Workday, Inc. Q3 FY2025 Earnings Call

Hello, welcome to Workday's Fiscal 2025 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 Q&A, please limit your questions to one. I will now hand it over to Justin Furby, Vice President of Investor Relations. Mr. Furby, you may begin.

Thank you, Operator. Welcome to Workday's Third Quarter Fiscal 2025 Earnings Conference Call. On the call, we have Carl Eschenbach, our CEO; Zane Rowe, our CFO; Doug Robinson, our Co-President; and David Somers, our Chief Product Officer. Following prepared remarks, we will take questions. Our press release was issued after the close of market and is posted on our website, where this call is being simultaneously webcast. Before we get started, we want to emphasize that some of our statements on this call, particularly our guidance, are based on the information we have as of today and include forward-looking statements regarding our financial results, applications, customer demand, operations, and other matters. These statements are subject to risks, uncertainties, and assumptions that could cause actual results to differ materially. Please refer to the press release and the risk factors in documents we file with the Securities and Exchange Commission, including our fiscal 2024 Annual Report on Form 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, the transcript of this call and 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 of fiscal 2025 quiet period begins on January 15th, 2025. Unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal 2024. With that, I'll hand the call over to Carl.

Thank you, Justin, and thank you all for being here today. I'm happy to share that we had another strong financial quarter in Q3, with a 16% increase in subscription revenue and non-GAAP operating margins of 26%. These results highlight the robust relationships we have with customers across various industries, the increasing demand for our AI innovations, and the strength of our global ecosystem. More organizations are choosing to consolidate on the Workday platform for several key reasons, including reducing total ownership costs, streamlining operations, leveraging AI in our top-notch HR and finance solutions, and enhancing the employee experience. Workday provides a significant advantage, which was evident in our Q3 growth in full suite offerings, net new acquisitions, and customer expansions across different regions and industries. Several sectors performed well this quarter, particularly government and higher education, where around 90% of new wins were for full suite solutions. Notably, the Defense Intelligence Agency expanded its engagement with Workday, and institutions such as the Maryland General Assembly and the University System of Georgia opted for Workday to upgrade their systems and meet rising expectations. This quarter, professional and business services also crossed the threshold of $1 billion in annual recurring revenue, joining financial services and retail and hospitality. Advantage Solutions, Connells Limited, and Flight Center Travel Group all chose Workday. In healthcare, we achieved a major win with CommonSpirit Health, one of the largest nonprofit healthcare providers in the US, alongside other clients like Community Health System and Valley Children's Healthcare. Our HCM solutions are leading the way for the future of work. In Q3, we secured wins with companies such as Brookshire Grocery Company and TeamHealth, among others. We are also continuing to invest in our Financials segment, which is driving demand for our comprehensive suite. More than 35% of our new core customers in Q3 opted for full suite solutions. Additionally, we were once again recognized as a leader in the 2024 Gartner Magic Quadrant for Cloud HCM Suites for large employers, Cloud ERP for service-driven companies, and Financial Planning Software. Our Planning business had an excellent Q3, as we expanded or formed new partnerships with organizations like Deloitte and Tenet Healthcare, and we were excited to see AWS go live with Planning this quarter. AI remains a priority for executives, and they are seeking out the right partner for this transformation—this is where Workday excels. Our clients recognize that investing in Workday equates to investing in AI, and we're witnessing significant enthusiasm for our AI solutions. In Q3, over 30% of our customer expansions included AI solutions, such as Talent Optimization and Recruiter Agent powered by HiredScore, which have shown measurable benefits, including reduced turnover. In particular, Recruiter Agent had an impressive quarter, achieving more new clients than in its entire 12-year history and significantly increasing our new ACV. It's encouraging to see that the average selling price of our core recruiting solution has risen by nearly 150%. Customers are eager to adopt AI tailored to their needs that delivers real results. They seek solutions that are easy to implement and provide swift value without requiring extensive IT resources, highlighting the vast opportunity to expand this segment of our business. We are committed to capturing this opportunity through our innovations. Our platform has over 70 million users under contract and generates more than 800 billion transactions annually, leveraging the largest and cleanest HR and Finance dataset in