Earnings Call
Workday, Inc. (WDAY)
Earnings Call Transcript - WDAY Q2 2024
Operator, Operator
Welcome to Workday's Fiscal 2024 Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the call. During the Q&A, please limit yourself to one question only. I will now hand it over to Justin Furby, Vice President of Investor Relations.
Justin Furby, Vice President of Investor Relations
Workday's Second Quarter Fiscal 2024 Earnings Conference Call is now in session. We have our Co-CEOs, Aneel Bhusri and Carl Eschenbach, along with CFO Zane Rowe and Co-President Doug Robinson on the call. After our prepared remarks, we will take questions. The press release was issued after market close and is available on our website, where this call is being webcast live. We want to highlight that some statements made on this call, particularly our guidance, are based on the information available today and include forward-looking statements about our financial results, applications, customer demand, operations, and other matters. These statements involve risks, uncertainties, and assumptions that could lead to actual results differing significantly. For more information on these risks and uncertainties, please refer to the press release and the documents we filed with the Securities and Exchange Commission, including our fiscal 2023 Annual Report on Form 10-K and our latest quarterly report on Form 10-Q. Also, during today’s call, we will discuss non-GAAP financial measures, which are meant to provide supplemental insight into Workday's performance. These non-GAAP measures should not replace or be viewed in isolation from GAAP results. Additional disclosures regarding these non-GAAP measures, including reconciliations to comparable GAAP results, can be found in our earnings press release, our investor presentation, and on the Investor Relations section of our website. The replay of this call will be accessible for the next 90 days on our Company website under the Investor Relations link. Our quarterly investor presentation will also be available on the Investor Relations website after this call. Additionally, our website's customers' page features a list of selected customers that is updated monthly. Our quiet period for the third quarter fiscal 2024 commences on October 15, 2023. Unless noted otherwise, all financial comparisons in this call will reference our results for the corresponding period of fiscal 2023. With that, I’ll turn the call over to Carl.
Carl Eschenbach, Co-CEO
Thank you, Justin, and welcome to Workday's Second Quarter Fiscal '24 Earnings Call. I am pleased to report that we delivered another solid quarter, achieving subscription revenue growth of 19%, 24-month backlog growth of 23%, and a non-GAAP operating margin of 24%. While we continue to see deal scrutiny, our workmates around the world did a remarkable job staying close to our customers in driving this quarter's results and positioning us for strength in the second half of the year and beyond. Workday continues to stand out from the crowd for a few key reasons. First, the mission-critical nature of our platform. Our customers, now representing more than 65 million users under contract, are all in on Workday because they trust us to manage their two most important assets, their people and their money. Trust is at the core of our customer relationships, and we will always work to earn it. Second, our value proposition is strengthening as businesses consolidate their technology footprint from best-of-breed solutions to a true platform. Workday is a trusted platform that they can turn to drive productivity gains, agility, skills-based talent strategies, and a great employee experience all at the same time. Third is our unique approach to AI and ML. Aneel will share more on our progress here shortly. Finally, our winning culture and talent are only getting stronger as we continue to attract our industry's best talent. We recently welcomed Emma Chalwin as Chief Marketing Officer. Emma is not only a great cultural fit, but she has extensive global experience across all facets of marketing at companies like Salesforce and Adobe. We also recently hired an incredible Head of our U.S. Federal Government team and a Senior Executive in sales operations, along with another in our services organization to help us scale our go-to-market efforts. Of course, you all know our CFO, Zane Rowe, who is joining us today for his first earnings call. I could not be more excited to welcome these leaders who, along with our existing team, will help us achieve our next phase of growth. Turning to the highlights of the quarter, I will focus on five key areas: land, expand, global, industries, and partners. Starting with land, we see full financials in HCM platform wins on the rise, illustrating the trust customers have in Workday. Wins this quarter include ADVOCATE Health, Assured Partners, Carillion Services for Tria, KinderCare, and the University of Florida. We continue to build on our market leadership position in HCM, with new customer wins including Fresenius, digital technologies, Stellantis, and Rio Tinto. Once we land customers, we immediately turn our efforts to successful deployments. In Q2 notable HCM go-lives include A1 Telekom Austria, Korean Airlines, Nike, and Rite Aid. Strategic financial go-lives include Fitness International, MultiCare Health Systems, Wintrust, and the University of Washington. We also celebrated our first FedRAMP go-live, which was a full platform rollout at a well-known civilian agency. Expanding our existing business with customers is key to our growth strategy. In addition to strong renewals this quarter, we had a number of expansions at companies such as Airbus, Dell Technologies, Lloyds Bank, and those in 7-Eleven. Our faster time-to-value solutions, which include planning, Picon, Extend, health, and talent optimization, continue to gain traction with many deals created and closed within the quarter. This year, we put increased focus on financials go-to-market, and it's starting to bear fruit with healthy customer growth in Q2. Beyond the full platform deals I mentioned earlier, we had several financial expansion wins in the quarter, including the Medical College of Wisconsin, Nordic Consulting, and Rakuten. Given our momentum, we continue to invest in financials targeted sellers to lay the foundation for durable growth. From a geographic perspective, the U.S. continues to be our largest market, representing 75% of our revenue. The U.S. team drove solid results in Q2, with particular strength coming from our customer base in industry teams. We have a significant runway for growth in this market with a healthy pipeline looking forward. Expanding our footprint globally is among our largest untapped opportunities and is a top priority. During Q2, we held 20 Elevate customer events across EMEA and APJ, attracting over 5,000 attendees and generating hundreds of leads in net new opportunities. Not only are we building pipeline, we're starting to see more consistent execution in certain regions, notably EMEA. We saw