Earnings Call Transcript - WDAY Q1 2025

Operator, Operator

Welcome to Workday's Fiscal 2025 First Quarter Earnings Call. Currently, all participants are in a listen-only mode. We will have a question-and-answer session towards the end of the call. I will now turn it over to Justin Furby, Vice President of Investor Relations. Thank you. You may begin.

Justin Furby, Vice President of Investor Relations

Welcome to Workday's first 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 and documents we file with the Securities and Exchange Commission, including our fiscal 2024 Annual Report on Form 10-K, for additional information on risks, uncertainties, and assumptions that may cause actual results to differ materially from those set forth in such statements. In addition, during today's call, we will discuss non-GAAP financial measures, which we believe are useful as supplemental measures of Workday's performance. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release, in our investor presentation, and on the investor relations page of our website. The webcast replay of this call will be available for the next 90 days on our company website under the investor relations link. Additionally, our quarterly investor presentation will be posted on our investor relations website following this call. Also, the customers page of our website includes a list of selected customers and is updated monthly. Our second quarter fiscal 2025 quiet period begins on July 15th, 2024. 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.

Carl Eschenbach, CEO

Thank you, Justin, and thank you all for joining us today. I'm pleased to report our solid financial performance for the quarter, including 19% subscription revenue growth, 18% 12-month backlog growth, and a non-GAAP operating margin of 26%. Over the past six quarters, we've made several key investments across the business, as well as important organizational changes to set the foundation for durable growth and continued margin expansion. In Q1, we continued to build on several important growth initiatives, including go-to-market changes that will help us further expand our total addressable market. And in the quarter, we closed several strategic deals, including a landmark federal win at the Defense Intelligence Agency. We also held our annual Innovation Summit, where we hosted 25 industry analysts and showcased our organic innovation engine, which continues to be one of the key strengths of our company. We already are seeing tremendous feedback from the event with lots of positive industry analyst coverage on the product roadmaps and the future of Workday. Our first quarter is always our seasonally slowest. We had clear areas of outperformance including healthcare, public sector, and continued strength in financials and full platform wins. But we also closed fewer large deals than last Q1, notably in EMEA. When purchase decisions are being made, our win rates remain strong. But within the quarter, we experienced increased deal scrutiny compared to prior quarters. And we are seeing customers committing to lower headcount levels on renewals compared to what we had expected. We expect these dynamics to persist in the near term, which is reflected in our revised FY 2025 subscription revenue guidance. While we can't control the macro, we are focusing on what's in our control, which is innovation, scaling our go-to-market engine and partner ecosystem, and delivering customer value. We remain confident that we're doing the right things to build a long-term, durable business with balanced growth and margin expansion. With the emergence of AI, the shifting talent landscape, and pressure to realize operational efficiencies, organizations across geographies and industries are turning to Workday as their trusted platform to elevate humans and supercharge work. We made several key developments in Q1 that strengthen our position and I'll share a few highlights. Let's start with customers. Our customers truly bring the power of Workday to life. A great example is our new partnership with the Defense Intelligence Agency. The DIA is the key intelligence agency for national defense in the United States. Workday will support the DIA on its mission to rapidly accelerate recruitment and onboarding efforts and create a diverse, trusted, and agile workforce. With Workday, they'll be able to identify, integrate, and direct skills and expertise to solve emerging intelligence problems when and where they are most needed. Not only is this a significant new win, but more importantly, it unlocks an incredible market opportunity for Workday in the federal government, and we expect it to increase our pipeline over the coming quarters. In fact, the DIA was on stage at our federal forum event in Washington, D.C. yesterday discussing digital transformation in the government. Now in its second year, the forum drew a record crowd of over 600 decision-makers across more than 70 agencies from the world of government and policy. This is up 100% from our federal forum last year, and the momentum we are building here is exciting. Speaking of momentum, we continue to take share in financials, bolstered by our go-to-market and platform investments combined with our compelling value proposition of having a single, secure platform to manage both your people and money. In Q1, new financial management customers and full platform customers both increased more than 20% over Q1 of last year. And more than 90% of our nearly 2,000 FINS customers are now leveraging the power of our HCM platform as well. In Q1, we added several full platform HCM and FINS customers, including Baptist Health, Covenant Health Systems, the City of Milwaukee, and Owning Group, the largest privately held staffing company in the U.S. We also had a number of expansions within the office of the CFO, including AllianceBernstein, Hospital Sisters Health System, and John Muir Health. During Q1, we also expanded our leadership in HCM, adding new relationships with organizations including ALS Group USA, Carhartt, and one of the largest P&C insurers in the world, which expanded its core financials footprint to add HCM. We had several strategic HCM expansions and renewals, including ING Bank, Sandvik AB, and Vallejo Management Services. Beyond the wins, we celebrate when our customers go live on our platform. In Q1, ASDA, Electrolux, Topgolf, County of Richland, Apex Group, and LVHN all successfully went live on Workday. Customers trust Workday to help them navigate huge transformations. They did so with the cloud, and now they're turning to us to help them responsibly leverage AI to drive productivity, efficiency, and cost savings. Workday gives them the ultimate advantage. We've been delivering AI capabilities to our customers for nearly a decade. We've built AI into the core of our platform, which means AI features and functionality are embedded natively in all of our applications. With more than 65 million users generating over 800 billion transactions per year on our platform, the volume of clean, trusted data that Workday and our ecosystem can leverage for AI is truly unmatched. We continue to make significant investments to further enhance our leadership in this area and deliver trusted and responsible AI innovations that drive meaningful business results. We now have more than 50 AI use cases live in production and 25 generative AI use cases on our roadmap to help our customers make confident decisions faster, increase efficiencies, and make their people more productive. In Q1, several new innovations went live for early access customers, including AI-powered content generation capabilities with growth plans, job descriptions, and knowledge base articles. These automate repetitive tasks and put information in the hands of the right people faster. We also released AI-enabled payroll insights, which help payroll professionals detect anomalies faster and more