the industry. This scale and quality of data are crucial differentiators, allowing Workday to deliver insights that no competitor can match. At Rising, we introduced Illuminate, the next evolution of Workday AI, which boosts productivity and human potential by enhancing manual tasks and transforming business processes. As part of Illuminate, we launched several AI agents designed to enhance complex HR and Finance processes, with more agents on the way. Our future offerings, such as Optimize Agent, are expected to reveal inefficiencies within processes and greatly enhance efficiency. The possibilities are tremendously exciting. Beyond our agents, we are working with partners to facilitate agent-to-agent communication for employee self-service, including collaborations with Salesforce and Microsoft on their M365 Copilot. We have enhanced Workday Assistant with our GenAI copilot, enabling employees to ask questions conversationally about their pay, benefits, and company policies, resulting in faster, tailored responses. Over 2,000 HCM customers are currently utilizing Workday Assistant to gain efficiency, with one customer experiencing nearly a 30% reduction in HR case volume. The new copilot is poised to further elevate productivity, allowing employees and HR teams to focus on strategic initiatives. CIOs show great enthusiasm for Workday Assistant, as other solutions necessitate transferring sensitive data outside their core systems, which poses significant risks. With Workday, all data remains secure within our trusted platform. To further advance our AI strategy, we have acquired Evisort, a leading document intelligence platform. Given that over 80% of business data is unstructured, Evisort's AI will help our customers unlock invaluable insights from previously untapped data. The Workday platform continues to attract interest from both customers and partners. We now have over 1,000 customers developing their own custom applications using Extend, making it one of our fastest-growing products. In fact, our new ACV for Extend has more than doubled year over year. Extend Pro, which facilitates the creation of AI-first apps, is proving particularly impactful with a much higher average selling price compared to Extend Essentials. Our partner ecosystem has grown nearly fivefold in just 18 months and is more varied than ever, contributing over 10% to our net new ACV in Q3. The rapid uptake of our Built on Workday program, launched less than six months ago, has seen more than 40 partners join, with organizations like Kainos already generating revenue from it. We also introduced Workday Wellness at Rising, which provides real-time insights into employee benefit usage to help organizations create better benefit programs within Workday HCM. We are pleased to have Guardian, The Hartford, Mutual of Omaha, and Unum signed on as strategic partners. International growth remains a compelling opportunity for Workday. During the past quarter, I engaged with customers and my fantastic Workmates in the UK, Ireland, Germany, France, and Japan, and the enthusiasm is remarkable. In Q3, we established a new strategic partnership with NTT Data in Japan and formed relationships with major Australian organizations like Estia and Flight Centre. We also deepened our connection with United Overseas Bank in Singapore. In EMEA, while we faced ongoing deal scrutiny, we achieved our largest public sector win with the UK's Department for Science, Innovation and Technology, prompting interest from other UK public agencies. We also secured significant wins with major companies like Decathlon in France and Goldbeck in Germany. We are preparing for Rising EMEA in Amsterdam in just a few weeks. The relationships we are forming globally signal the significant long-term potential of our international business. Currently, only 25% of our revenue comes from outside the US, but we are laying the groundwork for much greater expansion. Before I conclude, I want to update you on our team. Doug Robinson, an outstanding leader for the past 14 years, will retire at the end of the fiscal year. I can't express enough gratitude for the substantial impact he has made at Workday. We are excited for him to continue in an advisory role. With Doug’s departure, I’m excited to welcome Rob Enslin as our new President and Chief Commercial Officer. Workday continues to attract exceptional talent, and Rob exemplifies that with his 30 years in the enterprise sector. He has notable customer and partner relationships and a solid history of success, making him ideal for leading our go-to-market strategies as we enter the next growth phase. As you can see, this has been a productive quarter. We aim to achieve mid-teens subscription revenue growth and expand non-GAAP operating margins to 30% by FY27. We plan to accomplish this by continuing to innovate, gaining market share, and streamlining operations. What excites me the most is the opportunity to lead our customers through the AI revolution and help them prepare for the future of work. I am extremely grateful to my Workmates for their contributions this quarter. With our fantastic culture, ongoing innovation, and customer trust, Workday is poised for sustainable, profitable growth. Thank you all, and to those joining us in the US, Happy Thanksgiving! Now, I’ll hand it over to Zane.