strength in key markets such as Germany, the U.K., and France, with wins including Renus Assets, Symrise, National West Mr. Bank, and ALD Automotive SA. Our industry-first approach is paying off. This quarter, retail and hospitality became our second industry joining Financial Services to exceed $1 billion in annual recurring revenue. We continue to have strong momentum in financial services, which outperformed in Q2. The healthcare team also delivered another strong performance with three large hospital systems going all-in on Workday's platform in Q2. A great example is ADVOCATE Health, which, as part of their merger with Atrium Health, selected Workday to replace a competitor's cloud HCM financials and supply chain management solution. Workday supply chain continues to contribute to our traction in healthcare, with more than 220 healthcare organizations investing in it to reduce costs, promote standardization, and boost resiliency. Finally, our education and government team followed up a strong start to the year with an impressive Q2, with wins such as West Virginia University, Paul University, and Metropolitan Community College, to name a few. The potential we have to accelerate our growth through our partner community is huge. We are seeing early signs that our partner referral program will positively impact new logos, and our partnership with the AWS marketplace led to multiple strategic wins in Q2. In EMEA, our recently announced payroll partnership with ELI is beginning to drive pipeline. And in APJ, our strategic partnership expansion with Samsung SDS is not only helping us drive overall business in South Korea, but it also is enabling the development of region-specific applications built on Workday Extend. After spending time with many of our partners at our annual Altitude conference this past quarter, it is clear our momentum is building. We look forward to welcoming more than 15,000 members of our Workday community at our annual Workday Rising Conference next month in San Francisco. We hope to see many of you there. As this quarter's results show, the diversity and mission-critical nature of our business continues to fuel our success. We are the clear market leader for cloud HCM and finance, and our value proposition has never been more relevant or powerful. We are investing across our product portfolio, geographies, industries, and through partnerships to drive durable, long-term growth. It is an incredible and exciting time to be a Workmate, and I truly believe our future has never been brighter. With that, I will turn it over to my Co-CEO and good friend, Aneel, who will share more about our AI and ML strategy and innovation highlights from the quarter. Aneel, over to you.
Aneel Bhusri, Co-CEO
Thank you, Carl, and to everyone joining today's call, and especially to our nearly 17,900 workmates around the world for helping deliver another solid quarter. I couldn't agree more with the sentiment that our future is extremely bright. I've been on the road a lot recently to meet with current and prospective customers, and one thing is abundantly clear. More and more organizations are looking to Workday to be their trusted partner to help them navigate today's business landscape and thrive in this new world of work. Critical to our ability to be that trusted partner is our continued focus on artificial intelligence and machine learning, including generative AI. Last quarter, I highlighted Workday's unique approach to AI and ML, which began in earnest in 2014 with a focus on three key aspects. AI and ML are embedded into the core of our platform; we place an emphasis on being human-centric with our AI and ML strategy, and we believe the true potential of AI and ML can only be met by ensuring that they are leveraged in a trustworthy and ethical way. Looking ahead, generative AI will continue to be a major focus for us. Despite the recent hype cycle, Workday has been using large language models for years, and we're continuing to invest in a big way. What helps further set Workday apart is our unrivaled data set quality, which is fueled by our more than 65 million users under contract and $600 billion in annual transactions to create data models that provide accurate, meaningful, and most importantly, trustworthy results. We're currently building product capabilities that leverage generative AI for a variety of tasks. Examples include natural language generation, content search, content summarization, content augmentation, and document understanding. We are also looking beyond those use cases at how we can leverage copilots, agents, and conversational UIs, each of which will help our customers redefine the way they work. We look forward to previewing these new capabilities along with the rest of our latest AI developments at Workday Rising in September. All told, our differentiated approach is working, as we are seeing continued momentum across the board with our over 3,000 customers having opted into sharing their data with our ML models. We know they are realizing value once they have opted in, as we are processing more than 50 million ML inferences per day, an increase of more than 60% year-over-year. Furthermore, we believe that the enhanced value that AI and generative AI provide to our customers will also create economic benefits for Workday by positively influencing competitive win rates, renewal rates, and our already industry-leading customer satisfaction. We plan to offer most AI capabilities to our customers who opt in as part of their current product subscription with generous base usage entitlements. We also expect AI to open up new market opportunities with direct monetization that is wholly based on AI technologies, similar to our talent optimization solution that leverages Skills Cloud, one of our fastest-growing SKUs. Last quarter, I also shared our perspective on the growing importance of AI safeguards and the active role we're playing in driving the development of smart regulations. Since then, the EU has entered final negotiations on its AI Act, which we expect to shape AI regulation globally. We've worked closely with policymakers in Europe over the last two years and we're pleased to see many of our suggestions accepted in the Parliament's version that was recently approved. In the U.S., under the leadership of Sayan Chakraborty, our Co-President, we played a leading role in helping develop the AI framework for the National Institute of Standards and Technology, or NIST, which is a how-to guide for organizations to develop and use trustworthy AI. We are leading by example by implementing the NIST AI framework and we're working with Congress to encourage adoption throughout the federal government. We are also helping to drive the conversation with lawmakers at the state level, including California, as they look to find a path forward for new AI regulations. We're helping them develop legislative frameworks that build trust in AI tools while driving innovation across the enterprise. As we continue to drive thoughtful and concrete policy approaches