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Workday (NASDAQ: WDAY)
Q3 2025 Earnings Call
Nov 26, 2024, 4:30 p.m. ET
Workday Reports Strong Q3 2025 Earnings with Robust Growth
Call Agenda
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks Summary
Operator
Hello. Welcome to Workday’s fiscal 2025 third quarter earnings call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of the call.
During Q&A, please limit your questions to one. I will now hand it over to Justin Furby, vice president of investor relations. Mr. Furby, you may begin.
Justin Furby — Vice President, Investor Relations
Thank you, operator. Welcome to Workday’s third quarter fiscal 2025 earnings conference call. On the call, we have Carl Eschenbach, our CEO; Zane Rowe, our CFO; Doug Robinson, our co-president; and David Somers, our chief product officer. Following prepared remarks, we will take questions.
Our press release was issued after the market closed and is available on our website, where this call is being simultaneously webcast. We want to emphasize that some of our statements today, particularly regarding guidance, are based on the information we have as of now and include forward-looking statements about our financial results, applications, customer demand, operations, and other matters. These statements involve risks and uncertainties that could cause actual results to differ materially. Please refer to the press release and risk factors in our filings with the Securities and Exchange Commission, including our fiscal 2024 annual report on Form 10-K and our latest quarterly report on Form 10-Q for more information.
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Furthermore, we will discuss non-GAAP financial measures that we believe provide useful insights into Workday’s performance. These non-GAAP measures should be viewed in conjunction with, and not as a replacement for, GAAP results. For additional details, including reconciliations with GAAP results, please check our earnings press release and investor presentation. This call’s webcast replay will be accessible on our company website for 90 days under the investor relations link.
Also, transcripts and our quarterly investor presentation will be available after the call on our investor relations website. The customer page on our site lists selected customers and is updated monthly. Our quiet period for the fourth quarter of fiscal 2025 begins on January 15, 2025. Unless otherwise noted, all financial comparisons in this call will refer to results from the same period in fiscal 2024.
Now, I will hand the call over to Carl.
Carl Eschenbach — Chief Executive Officer
Thank you, Justin, and thank you all for joining us today. I’m pleased to report that we delivered a strong financial performance in Q3, with 16% subscription revenue growth and non-GAAP operating margins of 26%. These results highlight the strength of our customer relationships across various industries, increased demand for our AI innovations, and the effectiveness of our global ecosystem.
Organizations increasingly consolidate onto the Workday platform for key reasons: reducing costs, simplifying operations, and leveraging AI in our top-tier HR and finance solutions. This value was reflected in our growth across the full suite and in our new customer wins, expansions, and geographical reach. Notably, government and higher education sectors were particularly strong, with about 90% of our wins in these areas coming from the full suite.
In Q3, the Defense Intelligence Agency expanded its partnership with Workday. Additionally, Lake County in Illinois, the Maryland General Assembly, New Jersey Institute of Technology, and the University System of Georgia chose Workday to modernize their systems, addressing rising constituent expectations. Meanwhile, professional and business services became the third industry to cross the $1B mark in annual recurring revenue, joining financial services and retail/hospitality. Clients such as Advantage Solutions, Connells Limited, and Flight Centre Travel Group chose Workday as well.
In healthcare, we celebrated a significant full suite win with CommonSpirit Health, one of the largest nonprofit healthcare systems in the U.S., alongside Community Health System and Valley Children’s Healthcare. From a product perspective, our HCM solutions are setting a strong pace for the future of work. In Q3, we secured wins with various companies, including Brookshire Grocery Company, IOI Group, ProMach, Royal Mail, and TeamHealth. We continue to enhance our financial business, driving more interest in our full suite.
Over 35% of our new core customers in Q3 opted for the full suite. Furthermore, we were recognized as a leader in the 2024 Gartner Magic Quadrant for cloud HCM suites for large enterprises, cloud ERP for service-centric companies, and financial planning software. Planning, in particular, had a successful quarter, with new or expanded relationships with notable organizations such as Deloitte, the Fitness and Lifestyle Group, Motion Picture Association, and Tenet Healthcare.
We were also excited that AWS went live on our planning services in Q3. With AI being a top priority for companies today, leaders are searching for the right partners to support their transitions. Workday is positioned well in this space, as our customers understand that investing in us equates to investing in AI, generating heightened excitement and demand for our solutions.
