workday user in the natural flow of their work such as mobile devices, Microsoft Teams, and Slack, which helps us to address another CIO priority as they are more focused than ever on driving increased employee engagement. And finally, we further reinforced our leadership in artificial intelligence and machine learning with the announcement of next-generation skills technology that allows customers to more easily and securely bring skills data in and out of Workday. This helps customers leverage the full power of machine learning to gain deeper insights into their workforce skills and deliver more personalized employee experiences. In closing, we once again delivered a solid quarter with strength across a number of key growth initiatives, showcasing why Workday is the backbone of digital business. And while we expect that the macro uncertainty will cause our growth to moderate in the near term, we continue to believe we are well positioned to navigate this environment and emerge even stronger. Driving constant innovation to address our customers' evolving needs has always been key to our success and will continue to be our focus in this environment.

Thank you, Aneel, and thank you to everyone for joining today's call. I want to start off by offering my sincere thanks to the more than 17,500 Workmates that help us deliver another solid quarter. Your relentless focus on the customer continues to push us and the broader Workday community forward. Great job, team. I've been on the road a lot the last few months, including Workday Rising in Europe, which has wrapped up in Stockholm, and Workday Rising in the U.S. back in September. I've had the opportunity to spend time with hundreds of customers and prospects, and there are a couple of key themes emerging. First, despite all the challenges that companies are facing today, they increasingly realize the present need to modernize their HR and financial systems. The executives that I speak with have different viewpoints on what the macroeconomic climate will look like in the year ahead, but one thing they agree on is that the change is constant and it's nearly impossible to navigate with legacy systems. Second, there is a clear desire to consolidate and prioritize spend across an organization's more strategic technology vendors. Given our positioning as the backbone of digital business across HR and finance, this trend has led to more and more companies going all in with Workday as they look to harness the power of their data across the enterprise. And when I look at our solid Q3 results across both the large and medium enterprise, it's a direct validation of these themes being seen across organizations of all sizes. From a geographic standpoint, we saw solid results across North America with a number of CoreHR and FINS wins that Aneel mentioned, in addition to several strategic expansions across the Fortune 500. APA also outperformed with wins at Bank of Queensland, Fletcher Building, and Ono Pharmaceutical, and Trip.com, to name a few. And in EMEA, we had a number of important wins and expansions, including SGS, Allianz Medical Group, and Equiniti. Our customer base sales team once again saw outstanding growth, a direct reflection of the trust that customers are placing in us and a validation of our strategy. We drove very strong renewal rates in Q3, and we closed a number of strategic expansions at companies such as Accenture, University of Maryland, the state of Nebraska, Pick n Pay, Puma, and VF Corporation. As we shared at our recent Analyst Day, our customer base momentum is being driven by our broad portfolio. Solutions such as Journeys, Help, and Talent Optimization, for example, are seeing strong adoption as customers look to support employee experience, while our scheduling, time tracking, and payroll solutions are all resonating as customers increasingly focused on labor optimization. And other products such as Planning, Extend, Accounting Center, VNDLY, and our Spend Management solutions are all contributing to this quarter's strength across the customer base. Our industry focus continues to pay off. In Q3, nowhere was this more evident than in the healthcare vertical where we had strong growth in new ACV and where we surpassed $0.5 billion in annual recurring revenue. By far, the two largest costs for healthcare organizations are labor and materials. And by leveraging our full suite of HCM, FINS, and supply chain solutions, they are able to help optimize spend across these critical areas. In fact, all of our larger Q3 healthcare wins were full suite and included Workday's supply chain management. We also saw healthy momentum within the professional services industry highlighted by the aforementioned expansion at Accenture as we continue to co-innovate across the Workday platform, including significant new developments in the skills cloud, public cloud, and accessibility. Other strategic wins in the professional services industry included Novozymes and Reed Global, which was a full suite win. Our expanding partner ecosystem is also becoming an increasingly important driver of our growth. Key to our strategy is driving core innovation across the platform, which increases the differentiation of our solutions, enables even faster innovation to address real-time customer challenges and allows our partners to leverage their deep industry and solution insights to differentiate in the market. Examples of recent partner-driven innovation built on the Workday platform include Accenture's digital revenue operations solution, which integrates CPQ capabilities with Workday's billing and revenue automation to enable seamless quote-to-cash functionality for software and technology companies. Another great example is employee document management, built by partner Kainos on Workday Extend, which provides our customers with advanced document generation, access control storage, and finely tuned document retention rules. These are just a few of several solutions that were recently released by our partner ecosystem, and we have dozens more on the roadmap. As we move into our fourth quarter, the environment remains uncertain, which has led to increased scrutiny and the lengthening of certain sales cycles, particularly with the net new opportunities. While we aren't immune to this and see signs that it will persist into next year, we are confident in our diverse pipeline and are focused on executing in Q4 and laying a strong foundation for FY '24 and beyond.

