During its recent earnings call, Workday (NASDAQ:WDAY) CEO Carl Eschenbach outlined the company's strategic focus on investments to drive growth in key areas, despite a cautious spending environment. Workday is targeting growth in financials, international markets, and through partner channels, with an emphasis on cloud migration for financial systems.
The company has seen success with its investments in financials and workforce planning for medium-sized enterprises, and plans to continue capitalizing on these opportunities. Workday is also expanding its AI capabilities, including the recent acquisition of HiredScore, and is exploring new routes to market.
While the company had previously projected a 20% growth rate, it now aims for a 17% to 19% growth over the next three years, with an expectation to increase operating margins by 500 basis points.
Key Takeaways
- Workday is focusing on growth in financials, international markets, and partner channels.
- The company sees cloud migration for financial systems as a significant opportunity.
- Investments in sales capacity for financials may have longer yield times due to extended sales cycles.
- Workday has experienced success in the past year with its focus on financials and workforce planning for medium-sized enterprises.
- The company is expanding its AI capabilities, including an AI marketplace and the acquisition of HiredScore.
- Workday is exploring new routes to market, including selling on the AWS marketplace and partnering with Insperity (NYSE:NSP).
- Despite a cautious market, Workday aims to maintain a growth rate of 17% to 19% over three years while expanding operating margins by 500 basis points.
Company Outlook
- Workday is confident in its ability to grow by 17% to 19% in the next three years.
- The company plans to expand operating margins, aiming for 25% or higher in the coming years.
- Investments will continue as long as opportunities are present, with a readiness to pull back if they do not pay off.
Bearish Highlights
- The cautious spending environment may impact the rate at which financials move to the cloud.
- The company has acknowledged the extended sales cycles for large enterprises, which could delay returns on investments in sales capacity.
Bullish Highlights
- Workday has seen a growing pipeline, increase in new logos and new ACV, and a rise in whole platform sales.
- The company is doing well against competitors like Oracle (NYSE:ORCL) and SAP, particularly in the healthcare and education sectors.
- Competitive win rates have been increasing, indicating strong market positioning.
Misses
- Workday did not have a clear line of sight to achieving the previously projected 20% growth rate.
Q&A Highlights
- Questions were raised about the company's growth projections and investment strategies.
- Workday reaffirmed its commitment to investments in financials, AI, and partner channels, while also emphasizing cost management and the potential to pull back if necessary.
Workday's strategy, as outlined by CEO Carl Eschenbach, demonstrates a deliberate approach to growth, balancing investment in future opportunities with current market caution. The company's focus on expanding its AI offerings and international presence, along with a strong value proposition in cost savings and productivity gains, positions it to navigate the challenges of longer sales cycles and cautious spending.
Workday's ongoing investments and strategic partnerships are set to support the company's growth ambitions, aiming for a significant expansion of operating margins in the near future.
InvestingPro Insights
Workday's (WDAY) recent earnings call has highlighted their strategic initiatives and growth targets. To provide a deeper financial context to these strategies, let's consider some key metrics and insights from InvestingPro.
In terms of financial health, Workday holds more cash than debt on its balance sheet, which is a positive indicator of the company's ability to invest in growth and weather economic downturns. This aligns with the company's announced plans for strategic investments despite a cautious spending environment. Moreover, the fact that 23 analysts have revised their earnings upwards for the upcoming period suggests a consensus view that Workday's growth initiatives are likely to bear fruit.
From a valuation standpoint, Workday is trading at a high earnings multiple, with a P/E ratio of 52.48 as of the last twelve months leading up to Q4 2024. This could be attributed to investor confidence in the company's future earnings potential, particularly in light of their AI expansion and international market penetration.
InvestingPro Data further illuminates Workday's financial landscape:
- Market Cap (Adjusted): $72.79B USD
- Revenue Growth LTM Q4 2024: 16.78%
- Gross Profit Margin LTM Q4 2024: 75.6%
These figures reflect Workday's robust market position and its ability to generate profit from its revenues, which is crucial as the company aims to increase operating margins by 500 basis points over the next three years.
For readers looking to delve deeper into Workday's financials and strategic positioning, there are 15 additional InvestingPro Tips available at https://www.investing.com/pro/WDAY. These insights can help investors make more informed decisions, and by using the coupon code PRONEWS24, they can get an extra 10% off a yearly or biyearly Pro and Pro+ subscription.
