Workday Inc
NASDAQ:WDAY
Workday Inc
Amid the tech boom of the early 2000s, Workday Inc. emerged as a visionary force, founded in 2005 by business software veterans Aneel Bhusri and Dave Duffield. The duo, previously affiliated with PeopleSoft, sought to revolutionize the realm of enterprise software by offering an intuitive, cloud-based platform for human capital management (HCM) and financial management applications. At its core, Workday's approach involved shifting from traditional on-premise solutions to a dynamic, web-based infrastructure, thus significantly enhancing the efficiency and flexibility of organizational processes. By eliminating the need for cumbersome hardware and software installations, Workday empowered businesses to streamline HR, payroll, and financial operations with remarkable ease and accessibility.
Revenue generation for Workday is predominantly driven by subscription fees for its software-as-a-service (SaaS) model. Companies subscribe to Workday's platform on a recurrent basis, allowing for continuous updates and seamless integration of advanced features such as analytics, planning, and talent management. Furthermore, Workday fortifies its financial position by providing complementary services such as consulting, implementation, and support, ensuring clients experience a smooth transition and optimal use of their systems. With a focus on scalability and innovation, Workday supports a diverse client base that spans across industries, thus maintaining a robust growth trajectory despite the ebb and flow of technological advancements and economic shifts.
Earnings Calls
In Q3, Workday achieved $2.16 billion in total revenue, marking a 16% year-over-year increase, driven largely by a 16% rise in subscription revenue to $1.959 billion. The company expects Q4 subscription revenue of $2.025 billion, reflecting 15% growth. Notably, Workday's backlog rose to $22.19 billion, up 20%. They are raising their non-GAAP operating margin guidance for FY '25 to 25.5%. Anticipating FY '26 subscription revenue around $8.8 billion, or 14% growth, they foresee AI solutions fueling future expansion, with 30% of new deals incorporating AI technologies.
Management
Aneel Bhusri is the co-founder and co-CEO of Workday, Inc., a leading provider of enterprise cloud applications for finance and human resources. He co-founded Workday in 2005 with Dave Duffield, aiming to revolutionize the business software market by offering innovative and user-friendly cloud solutions. Under his leadership, Workday has grown significantly and become a prominent player in the software industry. Before starting Workday, Bhusri was an integral part of PeopleSoft, where he served in various leadership roles, including vice chairman. He has a strong background in technology and business, having worked as a venture capitalist and held positions at various tech companies. Aneel Bhusri earned his Bachelor of Science degree in Electrical Engineering from Brown University and an MBA from Stanford University. His contributions to the tech industry have been widely recognized, and he is known for his strategic vision and commitment to fostering a strong company culture centered around customer satisfaction and innovation. He also actively participates in various philanthropic endeavors and serves on several boards, contributing to the broader tech community.
Carl M. Eschenbach is a prominent business executive recognized for his extensive experience in the technology sector. As of recent reports, he is associated with Workday, Inc., serving in a critical leadership role within the company. Before joining Workday, Eschenbach was a key figure at Sequoia Capital, one of the world's leading venture capital firms, where he served as a partner. His role at Sequoia afforded him the opportunity to invest in and advise numerous high-growth technology companies. Prior to his tenure at Sequoia Capital, Eschenbach served as President and Chief Operating Officer at VMware, a global leader in cloud infrastructure and digital workspace technology. During his time at VMware, he played an instrumental role in the company’s growth and transformation, helping to scale the business significantly. Carl Eschenbach's career is marked by his strategic acumen and leadership abilities, making him a valuable asset to any organization he joins. His experience in scaling technology companies and his understanding of the digital landscape continue to influence his effective leadership at Workday, a company well-known for its enterprise cloud applications for finance and human resources.