Thanks, Chano, and good afternoon, everyone. As Aneel and Chano mentioned, we delivered solid Q3 results in the face of continued economic uncertainty, a testament to strong execution across the company as well as the strategic and mission-critical nature of our solutions. Subscription revenue in Q3 was $1.43 billion, up 22% year-over-year, and professional services revenue was $167 million, up 7%. Total revenue outside of the U.S. was $394 million, representing 25% of total revenue. The 24-month backlog at the end of the third quarter was $8.62 billion, growth of 21%. The result was driven by solid new business sales and strong renewals, with gross and net revenue retention rates over 95% and over 100%, respectively. Total subscription revenue backlog at the end of Q3 was $14.10 billion, up 28%. Our non-GAAP operating income for the third quarter was $314 million, resulting in a non-GAAP operating margin of 19.7%. Margin overachievement was driven by revenue outperformance, favorable cost variances across the business and the timing of certain expenses shifting into Q4. Q3 operating cash flow was $409 million, growth of 6%. Our cash flow this quarter was impacted by a $55 million semiannual interest payment associated with our Q1 debt offering. We also paid off the principal balance on our $1.15 billion convertible debt with cash in October, resulting in a reduction to our non-GAAP diluted share count of roughly 8 million shares. Given the late Q3 timing, this share count reduction will be fully reflected in our non-GAAP weighted average share count in Q4. During the quarter, we successfully added approximately 600 net new employees, ending Q3 with a global workforce of more than 17,500. We expect a strong moderation of hiring as we move into Q4, but we'll continue to add key talent across strategic growth areas of the business, notably go-to-market and product and technology. Overall, we're extremely proud of the strong company-wide performance in Q3, and we're focused on executing in Q4, our seasonally strongest quarter of the year. Now turning to guidance, which reflects both the continued momentum in our business while also balancing an uncertain macro environment. With that context, our guidance for FY '23 subscription revenue is now $5.555 billion to $5.557 billion, representing 22% year-over-year growth. We expect Q4 subscription revenue to be $1.483 billion to $1.485 billion, 21% year-over-year growth. We now expect professional services revenue to be $645 million in FY '23 with the slight reduction driven by the delay of a large project. For Q4, we expect professional services revenue of $147 million. We expect 24-month backlog to grow approximately 19% year-over-year in Q4. We expect Q4 non-GAAP operating margin of approximately 17.5%, which includes some expenses that shifted out of Q3. Our FY '23 non-GAAP operating margin guidance is now 19.2%. GAAP operating margins for both the fourth quarter and the full year are expected to be approximately 23 percentage points lower than the non-GAAP margins. This includes a change to our employee stock plan that will take effect in Q4 to provide more flexibility to our employees during the open trading window each quarter. Our vesting date will move from the 15th to the 5th of each month for all outstanding grants, resulting in an acceleration of stock-based compensation expense of approximately $30 million in Q4. This change will result in reduced stock-based compensation expense by the same amount over the next few years and has no impact on our dilution. The FY '23 non-GAAP tax rate remains at 19%. We are maintaining our FY '23 guidance for operating cash flow of $1.64 billion, but are reducing our capital expenditures outlook to approximately $375 million, reflecting the timing of certain data center and real estate investments being pushed out to future periods. And as Aneel mentioned, we are pleased to announce a share repurchase program with authority to repurchase up to $500 million in shares over an 18-month period. We will continue to prioritize allocating capital towards organic innovation, followed by targeted M&A, but given our strong balance sheet and free cash flow, we intend to use a portion of our capital towards the repurchase of shares, enabling us to partially offset future dilution from employee stock programs. This repurchase program is a direct reflection of our confidence in the business and our view that our shares are currently undervalued. While we are early in our planning cycle for next year and have an important Q4 ahead, we'd like to provide a preliminary view of FY '24. As discussed at our Financial Analyst Day, we have a significant long-term opportunity and multiple growth levers that drive our goal of sustaining over 20% subscription revenue growth on our path to $10 billion in revenue. While this remains our multiyear goal, given the continued macro uncertainty, we believe it's prudent to provide a preliminary FY '24 subscription revenue range of approximately $6.5 billion to $6.6 billion or 17% to 19% year-over-year growth. This outlook takes into account the lengthening of sales cycles that we're currently seeing impacting our net new business. From a margin standpoint, we currently expect FY '24 non-GAAP operating margin expansion of 150 to 200 basis points from FY '23 levels, placing us firmly on track to our target of a 25% non-GAAP operating margin and 35% operating cash flow margin at $10 billion in revenue. The expected margin expansion is driven by the scalability of our model, a strong moderation of hiring, and ongoing expense discipline. We plan to operate the business with agility, and we'll continue to appropriately balance growth investments based on what we see in the underlying market environment. And finally, I'll close by thanking our amazing employees, customers, and partners for their continued support and hard work.