Full transcript - Workday Inc (WDAY) Q1 2023:
Keith Weiss: Excellent. Thank you, everyone, for joining us this morning. My name is Keith Weiss. I run the U.S. software equity research franchise here at Morgan Stanley. Very pleased to have with us from Workday, Carl Eschenbach, the CEO. Carl, thank you for joining here.
Carl Eschenbach: Pleasure to be here.
Keith Weiss: Was here last year with you as well, and it's good to be back. We like repeat customers here. Before we get started, for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales rep. And from the Workday side of the equation for important Workday disclosures, please see the company's IR website. So Carl, like you noted, it's been a full year CEO. You've definitely pointed out in the investor community areas where you guys can lean in a little bit more aggressively, areas of potential strength that we hadn't been seeing. Maybe you could give us a kind of a rundown of what are the top two or three things you've learned about Workday over the last year really being entrenched in the day-to-day operations?
Carl Eschenbach: Yes. Sure. Thank you, Keith, and thanks again. Great to see a lot of people here bright and early on a Monday morning. So first and foremost, it's been an incredible 15 months. I think it's gone better than I could have ever even anticipated. Aneel is now in the Exec Chair role. And I think the year we had his co-CEOs was really well done. I think -- if you want a blueprint for a co-CEO model transitioning to a CEO and Exec Chair with the Founder, I think we are probably the blueprint for doing so. And over the last 15 months, I've spent a lot of time with three different parties around the world, our customers, our partners, and our employees. And I formed an opinion after meeting with so many people about where we should make investments. Let's start with the customers. Our customers truly trust us as a business partner. If you think about what we do, we support their most mission-critical and most important assets, their people and their finance. And what I've learned is spending time with customers is that they continue to lean into the partnership. They continue to think of us as a platform and an app simultaneously. They continue to ask us to bring new solutions to market that they can leverage from Workday. And that's led to a lot of our thinking about how we invest in the business going forward. On the partner side, we have a great partner community. But historically, our partner community was really focused on driving deployments of the Workday platform. But we've taken a different approach, and we've leaned into the partners in a significantly different way and think about them as an ecosystem of partners to help us drive growth, to help us drive innovation, to help us drive deployments. Last year alone, our partners did a great job deploying our platform, 95% of Workday platforms, ERP or HCM were deployed on time and on budget to our partner ecosystem. At the same time, I think we need to open the aperture to figure out how we can leverage and to drive software subscription growth and to drive innovation as well. And then the last are our Workmates, almost 19,000 Workmates around the world. I couldn't be more proud of how they have executed in the last year. Keith, to be honest, we brought a lot of change, a lot of transition, a lot of new strategies, a lot of new priorities to the company and they've been very good at digesting them. And one thing I've learned about the power of the Workday values and culture is if you align them on a very specific mission, they can crush it. And I think if you look at our results throughout FY '24, I think we had a hell of a year capped off with a solid Q4, and I think we've set a really long-term durable growth profile for the company that I think will continue for many years to come. So that's kind of formed my thinking about where we're going to invest going forward to continue to drive the business.
Keith Weiss: Got it. So that aligns with -- at the Analyst Day, you talked to us about three key areas of growth that you see for the company on a go-forward basis. So is the financial opportunity, the international opportunity, and the partner channel. I was hoping we could dive into each one. Maybe starting with financials. Can you kind of lay out for us like not just the size of the opportunity, because we all know core financials is a big market and it's a well-established market. But why now? Why is now the right time to be leaning in to investing further? And what type of investments do you think you can make to help catalyze Workday's ability to go after that opportunity?