to responsible AI, you'll hear more from us on our work in the EU, the U.S., and around the world at this pivotal moment for AI policy. On the application front, we're continuing to see our innovation story resonate with customers who are increasingly selecting Workday over the competition. According to Gartner's Enterprise Application Software as a Service market share research, which was published in Q2, Workday had the highest worldwide market share in 2022 for SaaS ERP at 21%. Additionally, we crossed another milestone in Q2 with more than 5,000 core HCM and finance customers, a testament to the power of the Workday platform. For the office of the CFO, we enhanced Workday Adaptive Planning with the next generation of our patented Elastic Hypercube technology. Powered by new AI and performance improvements, Workday Adaptive Planning can now support our customers' most complex planning requirements, scaling automatically without sacrificing speed or performance. Further proof of the continued momentum we are seeing with this application: Workday Adaptive Planning was named Best Financial Management Solution in the 2023 SIIA CODI Awards. Workday was also named a Customer's Choice in the 2023 Gartner Peer Insights Voice of the Customer for financial planning software report. Additionally, Workday Accounting Center is proving to be a true difference-maker for the office of the CFO, as shown by the 70% year-over-year growth we experienced in Q2. Today, Accounting Center is helping more than 150 customers across a dozen industries to pull from a larger, more diverse spectrum of operational data sources to deliver increased granular insights and allow them to better understand their profitability, all in one system. For the office of the CHRO, Workday HCM was named a leader in the Forrester Wave Human Capital Management Q2 2023 report, which highlighted our investments in Peakon and Workday Pecan, employee voice, as well as our use of embedded AI and ML to reduce user friction. In closing, I'm confident that our continued focus on driving innovation across the entire Workday platform will not only position us for future growth on our path to $10 billion in revenue but also play an integral role in helping us continue to build the highest levels of trust with our more than 10,000 customers. I'm excited to see many of you next month for Workday Rising, which is back in the Bay Area for 2023. With that, I'll turn it over to our CFO, Zane Rowe. As Carl pointed out earlier, Zane has been a perfect fit since joining Workday last quarter, and I'm thrilled to have him on board. Over to you, Zane.
Zane Rowe, CFO
Thanks, Aneel. As this is my first earnings call as Workday's CFO, I want to start by saying how honored I am to partner alongside you, Aneel, Carl, and all of our fellow workmates around the globe. I joined Workday because I thought it was one of the most compelling opportunities in all of enterprise software. The continued strength we saw in Q2 further reinforces that belief. Turning to the quarter, subscription revenue in Q2 was $1.62 billion, up 19% year-over-year. Professional services revenue was $163 million, leading to total revenue of $1.79 billion, growth of 16%. From a geographic perspective, total revenue outside the U.S. was $442 million, representing 25% of total revenue and 15% growth in Q2. As Carl mentioned, we see significant long-term international growth opportunities, which we expect will become a more meaningful portion of our revenue mix over time. The 24-month subscription revenue backlog was $10.27 billion at the end of Q2, up 23%, driven by new ACV bookings and strong renewals with gross and net revenue retention rates of over 95% and over 100%, respectively. Early renewals in the quarter exceeded our expectations and added roughly 1.5 points of growth to the 24-month backlog. Total subscription revenue backlog at the end of the quarter was $17.85 billion, up 32%. Early renewals in the quarter added roughly three points to the growth. In addition, we continue to see longer contract duration on both net new deals and renewals, which speaks to our customers' continued commitment to our platform and is causing our total backlog growth to significantly outpace growth in the 24-month backlog. Our non-GAAP operating income for the second quarter was $421 million, resulting in a non-GAAP operating margin of 23.6%. Margin strength relative to our guidance was driven by revenue out-performance and the timing of certain expenses. Q2 operating cash flow was $425 million, which benefited from the timing of collections in the quarter. During Q2, we repurchased $139 million in shares at an average price of $218.33 per share, and we had $287 million in remaining authorization under our buyback program as of quarter end. We ended the quarter with $6.7 billion in cash and marketable securities. We continue to add key talent across strategic growth areas of the business, and we ended Q2 with nearly 17,900 global workmates. We are pleased with our financial performance in Q2 and focused on continuing to drive results in the second half while investing to support longer-term growth. Now, turning to guidance. Following our momentum in the first half of the year, we are raising our full-year FY '24 subscription revenue guidance to a new range of $6.57 billion to $6.59 billion, representing 18% year-over-year growth. We expect Q3 subscription revenue to be $1.678 billion to $1.68 billion, representing 17% year-over-year growth. We're maintaining our FY '24 professional services revenue guidance of $630 million to $650 million as we continue to strategically shift more deployments to our partner ecosystem as part of our channel strategy. For Q3, we expect professional services revenue of $165 million. We expect the 24-month backlog to grow approximately 21% year-over-year in Q3, which includes our current outlook for early renewals in the quarter. We are raising our FY '24 non-GAAP operating margin guidance to 23.5%, and we plan on maintaining a disciplined approach of investing in long-term growth while we expand margins. For Q3, we expect a non-GAAP operating margin of approximately 23.5%. GAAP operating margins for the third quarter and the full year are expected to be approximately 20 and 22 percentage points lower than the non-GAAP margins, respectively. The FY '24 non-GAAP tax rate remains at 19%. We expect FY '24 operating cash flow of $1.95 billion, growth of 18% year-over-year. As we mentioned last quarter, we anticipate making our first semiannual payment of our employee cash bonus plan in Q3, which impacts our annual cash flow and quarterly seasonality for FY '24. In addition, we continue to expect FY '24 capital expenditures of approximately $300 million. I'll close by thanking our terrific community of customers and partners for their continued support. I look forward to seeing many of you in the investment community at our upcoming Financial Analyst Day on September 27 in San Francisco. With that, I'll turn the call back over to the operator to begin Q&A.