Fabulous, fabulous quarter given the macroeconomic conditions. I was wondering if you could give us some perspective. In some sense, this is a recession that everybody has been expecting, and nobody's going to be surprised. I was wondering if you could offer some insights into how Workday has been able to execute so well during a tough time while other software companies are facing headwinds. And to the extent we get some relief next year, if the economy does improve, could you do even better considering that your results are actually quite impressive?

Well, I don't think we'll comment on next year just quite yet, Kash, but thank you for the kind comments. I think the value proposition of our products works in a downturn just as it does in a good market, just like we did in 2008, 2009, and every other downturn. Chano, do you want to add anything?

No, I think I agree with what you said, Aneel. I believe the mission-critical applications of our solutions really resonate with our customers as they are modernized in their HR and finance solutions. And as I said in my comments as well, Kash, there is a consolidation of spend across strategic technology vendors, and we clearly are being one of those these days.

I'll echo the congrats on a really nice quarter in a tough environment. I guess, Chano, you talked about some deal cycles extending. I was just wondering if you could talk a little bit about what you're seeing at the top of the funnel. Obviously, you guys sort of came out perhaps of the COVID recession a little bit later than some others. I think there's a fear out there that once we get through this current wave of deals in your pipeline, that there might be some sort of cliff in terms of net new billings. But it sounds like you guys feel pretty good about your pipeline. So I was wondering if you could just sort of expand on that.

Thank you for your question, Kirk. Overall, companies continue to prioritize HCM and financial transformations, and we see ongoing momentum in important growth areas like our customer base team, what is a clear market trend, as I said, towards consolidation of vendors and as well the medium enterprise. There's good pipeline momentum, but maybe, Doug, you can add some color in terms of pipeline and deal dynamics overall.