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Workday Reports Strong Q3 Growth Driven by AI and New Partnerships
The third quarter showed impressive results for Workday as more than 30% of customer expansions utilized the company’s AI solutions, particularly Talent Optimization, Extend Pro, and Recruiter Agent powered by HiredScore. Talent Optimization continues to grow swiftly, leading to a significant reduction in employee turnover of up to 39%. The Recruiter Agent also experienced outstanding success, securing deals with notable clients like Johnson Controls, Cox Enterprises, and UofL Health.
Remarkably, Workday’s team closed more new logos in Q3 than in its entire 12-year history, leading to a more than 400% increase in new annual contract value (ACV) compared to Q2. The Recruiter Agent is elevating the average selling price of the core recruiting solution by nearly 150%, signaling that customers are eager to invest in specifically tailored AI solutions that provide immediate value and require minimal IT resources.
This increased demand illustrates the vast opportunity for growth within this segment of Workday’s business. With over 70 million users under contract generating more than 800 billion transactions annually on the platform, Workday leverages the world’s largest HR and finance dataset. In an industry characterized by high-stakes and complex decisions, the depth and quality of this data offer a significant competitive advantage.
The power of this data, augmented by Workday’s contextual understanding, allows for unique value realization among competitors. At the recent Rising conference, the company introduced Illuminate, a next-generation AI initiative aimed at boosting productivity and enhancing human potential by streamlining manual tasks and transforming significant business processes. This launch included AI agents designed to simplify recruiting, expense management, and succession planning.
Currently, the Recruiter Agent is available, with the Expenses Agent expected to launch by year’s end, and the Optimize Agent coming next year, anticipated to pinpoint process bottlenecks and inefficiencies effectively. The potential this innovation brings is exciting.
Workday is also enhancing functionality through partner collaborations. A notable example is its partnership with Salesforce, along with the alliance with Microsoft on its M365 Copilot Employee Self-Service Agent. Workday recently updated its Assistant with AI capabilities, enabling employees to ask natural language questions regarding pay, benefits, and policies, facilitating faster and more personalized responses. Over 2,000 HCM customers are utilizing this feature, with one customer reducing HR case volumes by nearly 30%. This advancement could further boost productivity, appealing greatly to CIOs.
Unlike other solutions that require sensitive data to be transferred outside of secure systems, Workday keeps all data within its protected platform. The company has also recently finalized the acquisition of Evisort, a leading document intelligence platform, continuing to enhance its AI capabilities.
With over 80% of business data being unstructured, the challenge lies in effective utilization of information in contracts, invoices, and policies. Evisort’s AI empowers Workday customers to uncover vital insights from unstructured data, facilitating swifter, informed decision-making.
Interest in the Workday platform remains strong, with over 1,000 customers using Extend to create custom applications, making it one of the fastest-growing products in the company’s history. New ACV for Extend has more than doubled year-over-year. Extend Pro allows users to develop AI-first applications and has a selling price that is double that of Extend Essentials.
The partner ecosystem has seen remarkable growth, increasing nearly five times in 18 months, contributing over 10% to both net new ACV and pipelines in Q3. Rapid adoption of the Built on Workday program, launched less than six months ago, has already brought over 40 partners on board, with companies like Kainos generating revenue through this initiative.
At the Rising event, Workday introduced Workday Wellness, providing companies with real-time insights into employees’ usage of benefits, enabling tailored benefits programs within Workday HCM. Strategic partnerships with Guardian, The Hartford, Mutual of Omaha, and Unum underscore this initiative. International expansion remains a key focus for Workday.
In Q3, site visits in the UK, Ireland, Germany, France, and Japan highlighted the enthusiasm for Workday’s solutions. A strategic partnership with NTT Data in Japan and collaborations with Estia and Flight Centre in Australia have further strengthened Workday’s presence abroad. While the company continues to navigate scrutiny in the EMEA region, it celebrated a historic public sector win in the UK, generating interest from other public agencies.
Workday has also made significant strides in the enterprise sector with deals involving Decathlon in France and Goldbeck in Germany. The upcoming Rising EMEA event in Amsterdam promises to continue this momentum, hinting at the potential for substantial long-term growth in international markets, where currently only 25% of revenue derives from outside the U.S.