Operator, Operator
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Our first question comes from Kash Rangan with Goldman Sachs. Please go ahead with your question.
Kash Rangan, Analyst
Thank you very much, and the energy on the call is just so palpable. It looks like there is a lot of new leadership changes. Congrats Zane on joining a great team here. I had one thing or maybe two things. The importance of data in the world of AI: you have data on 65 million professional workers. At a high level, how could you possibly monetize with AI the value of this data in the years ahead, and therefore its implications for the pricing power of Workday? And if you could, are there any pent-up areas within the portfolio that might have taken a bit of a seat back because of the caution in the spending environment? If that caution goes away, where do you see maybe geographies or product segments that could do even better in the year ahead? Thank you so much, and congratulations.
Aneel Bhusri, Co-CEO
So Kash, I'll take on the first part. Good to hear your voice. The data is really valuable because it lets us train the large language models. And what you'll see us do is have, with the large datasets, we can train the large language models. We can then do domain-specific large language models, and those are smaller and less expensive. And we turn around and use those models to either make our products more competitive or they're the basis of new SKUs like the Skills Cloud. I think you see us more in the mode of new SKUs like Skills Cloud rather than actually charging for any insight from the data; that it's the customer's data. They allow us to use it in an anonymized way, and we give them the results back. But I think what it allows us to do is train these large language models and then domain-specific ones that will create new SKUs.
Carl Eschenbach, Co-CEO
Yes. Just one quick add-on, then we'll talk about some of the other questions. Kash, great to hear your voice. And I think it's important to know that Aneel and Dave did, from the beginning, build this platform and built AI and ML deep into the platform. So it's been built in, and we've already seen a positive economic impact to Workday through our industry-leading customer set. Our renewal rates and competitive win rates remain strong because AI and ML are built in from the beginning. I think that's a differentiator for us against those 65 million users and $600 billion in transactions that we get on the platform a year. As it relates to your second question, maybe I'll start, Doug, and then you can jump in. We haven't seen any pullback due to any macro headwinds in any of the things we're selling into the market. If anything, I think our value proposition is only resonating more as people look to consolidate multiple products, sometimes called best-of-breed, onto best-of-suite platforms, and they're consolidating on top of Workday for both their financials and their HCM, and wrapping our adaptive planning product around both. So we continue to see strong momentum across the board. And you mentioned geographies; our European team continues to do quite well. We've talked about it the last couple of quarters, and our focus on international, and they continue to deliver for us. They're much more predictable and they are driving strong pipeline in EMEA. And then we'll still continue to work on APJ to grow that business out. Doug, do you want to add any additional color?
Doug Robinson, Co-President
I was reflecting on the caution that has emerged, particularly regarding cash. This level of caution remains prevalent, as evidenced by the increased scrutiny on deals. However, I want to highlight that we were very pleased with the performance of U.S. large enterprise. Carl mentioned that this success can be attributed to our execution, which has been strong across Europe in the first half of the year.
Kash Rangan, Analyst
Thanks, Doug.
Mark Murphy, Analyst
Thank you, and congrats on absolutely stellar performance. Zane, I'm wondering if you can dimensionalize at all the FINS quota capacity increase that you're bringing on board, or how much you could bring on just relative to the demand signals that you're seeing out there? And then for Carl or Aneel, I'm curious if you see more opportunities out there in the mid-market or perhaps sensing an inflection up at the Global 2000 level for some of the customers that might need to handle complicated currencies or legal entities, minority interest, country localizations, that type of an arrangement?