Yes. I believe you've highlighted two key points. We have a diverse range of revenue streams. As Chano mentioned, our medium enterprise segment performed well. There's a noticeable trend among our large customers who are looking to consolidate and reduce the number of suppliers while broadening their engagement with us. This definitely plays a positive role. Regarding your question about our current pipeline, it's noteworthy that the pipeline we're developing for Q3, which is primarily aimed at next year, has met our internal targets. We're witnessing project formation, although some projects are taking longer to complete. As Chano pointed out, these tend to be large enterprise new initiatives, which require additional steps. On a positive note, the initiation of new projects is aligning with the objectives we have set internally.

Yes. And I'll add my congrats. I'm interested in whether it's possible that the volatility of this type of environment where you have so many vectors moving around inflation, interest rates, FX, and supply chain issues. Is it possible that it's coming together in a way that really elevates the Workday value proposition with integrated planning, cloud-based, maybe more so than in the smooth sailing environment that we had in the last decade? Because as Kash mentioned, you're navigating your way through this very well. I'm just wondering if you see any effect of that. Maybe it's increasing some of your win rates and maybe it builds up a little pent-up demand for some time in the future when the environment starts to improve.

I wish that was the case everywhere. We definitely observe a trend where, during a downturn, some customers look to make the right choices to help them navigate these volatile conditions. At the same time, other customers are being cautious about making new decisions. I think these factors tend to balance each other out, and I’m not convinced it significantly impacts us positively or negatively. We are all experiencing the same environment. However, there are certainly customers who are delayed in making the transition, which I believe could serve as a catalyst for that shift. On the other hand, customers who have already transitioned may be hesitant about follow-on purchases. Chano, do you have anything to add?

Nothing to add.

This is Josh Baer on for Keith. I was hoping you could expand a bit on the macro assumptions that are embedded in that FY '24 subscription revenue guidance range. Just wondering what areas get worse, what stays the same when thinking about different geographies as well as new business from new logos or expansion and renewals from existing customers.

Josh, thanks for your question. So the guidance range that we provided is our best view at this time. It takes into account the continued momentum across important growth areas such as customer base and medium enterprise, but also balancing that with lengthening sales cycles that we're seeing impact our business, particularly our net new opportunities. So given the uncertain environment, we provided an estimated subscription revenue range with that low end of the range, assuming a larger impact to sales cycles than we're currently seeing today.

I want to express my congratulations not just for the quarter but also for the clarity of the guidance, both for revenue and profit, in what is clearly a very uncertain environment. So to start, if we examine the patterns in the sales cycles within the business, could you, Aneel or Chano, compare and contrast this from a pipeline perspective as we head into Q4? What do you anticipate the impact will be in your biggest quarter regarding bookings and new ACV growth? Additionally, could you provide insights on FINS versus HCM, indicating where you feel more optimistic and how they compare? That would be very helpful.

Let me share some overall thoughts. I've spent considerable time discussing with other CEOs, and the current situation is not like 2008 or 2009. No one believes we are facing imminent disaster as we did back then. Currently, there's a sense of caution; although there's uncertainty about the future, the situation doesn't feel overwhelmingly negative. However, caution can sometimes resemble stagnation, making it difficult to predict outcomes. Every CEO I've spoken with remains relatively optimistic about their businesses, but they are concerned about the economic fundamentals influenced by the Federal Reserve and the possibility of a recession. The prevailing sentiment is that everyone is exercising caution. Chano, how do you think this influences our pipeline in Q4 and beyond? It's important to note that we are not facing a catastrophic situation like we did in 2008 or 2009.

Yes. Thank you, Alex, for your question. I would say, first, when it comes to HCM or FINS, we don't see any significant difference between one or the other. So they're proportionally impacted given the macro environment. When it comes to Q4, I would say we had the pipeline to execute on the quarter. Of course, that usually will not manifest as a prioritization because those projects have been already prioritized, but it may happen some lengthening of sales cycles as we said before, particularly on net new deals and opportunities that they're more scrutinized on those, right? And Doug already commented on the growth pipeline for next year.