Douglas A. Robinson is the Chief Financial Officer (CFO) at Workday Inc., a leading provider of enterprise cloud applications for finance and human resources. He joined Workday in 2021, bringing with him significant experience in finance leadership roles across various industries. Before joining Workday, Robinson served as CFO of HealthEquity, where he played a critical role in driving financial strategy and growth initiatives. He also held senior finance positions at other notable companies, including J.P. Morgan and Goldman Sachs. At Workday, Robinson is responsible for overseeing the company’s financial operations, including financial planning and analysis, accounting, tax, treasury, and investor relations. His extensive background in finance makes him a key leader in supporting Workday's strategic objectives and financial health.
Zane C. Rowe is an accomplished business executive known for his significant contributions to the technology and aviation sectors. As of his tenure at Workday Inc., he has served as Co-President and Chief Financial Officer. In his role at Workday, Rowe is responsible for overseeing the company's financial strategy, planning, and operations, as well as collaborating on the company's broader strategic initiatives. Before joining Workday, Zane C. Rowe held several impactful roles in other major companies. He was Executive Vice President and Chief Financial Officer at VMware, where he played a critical role in driving the company’s growth and financial performance. His leadership at VMware earned him recognition for helping steer the company through a competitive and evolving technology landscape. Prior to his tenure at VMware, Rowe had a noteworthy career at United Airlines and Continental Airlines, where he held various leadership roles, including Chief Financial Officer. In these positions, he was instrumental in leading financial operations and contributing to strategic business decisions. Rowe's extensive experience across finance and strategic management in both the tech and aviation industries highlights his versatility and expertise in navigating complex business environments. His educational background includes a Bachelor's degree in Aviation Management from Auburn University and an MBA from Embry-Riddle Aeronautical University, further underscoring his foundation in both business and the aviation sector.
David Albert Duffield is an esteemed American entrepreneur primarily recognized for his pivotal role in the enterprise software industry. He was born on September 21, 1940, and has made significant contributions through his work with PeopleSoft and Workday, Inc. Duffield has a Bachelor of Science degree in electrical engineering and an MBA from Cornell University. He first gained prominence as the co-founder, along with Ken Morris, of PeopleSoft in 1987, where he served as CEO and chairman of the board. PeopleSoft rapidly became a leading provider of human resource management systems. However, after Oracle Corporation's hostile takeover of PeopleSoft in 2005, Duffield stepped down from the company. In 2005, demonstrating his resilience and vision, Duffield co-founded Workday, Inc. with former PeopleSoft executive Aneel Bhusri. Workday specializes in providing cloud-based enterprise applications for human resources and financial management. Duffield served as the company's CEO for several years before taking on the role of chairman of the board. Beyond his professional achievements, Duffield is also known for his philanthropic endeavors. He and his wife, Cheryl, established the Dave & Cheryl Duffield Foundation, which supports various causes, with a strong emphasis on animal welfare. One of their notable contributions is the establishment of Maddie’s Fund, named after their beloved Miniature Schnauzer, to promote animal welfare and no-kill shelters. Overall, David Duffield's legacy is characterized by his innovative contributions to enterprise software and his compassionate philanthropic efforts.
Mark S. Garfield is an accomplished executive known for his role at Workday Inc., where he serves as the Chief Financial Officer (CFO). With a wealth of experience in strategic financial management and leadership, Garfield plays a crucial role in steering Workday's financial strategy and operations. Before joining Workday, he gained significant expertise in financial leadership positions, including at other prominent technology and enterprise companies. As CFO, Garfield is responsible for overseeing all aspects of Workday's financial management, including financial planning, analysis, strategy, and reporting. His leadership contributes to Workday's growth and financial stability, ensuring that the company meets its strategic objectives and continues to innovate in the enterprise software industry.
Jim Stratton is recognized as the Chief Technology Officer (CTO) at Workday Inc., a leading provider of enterprise cloud applications for finance and human resources. Stratton is responsible for overseeing Workday’s technology strategy and innovation. Prior to joining Workday, he accumulated a wealth of experience in technology leadership and software development, which positioned him well to guide Workday’s product and technology vision. His role involves spearheading efforts to drive the company’s engineering capabilities and delivering cutting-edge, reliable solutions to meet the dynamic needs of Workday's clientele. Moreover, Stratton's leadership is pivotal in ensuring Workday's technology infrastructure is scalable and resilient, all while fostering an environment that encourages innovation and collaborative growth within the company.