Carl Eschenbach: Yes. So starting with financials, you're right, it's a very large opportunity. It's more than 50% of our addressable market globally. In Workday, since our early days of the company, we have been building out a financials platform. It's not like this is new. We've been building the platform for well more than a decade. So on the technology side, I think the product has evolved to now being able to service some of the largest companies in the world on the financial side. At the same time, a year ago, when we looked at this, I didn't think we were investing enough on the go-to-market side to capture that opportunity. So we leaned in quite heavily and really built out a go-to-market organization, both direct and indirectly with our partners to capture the financials opportunity. And I think that is coincided with now there is an openness from CFOs on a global basis to no longer say, should I move to the cloud, my financials and my system of record around financials, it's now when and how fast can I get there. We estimate that only 20% to 25% of financials, right, has moved to the cloud, which represents a huge opportunity for us going forward. So we think our go-to-market investment is inflecting with the financial community saying I'm ready to move to the cloud, because they'll get better data insights, able to get more innovation. And quite frankly, it will cost a lot less by running in a cloud environment as compared to running on-premise and maintaining those legacy ERP or financial systems. And then there's another dynamic that's actually helping us as well. We have some competitors out there who are saying to their customers, you need to move off your existing legacy platform to a new platform. And even when they're asking our customers to do that, they're not moving directly to the cloud. They're moving to an on-premises upgrade by 2027. And as that happens, it's opened up a tremendous opportunity for us to engage with customers a lot more than we probably would have otherwise if they had enforced this migration. So I think our competitors, it's the cheapest marketing opportunity we've had this year is to leverage some of their voice into the market. And then the last thing I'd say is, as you know, with our penetration rate and our success around HCM, we're seeing people realize the benefit of having a single platform across both HCM and financials to do financial and people planning and actually leverage its common data set, especially when it comes to AI to drive better insights and output from moving financials to the cloud in conjunction from -- with HCM. So there's a number of different factors. And I think they're all coming together. Those investments we started last year are about a year old. They take a while to really obviously materialize, but it's something we're going to continue to invest in as we go into FY '25.
Keith Weiss: Got it. And you bring up an important point at the end there about the time it takes these investments to mature.
Carl Eschenbach: Yes.
Keith Weiss: I think one of the conversations we're going to be having a lot throughout the TMT conference is that of timing. Where should investor expectations be in terms of how quickly can these things roll out, whether it's investments in sales capacity or investments in generative AI. When it comes to the investments that you're making in sort of the sales capacity of the go-to-market around the core financials channel, how should investors be thinking about the time frames for payoff on that or the time frames that we could actually see those investments start to yield better growth?
Carl Eschenbach: Yes. On financials, as you know, some of these financial sales cycles are quite long. They could be 12 to 18 months long when someone says, "Hey, I'm going to invest in a major capital project to move my financials to the cloud, especially as you go up into the large enterprise and the bigger companies." In the mid-market, it can happen pretty fast. That being said, these investments in the buildout of this direct sales force will take time. We're seeing early signs of that investment paying off, which is why we continue to lean into it, but keep these sales cycles, right, being as long as they are. Sometimes it leads to productivity ramp, it can be 12 to 18 months long for this dedicated sales force. And that's specific to the enterprise. In the medium enterprise, we're seeing it much shorter. It can be anywhere from nine to 12 months. So I think we're building this for the long term. We're not building it for the short term this quarter or next quarter. These investments will pay off and we look at it every single quarter across four dimensions of this financial investment. Number one, what does our pipeline look like? And as long as it continues to build, we'll continue to lean in. We look at it in a number of new logos. Last week, on our earnings call, we said we saw a nice uptick in new logos for financials. We look at it in new ACV. We also saw a big uptick in new ACV on a year-over-year basis. And the fourth, which is a direct impact to this build-out of our financials go-to-market strategy is we are seeing a significant uptick in what we describe as whole platform sales. Whole platform sales is when a customer comes and says, "I'm going to buy HCM and I'm going to buy financials at a single time." And the good thing is, today, we sell to three different personas, Keith. We sell to the office of the CHRO. We sell to the office of the CFO. And we also now sell to the office of the CIO. And then you've been in the medium enterprise, they buy everything at once, and then they were at financials and workforce planning around it. So it takes time, but we see clear evidence in the last 12 months that these investments are paying off, and we'll continue to lean into this financials opportunity, because I feel like it's coming our way.
Keith Weiss: Got it. One last question, this is a little bit broader than just financials, but this is also taking place in a macro backdrop that has been pretty cautious in terms of spending throughout 2023. What are you seeing in terms of your customers' willingness to lean into these investments, your customers' willingness to spend as we head into 2024?