Maybe building off Alex's last question there. I mean there's lots of interesting partner commentary in the script. I'm curious about the level of collaboration you have with partners on what they're working on with Extend or industry accelerators. And assuming you have visibility there, maybe you could talk a bit about where you draw the line on what Workday might own or build directly versus what you let go to partners.

Pete, do you want to talk about the product side first? And then Chano can talk about the partner side.

Sure. Thanks again for that question. As you heard us talk about the momentum with Extend that we've seen recently has been great, we talked about that a lot, both in Stockholm and in Orlando at our user conferences this year, now over 750 applications in production. When it comes to where that momentum is coming from, it is customers and it is partners as well. Partners are beginning to build on the Extend platform and Extend Workday applications as well as build net new applications that connect with HCM and Financials. So far, our customers have been getting value through both of those. The question of where do we draw the line between what is ours and what is our partners, I'll hand over to Chano.

Yes, I think as I commented on some of my prepared remarks, I mean clearly driving co-innovation with our partners across the platform is very critically important. You would say, where you draw the line when something is kind of you would define or I would define the last mile in a particular industry or we need some more content-driven specific understanding of that value add in that industry with a partner, there’s where we see an opportunity to collaborate with our partners. I mentioned some of these solutions that we're building with partners for different industries, like the revenue operation solution, again, that is very critical to the software and technology companies. There are others that would be a bit more, let's say, across industries like the document management, employee document management that I provided on. But honestly, we don't see that as a core, let’s say, value add from us in terms of building that solution. But, of course, it's adding value to our customers there and partners take just advantage of the maturity of Extend to bring that value add that is resonating with our customers. So we're really pleased, as you can imagine, that customer partners can differentiate and bring additional offering to our customers.

Yes, makes sense. And then, Barbara, maybe I could sneak in a follow-up for you. The buyback is great to see as analysts always ask for more. Why not be more aggressive given where the stock is, the strength of the balance sheet, expected cash generation next year? Like what were the considerations there?

I'll answer that one because I think Barbara probably wanted to do more. You just don't know what you're going into a tough economic environment, and cash is king. And so we wanted to be conservative. And if we come out in a good market environment in the next 6 to 9 months, you definitely could see more, but there's just a balance of risk.

Chano, what we're currently observing in the industry is an increase in investment in HR following the pandemic and the subsequent reshuffle. Are you noticing a similar trend in terms of customer interest? Do you believe this trend is more temporary and nearing its end, or do you think that HR and HCM are establishing a more prominent role within enterprises?

Thank you, Raimo, for your question. I think both of them, to be honest, have some good tailwind out of the pandemic, but clearly, of course, that nets out or balances out with the macro environment we are living into. But I would say that some of the financial transformations, we see those in the market, and they are taking place as we speak. As a dynamic of companies having a tough time to just navigate through their finance modernization or honestly doing simple things like closing their books online in terms of many legacy platforms and in terms of a lot of manual processes that could just not happen once you were not in the office. Clearly, employee engagement as a whole in HCM, the skills area, all the machine learning and AI that we're bringing to those processes are obviously value add the companies do see and want to take advantage of and continue to be a great tailwind for the HCM value proposition as a whole.

Yes. And then one follow-up is if you think about selling in this kind of slightly more tougher environment, can you talk a little bit maybe about the steps you're taking in terms of sales execution to kind of make sure you continue to deliver in this market? I'm thinking about higher pipeline coverage, kind of making sure you time the deals better, et cetera. Like where are we on that journey of implementing these kind of recession handbook kind of selling policies that we used to take out in the older days?

Doug, do you want to add some color there on the sales strategy in the market?

Certainly. We shifted to an ROI and TCO-focused approach to customer engagement at the beginning of Q1. While we have always provided business cases to our clients, the current challenging market conditions emphasize the importance of TCO and concrete savings through system rationalization and productivity. This focus has been particularly relevant for our HR offerings due to the tight labor market, which is increasing TCO considerations. Aneel mentioned this earlier, and we also experienced strong financial performance in Q3, with FINS+ doing well. Companies are looking for ROI-driven solutions, often starting with outdated systems. However, these discussions quickly evolve into broader plans that enhance business agility in uncertain times. Therefore, we are dedicating significant effort to collaborating with customers on building robust business cases from a sales and deployment perspective.