Thanks, Carl. And thank you to everyone for joining today’s call. In Q3, we continued to make progress across a number of our key growth areas as we lay the foundation for durable, profitable growth at scale. Subscription revenue in the third quarter was $1.959 billion, up 16%. Professional services revenue was $201 million, resulting in total revenue of $2.160 billion, growth of 16%. US revenue in Q3 totaled $1.62 billion, and international revenue totaled $537 million, both growing 16%. 12-month subscription revenue backlog, or cRPO, was $6.98 billion at the end of Q3, increasing 15%. Total subscription revenue backlog at the end of the quarter was $22.19 billion, up 20%. Gross revenue retention rates remained strong at 98%. Our non-GAAP operating income for the third quarter was $569 million, resulting in a non-GAAP operating margin of 26.3%. Q3 operating cash flow was $406 million, in line with our expectations, though down year-over-year, impacted by the stronger than expected collections activity we called out in Q2. During the quarter, we repurchased $157 million of our shares at an average price of $242.42 per share. We had $902 million in remaining authorization under our buyback program as of quarter end. We ended Q3 with $7.2 billion in cash and marketable securities. As of October 31st, headcount stood at nearly 20,500 workmates around the globe as we continue to hire talent across targeted growth areas. A few of our strategic wins in Q3 have future product deliverables in FY26. This slightly impacts our near-term results as these wins won’t fully benefit subscription revenue until next year. We expect Q4 FY25 subscription revenue to be $2.025 billion, growth of 15%, and full-year subscription revenue of $7.703 billion, an increase of 17%. We expect Q4 cRPO growth to be between 13.5% and 14.5%. We expect Q4 professional services revenue of approximately $155 million, resulting in full year professional services revenue of $712 million. We continue to balance targeted investments in key growth areas with increased focus on companywide efficiencies. As a result, we are raising our FY25 non-GAAP operating margin guidance to 25.5%, and we anticipate a non-GAAP operating margin of approximately 25% in Q4. GAAP operating margin for both fourth quarter and full year is expected to be approximately 20 percentage points lower than the non-GAAP rate. The estimated FY25 non-GAAP tax rate remains at 19%. We are maintaining our FY25 operating cash flow expectations of $2.350 billion, and we now expect capital expenditures of approximately $300 million. We are making good progress across our key growth initiatives, in particular with our partner ecosystem and developing AI opportunities, supporting our medium-term target of mid-teens growth. As an early view, we anticipate FY26 subscription revenue of approximately $8.8 billion, or about 14% growth. We expect our first quarter subscription revenue growth to be slightly lower than our overall growth rate for FY26. This is largely due to the impact of the leap year, which creates just over a one point headwind to Q1 subscription revenue growth. We expect a slightly higher growth rate in the second half, driven in part by emerging AI opportunities and deliverables tied to strategic wins from the third quarter which I referenced earlier. We are investing for growth, while at the same time focused on driving efficiencies across the business. This includes the continued expansion of our global workforce, integrating AI across the company, and improving processes and systems. We expect FY26 non-GAAP operating margin of approximately 27.5%, as we demonstrate progress towards long-term margin expansion. In addition, we are actively managing share-based compensation expense, and expect it to continue trending lower as a percentage of revenue. As we enter Q4, we are focused on executing for both the short and long term as we build the foundation for durable topline growth and margin accretion. With that, I'll turn it back over to the operator to begin Q&A.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Kirk Materne, Evercore ISI. Please proceed with your question.

Thank you very much. Zane, could you provide more details about the deliverable issue in Q4? Additionally, how much does this impact your preliminary guidance for fiscal 2026, especially in relation to the mid-teens guidance you've mentioned for fiscal 2027? It would be helpful to understand when this issue arose, as it seems people are concerned that it's more of a directional issue rather than a one-time situation. Thank you.