Before concluding, I’d like to share news regarding our leadership team. Doug Robinson, who has played a crucial role at Workday for 14 years, will retire at the end of the fiscal year, with the company continuing to benefit from his expertise as an advisor. We are excited to welcome Rob Enslin as our new president and chief commercial officer. Rob’s extensive experience and proven success in the enterprise space will be invaluable as Workday strives for continued growth.
The past quarter has been eventful. With a target of achieving mid-teens subscription revenue growth and expanding non-GAAP operating margins to 30% by FY ’27, Workday is poised for an exciting future.
Workday Reports Solid Growth with Strategic Focus on AI Innovation
By continuing to innovate and capture market share in its core sectors, Workday is effectively streamlining its operations. The company is particularly enthusiastic about guiding customers through the AI revolution to help reshape their businesses for the modern workforce. CEO Carl Eschenbach expressed gratitude to employees for their contributions in the latest quarter, emphasizing that Workday’s strong culture, ongoing innovation, and customer trust position the company well for sustainable growth.
As we move into Thanksgiving in the U.S., Eschenbach handed the call over to Chief Financial Officer Zane Rowe.
Zane Rowe — Chief Financial Officer
Thanks, Carl, and thank you to everyone for joining today’s call. In the third quarter, we made notable progress in key growth areas that set the stage for reliable and profitable scalability. Our subscription revenue for Q3 reached $1.959 billion, reflecting a 16% increase. Professional services revenue was $201 million, leading to total revenue of $2.160 billion, also up by 16%.
In the U.S., revenue totaled $1.62 billion this quarter, while international sales were $537 million, both growing at 16%. The company’s twelve-month subscription revenue backlog (cRPO) stood at $6.98 billion at the end of Q3, marking a 15% rise. Overall, the subscription revenue backlog reached $22.19 billion, a robust increase of 20%.
Notably, our gross revenue retention rates remained high at 98%. For Q3, our non-GAAP operating income was $569 million, yielding a non-GAAP operating margin of 26.3%. Operating cash flow came in at $406 million, which aligns with our expectations, though it decreased year-over-year due to stronger-than-anticipated collections previously noted in Q2. During this quarter, we repurchased $157 million worth of shares at an average price of $242.42 each.
At the end of the quarter, we had $902 million remaining under our share buyback program. Our cash and marketable securities totalled $7.2 billion. As of October 31, our global workforce numbered nearly 20,500 employees, as we continue to acquire talent in strategic areas. Some key wins during Q3 will result in product deliverables by fiscal year 2026.
This timing is expected to influence our near-term results, as these deals will not contribute fully to subscription revenue until next year. For the fourth quarter of FY ’25, we forecast subscription revenue to be approximately $2.025 billion, which would represent a 15% growth. The expectation for total subscription revenue for the year is $7.703 billion, up by 17%. We anticipate Q4 cRPO growth between 13.5% and 14.5%, along with professional services revenue close to $155 million, resulting in an annual total of $712 million.
As we balance investments in key growth sectors, a heightened focus on efficiency has led us to raise our FY ’25 non-GAAP operating margin guidance to 25.5%. For Q4, we predict a non-GAAP operating margin around 25%. It’s important to note that GAAP operating margins are expected to be roughly 20 percentage points lower than non-GAAP margins. Our estimated non-GAAP tax rate for FY ’25 remains at 19%.
We maintain our expectations for operating cash flow at $2.350 billion for FY ’25 and now estimate capital expenditures at approximately $300 million. We are making strides across our growth initiatives, especially within our partner ecosystem and AI development, supporting our medium-term goal of mid-teens growth. Looking ahead, fiscal year ’26 subscription revenue is projected to reach about $8.8 billion, signifying around 14% growth. It’s anticipated that first-quarter subscription revenue growth will be slightly below the overall FY ’26 rate due to the impact of a leap year, which is expected to reduce Q1 subscription revenue growth by just over 1 point.
However, we also expect a stronger growth rate in the latter half of the year, partially fueled by emerging AI initiatives and deliverables connected to strategic wins from Q3. We are focused on growth while enhancing efficiency, which encompasses expanding our global workforce, integrating AI, and refining processes. For FY ’26, our non-GAAP operating margin is projected to be approximately 27.5%, reflecting our commitment to long-term margin improvement. We are actively managing our share-based compensation, which is projected to decrease as a percentage of revenue over time. As we approach Q4, our focus remains on both immediate and long-term execution to establish a foundation for sustainable growth.