Carl Eschenbach: Yes. So listen, I think you've seen our business, we like to say it's very diverse, it's durable and it's resilient. And I think you've seen that resiliency play out in the last year and even heading into this year, we're projecting really solid growth once again this year, while expanding operating margins. From a customer perspective, listen, you guys know the statistics probably better than I. So I think $5 trillion being spent on IT with the biggest portion of that going into software and the fastest-growing market opportunities. So they're spending money. It's just on what do they spending money? I say that because if you have a strong value proposition like I think we have, whether it's a headwind or tailwind, we'll continue to execute well and people will lean into us. There's a challenge out there that everyone is facing. Number one, everyone is trying to drive productivity gains, Keith, everybody. Number two, they're also trying to save costs, right? Starting with the latter. We are a platform and we're seeing people consolidate onto our platform. So there's a total cost of ownership benefit we can give customers. So to your point, that people are pulling back on their spending, and you can show a really strong total cost of ownership or ROI story, they will lean in. And then there's this whole notion of talent. Talent is now a C-level discussion and everyone understands that they want to drive productivity gains, but you can't do it by incrementally adding one head count at a time. So what you need to do is you need to upskill and reskill and I think we are the platform to help people upskill and reskill their workforce and think about a skills-based economy more than ever. So I think while there's maybe reticence on spending, if you have a strong value proposition, they'll still spend, and I think we've shown that for the last year, and we think about that going into FY '25.
Keith Weiss: Right. And you mentioned priority and leaving a little bit to pitch my CIO survey because in our CIO survey, we did see a rising priority of ERP projects. And it's something we're hearing from systems integrators that these on-premise systems are really starting to become a drag for their customers, really starting to get in the way of other initiatives and sort of other modernization initiatives. Does that match with what you're hearing from your customer base as well that there's more of an impetus more of a priority for core financials right now?
Carl Eschenbach: There is no doubt about that, Keith. And I think it's probably even more pronounced in certain industries or industry verticals that we focus on. People have moved HCM to the cloud, but we talked about earlier, only a subset move financials to the cloud. And I think it's holding back their business priorities. They don't have agility. They don't have the right data insight. They don't have the right cost structure because they're running these on-premises solutions. So there is no doubt there is a movement to the cloud for both ERP and financials, and we're seeing that come across in space every single quarter. In fact, it's accelerating how many people are moving to the cloud. Another way that we look at that is there's evidence from our partner ecosystem. If we look at where they're investing most around Workday right now, it's around their financials practice because they see the opportunity, just like they saw on HCM to build these big deployment practices they see it around financials. So our partner ecosystem is leaning quite heavily into building out their capabilities to drive these deployments.
Keith Weiss: Got it. I want to go to the second point in terms of your core growth drivers, international. You talked a lot about there's a mismatch between how much business Workday does in international versus how big the market opportunity is in international and there's catch-up to be done. What do you think was the historical kind of blockage, if you will, like what kept Workday from doing more internationally? And how do you plan to fix that?
Carl Eschenbach: Yes. Well, first, to Workday's credit, which is what's giving me the opportunity to even be here is they cross the U.S. market when it comes to HCM. And they have a tremendous market share there when it comes to HCM. And if you look at it, it's reflected in our revenues. We get 75% of our revenues in the U.S. and 25% of our revenues outside the U.S. Outside the U.S. means international, and that includes Canada, Europe, and all of the Asia Pacific. That being the case, 50% of the total addressable market, more than 50% is outside the U.S. So we have a mismatch, so I see that not as a negative, but there's a huge opportunity, which is another area of investment that we made starting last year. We decided to really lean into the international market because we see that opportunity. And as you saw in our Q4 results, you saw our international execution and our growth start to go up. So what we've done is we've leaned into the international opportunity with investments. Number one, there's no substitution for great people, period end of story. We have a President of Europe, who's come in and put new leaders in the U.K., in Germany, in France, and in the Nordics. We have a new leader that we hired to run APAC for us. We just hired and announced a new President of Japan. And all of them are great leaders with tremendous experience. And with that, they bring great talent with them. So it starts with the people, number one. Number two, we're focused on expanding and leveraging the ecosystem more broadly than we've ever done before. We've announced partnerships in the last year with the likes of a light in ADP, a lot of people, Keith, would probably wonder would we ever really partner with ADP. When you look at the global payroll footprint, they have a big footprint, and we've now decided to lean in and partner with them. So we're taking a different approach to partnering when it comes to payroll because we don't have local payroll in geographies around the world. The third area is partners. If you go outside the U.S., a lot of the software industry is driven through partners in a strong ecosystem internationally, so we're leaning into that. We now have co-sell, resell and joint sell opportunities with partners around the world. We haven't had that in the past. We have a referral program. We launched a referral partner program. We expect it to have somewhere between 100 and 150 partners sign up for the referral program internationally. And we've expanded way beyond that and are driving new pipeline growth for us that we wouldn't otherwise have. And then lastly, as I think about co-innovation as we go internationally into these markets, we leverage local resources to co-innovate for both on the product side and the deployment side. For example, I think it was a month or two ago, Keith, we announced a deeper partnership with a company called Kainos, and Kainos now has the ability in the medium enterprise to deploy a full Workday platform, HCM and financials in less than four months. So there's a time to value opportunity there as well. So International is a huge opportunity for us. We need to invest in the product side a little bit to make sure it's localized and globalized to meet certain local requirements, especially on the financial side, but we're leaning into it. It's just a huge opportunity for us. And that's another investment we started last year that is starting to pay signs, we're seeing the growth start to accelerate a bit internationally, and we're going to continue to lean into that as we go into FY '25 as well.