accurately to save money and reduce risk. Perhaps the best example here is our Talent Optimization solution, which leverages Workday Skills Cloud. This is an AI-first SKU where we have seen strong attach rates on new deals and have significant momentum selling back to our customer base as well. I'm pleased to share that over half of our core customer base has now licensed this product, making it one of our fastest-growing ever. Continuing to accelerate our AI roadmap, we closed the acquisition of HiredScore in Q1, giving us a comprehensive AI-powered talent acquisition and internal mobility offering. Our shared customers are realizing a 25% increase in recruiter capacity with AI, one of the many reasons we're so excited about this combination. We closed our first joint deal this quarter, and we're rapidly building pipeline, particularly across our base of more than 4,000 recruiting customers. The power of Workday is our platform, and that gives us a ton of flexibility to fuel growth, for example, in industries. This is a key foundational element and a major differentiator for us. We've been focusing on deepening our purpose-built offerings in key verticals, including healthcare, public sector, financial services, and professional services. As you can see in the logos from this quarter, healthcare once again performed very well with new ACV growth exceeding 50% in Q1. At the same time, our professional and business services vertical is already well on its way to eclipsing $1 billion in annual recurring revenue. In Q1, we released a natively built configure price quote solution for services businesses, which integrates with CRM platforms to streamline the quoting process. Our research shows that for 95% of our customers, quoting is still happening in spreadsheets today, so this is going to significantly increase their efficiencies. The public sector was another highlight in Q1. In addition to the DIA, we continued to excel in state and local government, closing full platform wins with the cities of North Las Vegas, Milwaukee, Palm Bay, and Monroe and Washington counties. In education, we had a record number of Workday Student go-lives in Q1, and now we have taken 20 new customers live so far this year, including Iowa State University, the University of Arkansas System, and Wake Forest University. Global expansion continues to be a key growth driver for Workday. We're focused on investing at all levels to build our regional businesses with local leadership, go-to-market and product enhancements. For instance, this quarter, our native payroll solution for customers in Australia became generally available. Our global payroll platform is now available for early adopters as we extend the power of Workday with strategic partners like ADP, Alight, and more. On the go-to-market side, we began holding Workday Elevate events across APAC, Japan, and EMEA in Q1 and will continue throughout Q2. These events bring together thousands of prospects and customers, generating new pipeline and deepening our existing relationships. Just last week, we announced our plans to invest more than GBP 550 million in our U.K. operations over the next three years. We also announced that in early 2025, our customers will be able to access our core HCM, Financials, and Adaptable Planning solutions locally on the AWS Cloud in the U.K. Not only are we enabling compliance with data residency requirements, we're also boosting performance and helping businesses scale for the future. So as you can see, we're continuing to invest for our growth, and I'm energized by how we'll be able to empower more U.K. organizations with the power of our platform. And while it was a more challenging quarter in some of our international markets, we saw strength in France, the Netherlands, and Japan. Key international wins in Q1 included OCP Group, Knight Frank, and Aman Resorts. Our partner ecosystem is a powerful driver of customer success, and it continues to grow in both breadth and depth. Across the board, we're seeing continued growth in our referral and co-selling efforts with our partner sourcing more pipeline and closing more ACV in Q1 than all of FY 2024 through our sales program. This points to increasing ecosystem-led growth, which is a key priority. We have over 200 co-sell and referral partnerships that are helping expand our routes to market. One of the partners that we signed in Q1 that I'm particularly excited about is Google. Under our new partnership, GCP customers will have access to Workday products through the Google Cloud Marketplace. We're off to a fast start, and we expect to have our first transaction via the Marketplace this month. We also recently expanded our relationship with AWS to include co-innovation across industries and enhance go-to-market investments. We bill over $75 million of active ACV pipeline with AWS, and the expanded partnership should only accelerate that. In Q1, we formed a new reseller agreement with Kyriba that enables Workday customers to integrate with a network of over 1,000 global banks. This dramatically reduces the time, complexity, and costs needed to integrate and adapt to changing banking requirements. Partners are critical to helping us accelerate and broaden our innovation footprint. In two weeks, we'll welcome 1,200 partners and customers to Las Vegas for DevCon, our annual developer conference. DevCon, as well as our developer ecosystem, has grown by more than 50% since last year, which is a testament to the momentum we're building across our platform. At the event, we'll be announcing new ways for partners to build, distribute, and monetize their applications on the Workday platform. We are also launching several other components of the program to enable us to embed partner solutions within Workday in ways we've never done before. With our cloud-native platform in Workday Extend, we are enabling AI innovation not just from Workday but also from our customers and partners. We now have more than 900 Extend customers and 1,600 apps, delivering significant value across our ecosystem of customers and partners. Workday Extend Pro, which includes AI Gateway as well as Developer Copilot launching later this year, enables our customers and partners to build AI-first apps that leverage the power of our platform. There is clearly an appetite to build AI-first apps on top of Workday. More than 50% of our Q1 Extend ACV was from Extend Pro, making it another one of our fastest-growing SKUs. Our AI Marketplace, which is going live next month, gives our customers access to the best of Workday AI and solutions from third-party partners together in one place. These are just a few of the latest examples of the breadth of our innovation and the reach of our platform. Now to close, as I've said many times, we have a durable business with multiple levers to drive long-term growth. With our leadership and investment in AI, our unique ability to address organizations' most critical challenges, and the deep relationships we have with our customers and partners, Workday remains well positioned to extend our market leadership. This is exactly what drew me to Workday and what continues to excite me. We also have a diverse business serving more than 10,500 customers across industries, which now includes more than 60% of the Fortune 500, an incredible milestone and a testament to the strategic nature of our platform. And yet, we're just getting started with more than 40,000 organizations in our addressable market and a continued opportunity to expand our footprint and deliver even more value within our existing customer base. Moving into Q2, we are well positioned to achieve our objectives in the near term while continuing to build for the long term. I'd like to thank our customers who put their trust in us, our partners, and especially my 19,400 workmates around the world for helping drive Workday forward. With that, I'll hand it over to Zane.