Rani Johnson is an accomplished technology executive with a strong background in IT leadership and strategic innovation. As a Senior Vice President at Workday Inc., she has been instrumental in driving the company’s technology strategies and initiatives. Her role focuses on leveraging technology to enhance operational efficiency and improve customer experiences within the company. Before her tenure at Workday, Rani Johnson held significant leadership positions at several other organizations. She served as the Chief Information Officer (CIO) for companies in various sectors, demonstrating her versatility and skill in managing complex IT infrastructures and leading digital transformation efforts. Rani Johnson is known for her strategic vision and her ability to build and lead high-performing teams. Her leadership style emphasizes collaboration, continuous improvement, and a strong customer focus. Through her efforts, she has contributed to Workday’s reputation as a leader in enterprise cloud applications for finance and human resources. With a strong commitment to diversity and inclusion, Rani Johnson actively advocates for women and minorities in technology, mentoring the next generation of leaders in the field. Her educational background, coupled with extensive industry experience, underscores her role as a prominent figure in the tech community.
Hello. Welcome to Workday's fiscal 2025 Third Quarter Earnings Call. [Operator Instructions]
I will now hand it over to Justin Furby, Vice President of Investor Relations. Mr. Furby, you may begin.
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 close of market and is posted on our website, where this call is being simultaneously webcast.
Before we get started, we want to emphasize that some of our statements on this call, particularly our guidance, are based on the information we have as of today and include forward-looking statements regarding our financial results, applications, customer demand, operations and other matters. These statements are subject to risks, uncertainties and assumptions that could cause actual results to differ materially. Please refer to the press release and the risk factors and documents we file with the Securities and Exchange Commission including our fiscal 2024 annual report on Form 10-K and our most recent quarterly report on Form 10-Q for additional information on risks, uncertainties and assumptions that may cause actual results to differ materially from those set forth in such statements.
In addition, during today's call, we will discuss non-GAAP financial measures, which we believe are useful as supplemental measures of Workday's performance. These non-GAAP measures should be considered in addition to, and not as a substitute for, or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results, in our earnings press release, in our investor presentation and on the Investor Relations page of our website.
The webcast replay of this call will be available for the next 90 days on our company website under the Investor Relations link. Additionally, the transcript of this call and our quarterly investor presentation will be posted on our Investor Relations website following this call. Also, the Customers page of our website includes a list of selected customers and is updated monthly.
Our fourth quarter fiscal 2025 quiet period begins on January 15, 2025. Unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal 2024.
With that, I'll hand the call over to Carl.
Thank you, Justin, and thank you all for joining us today. I'm pleased to report another quarter of solid financial performance in Q3, with 16% subscription revenue growth and non-GAAP operating margins of 26%. These results are a testament to the strong customer relationships we have across industries. The growing demand of our AI innovation and the power of our ecosystem around the world.
More and more organizations are consolidating on the Workday platform for a few key reasons. They want to reduce total cost of ownership, simplify their operations and harness the power of AI across our best-in-class HR and finance solutions, and provide employees with an amazing user experience. Workday gives them the ultimate advantage.
That was evident in Q3 by the growth we had in full suite. And in our net new wins, customer expansions across geographies, in segments along with industries. Several industries were strong in the quarter, and government and higher education were two of the standouts. Roughly 90% of the wins in these industries for full suite.
In Q3, the Defense Intelligence Agency expanded its business with Workday and Lake County, Illinois, Maryland General Assembly, New Jersey Institute of Technology and University System of Georgia, all chose Workday to modernize their systems and meet the rising expectations of their constituents.