Yes, sure Kirk. Happy to start on that and then I'm sure Carl add some comments afterwards. There were a number of key strategic deals in the third quarter, that as I mentioned had some product deliverables or otherwise we saw revenue recognition a little bit later on. We expect it to ramp up through the course of next year. If you think about our outlook for the fourth quarter, it would put us roughly in the midpoint of our original guidance for the year. So I'd say approximately $8 million to $10 million of impact in the fourth quarter, if you think about sort of the actual deal, were we to recognize revenue as we have historically. And then on a sort of second half of FY26 basis, if you look at that on a year-over-year basis, it would contribute to I'd say approximately half a point on that growth. As I mentioned, obviously in Q1, we lap the leap year and that's about a point of growth heading into Q1. And we still believe there'll be a nice build through the course of FY26. But we definitely see the impact of the revenue recognition impacting this part of the business. I'll point out these are key strategic deals and there's obviously a fair amount of product that aligns with those and that's the point at which we can recognize that revenue. But we're very excited about the momentum in this area and expect these and others to continue to grow beyond FY26. Carl, let you add to that.

Yes, I think what's really important Kirk is to recognize the strategic importance of a deal like DIA or Defense Intelligence Agency. We have to go out and build a platform for the federal government with different levels of security and we're doing so and we can't recognize revenue on those opportunities until we can deliver it to the government. But these are critical wins for us and it's actually driving demand for us in the federal government as people recognize Workday is really pushing hard into that market. The other one is wellness, Workday Wellness. It's another critical platform for us to engage with our wellness partners and for them to integrate into the Workday platform, and we're building that out as well. So, while we signed a number of key partners like Guardian, The Hartford, Mutual of Omaha, and Unum, they're ready to build on that platform. It's just not able to be delivered yet, which impacts our revenue recognition for the next year.

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

Yes, thanks for the question. No, I've known Rob for probably 25 or 30 years. I'm sorry I'm showing our age, but we've been around the industry for a long time. We grew up in the industry and I have a tremendous amount of respect for him. I think his background and experience fits us nicely, especially when you think about what we're doing in international. Rob's lived in Japan, he's lived all over Europe, he started SAP business in China like he's just a tremendous asset for us to pick up and we're going to be very sad that we'll be passing the baton as Doug steps aside. But we also have almost six months of overlap between Doug and Rob. So I don't expect any impact at all to how we're running the business or how we're thinking about the future of our go-to-market strategy. In fact, if you think about Rob, because he has spent so many years at SAP, there's not a single partner that Workday has today that Rob doesn't already have relationships with. So it's a great hire for us. We're super excited and energized he's joining the team, and I think he'll bring a great outlook for the future to us.

Thanks, Carl. Happy Thanksgiving, guys.

Thanks, Kirk.

Thank you. Our next question comes from Mark Murphy, JPMorgan.

Thank you very much. Carl, there was a comment at the Analyst Day about the US Federal business reaching an inflection point. I understand you closed a defense agency in Q3, but I'm curious how those agencies might be interpreting the stated plans of the Department of Government Efficiency to cut $2 trillion in spending. We’re receiving a lot of questions about that. Do you think it might impact their budgeting and spending behavior going into next year? I have a quick follow-up.

Sure, Mark. So I'll start. As I said in my prepared remarks, we're really focusing on the federal government going forward. We think there's a huge opportunity there with probably more than 80% of HCM and ERP still on premises that hasn't moved to the cloud. And we think we're catching it at an inflection point right now, which is why we're investing so heavily in building out a secure platform. At the same time, post-election and with changes coming out, people are absolutely looking to drive more economies of scale and more efficiency. And I can tell you supporting these on-premises antiquated systems is not a way to do that. So we think this will only be a tailwind for us as we think about the federal government business going forward.

Okay. That's great to hear. And then Zane, as a quick follow-up, I'm also wondering, subsequent to the interest rate cuts and moving past the US Election, is there any possibility you might have detected stabilization or any uptick in any employment indicators in your customer base? I know I think generally it's been kind of sluggish and moving sideways, but I wasn't sure if you might have seen any recent renewals where any of that feels different than it did a couple of quarters ago or even any payroll runs without any of that data might look different?