Zane Rowe, CFO

Thanks, Carl, and thank you to everyone for joining today's call. Our Q1 performance was in line with our expectations across our key financial metrics. Subscription revenue in the first quarter was $1.815 billion, up 19%, including a 1 point benefit from the leap year. Professional services revenue was $175 million in the quarter, leading to total revenue in Q1 of $1.99 billion, growing 18%. U.S. revenue in Q1 totaled $1.49 billion, and international revenue totaled $497 million, both growing 18%. 12-month subscription revenue backlog, or CRPO, was $6.6 billion at the end of Q1, representing growth of 18%. Renewal volume in the quarter, including early renewals, was in line with our expectations. Gross and net revenue retention rates remained strong at over 95% and over 100%, respectively. Total subscription revenue backlog at the end of the quarter was $20.68 billion, up 24%. Our non-GAAP operating income for the first quarter was $515 million, resulting in a non-GAAP operating margin of 25.9%. Margin strength was driven by moderate revenue outperformance and lower expenses. Q1 operating cash flow was $372 million, growth of 34%. During Q1, we repurchased $134 million of our shares at an average price of $267.09 per share. In addition, starting in April, we began to fund withholding taxes due on employee equity awards by net share withholding. This reduced our dilution by 1 million shares in the quarter relative to our prior sell-to-cover method and impacted our cash flow from financing by $239 million in Q1. We ended the quarter with $7.2 billion in cash and marketable securities. As of April 30, headcount stood at over 19,400 Workmates around the globe. We were pleased to see the continued progress across our key growth initiatives, including momentum in full platform wins and continued ramping of our partner ecosystem, which we expect to support growth in the coming years. At the same time, we experienced elevated scrutiny in our sales cycle, particularly in EMEA. Within our customer base, we continue to see expansion, primarily through product add-ons versus customer headcount growth, which has slowed relative to our expectations. Taking these factors into account, we are updating our full year FY 2025 subscription revenue guidance to $7.7 billion to $7.725 billion, representing growth of approximately 17% compared to our previous guided range of 17% to 18%. We expect Q2 FY 2025 subscription revenue to be $1.895 billion, representing 17% growth. We now expect FY 2025 professional services revenue of approximately $650 million to $660 million, reflecting the Q1 outperformance and our Q2 expectations along with our strategy of further leveraging our partner ecosystem. For Q2, we expect professional services revenue of $175 million. Turning to backlog. As we've highlighted previously, CRPO growth is influenced by quarter-to-quarter variability in renewal volume and new business bookings. The strength in overall renewal activity in FY 2024, including early renewals, caused our CRPO growth to outpace subscription revenue growth throughout last year. This aggregate effect is impacting our backlog growth this year. In Q2, as we saw in Q1, we expect CRPO growth to be below subscription revenue growth, impacted by the cumulative headwind from last year's strong renewal activity. In Q2, we expect CRPO to increase between 15% and 16%. We continue to see momentum across our core growth areas and are continuing to invest for future growth while driving increased efficiencies across the company. We now expect FY 2025 non-GAAP operating margins of approximately 25%. For Q2, we expect a non-GAAP operating margin of 24.5%, which reflects our typical seasonality. GAAP operating margins for the second quarter and full year are expected to be approximately 20 and 21 percentage points lower than the non-GAAP margins, respectively. The FY '25 non-GAAP tax rate remains at 19%. We continue to expect FY 2025 operating cash flow of $2.25 billion and capital expenditures of approximately $330 million. In closing, I want to reiterate our commitment to investing to support long-term growth while expanding margins. We continue to see strong customer demand and engagement across our platform, supporting our financial targets and helping drive our strategic growth initiatives.