With that, I will turn it back to the operator to begin our Q&A session.
Questions & Answers:
Operator
[Operator instructions] Our first question comes from Kirk Materne of Evercore ISI. Please proceed with your question.
Kirk Materne — Analyst
Yes, thanks very much. Zane, could you elaborate on the deliverable issue for Q4? How significant is this in relation to your preliminary guidance for fiscal 2026? Some concern exists that this might suggest more of a persistent issue rather than a temporary one. Thank you.
Zane Rowe — Chief Financial Officer
Sure, Kirk. I’m happy to explain this. There were several strategic deals in the third quarter where product deliverables caused a delay in recognizing revenue. We anticipate these will ramp up throughout next year. For Q4, we’re looking at an approximate impact of $8 million to $10 million based on our historical revenue recognition. When assessing the second half of FY ’26, this could contribute about half a point to growth year-on-year. It’s also important to note that due to the leap year, we face about a 1-point growth impact entering Q1.
However, we expect positive momentum in FY ’26, with these strategic deals and others continuing to enhance growth beyond that period.
Carl, you may want to add to that.
Carl Eschenbach — Chief Executive Officer
Absolutely, Kirk. One critical deal is with the Defense Intelligence Agency (DIA). We’re developing a platform tailored for federal government needs, which requires distinct security levels. Revenue from these opportunities can only be recognized once delivered to the government, but winning these contracts positions us well in the federal sector. Another vital initiative is our Workday Wellness platform that plays a significant role going forward.
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Carl Eschenbach — Chief Executive Officer
We’re working closely with our wellness partners as they integrate their services into the Workday platform. Although we have established key partnerships with firms such as Guardian, The Hartford, Mutual of Omaha, and Unum, we are not able to roll these out just yet. This situation will impact our revenue recognition for the coming year.
Kirk Materne — Analyst
On the topic of Rob’s appointment, Carl, I assume he’s already on board. Considering the changes you’ve made since arriving, is there any intention to alter your partner strategy as we head into next year?
Carl Eschenbach — Chief Executive Officer
Thank you for your question, Kirk. I’ve known Rob for about 25 to 30 years. We both have deep roots in this industry. His extensive experience, particularly in international markets, is invaluable. Rob has lived in Japan and Europe, and he was instrumental in launching the SAP business in China.
We will miss Doug, but with nearly six months for Doug and Rob to work together, I don’t foresee any disruption in our business or our go-to-market strategy. Since Rob has established relationships with all of Workday’s current partners, his addition to the team is a significant advantage. We’re enthusiastic about the fresh perspective he will bring to our business moving forward.
Kirk Materne — Analyst
Thanks, Carl. Wishing you all a Happy Thanksgiving!
Carl Eschenbach — Chief Executive Officer
Thank you, Kirk.
Operator
Thank you. Our next question comes from Mark Murphy, JPMorgan.
Mark Murphy — Analyst
Thank you. Carl, during the analyst day, you mentioned that the U.S. federal business is reaching an inflection point. While you closed a defense agency in Q3, how do you think these agencies are interpreting the government’s stated plans to cut $2 trillion in spending? Could this impact their budgeting behavior going into next year?
Carl Eschenbach — Chief Executive Officer
Good question, Mark. As I noted, we are concentrating on the federal government moving forward because there’s significant potential. Over 80% of Human Capital Management (HCM) and Enterprise Resource Planning (ERP) systems remain on-premises and haven’t transitioned to the cloud.
We are positioning ourselves at a crucial moment when the urgency to improve efficiency is heightened. Supporting outdated on-premises systems won’t help agencies achieve their goals, so we anticipate this will work to our advantage as we pursue our federal contracts.
Mark Murphy — Analyst
That’s encouraging to hear. As a follow-up, since the recent interest rate cuts and the elections, have you observed any stabilization or uptick in employment indicators from your customers? I’m aware that the overall trend has been sluggish, but have you seen any changes in renewals or payroll runs?