This quarter, professional and business services became the third industry to exceed $1 billion in annual recurring revenue alongside financial services and retail and hospitality. Advantage Solutions, [ Connells ] Limited and Flight Centre Travel Group all selected Workday. And in Healthcare, we had a huge full suite win with Common Spirit Health, one of the largest nonprofit healthcare systems in the U.S., as well as community health system in Valley Children's Health care.
From a product perspective, our HCM solutions are really setting the pace when it comes to the future of work. In the quarter, we had wins with Brookshire Grocery Company, [ IOI ] Group, [ Pro Mac ] Royal Mail, Team Health, just to name a few. We're also continuing to invest in our financials business, and that's driving demand for our full suite. More than 35% of our new core customers in Q3 were full suite. And in Q3, we were again named a leader in the 2024 Gartner Magic Quadrant for Cloud HCM Suites for 1,000-plus employee enterprises, cloud ERP for service-centric enterprises and financial planning software.
And speaking of planning, that business had a great Q3. We either expanded or formed new relationships with some fantastic organizations like [ Deloitte ], the Fitness and Lifestyle Group, Motion Picture Association and Tenet Healthcare, and we were thrilled to have AWS go live on planning in Q3.
AI is top of mind for every CEO right now, and they're all looking for the right partner to guide them through this transformation. That's where Workday comes in. Our customers know that an investment in Workday is an investment in AI, and we're seeing a ton of excitement and demand for our AI solutions.
In Q3 alone, more than 30% of our customer expansions involved one or more AI solutions, including talent optimization, Extend Pro and Recruiter Agent powered by hired score. Talent Optimization remains one of our fastest-growing SKUs and it's driving tangible value. Customers have experienced up to 39% reduction in turnover.
Recruiter Agent, in particular, had a huge quarter with wins at Johnson Controls, Cox Enterprises and [indiscernible] Health. In fact, the team closed more new logos in Q3 than in its 12-year history, and our new ACV more than quadrupled compared to Q2. And whats awesome is that recruiter agent is boosting the average selling price of our core recruiting solution by almost 150%.
It's clear that customers are ready to invest in AI that's built for their very specific needs and delivers real results. They want solutions that are easy to implement, quickly provide value without the need of a ton of IT support. This growing demand shows the huge opportunity we have to grow and monetize this part of our business.
So let's talk about how we're going to capture this opportunity with our innovation. With more than 70 million users under contract, generating more than 800 billion transactions a year on our platform, our AI leverages the world's largest and cleanest HR and finance data set. In our industry, where decisions are high stakes in complex, the quality and quantity of our data is a critical differentiator, and the combination of this data with our ability to understand the context behind it, enables Workday to unlock value in a way that no competitor can do.
At Rising, we unveiled Illuminate, the next generation of Workday AI. With [ Illuminate ], we're unlocking a whole new level of productivity in human potential by accelerating manual task, assisting every employee and ultimately transforming entire business processes. As part of Illuminate, we launched a set of new AI agents that uniquely transform some of the most complex business processes in HR and finance, such as recruiting, expense management and succession planning.
Recruiter Agent is available now. Expense Agent is expected to become available by the end of the year and several more will soon follow. We believe Optimize Agent which is coming out next year is going to be a true game changer. It pinpoints bottlenecks, inefficiencies in areas where processes aren't running as smoothly as they could be. The possibilities with this are endless, and I'm fired up about it.
Beyond the agents Workday is delivering, we're collaborating with our partners to support agent to agent communication for employee self-service needs. Salesforce is a great example here. So is our recent partnership with Microsoft on its M365 Copilot employee self-service agent. We also updated Workday Assistant with our Gen AI Copilot. Employees can use it to ask questions in natural language about anything from their pay and benefits to company policies, and get quick personalized answers. More than 2,000 of our HCM customers are using the currently available Workday assistant to improve efficiencies, including one of our customers who has been able to cut down HR case volumes by almost 30%.