Yes, sure Mark. As we mentioned earlier in the year, it was more a moderation of expectations and what we saw early in the year. I'm pleased to say we haven't seen any further downtick. In fact, it has moderated. We haven't necessarily seen significant improvement either. So I think it's within our expectations as we plan ahead, but always welcome the enthusiasm around where interest rates may go, and obviously the conviction around growth in business is always good for our business. So we take that, although I would caution right now we still believe that especially in certain areas around the globe and we're a global business that we are still impacted by increased deal scrutiny. All that being said, we're very pleased with the momentum we've seen through the quarter and look forward to continuing that into next year. But no significant change in impact or outlook from what we've experienced through the course of the year.

Okay. Well understood. Thank you very much.

Thanks, Mark.

Thank you. Our next question comes from Kash Rangan, Goldman Sachs.

Carl, with Rob joining you guys, you're going to be outnumbered with Rob and Zane, and you're going to have to learn cricket. So if you need a primer, please let me know.

Yeah. That's right, Kash.

I may take you up on that, Kash, but I know a little bit about cricket, and I really enjoy it. Only when they're the shorter matches though.

It's nice to see the company confirm the 15% growth rate compounding in fiscal '26 and '27. I'm curious about your thoughts on the challenge of maintaining that growth rate as numbers increase. Are we anticipating any turning points with AI monetization or improvements in core performance in '26 and '27? Please recap why you're still confident in these projections for the next couple of years. Thank you. That's all from me.

Yes. Thanks so much, Kash, for the question. And let me give you a couple of salient points that I think reflect the conviction and confidence we have in our mid-teen guide over the next couple of years while being able to expand operating margins. So number one, we had a really solid Q3 after delivering a solid Q2. We had our Rising Conference, which you attended back in September, at which we launched the Workday Illuminate, which is our next generation AI platform. And I can tell you the excitement we felt at the conference continued throughout the quarter. We tried to highlight that with a number of points around our AI momentum, including our Recruiter product, which we had more logos in the quarter in Q3 than we did in the 12 years prior that they were running the business. We also saw an uptick in selling back to the base our AI solutions. More than 30% of our sales back to our customer base included one of our AI solutions, which is our Recruiter Agent, Talent Optimization, along with our Extend Pro platform. So we are absolutely seeing momentum in the business when it comes to AI. If you combine that then Kash with all the things we've been working on over the last few years, like our focus on building out our partner ecosystem, our focus on building out our opportunity in the US Federal Government, our continued focus on industries, our focus on pushing a platform along with full suite sales, which in this quarter I think I had in my prepared remarks, more than 35% of our net new lands included full suite solutions. And then you just continue what we're doing as we move down market into the medium enterprise. We feel very confident in our ability to maintain that mid-teens growth over the next couple of years. And as you think about the guide we gave you for FY26, let's remember we got a big quarter here in Q4 we got to nail. We're focused on nailing this quarter. We have a really strong pipeline, as it relates to Q4. And I'm confident we'll be able to deliver against our current guide for the quarter and then we'll update you further on our FY26 number during our Q4 earnings call.

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

Thank you, Zane and Carl. Happy Thanksgiving.

Thanks, Kash.

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

Sorry, I was on mute, the old unmute trick, apologies for that.

That's okay.

Given that there are several factors you're considering, and that's not unique to software, could you provide additional context on what drives your Q4 guidance, especially regarding Workday's larger seasonal profile? Any insights on potential foreign exchange impacts or other variables would be appreciated. Additionally, any thoughts on how the close of the year might influence your approach to balancing growth and margins for the upcoming year would be helpful. Thank you.

Yes. Thanks, Michael. We have a solid pipeline coming into Q4. One that is reflected in the guide that we did give you for the quarter. We also, as I said, we have a lot of momentum in the business right now, especially when you think about some of our AI solutions like the Recruiter Agent, what we're doing with Talent Optimization and Extend Pro. I mean, in the quarter, selling back into our customer base where 30% of our deals now include an AI SKU is a pretty rapid uptake of these technologies. And what's really interesting is that our customers are willing to pay for these solutions because they have tangible ROI that they can get from these products. So it's the momentum, it's the pipeline, it's the large deals that we have in the quarter. And as you always know, Q4 is historically the largest quarter of the year for us, and I don't think it will be any different this quarter as well.