Keith Weiss: Got it. Can I play devil's advocate for a second. I'm going to do play devil's advocate for a second. So I think a lot of investors historically have thought. In the U.S., the main competitor here is Oracle, and that's in our in your back, your sweet spot of more services-oriented type of engagement and Europe is dominated by SAP. They're more on the manufacturing side. And Workday is not really able to go after those more process industries, if you will. Is that still bit dynamic? And is that something that's always going to weigh against your ability to do better in international business?
Carl Eschenbach: So I'll start with answering the last question. There are industries like manufacturing that we've been very clear that we're not going to go in right, and that has not changed. That being said, if you look at our biggest growth factors in the business, it's in industries that we are doing very, very well, health care, education, state local government. And if you look at the European market, in general, Keith, we all like to talk about the large enterprise or what we call the Fortune 500, the Global 2000, but Europe is primarily a medium enterprise market. And one of our fastest-growing market segments is a medium enterprise. The reason for that is some of the competitors you'd mentioned, I don't think they have a full platform architecture and suite like we have that combines both financials and HCM into a single solution. It's one platform, one data set, one data model. So I think when it comes to international and our focus on the medium enterprise, we're doing extremely well. And when you back that up with rapid deployment services from both us and our partners, that's what's sustaining and keeping our growth at the level we're seeing. So yes, there are certain areas that we won't go into, like manufacturing. But everything else is open and fair game for us. And I think if I think about competing against those two big competitors, our competitive win rates in the last year has ticked up every single quarter. So if we get a seat at the table and we have an opportunity to compete, we're doing extremely well.
Keith Weiss: Got it. That's clear. On the last growth vector that you -- we're still on question number 2, by the way, but the last growth vector you talked about was the partner opportunities. And you've mentioned a couple of them, but what's really been impressive is the scope of activity on the partner side of the equation. It's referral partners, it's co-selling, and all of this really didn't take place within the Workday model. Can you start with just the expanse of the like the number of partner programs that you guys have rolled out over the past 12 months?
Carl Eschenbach: Yes. It's been an under number of them, which is why I said earlier on, the thing I've been super impressed with is my workmates at Workday and their openness and willingness to try new models and really lean into some strategic initiatives we have to drive growth. But historically, our partners had deployed Workday and they've done it extremely well. I said earlier, Keith, they deployed 95% of our projects on time and on budget, and we want them to continue to do that. But we also want to seek and get reciprocity back from them to help us drive subscription growth. So we launched a referral program, which is going super well. They're bringing lots of new pipeline to us that we hope materializes in FY '25. At the same time, we're doing things like co-sell and resell where we're meeting in the channel with folks like Ali or with ADP, and we're driving joint solutions into the market. Sometimes we have the best-of-breed solutions. Sometimes they have payroll, we don't have, and it's a great outcome for everybody. So that's another opportunity. We're also doing co-innovation. So I think it was in rising back in November in Europe at our User Conference, we announced the co-innovation with Accenture (NYSE:ACN) around our Accenture Skills Cloud, which is an amazing opportunity for people to say who want to move to a skills-based workplace. How do you do that, partner with someone like Accenture who leverages Workday Skills Cloud to drive that. So there's co-innovation happening. And then we're also thinking about how do we open up the aperture, everyone talks about operating leverage at the company level, I think about operating leverage on the go-to-market side. And how do we think about driving operating leverage through new routes to market. For example, we're in the AWS marketplace. I don't think people would have ever thought you're selling HCM or Financials to the AWS marketplace. We're doing that, and we'll announce more in the coming probably days or weeks on how we can go to market there. We announced a partnership last quarter. It was on our earnings call last week with someone called Insperity. Insperity is a PEO, which is down market, serving, if you will, the 50 to 500 community where people are outsourcing their employment services to them. We're the underpinning for them moving forward. So with that market, Workday would never go down into, right to serve an SMB market. And now we get access to that and everyone who lands on top of them, we monetize it as well. So there's lots of opportunity for us to expand what we're doing with partners to drive operating leverage and drive growth going forward. And we're going into our sales kickoff conference here this week, actually it starts today. I'll be finding here right after this to Vegas. And I look at how many partners at our sales kickoff conference because we include them. It's up significantly over this time last year because they see the opportunity to invest back in Workday, and they see us leaning into them more than ever.