I wanted to ask a question around backlog for next year. I think, Chano, you made some comments that you feel good about Q4 pipelines heading into Q4. And the question on everyone's mind is really what about next year? There's a lot of moving parts. In your conversations with the office of CFO, office of HR, what are they saying with regard to budgets for next year? Do you feel pretty confident that you can sustain this kind of growth into next year as well?

Well, Brad, thank you for your question. Right now, we're exactly on those discussions, right, where companies are going through their planning and budgeting cycles, and it is a question of prioritization of projects. And we're having those discussions that, that was commenting on that are really TCO- and ROI-based, right? So clearly, here where you see some different scenarios on our guidance, particularly depending on what happens on some of the new local sales cycles that might put some lengthening. And clearly, even though they might be building right now, maybe fall outside of next year or some of them that just may be pushing forward. But right now, we're having most of those discussions. Overall, we feel good given the momentum we have and given the momentum on the new pipeline build and the conversations we're engaging with and the strength of our customer base, our medium enterprise, and the diversity of our business, as Doug has commented. But clearly, we are cautiously monitoring what's going on in the environment.

We are quite diversified across various industries, with some performing better than others. In examining the situation in Silicon Valley, we have several tech companies, but our exposure to tech isn't as significant as that of newer firms with high concentrations in this sector. Our tech companies are primarily well-established and mature. I don't believe there's a specific sector that's particularly supporting us, although I would highlight that financial services are robust. This sector benefits from rising interest rates and continues to expand, where we maintain a strong presence.

Aneel, just to follow up on the verticals. A number of the partners have been talking about strength in state and local government and higher ed. I'm curious if you could drill in on those two to give us a sense of what you're seeing right now in both those sectors.

Both sectors performed well this quarter. We secured several student deals, and while we had previously focused on financials and HCM in higher education, we achieved significant growth in Q3 with our student offerings. We are optimistic about both verticals at this time.

Can I just follow up real quick on international? It was the lowest growth in 5 quarters. Is there anything to point out in Europe versus the U.S. kind of just the classic still over what we've been hearing? Or is there anything specific on an execution? Can you just compare and contrast what you're seeing?

I would say, clearly, the environment is more uncertain in Europe. Obviously, on top of everything else going on in the world, we have energy as a big challenge. And where we see, let's say, an increase signs of deals and sell cycles lengthening that tends to happen in Europe. And I would say, in general, we are more cautious overall about what's going there in the near relative terms than in other markets and other segments.

I guess this one will be relatively straightforward as you all called out slowness in the enterprise segment a couple of different times. We talked about the mid-market being, I guess, relatively untouched. Can you help us kind of understand maybe what's going on in the mid-market to not really see any weakness today? I think that's an interesting kind of a change at least relative to what we're seeing out there. And then as we think about the guidance within the mid-market, is the slowness or maybe additional macro uncertainty impacting the low end of the guidance? Do you have some sort of conservatism baked into any potential slowdown in the mid-market also impacting that guidance?

Yes, we haven't stated that the mid-market is unaffected. What we've indicated is that we've seen overall greater strength in the medium enterprise and our customer base. Typically, as larger deals and companies come into play, there tends to be more scrutiny regarding business cases or additional approvals. Our value proposition is robust and resonates well, offering quicker time to value, fixed implementation costs, and predictability across HCM and finance in the mid-market. This leads to strong ROI and excellent total cost of ownership regarding financials and overall transformation. The mid-market is adapting to this value proposition at an accelerated pace as they modernize and enhance their platforms.

Ladies and gentlemen, thank you for your participation in today's conference. This will conclude Workday's Third Quarter Fiscal Year 2023 Earnings Call. Thank you again for joining us.