We believe the new Copilot will help drive even further increase in productivity, allowing employees and HR departments to focus on more strategic work. CIOs get super excited when we talk about Workday Assistant. Other solutions out there require organizations to take sensitive data like payroll information and move outside their core systems. That is a big risk and no one wants to take it. With Workday, everything stays secure within our trusted platform.
Continuing to accelerate our AI road map, we closed our acquisition of [ Evisor ], a leading document intelligence platform. Consider this, over 80% of business data is unstructured, making it difficult to search, analyze or use effectively. This includes critical information locked away in contracts, invoices and policy documents, just to name a few. With [ Evisort's ] powerful AI, our customers can now unlock critical insights from this untapped data, empowering them to make faster, more informed business decisions.
The strength of the Workday platform continues to draw interest from customers and partners alike. We've now got over 1,000 customers building their own custom applications on our Workday platform using Extend, making it one of our fastest-growing products ever. In fact, new ACV for Extend more than doubled within the quarter compared to last year. Extend Pro, which allows you to build AI first apps, with our AI Gateway in developer Copilot is having an even greater impact, with its average selling price double that of Extend Essentials.
Our partner ecosystem has grown nearly 5x in just 18 months and is more diverse than ever. Our partners are becoming increasingly critical to our growth, sourcing over 10% of our net new ACV in Q3 and a similar percentage of our new pipeline. We've seen rapid adoption of our bill on Workday program, which we launched less than 6 months ago. We've already got over 40 partners on board, and partners like [ Kainos ] are generating revenue from it.
At Rising, we announced Workday Wellness, which gives companies real-time insights into how their employees are using their benefits. This helps them design more tailored benefits programs right within Workday HCM to improve the overall employee experience. We're excited to have Guardian, the Hartford, [ Mutual of Omaha ] and [ Unum ] already signed on as strategic partners. International growth continues to be one of Workday's most compelling opportunities.
This past quarter, I spent time with customers and our amazing workmates in the U.K., Ireland, Germany, France and Japan. The energy and excitement is incredible. In Q3, we formed a new strategic partnership with NTT DATA, one of the most influential system integrators in Japan. And in APAC, we formed new relationships with SCA, a major Australian aged care provider in Flight Center, a leading Australian travel and leisure brand. We also expanded our footprint with United Overseas Bank, one of the largest banks in Singapore.
Over in EMEA, we faced the same deal scrutiny we've called out the last few quarters, but we had our largest ever public sector win with the Department for science, innovation and technology in the U.K. That's generating a lot of interest from other U.K. public agencies. We also had major wins with big enterprises like [ Decathlon ] in France and Goldbeck in Germany.
And we're gearing up for rising EMEA and Amsterdam in just a few weeks. The relationship we are building around the world point to the significant long-term potential of our international business. While only 25% of our revenue comes outside the U.S. today, we're laying the groundwork for something much bigger.
Before I wrap up, I wanted to give you a quick update on the team. We recently announced that Doug Robinson, who has been an incredible leader over the past 14 years, will be retiring at the end of the fiscal year. I can't thank Doug enough for the tremendous impact he's had on Workday. We're excited to have him continue in an advisory to the company.
With Doug's retirement, I'm thrilled to welcome Rob [ Enslin ] to Workday as our new President, Chief Commercial Officer. Workday continues to be a magnet for great talent, and Rob is another great example. He's a world-class executive with more than 30 years of experience in the enterprise space. He brings fantastic customer and partner relationships and a proven track record of success. He is a perfect person to lead our go-to-market efforts as we move into the next phase of growth.
As you can see, it's been a busy quarter. We have a clear target between now and FY '27 of driving mid-teen subscription revenue growth, while expanding non-GAAP operating margins to 30%. We plan to achieve this by continuing to innovate and take share in our core markets while also streamlining operations across the company. But what really excites me is the opportunity we have ahead of us as we lead our customers through the AI revolution and help them transform their organizations for the future of Work.