Operator, Operator

Thank you. We will now conduct a question-and-answer session. Our first question comes from Kash Rangan with Goldman Sachs. Please proceed with your question.

Kash Rangan, Analyst

Hi, thank you, Carl and Zane. I wanted some clarification on the extended sales cycles and the growth in smaller customers and headcount. Was this mainly limited to EMEA, or did you observe similar trends in the U.S. as well? Additionally, if the partner generation of new business continues to exceed expectations in 2024, would you consider adjusting your guidance accordingly? In other words, do you believe there are enough other factors at play that could help you get back on track as the fiscal year moves forward? Thank you.

Carl Eschenbach, CEO

Yes, thank you for the question. Before I address it, I want to express my appreciation for our employees, customers, and partners worldwide for contributing to a strong start to the year. As reflected in our Q1 results, it was indeed a solid quarter, but we did notice some changes. Specifically, we saw more scrutiny, particularly on large and new deals, which was not limited to the U.S. but observed globally. This may be attributed to our focus on full platform deals, rather than just HCM deals, which involves multiple stakeholders such as the CHRO, CIO, and CFO, complicating the sales cycle and extending timelines. However, when customers decide, we are successfully capturing a good share of HCM, Financials, and full platform deals. Additionally, we experienced a global trend of reduced headcount expansion during renewals, not confined to any specific region. Concerning our partners, we have made significant investments, and in Q1, we noted that we generated more pipeline than in all of last year and closed more business with partners than we did the previous year. This demonstrates that our efforts in the partner ecosystem are gaining traction, and we are excited about the potential future impact.

Zane Rowe, CFO

Kash, I would just add, as we think about the growth in partners, we would expect it to ramp through the year, and as Carl alluded to, we see great progress there. As it relates to subscription revenue, the bulk of that would probably then enter into the next fiscal year more so than this fiscal year. But obviously, we're excited about the progress we're making on the partner front.

Kash Rangan, Analyst

Thank you so much.

Zane Rowe, CFO

Thanks, Kash.

Operator, Operator

And our next question comes from the line of Mark Murphy with JPMorgan. Please proceed with your question.

Mark Murphy, Analyst

Just following on Kash's question, the aspect of the lower customer headcount growth, we can see that non-farm payrolls were growing 5% just a couple of years ago. It has fallen to about 1.8% recently. I'm curious if that roughly aligns with the slower headcount growth you're seeing across the base. In other words, could you be renewing contracts from two to three years ago and seeing that type of a headwind perhaps a few points' worth? And then secondarily, I'm just wondering if it's more pronounced at HCM than FINS because it would touch the entire employee base on the HCM side.

Zane Rowe, CFO

Hi, Mark, I'm happy to start that and then maybe have Carl give more color. I'd say generally, what we see is that the increase over our baseline has come down. So we still are fortunate to see an increase in net headcount growth on a year-over-year basis. But what we've seen is a slowdown and candidly just below our expectations. So I think some of what you referenced earlier on non-farm payrolls probably does align with what we're seeing. And the other part is just a subset of our cohort and our customer base just being impacted by how they're seeing it and the increase over the baseline amount coming in.

Carl Eschenbach, CEO

Yes. Go ahead, Doug. You have some color?

Doug Robinson, Co-President

Yes. I'd just add to that, Mark, that we see that in both renewals that show up, but also, as you know, we have a sort of true-up mechanism that happens on an annual basis. So customers, while they're still adding employees and headcount to the system, are doing it at a more moderated rate than we had anticipated in Q1.

Carl Eschenbach, CEO

Yes. Mark, I do think as both Zane and Doug alluded to, we did kind of expect a slowdown in headcount growth compared to last year. But in Q1, it was even lower than our forecast. We don't necessarily see that changing throughout the rest of the year, and we took that into account as we thought about the full year guidance.

Mark Murphy, Analyst

And does that impact HCM more than FINS?