Zane Rowe — Chief Financial Officer
We’ve noted a moderation in expectations early this year, Mark. I’m happy to say there hasn’t been a further downturn; instead, we have seen moderate stabilization. We haven’t experienced significant improvement either, but it aligns with our expectations as we plan for the future. Still, we acknowledge that increased scrutiny around deals remains a factor globally. Despite this, we are pleased with the momentum we’ve maintained through the quarter and expect to carry this forward into the next year.
Mark Murphy — Analyst
Understood. Thank you.
Carl Eschenbach — Chief Executive Officer
Thank you, Mark.
Operator
Thank you. Our next question comes from Kash Rangan, Goldman Sachs.
Kash Rangan — Analyst
Carl, with Rob joining, you’ll have two colleagues who hail from that background, so you might need to brush up on cricket! If you need help learning, I’m happy to assist.
Carl Eschenbach — Chief Executive Officer
Thank you, Kash.
Zane Rowe — Chief Financial Officer
Exactly, Kash.
Carl Eschenbach — Chief Executive Officer
I appreciate it! I know a bit about cricket, and I enjoy the shorter matches.
Kash Rangan — Analyst
Keep training! Now back to the business at hand. It’s encouraging to see the company reaffirm its 15% growth rate for fiscal years ’26 and ’27. However, as the numbers increase, maintaining that growth percentage can be more challenging. Are we anticipating any significant shifts, such as AI monetization or improvements in core operations, that might contribute to this growth in ’26 and ’27? Please recap why you feel confident in these projections over the next couple of years.
Carl Eschenbach — Chief Executive Officer
Thank you, Kash. Let me highlight a few key points that underline our confidence in maintaining a mid-teen growth rate over the next few years while also expanding operating margins. First, we achieved solid results in Q3, following a successful Q2.
At our Rising Conference last September, we introduced Workday Illuminate, our next-generation AI platform. The excitement around this new offering carried on throughout the quarter. We saw remarkable traction with our AI solutions, notably our Recruiter product, which gained more clients in Q3 than in the previous 12 years combined. Additionally, we experienced increased selling efforts aimed at our existing customer base with our AI solutions.
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Workday’s Steady Growth Driven by AI Solutions and Strong Pipeline
Sales Strongly Tied to AI Integration
Workday reports that over 30% of their sales to existing customers include AI solutions, particularly the Recruiter Agent, Talent Optimization, and the Extend Pro platform. The CEO, Carl Eschenbach, highlights the momentum in their AI capabilities and the success in the company’s overall sales strategy. He noted that more than 35% of new customer landings this quarter involved comprehensive suite sales. With plans to expand in the U.S. federal government and medium enterprises, Eschenbach expresses confidence in maintaining mid-teens growth over the next couple of years.
Focus on a Strong Quarter Ahead
As they approach Q4, the company’s leadership emphasizes the importance of delivering strong results. Eschenbach assures stakeholders of a solid sales pipeline, which aligns with their ambitious guidance for the upcoming quarter. Further updates regarding their fiscal year 2026 outlook will be provided post-Q4 earnings call.
Positive Financial Outlook Despite Economic Headwinds
Chief Financial Officer Zane Rowe notes the ongoing momentum within the business and the strategic deals already secured. With an eye on future revenues, Rowe mentions a projected $8.8 billion, reinforcing confidence in upcoming quarters. Analysts have raised inquiries regarding quarterly guidance, with specific focus on any potential foreign exchange impacts and broader market conditions.
European Market Observations
CEO Eschenbach acknowledges mixed reports from partners in Europe but remains optimistic about Workday’s position there. He emphasizes that 50% of their addressable market lies outside the U.S. Despite facing economic challenges in the EMEA region, he reports strong win rates for major deals. “Our leadership team is stronger than ever,” he assures, emphasizing their commitment to innovation and customer engagement.
Diversity in Government and Higher Education Strengths
As the discussion shifts to Workday’s presence in government and higher education sectors, analysts inquire about which applications are proving effective. With ongoing success in these verticals, Eschenbach notes the success of integrated solutions that combine financial management and human capital management functionalities. The company continues to identify and nurture emerging applications that could represent future sources of strength.
Concluding Thoughts
As Workday moves forward, the integration of AI, solid sales strategies, and a strong emphasis on customer needs positions the company well to navigate potential challenges while fostering growth across diverse markets.