Yes, Michael, I would just add obviously, we feel good about the cRPO. It's just one of the elements we look at the growth that we saw in the third quarter, we believe positions us well exceeding our expected range by a number of basis points. So we feel good about the setup. FX is an impact, but obviously, where the majority of our business is still US-based, so we don't see it as being that significant this close into the fourth quarter. So we still feel good about the guide and the outlook for the quarter. And then we are always balancing that top-line growth opportunity with margin. We've done, I think, a good job over the last number of years in thinking about people, process, and systems, and we'll continue to focus on efficiencies and continuing to scale the business. So we feel great about the margin outlook not only for the remainder of this year but into next year and beyond that as we grow margins beyond 30% over the next two years.

Thanks very much.

Thank you.

And our next question comes from Brad Zelnick, Deutsche Bank.

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

Yes. Thanks for the question, Brad. So let me start with the thesis. That has not changed, and that is 50% of the addressable market for Workday is outside the US. That has not changed. Yes, while we have seen some headwinds in the economy, specifically, if you will, in EMEA, and I think a lot of people have called that out, our business still remains intact. Our leadership team is stronger than ever. And at the same time, when people do ultimately make a decision on a large transformational opportunity, whether it's HCM or Financials or both, we are winning a significant portion of those deals. Our win rate in Europe when these customers do decide to go forward is very strong. So while there are some headwinds, we can't control that, obviously. What we can control is continuing to innovate, continuing to work with our customers and prospects so that when they do make a decision to do a transformational project, we are continuing the win rates that we've seen over the last couple of quarters. I'm very confident in what we're doing in Europe and the opportunity ahead.

Excellent, thank so much.

Our next question comes from Brad Sills, Bank of America.

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

Yes. Thanks for the question, Brad. I think historically, we've always had a pretty strong business in both government, state and local government, and higher ed. In this quarter, we called out that 90% of our wins this quarter included full suite and full platforms. So when you're dealing with the state and local government or even the federal government and then you do it in higher ed, these people have a tendency to make a decision for full platform, full suite at the same time. I also think because of the student product that continues to gain momentum in higher ed, it gives us an advantage over the competition. The one we also called out that performed quite well, it didn't have the exact growth rate we've had over the last couple of quarters that we've called out is healthcare. We continue to win in healthcare. In fact, I think it was probably the largest deal on the table over the last 12 months in the healthcare market, CommonSpirit. We were able to win that which is a testament to not only our platform, both our HCM and Financials, but it's also our supply chain product as well. So I think these are three industry verticals we'll continue to have momentum because they look at full suite and in certain industries, we have products like student for higher ed and then we have supply chain for healthcare.

Wonderful, thanks Carl.

Thank you. And our next question comes from Karl Keirstead, UBS.

Thank you. Zane, I have a couple of questions regarding the outlook for next year. First, you mentioned that Q1 will likely be below 14%, which suggests a decline of over 150 basis points compared to the second half of this year. It's unusual for a drop to be that steep. Could you explain the expected performance for Q1? Secondly, regarding the anticipated acceleration in the second half, you mentioned that this is due to strategic wins ramping up and emerging AI. Can you clarify which of these factors you believe will have a greater impact on the acceleration? If AI is the bigger driver, could you share some insights into why you feel confident about your ability to monetize in the second half of next year? Thank you.

Sure. Yes, let me start with Q1. I highlighted that obviously, we have the leap year compare, which was about 1 point. We haven't given any linearity or any more detail into FY26, Carl, other than to mention that obviously, we see the pressure there in Q1. And obviously, it will build through the course of FY26. Yes, as it relates to AI, and the strategic wins. This is a small part of, obviously, the $8.8 billion. I just wanted to highlight on the strategic wins that as we recognize it, we expect to see 0.5 point of improvement just related to those deals for the second half. So we do expect to see slightly higher growth in the back half. And then I'll let Carl talk about some of the momentum and what we're seeing on the AI front through the course of FY26.