Zane Rowe, CFO

Equally, equally.

Carl Eschenbach, CEO

I think it's equally. It's not one versus the other. Obviously, we have a much larger installed base of HCM customers, so it would be more pronounced around HCM because of our customer base. But I think it's consistent across both HCM and FINS when we have both deployed.

Mark Murphy, Analyst

Understood. Thank you very much.

Operator, Operator

And our next question comes from the line of Kirk Materne with Evercore ISI. Please proceed with your question.

Kirk Materne, Analyst

Thank you very much. I would like to follow up on the question Mark asked regarding the challenges facing the business. What adjustments have you made to the guidance to account for these challenges? Have you revised your outlook on pipeline close rates or conversion rates to ensure we have more confidence in the full year forecast? I understand that the macro environment can be variable, but could you provide some insight into what steps you have taken to ensure that the guidance we have is suitable given the headwinds that have arisen over the last quarter?

Zane Rowe, CFO

Yes, Kirk, this is Zane. I'll start, and then let Carl finish the answer. We've been thoughtful as far as projecting out for the year and how we've looked at each of these dynamics. Carl touched on the impact on the pipeline, the fact that these companies haven't necessarily moved out. It's just been a slowing effect, and that's the part that's impacted us more so than actually losing deals. In fact, our win rates have come in nicely aligned with where we've seen them historically. Our forecast methodology hasn't changed. We feel good about the forecast. I'll point out, we've obviously moved the midpoint of our guide down $35 million for the full year. We factored these elements into account, and we are making adjustments accordingly for the year. But we believe that given what we see today, the updated guidance accounts for the factors that we've mentioned here.

Carl Eschenbach, CEO

Yes. And I'd just add, Kirk, that as we looked at our pipeline for the remainder of the year, we have a solid number of large opportunities in front of us. These opportunities, while there is more scrutiny, we think we have a really good chance to close them throughout the rest of the year. We've taken that into account in our guidance. In any given quarter, these larger transactions can be pushed out, sometimes pushed out one or two quarters. In some cases, we pull them in. But what's really important to know is none of the larger opportunities that didn't close in Q1 moved out of our pipeline. When a customer makes a decision to go for a big transformation of a platform like Workday and HCM or Financials, it's not if they're going to do it. It's when they're going to do it. All of these remain in our pipeline, which is what gives us confidence in the guide going forward.

Kirk Materne, Analyst

Thanks, guys.

Operator, Operator

And our next question comes from the line of Brent Thill with Jefferies. Please proceed with your question.

Brent Thill, Analyst

Thanks. Carl, on EMEA, I guess when you talk about lower wins, I know you've made a lot of changes in your players. Do you think some of this may be just a player swap-out in the short term where you're having some maybe internal execution versus an external? Or are you focused more that this is more of an external force that has nothing to do with some of the changes you've implemented over the last year?

Carl Eschenbach, CEO

Yes. Thanks for the question, Brent. I absolutely don't think it has to do with anything we're doing internally. In fact, if you recall, for the last number of quarters, one of the things we've highlighted probably for the last four to six quarters, we've highlighted the execution that we've seen out of EMEA. We have new leaders. We're going to market differently with pricing and packaging. We're going to market differently with partners over there. We've added a lot of capacity. So everything we're doing in Europe, and for that matter, the rest of the world, I think, are all positive things. I don't think this is an execution issue at all. This is just a pocket of softness we saw outside of the U.S., and it was because of the factors we talked about. Specifically, in EMEA, last Q1, we closed a large number of bigger deals. We didn't have that same close rate this Q1, so the year-over-year compare was a bit tougher. But I don't think this has anything to do with what we're doing or how we're executing. In fact, I'm really bullish on the leadership team and how we're going to market with any changes we've made outside the U.S.

Brent Thill, Analyst

Great. Thank you.

Operator, Operator

And our next question comes from the line of Brad Sills with Bank of America. Please proceed with your question.

Bradley Sills, Analyst

Hello. Great. Thank you so much. Maybe if I could just ask one more on some of the impacts you've seen during the quarter. We certainly understand if some of these bigger platform deals where there's both FINS and HCM involved are going to take longer to push over the finish line. We're certainly hearing that from the channel that you're seeing more of those deals. How much of this would you attribute to that move? It seems like something you're seeing increasingly. And I guess a related question to that is, was this largely limited to some of those newer platform deals as opposed to renewal deals? How did renewals in EMEA track this quarter? Thank you.

Carl Eschenbach, CEO

Yes. Thanks for the question, Brad. Your question actually is part of my answer. Most of the deals that we see getting more scrutiny are net new deals. It's not renewals. A lot of them are full platform when we're selling both HCM and we're selling FINS. When we're just selling HCM, we don't see as much scrutiny. That being said, if it's a very large HCM transformational or platform deal, there is some additional scrutiny that does take place, but we absolutely are seeing more when it's full platform. The other thing I would say is that full platform deals in the medium enterprise are accelerating. The reason for that is we can find a company that has a buyer and decision-maker that are one and the same and then make a decision around both HCM and Financials at once. We talked about our Financials business and full platform business being up greater than 20% year-over-year. A lot of that is in the medium enterprise. But in the large enterprise, there is more scrutiny.