Zane Rowe, CFO
Sure, Mark. I'm happy to start and then hand over to Carl. As you point out, we're bringing on some significant amount of financial sellers as we see that opportunity, I'd say, both on the domestic side and on the international side. I'd say it's still early days there as we bring them on. Obviously, it will take some time for us to realize all those benefits, but it's clearly a focus area for us. I will tell you that the unit growth in FINS this quarter was tremendous and exceeded our expectations. So we're very pleased with the growth that we're seeing and optimistic about what we can do in the future there on FINS with the additional go-to-market capacity.
Carl Eschenbach, Co-CEO
Yes, Zane, thanks for that color. Yes, Mark, as you know, six months ago, we decided to put a big investment in the go-to-market side, specifically around FINS. And while it takes six to 12 months to get your reps up and ramped, we're seeing early indications of it providing significant leverage in the business. One of the ways it's turned up here this quarter, as Zane just talked about, is we saw really good growth in a number of new FINS units sold on a year-over-year basis into the market. But it's more than just selling FINS. We're also seeing the knowledge set that we have across the field now with financials actually impacting our full platform sales. Our full platform sales are only accelerating as we sell both HCM and FINS into the market at the same time. And we saw that specifically in your next question, in the medium enterprise business. The medium enterprise, we see full platform sales very regularly at this point. I think that's attributed to the build-out of our FINS sales force. And then the last thing I will talk about is the FINS sales force helps us continue to drive a land sale with planning. Planning continues to be a good product for us. We're landing with it, and it opens up the door for us to go back and sell both FINS and full platform into those customers that we landed with planning. So there is no doubt that the FINS build-out of the sales force is paying dividends. As it relates to the medium enterprise, we had a solid quarter in what we described as the medium enterprise segment. The highlight there was specifically we're seeing more and more full platform sales into that market segment, and we are pleased with their performance, specifically here in the U.S., and we're going to replicate that internationally as we build out the medium enterprise globally.
Brad Sills, Analyst
Oh, wonderful. Thanks and great to see the great results here. I wanted to ask one on the expand success that you're seeing here. I know Carl has been an initiative here to go back to the base here. Is there any color you could provide as to where you're seeing particular strength? There's so many modules within HCM and FINS that I would love to get some color from you as to where you're seeing success there. And then the second question would just be on the macro; you mentioned that deal scrutiny is still there. Is that outsized in the office of HR versus the office of CFO? Where might we see some potential acceleration coming out of the macro, and any differences there? Thank you.
Carl Eschenbach, Co-CEO
Yes, we appreciate the diversity and durability of our business model. We're still securing a significant portion of our business through new deals, which is exciting because it allows us to sell back into our customer base. This quarter, we balanced our performance between selling to existing customers and acquiring new ones, and we plan to continue focusing on this approach. We also discussed the addition of FINS sellers, who are assigned to either pursue new FINS deals or engage with our existing customers. This strategy is clearly effective for us. Regarding the macro environment, I'll provide a brief overview and then invite Doug to share his insights based on his daily interactions with customers. Our performance has remained strong over the last few quarters, as our sales team is adept at navigating the increased scrutiny they face. They are effectively managing the sales process, closing deals, and achieving successful outcomes. This success reflects both our talented global sales force and the strong value proposition we offer, as we continue to be the preferred platform for supporting customers' people and finances, their two most valuable assets. This is a result of good execution and a clear understanding of the sales cycle, along with our compelling value for customers and prospects. Now, I'll let Doug add any further insights on the macro environment.
Doug Robinson, Co-President
Yes. Thank you, Carl, and nice to talk to you, Brad. From a macro perspective, you asked the question whether it shows up in one area or the other, I think you meant between HCM or FINS, and I'd say not really. I think it's fair to say that the scrutiny on any dollar spent in corporate America or across the globe is getting that scrutiny. So it is sort of across the board. I would say, perhaps more pronounced – I don't know if 'scrutiny' is the right way to describe it in net new versus customer base; which is why the customer base has been such an important part of our motion over the last two years at the company. Which was your first question around expand. So in that motion, we really sort of see two key things. One is this notion of create and close, or what we call speed SKUs or speed solutions. Just to highlight there, Peakon planning, talent optimization tend to go quickly with time to value and tend to be really strong in quarters sort of create opportunities and close. But at the same time, we have our customers or the customer base doing larger, what I would describe as more strategic enterprise-type agreements. We talked about the expansions across Airbus, Lloyds Bank, Lowe's, and 7-Eleven this quarter. Those are already big customers committed to the platform but have taken on an even more strategic approach with us as they look to consolidate vendors and standardize on our platform.
Kirk Materne, Analyst
Thank you very much. I'll echo the welcome to Zane. Good to hear from you again. Carl, I was wondering if you could just double-click a little bit on international and what you're seeing in that region, maybe across some of the products. And I was wondering if you could also just talk about the investments that you're making today and sort of the opportunity for those to kind of come to fruition from a bookings perspective next year? I guess just a little bit more color on international would be helpful.