Keith Weiss: Got it. Got it. So if we pull this all together, a really right market opportunity and 75% to on-premise, making the investments to go after that from a go-to-market side of the equation. You have partners that are bringing this more to bear, bringing more pipeline, letting in international regions. At the Analyst Day, this all summed up into a growth outlook of 17% to 19% through the next several years. It was a little bit below how Workday had been talking about growth -- had been talking about durable 20%-plus growth. How much of that is a sort of the macro that we're in, the investments that you're making, trying to kind of reset a bar on a go-forward basis, versus you coming in as a new CEO and say, "Hey, listen, this is a more durable rate of growth on a go-forward basis? Or maybe said another way, is 20% still possible at some point? Or was that a different type of company than the one that you were looking at?
Carl Eschenbach: Yes. So I think what we laid out at Financial Analyst Day back in September was a midterm durable growth opportunity. We said we can maintain growth 17% to 19% over the next three years, scaling to $10 billion, which by the way, Keith, I remind people, not a lot of people maintaining growth as they get bigger in scaling the $10 billion, all while expanding operating margin by 500 basis points in the last year. So we're doing all of these investments and expanding operating margin simultaneously. And we think we can maintain this growth based on some of the strategic initiatives that we just talked about over the next few years. Listen, we think we have a rich opportunity. We have a big market. We're going to lean into these investments. We're going to be operationally efficient and prudent. We review these initiatives every single quarter. If they're paying off, will continue to lean in, and we'll continue to be smart about where we're hiring to make sure we can meet those goals. Do we have aspirations to get to 20% at $10 billion? Sure, I'd sit here and say, why wouldn't we want to get there. But we're building a long-term durable business that's highly profitable, throwing off good free cash flow, expanding margin, all while maintaining growth at a similar rate we're doing today over the next three years. That's a pretty damn good business.
Keith Weiss: Yes, definitely. So we've made it 27 minutes without talking about generative AI, and I think that's going to probably be the record for any presentation I give this week. And to a certain extent, it speaks to the raft of growth opportunities ahead of Workday outside of generative AI. It also speaks to, I think a little bit of an investor debate on to what degree can Workday really participate in generative AI. To what degree can they monetize it? Can you walk us through kind of how you're approaching the generative AI opportunity, where we're going to see it in your portfolio? And then I think from an investor perspective, most importantly, what's the monetization potential?
Carl Eschenbach: I'm surprised you didn't get to that question first but we're there, so let's answer.
Keith Weiss: I'm trying to be disciplined.