I'm incredibly grateful to my workmates for their contributions this quarter. With our amazing culture, continuous innovation and the trust of our customers, Workday is in a fantastic position to drive sustainable, profitable growth at scale. Thanks again, and to those of you joining us in the U.S., happy Thanksgiving.
With that, I'll hand it over to Zane.
Thanks, Karl, and thank you to everyone for joining today's call. In Q3, we continued to make progress across a number of our key growth areas as we lay the foundation for durable, profitable growth at scale.
Subscription revenue in the third quarter was $1.959 billion, up 16%. Professional services revenue was $201 million, resulting in total revenue of $2.160 billion, growth of 16%. U.S. revenue in Q3 totaled $1.62 billion, and international revenue totaled $537 million, both growing 16%. 12-month subscription revenue backlog, or 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%.
Our 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, in line with our expectations, though [indiscernible] year-over-year, impacted by the stronger-than-expected collections activity we called out in Q2.
During the quarter, we repurchased $157 million of our shares at an average price of $242.42 per share. We had $902 million in remaining authorization under our buyback program as of quarter end. We ended Q3 with $7.2 billion in cash and marketable securities. As of October 31, head count stood at nearly 20,500 Workmates around the globe as we continue to hire talent across targeted growth areas.
A few of our strategic wins in Q3 have future product deliverables in FY '26. This slightly impacts our near-term results as these wins don't fully benefit subscription revenue until next year. We expect Q4 FY '25 subscription revenue to be $2.025 billion, growth of 15%, and full year subscription revenue of $7.703 billion, an increase of 17%. We expect Q4 CRPO growth to be between 13.5% and 14.5%. We expect Q4 professional services revenue of approximately $155 million, resulting in full year professional services revenue of $712 million.
We continue to balance targeted investments in key growth areas with increased focus on company-wide efficiencies. As a result, we are raising our FY '25 non-GAAP operating margin guidance to 25.5%, and we anticipate a non-GAAP operating margin of approximately 25% in Q4. GAAP operating margin for both fourth quarter and full year is expected to be approximately 20 percentage points lower than the non-GAAP rate. The estimated FY '25 non-GAAP tax rate remains at 19%. We are maintaining our FY '25 operating cash flow expectations of $2.350 billion, and we now expect capital expenditures of approximately $300 million.
We are making good progress across our key growth initiatives, in particular, with our partner ecosystem and developing AI opportunities, supporting our medium-term target of mid-teens growth. As an early view, we anticipate FY '26 subscription revenue of approximately $8.8 billion, or about 14% growth. We expect our first quarter subscription revenue growth to be slightly lower than our overall growth rate for FY '26. This is largely due to the impact of the leap year which creates just over 1 point headwind to Q1 subscription revenue growth. We expect a slightly higher growth rate in the second half, driven in part by emerging AI opportunities and deliverables tied to the strategic wins from the third quarter, which I referenced earlier.
We're investing for growth while at the same time, focused on driving efficiencies across the business. This includes the continued expansion of our global workforce, integrating AI across the company and improving processes and systems. We expect FY '26 non-GAAP operating margin of approximately 27.5% as we demonstrate progress towards long-term margin expansion. In addition, we are actively managing share-based compensation expense and expect it to continue to trend lower as a percentage of revenue.
As we enter Q4, we are focused on executing for both the short and long term as we build the foundation for durable top line growth and margin accretion. With that, I'll turn it back over to the operator to begin Q&A.
[Operator Instructions] And our first question comes from Kirk Materne, Evercore ISI.
Zane, I was wondering, can you just talk a little bit more about the deliverable issue in the fourth quarter? And how much of that is also weighing on -- I realize it's a preliminary guide for fiscal '26, but how much of that plays into that guide relative to sort of the mid-teens guide you guys have talked about for fiscal '27?
Can you just provide a little bit more color on that as -- and maybe when that came about just because I think people are obviously concerned it's more directional in nature than perhaps onetime in nature?