Carl Eschenbach, Co-CEO
I'll focus on EMEA, which both Doug and I mentioned earlier. Over the last couple of quarters, we've shared that we have brought in new leadership across the region, specifically in the U.K. and France. We've strengthened the leadership team, and they are successfully attracting more talent. This is beginning to yield positive results. We are noticing early indicators of a strong and more predictable pipeline than in the past. The business has become more predictable as they gain control over it, successfully selling both HCM and financial products. Additionally, similar to trends in the U.S., the EMEA market is predominantly a medium enterprise business. They excel at selling full platforms in EMEA where customers recognize the value of integrating HCM and financials, including comprehensive planning for complete platform sales. We're definitely seeing positive momentum. While we have significant competitors nearby, our competitive win rates across the market, even in the face of these competitors, remain strong, and our discounting strategy is also effective. The team is executing well and taking a decisive stance in the market. We are very pleased with the progress in EMEA. In APJ, the past quarter was decent, but there is more work ahead. We see great potential in the APJ market and will continue to invest in resources for our go-to-market strategy, while also localizing and adapting our products to better serve some of the emerging markets we are targeting in APJ.
Alex Zukin, Analyst
Thank you for taking my question. Carl, I'd like to start with you and then I have a quick question for Zane. You mentioned several interesting deals across various verticals, including state and local government. You also talked about a FedRAMP deal. Can you provide some insight into the growth of these verticals compared to financial services and retail hospitality? When do you expect sectors like state and local government, federal, health and life sciences, and education to reach a scale comparable to what you're seeing with financial services and retail hospitality? And then I'll have a quick follow-up for Zane.
Carl Eschenbach, Co-CEO
Yes. So thanks for the question, Alex. As you know, we don't break out or share specifically percentages on any given market segment or industry. But in this case, we did highlight our second $1 billion in annual recurring revenue business in retail and hospitality, which continues to be quite strong and growing. We had another really solid quarter in industries as a whole and specifically in higher education, we called out healthcare and financial services. In the government business, listen, we're still in the very early days of state and local government. I think there's only 15 states at this point who have decided to do a full platform replacement, which leaves 35 or 36 states up for opportunity for us going forward. We think we have a really good solution for that market. On the federal side, listen, we're just starting. We have FedRAMP moderate, and we said we were excited to see our first customer, a civilian agency, do a full platform rollout on our FedRAMP Cloud. We also said we were bringing in a new leader, a really seasoned leader to help us lead federal going forward. This is an area we'll continue to lean into. We do see opportunity in federal even without having FedRAMP high on the cloud. We have a lot of opportunities with existing agencies, and we see that as a rich market for us going forward.
Alex Zukin, Analyst
Around the early renewal dynamic that you guys are seeing this year. Clearly, solid benefit for Q2, 24-month subscription backlog. It sounds like there's also some benefit in the guide for Q3. Maybe just dimensionalize it and remind us like what's the customer activity? Is it an incentive that you're giving? Is it the macro? Like what's driving this? And do we think about this as a future headwind? Or do we think about this as an opportunity for co-terming and upsell? What's the right way to think about this?
Zane Rowe, CFO
Alex. Yes, I'll start and then let Carl chime in as well. As you pointed out, we're very pleased with the RPO growth on the 24-month side this quarter, which was 22.7% growth. But as we pointed out, for all the reasons Carl and Doug mentioned, we saw about 1.5 points of that from early renewals coming into the quarter, which is a terrific opportunity for us to interact and interface with our customers, as well as upsell them as well. So we're very pleased with the outcome in Q2. As we look to Q3, what we've done is taken a look at where our expectations are for Q3, which is included in that 21% increase as part of our guide. I'd say approximately one point of that as we look out to the next quarter right now is included in that 21%. We believe that activity will continue. Again, we’re thrilled with the activity. It means our customers are doubling down on us. They're leaning into that platform, and we couldn't be more pleased with that. As you point out, we've been running ahead of subscription revenue for some time on RPO. We would expect some variability related to subscription revenue in the future, but we welcome the early renewals, and we think it's a terrific opportunity for customers to continue to buy into the platform. Carl, I'll let you add to that.
Carl Eschenbach, Co-CEO
Yes. Thanks, Zane. Yes, Alex, we did have another really good quarter of selling back into our customer base. We talked about that earlier. That is what drives a lot of the early renewals. But I want to make sure it's clear to everyone; we don't incent our teams to drive early renewals. We incent our teams to work with our customers to add additional SKUs as they look to consolidate more and more on top of the HCM or the financials platform. So the demand is being driven by our customers, and then we go and we work with them in some cases where they add new SKUs. When they do, they actually do an early renewal and they've co-term their agreements, which drives the uplift that Zane talked about in our 24-month RPO. So we're not incenting people to do it; it's customer demand. They're looking to add more and more modules, and as we continue to innovate and bring new SKUs to market, we would expect this to continue going forward.
Keith Weiss, Analyst
Excellent. Thank you, guys, for taking the question and congratulations on a really strong quarter. I wanted to sort of extend on Brad Sills earlier question about kind of the upsell motion. It seems like you guys are having a lot of success there. Carl, when I think back to your time at VMware, VMware was a machine in terms of packaging and mechanisms for selling more solution into existing customers, and there's a huge part of that business. Are there sort of learnings or improvements that you guys can make in that hub sell motion that you could bring on board that could turbocharge this upsell effort even further from what we've been seeing thus far?