Carl Eschenbach: So yes. So the AI opportunity is real. It's real for the industry, and it's real for us. And we're taking a multipronged approach to how we think about AI. Number one, we think about it from a platform. For the last decade, we built in AI into our platform. It's not bolted on. We're not going out and using third-party large language models. It's built into the core of what we do every single day. So we're taking a platform approach. At the same time, we have an AI gateway that allows people to leverage third-party AI solutions and LLM and bring them in on top of us as if they want to as well. But we're focused on platform approach. Nothing's changed. We've been doing this for the last decade plus around AI, number one. Number two, data, data, data. The output of your AI models is only as good as the data you're using to train off of. At Workday, we have a highly curated model. Everybody is on the same code base all the time. HCM, Financials. We have 65 million users. Now we've upped this number in the last month, processing 800 billion transactions a year. That's the data set that we get to train off of. It's unprecedented in the industry for the solutions we're serving for our customers that have that high of a quality data set. If you look at our competitors, some of them you mentioned earlier, they're on-premises. They're in the cloud, they're multi-cloud. It isn't as clean and curated as data set as we have. It's a huge differentiator for us. And then the third thing is trust. I mentioned trust early on that I recognize this and our customers' feedback is absolutely they trust us, and we're taking a very ethical and responsible and safe approach to delivering human-centric AI solutions to the market. We support regulation, we lean into it and we have the opportunity going forward to prove that to our customers just like we have for the last 19 years. When it comes to monetization, we're taking a multipronged approach. We're being very measured and we're being very thoughtful. We're not like everyone else out there who's rushed in the last 12 months to go to the customer and say, give us a 20% or 30% increase because we have AI. I said it's built into the platform. We're trying to turbocharge the Workday platform by bringing our customers AI solutions. And we get paid for that in a multitude of ways. Number one, if you look at what we get at renewal rate at the time of renewal, we have an innovation index that we get from our customers to continue to drive our innovation and fuel our growth. They pay for that, so we think they are deserving of the AI. Number two, we can see in our competitive win rates, I mentioned earlier that in the last year, every single quarter, our competitive win rates have gone up and up and up. And the feedback from customers is Workday, thank you for taking the approach you're taking to AI, and thank you for building it into the platform. This is a differentiation from your competition. So our competitive win rates and our renewal rates continue to go up, and I think a lot of that has to do with our approach to AI. The second pronged approach is we're focused on bringing solutions to market when they provide true value for our customers, and they're willing to pay for these AI solutions, we'll monetize it. An example would be Talent Optimization. It's one of the fastest-growing SKUs in the history of Workday and it's 100% AI driven. We have an Extend platform, Extend allows developers to actually write and build applications on top of Workday. Last quarter, we announced Extend Pro, Extend Pro allows them to do it and actually includes our AI gateway, so you can bring in, I mentioned earlier, other AI solutions or large language models on top of us. And we saw that SKU in one quarter bypass what we were doing on Extend, the base platform alone. It also gives you access to a whole bunch of new, if you will, AWS services. The third way we're monetizing it and approach will be through an AI marketplace. At Rising last year, we announced 15 partners who would be part of our AI marketplace who are building on top of the Workday platform, but it's highly curated and highly supported by Workday. And because our customers trust us, they will lean into those solutions, so we don't have to do it all ourselves. And I think we can monetize it by being a toll collector through the marketplace. And last week, Keith, we announced an acquisition on our earnings call of HiredScore. HiredScore is 100% AI-driven talent sourcing solution. I think now we have got the best talent acquisition and sourcing platform in the industry. We can identify customers, we can engage with them, we can recruit them faster. And once you recruit them, we can retain them better than anyone else through internal mobility based on skills, and that is all AI-driven. So we will be monetizing that and selling that right back into our customer base around solutions like recruiting, which recruiting has an 80% attach rate today to our core HCM. There's no reason we can't bring recruiters more solutions around AI, and that's something we'll be doing with HiredScore. So it's a thoughtful, methodical approach without going after our customers day 1, we'll monetize it where we see the opportunity. We have the marketplace and then we'll bring new solutions to market, like HiredScore and other things as we see fit.
Keith Weiss: Got it. So a lot of irons in the fire. There are probably more so than investors are realizing I'm going to open up for questions in a minute, so if the mic runners could get into position. While they're getting a position, one last question. On -- you mentioned trust amongst your customers and trust with these new innovations, I think is going to be an interesting equation in that a lot of people are trying to push these innovations into the solutions quickly. And the enterprises are still trying to figure out, are they secure, right? Are they giving us the right answers? Are they -- are the optimization something that we could rely on? Where do you think your customers are in that process of getting trust in these generative AI solutions and how does Workday ensure that when you put that optimization and you put that generative AI in that it's spitting out something that's verifiable and correct?
Carl Eschenbach: Yes, so we've been talking about trust for quite a while at Workday. And it was part of our Rising User Conference in San Francisco, where we had 15,000 customers with us. We talked a lot about trust and the importance of trust, and I talked about my engagement with the customer was they trust us. We need to maintain that trust by having a highly secure, highly resilient platform, number one. We didn't talk about security, but security is critically important. Number two, you have to do in a responsible, ethical and safe way. And we use this term, we take a human-centric approach. We're always going to have a human in the loop, if you will, as we think about AI. And number three, our customers are absolutely looking at AI and generative AI solutions this year. A lot of them are doing experimentation and that experimentation will be done first with partners they trust which is why I think we have a really unique advantage to take -- the first mover, if you will, when it comes to AI. The other thing I'd say is this. The office -- the CHRO plays a really big role in AI and generative AI because a lot of the use cases you can take advantage of to drive skills, to drive faster enablement, to drive growth plans, to think about how quickly you can go out and recruit people based on AI and matching skills to opportunities, I think the CHRO is in a unique position to be a thought leader when it comes to AI. And if you talk to CHROs, I think they'll clearly say they trust Workday.