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Workday CEO Discusses Business Growth and AI Strategies in Recent Call
Carl Eschenbach — Chief Executive Officer
Thank you for the question, Brad. Historically, we’ve had a strong presence in government sectors, including state and local levels and higher education. In this quarter, we noted that 90% of our wins included our full suite and platform offerings.
When working with government entities and higher education, decisions often favor full platforms and suites simultaneously. Additionally, our student product is gaining ground in higher education, giving us a competitive edge. While our healthcare segment didn’t see the same growth rate as previous quarters, we’re still succeeding there.
For instance, we recently completed one of the largest deals in healthcare over the last year with CommonSpirit. This success highlights our strengths in HCM, financials, and supply chain products. These three industry sectors—government, education, and healthcare—should continue to drive momentum due to their preference for full-suite solutions, including specialized products like student information systems and healthcare supply chains.
Brad Sills — Analyst
Thank you, Carl.
Operator
Thank you. Our next question comes from Karl Keirstead, UBS.
Karl Keirstead — Analyst
Thanks. Zane, I have a couple of questions regarding the outlook for the next year. Starting with Q1, you mentioned it is likely to be under 14%. That represents a decline of about 150 basis points from the second half of this year. This sharp drop seems unusual. Can you explain the expected performance for Q1? Secondly, regarding the anticipated acceleration in the second half, could you clarify whether this is primarily driven by strategic wins or emerging AI technologies? Also, can you provide insight on how you plan to monetize these opportunities?
Zane Rowe — Chief Financial Officer
Certainly, Karl. In Q1, we’re facing a leap year comparison, which accounts for about a 1-point difference. While we haven’t provided detailed forecasts for FY ’26, we do anticipate some pressure in Q1.
The growth should build throughout FY ’26. Regarding AI and strategic wins, they comprise a small part of our projected 8.8 billion, but I can confirm that strategic wins are expected to contribute about half a point of improvement in the second half. We foresee some uplift in growth as the year progresses.
I’ll now hand it over to Carl for insights on our AI momentum and prospects for FY ’26.
Carl Eschenbach — Chief Executive Officer
Thank you, Zane. On the AI front, we recently completed our acquisition of HiredScore and have seen promising sales of the Recruiter Agent to our customer base, which consists of over 4,000 customers. We have only just begun to penetrate this market.
Alongside this, we’re seeing growth in our Talent Optimization solutions and other products like Extend Pro, which offers an AI API gateway for developers. These developments indicate strong customer demand for AI solutions from Workday. Moreover, we have three new AI agents launching soon, including an Expense Agent, a Successor Agent, and an Optimized Agent, all designed to integrate directly into our existing platform without needing data extraction, setting us apart from most AI offerings in the market.
We believe these innovations will positively impact bookings and revenue as we enter the new year. Additionally, our Evisort platform, which focuses on the scanning and analysis of documents, is also generating excitement based on early feedback.
Karl Keirstead — Analyst
Thanks for the clarification, that’s helpful.
Operator
Thank you. Our next question comes from Brent Thill, Jefferies.
Brent Thill — Analyst
Zane, regarding your guidance, are you using the same methodology as before, or are you taking a more conservative approach due to previous revisions? Can you shed light on your outlook process?
Zane Rowe — Chief Financial Officer
Thanks, Brent. Our current outlook for FY ’26 reflects our line of sight. Due to uncertainty regarding some AI opportunities, we decided to provide a narrower range. We are confident in achieving approximately 8.8 billion, although we recognize it’s early in the AI development phase.
As we consider next year, remember that the leap year complexity will also influence results. In the second half of the year, contracts already in place should support growth, but this is just an initial perspective.
Brent Thill — Analyst
Understood. Carl, with Rob’s arrival, what should investors expect in terms of potential changes? How can you assure us that his addition won’t disrupt your current strategies and operations?
Carl Eschenbach — Chief Executive Officer
Thank you for the question. I’m very optimistic about the positive impact Rob will have due to his extensive experience in our industry. Additionally, Doug will remain involved for the next six months, facilitating a smooth transition and ensuring continuity in our operations.
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Workday CEO Discusses AI Strategies and Financial Guidance in Recent Analyst Call
Positive Outlook on Team Changes
During the call, Workday’s CEO, Carl Eschenbach, expressed confidence about the transition of a new team member. “I’m not nervous at all about any impact from him joining the team,” he said, noting that he believes the change will yield only positive outcomes for the company moving forward.