Carl Eschenbach, Co-CEO
Thanks for the question, Keith. I appreciate it. The teams are performing well in selling back into our customer base. This success is largely due to the distinct strategies that Doug and Patrick are implementing with two separate sales forces—one focused on existing customers and the other on new accounts. With our emphasis on customer-based sales, the teams are successfully introducing new SKUs to our current customers. Regarding potential changes, we are exploring various pricing and packaging options for our products in the future to make them more accessible for our customers and to simplify the sales process for our reps. However, at this moment, there are no significant new initiatives being implemented. The team is executing effectively, and our customers recognize the value of the new SKUs and the advantages of consolidating on our platform. Therefore, I don't anticipate any immediate changes. We are continuously seeking innovative approaches in our go-to-market strategy, including future developments in pricing and packaging.
Doug Robinson, Co-President
Keith, I would just add, we continue to obviously invest in this area. It's one of tremendous opportunities for us, and we spend a fair amount of time looking at it and thinking about what's the next best opportunity for the customer to recognize value and, of course, in turn for us to do the same. So it's an area that we continue to see good progress on.
Brent Thill, Analyst
Carl, earlier in the year, you unveiled a new partner referral program. Maybe it's too early to see the fruits of this new program, but I'm curious if you are seeing what you're seeing and ultimately what over the next six to nine months with this partner program?
Carl Eschenbach, Co-CEO
Yes, sure. Thanks, Brent. Good to hear from you. We did launch a new partner program. There are many facets to it, including technology arrangements and collaboration on the technology front, including co-sell and resale. We rolled out a referral program. I will say we're seeing early signs of the customers really leaning into this new program. They're getting value because they're innovating on top of Workday, leveraging things like Extend to expand their market opportunity with us as well. So the resale program, that's Phase 2, but the co-sell and referral program has kicked off, and we're seeing a nice uplift in referrals from our partners on a global basis. Another thing we did is we launched a partnership, if you recall, Brent, with AWS, and we're selling to the marketplace. We've seen several opportunities in Q2 that were driven from that partnership with AWS as people are looking to burn down the credits they have with AWS today. So overall, we're very excited about the partner program. We had a big partner conference just last month. We had over 3,000 people joining us at our Altitude conference, where we spent more time articulating our new program and sharing with them how they can monetize the Workday platform to sell more services and innovative solutions, and also help us drive net new outcomes and get paid for it.
Karl Keirstead, Analyst
Thank you. Welcome aboard Zane; I'll direct this one to you. As you mentioned, the difference between the 24-month backlog and the subscription revenue growth has historically been quite small, but it has increased significantly in recent quarters to three to four points. I'm curious why that is and over what timeframe you think that gap will close. It might be partly due to the early renewals you indicated, but there could be other factors as well.
Zane Rowe, CFO
Certainly, Karl, it's great to hear from you. As we mentioned, we are very pleased with the program we have in place, and the additional backlog and performance of RPO has surpassed our expectations over recent quarters. This is driven by several factors. Both Carl and Doug discussed the importance of our relationship with customers and the opportunity to expand our SKUs and maintain relevance with them, which is why we are satisfied with our performance in that area. Some of the variability we noted in education and government contracts typically has a longer duration, leading to natural extensions. In many cases, especially when we look at the top-line growth of backlog and RPO, we see significant increases due to that mix shift. Another dynamic is the early renewals we mentioned, providing an opportunity to engage more deeply with customers and sell more SKUs. For the third quarter, we believe that our expectations and activity level from the second quarter were higher compared to what we anticipate for the third quarter. This also depends on where Doug's team focuses their efforts, as we are preparing for a seasonally strong fourth quarter. We like this approach and see it as a chance to build longer and more sustainable relationships with our customers. We expect this will be reflected in our results. However, this may introduce some variability when looking at the difference between backlog and subscription revenue. Our primary focus remains on driving continuous growth in the business, specifically targeting long-term subscription revenue. I hope that clarifies things.
Karl Keirstead, Analyst
Yes, it does, Zane. Thank you.
Brad Zelnick, Analyst
Great, thanks very much for taking my question. There's a lot of goodness in the results and the message. So I'll echo my welcome to Zane and congrats to you all. My question is actually for you, Zane; in your comments, you've said that Workday plans on maintaining a disciplined approach to investing in long-term growth while expanding margins, which I think is music to everyone's ears. But can you expand on what that means to you, and if there's any sort of framework or even rule of thumb that we should consider in the years ahead?
Zane Rowe, CFO
Yes, it's great to connect with you. I believe we're in a unique position as a company to focus on making strategic investments. Carl has mentioned several areas of opportunity, including partnerships, international markets, defense, and products. We have the chance to really capitalize on our total addressable market and the growth potential across our platform. From a financial perspective, we can make informed investments that will support growth in our products, especially in areas like AI and machine learning. On the go-to-market front, we have a balance of 75% domestic and 25% international, which presents significant opportunities for international growth, especially in EMEA, as Carl pointed out. Despite some uncertainties, we've identified great opportunities and have experienced positive growth there. I'm optimistic about leveraging our financial resources to make investments that will drive top-line growth. As I indicated regarding our remaining performance obligations, we anticipate substantial growth there as well. Additionally, we are investing in promising areas that will contribute to long-term revenue growth and subscription revenue globally. Carl, would you like to add anything?