Yes. Sure, Kirk. Happy to start on that and then I'm sure Carl have some comments afterwards. There were a number of key strategic deals in the third quarter that, as I mentioned, had some product deliverables or otherwise, we saw revenue recognition a little bit later on. We expect it to ramp up through the course of next year.
If you think about our outlook for the fourth quarter, it would put us roughly in the midpoint of our original guidance for the year. So I'd say approximately $8 million to $10 million of impact in the fourth quarter, if you think about sort of the actual deal, were we to recognize revenue as we have historically.
And then on a sort of second half of FY '26 basis, if you look at that, on a year-over-year basis, it would contribute to, I'd say, approximately 0.5 point on that growth. As I mentioned, obviously, in Q1, we lapped the leap year, and that's about 1 point of growth heading into Q1. And we still believe there will be a nice build through the course of FY '26. But we definitely see the impact of the revenue recognition impacting this part of the business.
I'll point out, these are key strategic deals, and there's obviously a fair amount of product that aligns with those, and that's the point at which we can recognize that revenue. But we're very excited about the momentum in this area and expect these and others to continue to grow beyond FY '26.
Carl, I'll let you add to that.
Yes. I think what's really important, Kirk, is to recognize the strategic importance of a deal like the DIA or Defense Intelligence Agency. We have to go out and build a platform for the federal government with different levels of security, and we're doing so, and we can't recognize revenue on those opportunities until we can deliver it to the government. But these are critical wins for us and it's actually driving demand for us in the federal government as people recognize Workday is really pushing hard into that market.
The other one is wellness, Workday wellness. It's another critical platform for us to engage with our wellness partners and for them to integrate into the Workday platform, and we're building that out as well. So while we signed a number of key partners like Guardian, the Hartford, [ Mutual of Omaha ], in [ Unum ], they're ready to build on that platform. It's just not able to be delivered yet, which changes our revenue recognition for the next year.
If I can ask a quick follow-up just on Rob's appointment, Karl. I assume that Rob's on board, you've made a lot of changes since you came on board. I assume you and Rob are thinking in the same way so that as we start next year, there's not necessarily any kind of sort of restart or reshuffling of the deck in terms of your partner strategy, et cetera?
Yes. Thanks for the question. No, I've known Rob for probably 25 or 30 years. I'm sorry, I'm showing our age, but we've been around the industry for a long time. We grew up in the industry and I have a tremendous amount of respect for him.
I think his background, his experience fits us nicely, especially when you think about what we're doing in international. Rob's lived in Japan. He's lived all over Europe. He started the SAP business in China. Like he's just a tremendous asset for us to pick up, and we're going to be very sad that we'll be passing the baton as Doug steps aside.
But we also have almost 6 months of overlap between Doug and Rob. So I don't expect any impact at all to how we're running the business or how we're thinking about the future of our go-to-market strategy. In fact, if you think about Rob, because he spent so many years at SAP, there's not a single partner that Workday has today that Rod doesn't already have relationships with. So it's a great hire for us. We're super excited and energized he's joining the team and I think he'll bring a great outlook for the future to us.
Our next question comes from Mark Murphy, JPMorgan.
Carl, there was a comment at the Analyst Day that the U.S. Federal business is can inflection point. And I understand you closed a defense agency, but in Q3, but I'm curious how those agencies might be interpreting if you've heard anything, the stated plans of this department of government efficiency to try to strip $2 trillion in spending out. We're getting a lot of questions on that.
And whether you think that, that might be impacting any of their budgeting spending behavior going into next year? And I have a quick follow-up.
Sure, Mark. So I'll start. As I said in my prepared remarks, we're really focusing on the federal government going forward. We think there's a huge opportunity there with probably more than 80% of HCM and ERP still on-premises. It hasn't moved to the cloud. And we think we're catching it at an inflection point right now, which is why we're investing so heavily in building out a secure platform.
At the same time, post election, and with [indiscernible] coming out, people are absolutely looking to drive more economies of scale and more efficiency. And I can tell you, supporting these on-premises antiquated systems is not a way to do that. So we think this will only be a tailwind for us as we think about the federal government business going forward.