Yes. So Karl, a couple of things on AI. Remember that we just closed earlier this year, the acquisition of HiredScore and we highlighted some of the success we had in Q3 selling the Recruiter Agent back into our customer base. That typically gets sold back into customers who have our recruiting platform. That's 4,000-plus strong. So we're only in the low single digits of penetration or attach rate to our existing customer base to sell, for example, our Recruiter Agent. When you couple that with the momentum we're seeing around Talent Optimization, which is an internal workforce mobility AI platform and things like Extend Pro, which has an AI API gateway and a Copilot for developers to write and build applications on top of us, these are all indications that the customers are seeking AI solutions from Workday. And then later this year and into next year, we have three new agents that will come out. We'll have an Expense Agent, we'll have a Successor Agent, and we'll have an Optimized Agent. These are all agents that will bring to market that are built deep into the core of Workday. The data doesn't have to be extracted. It stays within the core of the platform, which is different than most AI solutions out there, and we think they are going to have a nice impact on bookings and revenue as we go into the new year. So the momentum is there. We see it building. Customers are willing to pay for our AI solutions. And I didn't even mention oh, by the way, Evisort, which is an AI platform for scanning and looking at documents, especially in the unstructured world of data we live in today. That's very powerful and we're excited with the early indications and signs that, that's driving to.

Okay, great. That color is helpful. Thank you both.

Thanks, Karl.

Thank you. And our next question comes from Brent Thill, Jefferies.

Thanks, Zane. In terms of the guidance, are you using the same methodology as before, or are you adopting a more cautious approach since the guidance has been adjusted several times? Is everyone looking for a new guidance or are you maintaining a similar outlook? Could you provide any insight into that methodology?

Sure. Thank you, Brent, for the reminder. I would say this is our current perspective as we look at fiscal year 2026. For that reason, we did not want to provide a broader range, as we are confident in approximately $8.8 billion, as I mentioned. We are very excited, but we believe it is still early stages regarding several of these AI opportunities in particular. I also wanted to emphasize that this is just an early look. As we look ahead to next year, we have the leap year overlap, and in the second half, we have already closed several transactions that will affect the growth rate for the latter part of next year. We will leave it there and look forward to providing more details next quarter when we outline fiscal year 2026 in greater depth. We feel positive about the initial guidance, but it is just an initial look.

Okay. Great. And then quickly for Carl. With Rob coming on board, there have been a lot of questions about the impact, as typically when you bring someone new on at his caliber, changes tend to follow. I know you've already implemented many proactive positive changes for the go-to-market strategy. How do you assure investors that there won't be any further turbulence resulting from another go-to-market executive? How should we approach that?

Yes, thank you for the question. I am very confident that Rob's joining will not have any negative impact. It will be entirely positive due to his experience and industry knowledge. Additionally, I believe we have sufficient overlap with Doug for the next six months, as he will be staying on to ensure a smooth transition. Therefore, I am not worried at all about any impact from Rob joining the team and in fact, I am certain it will result in net positives moving forward.

Great. Thanks.

Thank you. We will now take two more questions. And our next question comes from Raimo Lenschow, Barclays.

Thank you. Can I revisit the AI question regarding the acceleration for the next half? Carl, how is your perspective on monetization evolving in the industry? Considering that many players in Eurospace view it more as a bundled add-on solution, how do you ensure that you are compensated for those solutions?

Yes. Thanks for the question. As we've stated in the past, we take a multi-pronged approach to AI monetization. It starts with, number one, when we meet with customers or prospects, they truly believe that an investment in Workday is an investment in their AI strategies and that gets reflected for us in our customer win rates on new opportunities, our expansion rates with our existing customers and our renewal rates, as well as our customer satisfaction. And a lot of times, our customers are leaning into us with a core platform that already has a whole bunch of AI built into it. It's not bolted on. At the same point, as we bring new solutions to market, like Recruiter Agent, it's a great example where customers are willing to pay us for that platform. Our customers are seeing upwards of 30% productivity gain in the recruiters, which is significant when you think about recruiting being one of your biggest costs associated with HR. So our customers are willing to pay for it and we monetize it. Another example is Talent Optimization, where we have over 3,000 customers using it to drive internal mobility and reduce attrition. And then lastly, our current example of Extend Pro, how people are leaning into it and buying it. It's actually a significant uplift from our Extend Essentials platform, and people are paying us for it as well. And as we bring out new products and new agents, like I said earlier, we're going to bring out an Expense Agent, a Successor Agent, as well as an Optimized Agent, we're going to be pricing them based on the impact and the value our customers get. So I think we have a good strategy around AI monetization. And I think it is going to continue to help drive sustainable growth over time.