Carl Eschenbach, Co-CEO
Yes. No, I think you said it well, Zane. We continue to invest on the go-to-market side, but I want to make sure everyone knows we're investing heavily on the product and technology front as well. Aneel's leading that charge with investments in our platform; we continue to invest to drive innovation here at Workday, and we're leaning into the AI and ML opportunity, which we think will bear fruit in the future. The other thing to think about is how we get operating leverage from AI and ML internally. We think by using these technologies, we can actually drive better operating margins, which allows us to reinvest in go-to-market and products in the future. So there's a kind of a flywheel effect we can get from the benefit of AI and ML.
Michael Turrin, Analyst
Hey, great. Thanks, congrats from me as well on the results. You're getting a number of questions on the backlog metrics, but it's really the consistency of those metrics that continues to impress. You're guiding for low-20s growth again next quarter. So maybe you can expand on just what's helping sustain such a consistent growth profile in an inconsistent environment? And then going back to the international side, there were some encouraging commentary around EMEA, but the growth rate there still lagging a bit. So just wondering if there are signs you're seeing that can help the growth rate there and maybe pick back up and take some of the load off of the U.S. strength you're seeing? Thanks.
Zane Rowe, CFO
Sure. Yes, I'll start and then hand over to Carl. As we pointed out with backlog, it's really that relationship with the customer and the diversity of the business and the contract lengths that have helped support that. Doug's team has been interacting, interfacing with those customers, and leaning in more on the platform. That's what you see reflected in those RPO numbers. Our success that we've seen on the renewals has clearly helped our customers engage more, create more uplift, and extend the duration of our relationship with them. I think it's that compounding effect you've seen over the last number of quarters. Again, I would highlight that we lean in there, but we wouldn't always expect, as we look out for the remainder of the year or even into next year, it's not that we're pushing the backlog. We're focused on subscription revenue and continued subscription revenue growth; the backlog just happens to be a byproduct of the interaction and interface that we have with those customers and the long-term relationship we've developed with them. Carl, would you maybe give a bit more detail?
Carl Eschenbach, Co-CEO
I think you're asking specifically on the first question about how we continue to do this. I think it's just the strength of the platform we have. Some headwinds in the market continue to face the people looking to do more with less; by doing so, they're looking for a total cost of ownership play. I think we provide that both on the HCM side and the financials as people consolidate what I said earlier, from best-of-breed to best-of-suite. It's also driving a different level of employee experience; we're helping drive productivity gains for our customers. We're helping them upscale and rescale individuals and delivering a new level of employee experience. By doing all of those, people continue to put more and more on top of our platform. Even if it is our own SKU, they're leveraging things like Extend to build other solutions on top of the Workday platform. This motion of selling back into the base is going to continue as people consolidate more onto us. As it relates to the international growth, again, we're highlighting we saw really good performance from our team in EMEA specifically. We're encouraged by both the consistency and predictability of their performance and the strong pipeline that we're building as we head into the second half of the year. Let me say, though, on the flip side, if I can, Michael, our U.S. team continues to drive really solid performance, outperforming in several key areas like large enterprise and across some of those industries we spoke about today. Our education business, healthcare, and financials. We're aiming to keep driving our U.S. business and watching them continue to perform better. We'll also try to drive international growth.
Rishi Jaluria, Analyst
Thank you for taking my question. It's great to see the ongoing strength and resilience in the business. I'd like to revisit the topic of generative AI and the opportunities it presents. There is clearly significant potential to leverage your data to improve the product and platform. Specifically, I want to discuss how generative AI can facilitate the transition from legacy on-premise solutions, making it easier for custom applications to migrate and for data to be transformed while maintaining its integrity. Additionally, I’m curious if you see an opportunity to use generative AI to lower the services attach rate and reduce the services mix over time. Any insights on how you can implement this would be greatly appreciated. Thank you.
Doug Robinson, Co-President
Yes. On the first part, we are definitely looking at generative AI to do a better job of data transfer and transformation from legacy systems. I think over time, it will be increasingly automated with AI. So that's already in motion. On the second one, it's definitely something we're exploring; how we bring AI into our services organization to speed up implementations. Stay tuned on that part. We're very focused on the products that we deliver to our customers. One thing to think about is how we build AI into the products to make them easier to implement. But that's a work in progress at this point. It's a great question.
Operator, Operator
That is all the time we have for questions. Ladies and gentlemen, thank you for your participation in today's conference. I'll now turn it over to Mr. Eschenbach for final comments.
Carl Eschenbach, Co-CEO
Thank you, operator, and thank you for everyone joining today's call. A special thanks to our workmates, customers, and partners around the globe that continue to fuel Workday's success. Q2 was another solid quarter, highlighted by the diversity and mission-critical nature of our business. We have an exciting opportunity ahead, and we are all well positioned as we think about the second half of the year and beyond. I look forward to seeing many of you at our upcoming Rising Conference and Financial Analyst Day in San Francisco. With that, I will hand the call back over to the operator to close today's call, and I hope everyone has a great evening.
Operator, Operator
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.