Keith Weiss: Got it. Maybe flipping the question around, like are you as an organization Workday using a lot of external generative AI tools yet? Or is Workday still in that same kind of experimentation phase that you're talking about your customers are being in?
Carl Eschenbach: We're leveraging AI to drive operational efficiencies inside the company. We're leveraging them around our customer success platform, in our support platform. And in R&D, we're leveraging copilots to help drive better productivity with our developers. But to be honest, we're in the early phases of that. We're in the experimental phase as well. And we also need to make sure that you can quantify those investments. One of the things I think eventually is going to come out with all of this AI and generative AI, while people may be spending money on it, it's not going to be long before a CFO comes back and say, where is the business benefit? Where is the productivity gains we're getting? And where is the operational efficiencies by leveraging these technologies? So I think you just have to be careful you don't go after it too fast, you have to lean into it. It's real. It's here and it's going to drive a step function change in human productivity, but you have to be thoughtful how you do it and you got to be able to quantify the impact it's going to have.
Q - Keith Weiss: Got it. Do we have any questions for the audience for call. We have one right up here.
Michael Lippert: Carl, I'm Mike Lippert with Baron Capital.
Carl Eschenbach: Hi, Mike.
Michael Lippert: I want to follow-up on what Keith gave a shot to, which I know every investor is talking about were all in the hallways talking about it, 20% to 17% to 19%. What changed? Is it the market Workday's execution, product fit, not exactly right. New management yourself now as the CEO, simply Investor Relations, setting numbers low enough that you know you can beat them. If you can give us any insight as to what changed from the 20% subscription revenue growth that we believe was durable to the number that we have today. Thank you.
Carl Eschenbach: Yes, I think it's a combination of all the things you mentioned, quite frankly, when myself and Zane, the CFO of the company, who's here looked at the numbers over the next three years, looking at a 20% number. We didn't have a clear line of sight to that 20% number. So we decided to put a number out there and our objective is to share with all of you a number and deliver. We've done it for five consecutive quarters. We put a number out there. We've delivered or slightly beat our guidance, and we've increased operating margin. That being said, all of these investments we're making that I just articulated are to help us either maintain or maybe ultimately accelerate growth in due time if all of these investments pay off. So I think it's a combination. Do we have aspirations to get into 20%? Yes. But I'm not going to put a number out there that we don't have clear line of sight to. And until we can see all these investments paying off. And oh, by the way, -- let's not forget. I'm going to go back to this time and time again, so I apologize for doing it. We're saying we're going to grow the business, 17% to 19% over the next three years and expand operating margin. Even sustaining growth at our scale is not the easiest thing to do. But we're very confident in our investments and our ability to do so.
Michael Lippert: That is one last question for Carl.
Keith Weiss: Right, so I'm going to squeeze in one last question in a minute. I'm going to give you the CFO question on margins. So if we think about the investment envelope that you guys are operating in, there's definitely big buckets of investments you want to make in go-to-market and partners and international and the like. Should we, as investors thinking about it is there's an absolute amount of investment you're going to make if you guys outperform on the top line, that will drop through to operating margins? Or listen, we're going to sort of managed operating margins if we're doing better than expected on the top line, that gives us more envelope for investment.
Carl Eschenbach: Yes. Keith, listen, we talk about profitable and durable growth. That's our focus. And I think we've laid out a really good plan over the next three years, as I just said to maintain our growth and expand operating margin. Let me go back, make sure everyone caught this. In the last year, our operating margins have expanded by 500 basis points in a year, 500 basis points in a year while making all these investments to maintain our current growth rate. And as long as we see the opportunity, which absolutely I do, we're going to keep making investments. We're going to be smart about it. If those investments aren't paying off or pull back. And let's not forget, we said we'll have 25% plus operating margins over the next few years. So even though we're guiding to 24.5%, there's still headroom for us to expand operating margins, all at the same time while maintaining investment in the growth opportunity that we see ahead.
Keith Weiss: Got it. I think that's a great point to end on the 25% plus. So thank you, Carl, so much for joining us. It was a great conversation.
Carl Eschenbach: Thanks for having us. Appreciate it.
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