Zane Rowe, CFO

Hi, Brad, this is Zane. I'll just add that in looking at the year’s forecast of $35 million, we attribute roughly half of that to the scrutiny of deals and the other half to the impact of headcount we've observed. So when you break it down for the year, it's about a 50:50 distribution.

Doug Robinson, Co-President

Just wanted to highlight that this is Doug. One point I would like to add is regarding large enterprise net new opportunities. As Carl mentioned, there are actually areas of strength as well. There is an industry aspect to consider. In our healthcare segment and the public sector, we are seeing continued market movement, and they performed very well in Q1. Specifically, I believe healthcare experienced a 50% increase in ACV growth for the quarter. So, it's not accurate to say there is a lack of large deals being completed. It is simply a more challenging environment for many industries globally, especially in Europe.

Carl Eschenbach, CEO

Doug, when you talk about the public sector, it's not just state and local. Now we're seeing some big wins like we saw in federal with the Department of Intelligence Agency.

Bradley Sills, Analyst

Understood. Thank you very much.

Operator, Operator

And our next question comes from the line of Scott Berg with Needham. Please proceed with your question.

Scott Berg, Analyst

Hi, everyone. Thanks for taking the question here. Carl touched on it just briefly a little bit ago, but how about some clarity in terms of what you're seeing in the mid-market? Sounds like full platform deals are fine, but are you seeing some of the same scrutiny around sales cycles and some of the regional pressure there? Any additional color there would be helpful. Thank you.

Carl Eschenbach, CEO

Yes, sure. In the medium enterprise, we were really pleased with our performance, specifically in the U.S., where we've been selling into that market and built out the go-to-market engine a lot quicker than we did in Europe. We're building that out now in Europe. But in the U.S., our medium enterprise business was quite solid. The reason for that is now that we were pushing hard on Financials, we are absolutely seeing the Financials have an impact on full platform sales in the medium enterprise. Also, we've changed some of our pricing and packaging as we serve that market with Workday Accelerate, which now gives us the opportunity to sell a bundle or a suite. And it's easier to sell, and for customers, it's easier to consume. We backed that up with some rapid delivery capabilities on the services side that actually allows customers to get value quicker. So across the board, we're really excited about what's happening in the medium enterprise. I would also say when it comes to our partners, while yes, our partners are very impactful on the large enterprise, we talked about the pipeline build in Q1. A lot of that partner pipeline build came into medium enterprise. Overall, the medium enterprise continues to perform well. In fact, it's allowed us to even go down market quite even further. What we now call the emerging enterprise where we're able to sell because of the pricing and packaging and accelerated deployment, we can now address a market that's even further down than we served in the past.

Scott Berg, Analyst

Helpful. Thank you.

Operator, Operator

And our next question comes from the line of Karl Keirstead with UBS. Please proceed with your question.

Karl Keirstead, Analyst

Okay. Great. Thanks. Maybe I'll pivot to margins, so I'll direct this at you, Zane. Typically, you don't get a margin raise alongside a revenue cut. So maybe a two-parter. Where did you find those efficiencies to create that outcome? And then secondly, maybe just a bigger picture question. Would you and the leadership team consider effectively running Workday for a mid-teens growth and just leaning, cranking more on the margin upside? Is that on the table? Thank you.

Zane Rowe, CFO

Hi, Karl, yes. First off, I'll point out that as we've said for a number of quarters now, we continue to balance margin with revenue growth. We've been fortunate to see outperformance on the top line for a number of quarters. And obviously, as I've also said, we'll invest very thoughtfully in a number of these growth areas and investment areas. And we've been doing that but we've been doing it judiciously. We've also been focused across the company with our people, our processes, and our systems, and how we think about scale and just really being mindful about where we spend and where we invest across the business. So I would say no adjustment to that line of thinking. We're still very focused on growing this business. We think we've got tremendous TAM and tremendous opportunities around the globe. On the top line, we're pleased with the performance, and with our over 19,000 Workmates have been leaning in how to be more productive and how to be more efficient as we continue to scale this business. So I'm pleased there. Candidly, I think there's more to come on both fronts and excited about the opportunity. But we'll continue to balance that.

Karl Keirstead, Analyst

Okay. Thank you, Zane.

Zane Rowe, CFO

Thank you.

Operator, Operator

Our next question comes from the line of Alex Zukin with Wolfe Research. Please proceed with your question.