Okay, perfect. Zane, I have a question for you regarding cash flow. You didn't change the cash flow guidance. Can you explain the factors that influenced this quarter's performance and the decision on the guidance? Thank you.

Raimo, we mentioned last quarter that collections came in really strong. So if you balance out the two quarters that gets you back to a more normalized rate. And if you recall for this fiscal year, we’ve also mentioned that we had an additional pay period, which actually comes into the fourth quarter. So a lot of this is expected. We haven't changed our guide for some time, obviously, for FY25. You may recall as well, we had sizable collections last fiscal year, which impacted FY25, and we called that out early in the year as well. So I feel really good about OCF generation through the course of the year and in line with our expectations, even though I understand that you're picking up on the variability we saw in Q3. We were off about 10%. But net-net, we feel good about OCF.

Perfect. Thank you.

Thanks, Raimo.

And our final question comes from Alex Zukin, Wolfe Research.

Hi, everyone. Thank you for my opportunity to ask a question. I'd like to start with the quarter itself. Your quarter concluded during a rather tense period in the market. I'm curious if the election resulted in any last-minute deal delays or added challenges within that quarter, and if any of that shifted afterward. Additionally, it would be helpful to hear about the discussions with customers as we emerge from this period. You addressed the federal sector in the US, but are there any other sectors that you're feeling more optimistic about? I also have a quick follow-up.

Yes. Hi Alex, thanks for the question. Listen, we were pleased with our execution in Q3, and the results were in line with our expectations that we had internally. We had a good bookings quarter. We closed a number of significant deals, and we saw tremendous momentum on AI. So what I would say is we're happy to have the election behind us for any distractions that it may have created. It's good to have that behind us. But we didn't see any impact one way or the other in the quarter, or any change in deal scrutiny or anything else. It was pretty consistent both pre-election and post-election.

Perfect. As we consider the deliverables and shift our focus to the online impact on numbers, was it surprising that you were able to secure these larger deals? Did you anticipate signing them, but not expect them to request additional elements? Could you help clarify this, as it's the first time we're hearing about this issue affecting the quarter for any of the companies I cover? I would appreciate understanding the mechanics and logistics surrounding this concern.

Yes, Alex, as you get into a number of these strategic deals, there are obviously deliverables, and in some case, you recognize revenue sooner; in some cases, later. Just so happened that these two were later. Whether or not it was a surprise, obviously, we've been working on these for some period of time. And you traditionally look at the accounting and everything that you have to produce through the course of the negotiation. So obviously, if you had perfect line of sight into these, you may have either structured them differently or there may be some different elements to it, but we feel very good about these transactions. They are incredibly strategic. We expect them to grow significantly over a number of years. So we're very excited about them. Again, I wouldn't read too much into it. It's just one part of the business that we just decided to call out this quarter.

So basically, it doesn't change the annual contract value. It's just a timing aspect that may shift a bit to the later period.

Correct. I mean, in some cases, you can't necessarily capture the cRPO element because of the nature of the deal. But yes, it's just a timing element. That's exactly right.

Perfect. Thank you, guys.

Thanks, Alex.

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

Thank you, operator, and thank you again for everyone for joining our call today. Before we go, I'd like to thank our Workmates, our customers, and partners around the world who continue to fuel Workday's success. We continue to believe Workday can be amongst the most enduring and profitable software businesses of our time. We’re focused on driving durable growth at scale and expanding operating margins, and we once again achieved this in Q3, all while executing on our platform strategy to deliver the world’s best AI solutions for our customers. Thanks again. And to those of you in the US, happy Thanksgiving! With that, I’ll turn it back to the operator to close out the call. Thank you, everyone.

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