Workday, Inc. Q3 FY2025 earnings call

• Financial performance: Solid with 16% subscription revenue growth and 26% non-GAAP operating margins. - Customer relationships: Strong across industries, with growth in full suite, net new wins, and customer expansions in various geographies and segments. - AI innovation: Recruiter Agent had significant growth, Talent Optimization driving value, acquisition of Evisort for document intelligence, and Workday Illuminate launched. - Product growth: Extend product had rapid growth, Workday Wellness introduced for employee benefits insights, and international growth opportunities. - Management changes: Doug Robinson retiring, Rob Enslin joining as new President, Chief Commercial Officer.

In Q3, subscription revenue was $1.959 billion, up 16%. Professional services revenue was $201 million, resulting in total revenue of $2.160 billion, a 16% growth. US revenue totaled $1.62 billion and international revenue was $537 million, both growing 16%. 12-month subscription revenue backlog (cRPO) was $6.98 billion at the end of Q3, increasing 15%. Total subscription revenue backlog at the end of the quarter was $22.19 billion, up 20%. Gross revenue retention rates remained strong at 98%. Non-GAAP operating income for the third quarter was $569 million, resulting in a non-GAAP operating margin of 26.3%. Q3 operating cash flow was $406 million. During the quarter, $157 million of shares were repurchased. As of quarter end, $902 million remained under the buyback program. Cash and marketable securities ended Q3 at $7.2 billion. Headcount stood at nearly 20,500 workmates around the globe.

• Q4 subscription revenue expected to be $2.025 billion, growth of 15%; full-year subscription revenue of $7.703 billion, an increase of 17%. - Q4 cRPO growth expected to be between 13.5% and 14.5%. - Q4 professional services revenue expected to be approximately $155 million, full-year professional services revenue of $712 million. - Raised FY25 non-GAAP operating margin guidance to 25.5%, and anticipates a non-GAAP operating margin of approximately 25% in Q4. - Maintaining FY25 operating cash flow expectations of $2.350 billion and expecting capital expenditures of approximately $300 million. - FY26 subscription revenue anticipated to be approximately $8.8 billion, or about 14% growth. Q1 growth expected to be slightly lower due to leap year, with second half driven by strategic wins and emerging AI. - FY26 non-GAAP operating margin expected to be approximately 27.5%.

• Statements, particularly guidance, are based on current information and subject to risks, uncertainties, and assumptions that could cause actual results to differ materially. - Non-GAAP financial measures should be considered in addition to GAAP results. - Macro-economic environment, policy changes, and partner relationship changes may impact business.

Q: Kirk Materne asked about the deliverable issue in Q4 and its impact on FY26 guidance.

A: Zane Rowe said there were key strategic deals in Q3 with later revenue recognition, impacting Q4 and contributing to half a point of growth for FY26. Carl Eschenbach added about strategic wins like DIA and Workday Wellness being critical but not yet deliverable.

Q: Mark Murphy inquired about federal government budget efficiency and employment indicators.

A: Carl Eschenbach stated focus on federal government with opportunity in cloud migration, and Zane Rowe said no significant change in employment outlook from current expectations.

Q: Kash Rangan asked about AI monetization and growth confidence.

A: Carl Eschenbach mentioned momentum in AI with Recruiter Agent, Talent Optimization, and Extend Pro growth, and Zane Rowe noted line-of-sight into $8.8 billion for FY26.

Q: Michael Turrin asked about Q4 guidance, seasonal profile, and FX impact.

A: Carl Eschenbach said solid pipeline and momentum in AI solutions, Zane Rowe noted good cRPO and confidence in the guide.

Q: Brad Zelnick asked about Europe business.

A: Carl Eschenbach said thesis on Europe remains, with strong win rates despite headwinds.

Q: Brad Sills asked about strengths in government and higher ed.

A: Carl Eschenbach mentioned full suite wins, student product in higher ed, and health care wins.

Q: Karl Keirstead asked about Q1 performance and AI impact on second half acceleration.

A: Zane Rowe talked about leap year impact on Q1, Carl Eschenbach discussed AI momentum and acquisition of HiredScore.

Q: Brent Thill asked about guidance methodology and Rob Enslin's impact.

A: Zane Rowe said initial look at FY26 guidance, Carl Eschenbach confident in Rob's positive impact with smooth transition.

Q: Raimo Lenschow asked about cash flow and AI acceleration.

A: Zane Rowe said cash flow in-line with expectations, Carl Eschenbach talked about strategic deals' impact on revenue timing.

Q: Alex Zukin asked about election impact and delivery timing.

A: Carl Eschenbach said no impact on Q3 execution, and it's a timing element for revenue recognition of strategic deals.