Aleksandr Zukin, Analyst

Hi, guys. Thanks for taking the question. If I'm reading the comments right, it doesn't sound competitive on the sales cycle elongation. It sounds more concentrated in Europe. I guess is there this dynamic where maybe some deals that you were expecting to get into Q1 actually got pulled into Q4 from some of the early renewal activity? Or was this concentrated in some verticals and geographies, a couple of deals that pushed late in the quarter? Just give us a sense for that linearity of how it developed and kind of where you came out.

Carl Eschenbach, CEO

Yes, sure. First, we don't think it's anything to do with our competitors or our competitive win rates. In fact, they've remained quite stable. When customers do decide to make a decision and move forward, our win rates are very good. That being said, we had a solid quarter in Q4, delivering above our guidance in Q4, and we were able to pull in some deals. At the same time, we saw some deals in Q1 push out into the rest of the year. But our pipeline of big deals remains extremely solid. It has nothing to do with the competitive nature. In fact, I think we would say our competitors are helping us by pushing customers to migrate off their current and existing platforms, pushing them to the cloud. When that happens, it opens up more opportunity for us. So I think our win rates are solid. Our discount rates have remained consistent. When customers ultimately make a decision on a big platform transformation, they're coming to Workday.

Aleksandr Zukin, Analyst

Perfect. And then, Zane, maybe just a follow-up on the headcount element on these renewals. I guess how should we think about that as a persistent headwind across your renewal cohorts or your renewal base? Have you reflected that at least either in the revenue guide or your thinking in backlog for the back half of the year? Is there a way to quantify how much of a persistent headwind, if there's kind of lower employee headcount, that renewal dynamic persists? What are we thinking here?

Zane Rowe, CFO

Yes, it's a good call-out. We're assuming it remains consistent throughout the year. And to your point, it didn't impact us as much on the revenue side in Q1. But we expect it to persist through the year, which is why I mentioned that half of the change we made in our subscription revenue forecast for the year was attributable to this headcount dynamic that we're seeing with our customers. But we're assuming no change from the current environment as we look at the remainder of the year.

Aleksandr Zukin, Analyst

Perfect. Thank you, guys.

Zane Rowe, CFO

Of course. Thank you.

Operator, Operator

And our next question comes from the line of Michael Turrin with Wells Fargo Securities. Please proceed with your question.

Michael Turrin, Analyst

Hi, great. Thanks. Appreciate you taking the question. Q1 is generally lighter seasonally for Workday, but the commentary throughout the call suggests you're seeing more than just seasonal. So maybe I was hoping you could just level set how you assess how much is seasonal versus persistent. And to Alex's prior question, if we are in a world of lower headcount for longer, maybe speak to any offsets you see on the product side, whether it's consolidation, some of the AI-related product efforts you're working on, or something else you have in your playbook just to potentially help offset some of that. Thank you.

Carl Eschenbach, CEO

Thank you, Michael. Q1 is typically a seasonally challenging quarter for us. However, we noted a few changes this quarter related to deal scrutiny. We experienced lower performance internationally, particularly in EMEA, and our headcount trends came in below our forecast, prompting us to adjust our guidance for the year. Regarding our products, especially AI, we're encouraged by early indicators in this area. In my opening remarks, I mentioned several AI SKUs that are seeing rapid growth, such as talent optimization. We discussed Extend and Extend Pro, which incorporate our AI Gateway and are among our fastest-growing SKUs. We're also excited about HiredScore, the AI-driven talent acquisition platform we acquired in the quarter. The pipeline is building nicely. Furthermore, during conversations with customers, they consistently inquire about our AI initiatives and how they can utilize our extensive data sets to benefit them and the wider customer base. Customers do not want to invest in another AI platform or superficial solutions that merely claim to be AI. We are observing significant activity among our customers, who are keen to harness our existing AI capabilities. Where appropriate, we are monetizing these opportunities, as I previously highlighted.

Michael Turrin, Analyst

All very helpful. Thank you.

Carl Eschenbach, CEO

Actually, Michael, one other thing I think was in my prepared remarks. We're launching the AI Marketplace this quarter, and we launched and spoke about it at Rising last year. It's actually going and will be up and running in production, and we'll be able to monetize our partners who will be part of the AI Marketplace starting this quarter.

Michael Turrin, Analyst

Thank you.

Operator, Operator

Our next question comes from the line of Rishi Jaluria with RBC. Please proceed with your question.

Rishi Jaluria, Analyst

I wanted to maybe double back on the philosophical debate on margin versus growth. So look, you're guiding to about 15.5% subscription growth in the back half of the year. I understand all the macro pieces. At the same time, you're raising margin guidance. I'd have to wonder with kind of initiatives around AI, with using the partner channel, innovating on products, I'd have to imagine that it would make sense that at some point, macro is going to turn better, right? That this is not due to sales execution, this is not competition, and maybe the market starts to grow faster. I guess why not kind of keep your foot on the accelerator when it comes to investments, especially given all these opportunities and how expensive AI workloads are to position yourself better for when macro eventually does turn better, and you're not going to kind of get caught under-invested? Help me kind of understand that philosophy. Thanks.