AI Monetization Strategies Explained
Raimo Lenschow from Barclays asked about the company’s approach to integrating AI into their services. Eschenbach explained that Workday employs a multi-faceted strategy for monetizing AI. For starters, customers view their investment in Workday as an integral part of their AI strategies. This perception, he noted, shows in the company’s increased customer win rates, expansion opportunities, renewal rates, and overall customer satisfaction.
Workday’s platform already includes extensive AI features. As they launch new solutions like Recruiter Agent, customers are willing to invest due to the significant productivity gains seen—up to 30% in recruiting productivity, a major expense for companies. Similarly, more than 3,000 customers leverage Talent Optimization to enhance internal mobility and minimize employee turnover.
Moreover, the Extend Pro platform has shown significant interest, leading to increased sales compared to their previous Extend Essentials platform. Eschenbach detailed that new products and agents would be priced according to the value they deliver to customers, signaling a strong strategy in AI monetization that should support sustained growth.
Cash Flow Guidance Remains Steady
Next, Zane Rowe, Workday’s CFO, addressed Lenschow’s inquiry regarding cash flow guidance. Rowe noted that the company’s previous quarter showcased strong collections, balancing over time to a more normalized rate. He pointed out that this fiscal year included an extra pay period in the fourth quarter, which had been anticipated. Although it was acknowledged that there was a dip of about 10% in Q3, Rowe remains optimistic about ongoing cash flow generation, maintaining the guidance as planned.
Market Conditions and Customer Engagement
Alex Zukin from Wolfe Research asked about potential impacts from recent elections on deal closures. Eschenbach responded that the company experienced favorable execution in Q3, which met internal expectations. He mentioned significant deals were closed, and momentum regarding AI solutions continued to grow. The conclusion of the election season removed potential distractions, without presenting noticeable changes in deal scrutiny before or after the event.
Understanding Revenue Recognition Timing
In his follow-up question, Zukin wanted clarity on how changes in deliverables during deal negotiations affected revenue recognition. Eschenbach explained that strategic deals can sometimes result in altered timing for recognizing revenue. While some deliveries happen sooner, others might extend later. Despite these nuances, the CEO reassured that the transactions were strategic, suggesting long-term growth potential, though he noted that the timing variations shouldn’t greatly influence the company’s overall Annual Contract Value (ACV).
Workday’s Q3 Conference Call Highlights Key Achievements and Future Goals
CEO Carl Eschenbach Reflects on Growth and Challenges
Carl Eschenbach — Chief Executive Officer
Correct. In some situations, capturing the cRPO element can be challenging due to the nature of the deal. However, it is primarily a matter of timing. That’s precisely it.
Analyst Alex Zukin Thanks the Team
Alex Zukin — Analyst
Perfect. Thank you, everyone.
Carl Eschenbach — Chief Executive Officer
Thank you, Alex.
Final Remarks from the Operator
Operator
Thank you. Ladies and gentlemen, we appreciate your participation in today’s conference. I will now hand things back to Mr. Eschenbach for final remarks.
Gratitude and Future Outlook from Workday’s CEO
Carl Eschenbach — Chief Executive Officer
Thank you, operator, and a big thank you to everyone who joined our call today. Before we wrap up, I’d like to express our gratitude to our Workmates, customers, and partners worldwide who contribute to Workday’s success. We remain confident that Workday can become one of the most lasting and profitable software companies of our era. Our focus is on achieving sustainable growth and enhancing our operating margins.
This quarter, we successfully achieved our goals while continuing to execute our platform strategy, aimed at providing the best AI solutions for our clients. Thank you once more. To those in the U.S., Happy Thanksgiving! I will now turn it back to the operator to close out our call.
Thank you, everyone.
Operator
Thank you. This concludes today’s teleconference. [Operator signoff]
Duration: 0 minutes
Call Participants
Justin Furby — Vice President, Investor Relations
Carl Eschenbach — Chief Executive Officer
Zane Rowe — Chief Financial Officer
Kirk Materne — Analyst
Mark Murphy — Analyst
Kash Rangan — Analyst
Michael Turrin — Analyst
Brad Zelnick — Analyst
Brad Sills — Analyst
Karl Keirstead — Analyst
Brent Thill — Analyst
Raimo Lenschow — Analyst
Alex Zukin — Analyst
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