Zane Rowe, CFO

Yes, Rishi, you've pointed out a number of areas that we continue to invest in. Obviously, we're encouraged, as I mentioned, by the returns we're getting on those investments. We're also being thoughtful about the pace of those investments and as we build up those investments over time. We feel like we're in a great position where we can continue to grow the top line, and then also as we scale this business, just be thoughtful around all the areas where we can benefit from internally, whether it's using AI internally. It's just being more productive internally, having a workforce around the globe as we become more international ourselves. There are a number of areas, and we don't want to pull back on our partner investment. In fact, if anything, I want to lean deeper into it. Internationally, while we had an air pocket in Q1 from a bookings perspective, let's not forget that greater than 50% of the TAM associated with our total market is outside the U.S. We will continue to lean into the international opportunity. On the product side, we continued to invest in business quite deeply. We have a whole bunch of things that we showcased recently at our Innovation Summit. We have 50 different AI solutions in the market with 25 more coming out later this year. We're investing in the business. What we're doing slightly better is we're more prudent internally on where we're investing those dollars. That is paying off in sustained long-term growth and expanding operating margin simultaneously.

Rishi Jaluria, Analyst

Wonderful. Thank you, guys.

Operator, Operator

Next question comes from the line of Derrick Wood with TD Cowen.

Derrick Wood, Analyst

Great. Thanks. Carl, you guys called out healthcare and public as strong verticals. Are there certain verticals you'd call out that are seeing slower-than-expected headcount growth? And I know investors are going to poke it on this topic. But do you think that anything that's kind of AI productivity gains related and that's leading to slower headcount growth? Or what would you flag as causing this delta versus what you guys thought about entering the year?

Carl Eschenbach, CEO

Yes, thanks for the question. Specifically on headcount growth, there are some industries, and I think you've seen it out there where we do see a bit slower headcount growth. Media and technology, to be specific, is definitely lower headcount growth than we anticipated from the past.

Derrick Wood, Analyst

Okay. And just in terms of what do you think caused the delta versus what you guys were thinking at the beginning of the year, is it macro-related? Is there anything AI-related that you'd call out?

Carl Eschenbach, CEO

Yes. So as we indicated, we did reset our forecast for the full year on headcount growth. It was down over last year, and it came in under what we had actually forecasted. I think it's macro-related. Is that macro relation coming from AI? I don't think we're in a position to say that we see that yet. I just think in general, we're seeing people not expand their headcount growth. In some cases, like you've seen in the high-tech market, which is a big vertical for us, they've actually had layoffs. When it comes to the time of renewal, we have to reset our numbers.

Derrick Wood, Analyst

Understood. Thank you.

Operator, Operator

Thank you. And our final question will come from the line of Brian Schwartz with Oppenheimer. Please proceed with your question.

Brian Schwartz, Analyst

Hi. Thanks for taking my question and squeezing me in. Carl and Doug, just one question I had on the scrutinizing of larger deals that you're seeing. Is that at all reflecting that the business cost optimization cycle could be slowing, that reducing vendors is less of a priority out there in budgets? I guess are you seeing any changes in the number of products that you're replacing in deals that you want in the first quarter? Thanks.

Carl Eschenbach, CEO

Do you want to start with that, Doug?

Doug Robinson, Co-President

Yes. I mean I guess the counter to that is that we're still seeing optimization in our customer base, meaning there's this rationalization of vendors and standardizing on our platform that we are seeing in our customer base. This was uniquely two transformational large projects where they don't do any business with us today. What comes with that is a large business transformation. There's more cautiousness, there's more round trips, there are more approvals, is where we saw that. I don't know that I'm prepared to say that the era is over because of what we're seeing specifically within our customer base.

Carl Eschenbach, CEO

Yes. Doug, I don't think I have much to add other than our customer base is looking for Workday to consolidate their footprint around HR IT, no doubt. We think we can do that because we have the platform and the extensibility to bring more and more applications on top of us. It's really the new deals, net new specifically in large enterprise on a global basis that we're seeing the scrutiny pick up.

Brian Schwartz, Analyst

Thank you for taking my question.

Operator, Operator

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

Carl Eschenbach, CEO

Thank you, operator. I just want to take a few minutes to say something to the broader audience and thank everyone. First, I would like to thank all the analysts for joining us today. I would also like to send a special thanks out to our Workmates, customers, and partners around the globe who continue to help fuel Workday's success. As you heard from my prepared remarks, we continue to lean into our key growth areas, and I'm excited by the momentum we're building, including full platform wins, Financials and industry wins, and the growth of our partner ecosystem. We're driving efficiencies across the business at the same time. We can optimize for investments we want to make by being much smarter about what we're doing internally. We are committed to delivering a balance of growth and margin expansion. With that, I'd like to hand it back over to you, Ms. Operator, to close today's call. I wish everyone a great day, great evening, and a good summer.

Operator, Operator

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