Okay. That's great to hear. And then, Zane, as a quick follow-up, I'm also wondering, subsequent to the interest rate cuts and moving past the U.S. election, is there any possibility you might have detected stabilization or any uptick in any employment indicators in your customer base?
I know I think, generally, it's been kind of sluggish in moving sideways, but I wasn't sure if you might have seen any recent renewals where any of that feels different than it did a couple of quarters ago or even any payroll runs without any of that data might look different?
Yes. Sure, Mark. As we mentioned earlier in the year, it was more a moderation of expectations and what we saw early in the year. I'm pleased to say we haven't seen any further downtick. In fact, it has moderated. We haven't necessarily seen significant improvement either. So I think it's within our expectations as we plan ahead, but always welcome the enthusiasm around where interest rates may go and obviously, the conviction around growth in business is always good for our business.
So we take -- although I would caution right now, we still believe that especially in certain areas around the globe and we're a global business that we are still impacted in increased deal scrutiny. All that being said, we're very pleased with the momentum we've seen through the quarter and look forward to continuing that into next year. But no significant change in impact or outlook from what we've experienced through the course of the year.
Our next question comes from Kash Rangan, Goldman Sachs.
Carl, with Rob joining you guys, you're going to be outnumbered with Rob and [indiscernible] and you're going to have to learn cricket. So if you need a primer, please let me know.
That's right. I may take you up on that Kash, but I know a little bit about cricket and I really enjoy it. Only when they're the shorter matches though.
Great. So moving on to business. It's good to see the company reiterate the 15% growth rate compounding in fiscal '26 and '27. I'm curious what do you make -- as the numbers get bigger, I guess, the margin becomes a little bit harder to maintain the same growth rate. So are we building in any inflection point with AI monetization or [indiscernible] getting better perhaps in '26 and '27? Give us a recap of why you still feel confident with these numbers over the next couple of years?
Yes. Thanks so much, Kash, for the question. And let me give you a couple of salient points that I think reflect the conviction and confidence we have in our mid-teen guide over the next couple of years while being able to expand operating margins.
So number one, we had a really solid Q3 after delivering a solid Q2. We had our Rising conference, which we attended back in September, at which we launched the Workday [ Illuminate ], which is our next-generation AI platform. And I can tell you the excitement we felt at the conference continued throughout the quarter. We tried to highlight that with a number of points around our AI momentum, including our recruiter product, which we add more logos in the quarter in Q3 than we did in the 12 years prior that they were running the business.
We also saw an uptick in selling back to the base our AI solutions. More than 30% of our sales back to our customer base included one of our AI solutions, which is our Recruiter Agent, Talent Optimization, along with our Extend Pro platform. So we are absolutely seeing momentum in the business when it comes to AI.
If you combine that then Kash, with all the things we've been working on over the last few years, like our focus on building out our partner ecosystem, our focus on building out our opportunity in the U.S. federal government, our continued focus on industries, our focus on pushing a platform along with full suite sales, which in this quarter, I think I had in my prepared remarks, more than 35% of our net new lands included full suite solutions. And then you just continue what we're doing as we move down market into the medium enterprise, we feel very confident in our ability to maintain that mid-teens growth over the next couple of years.
And as you think about the guide we gave you for FY '26, let's remember, we got a big quarter here in Q4, we got a nail. We're focused on nailing this quarter. We have a really strong pipeline as it looks -- as it relates to Q4. And I'm confident we'll be able to deliver against our current guide for the quarter, and then we'll update you further on our FY '26 number during our Q4 earnings call.
Kash, I would just add, obviously, we have a lot of momentum and conviction on the work that's been done, including the strategic deals that we've already closed where we expect to see that revenue into next year. And point out, obviously, we have line of sight into approximately $8.8 billion. And as Carl said, more to come, and we'll update you again next quarter on more details there.
And our next question comes from Michael Turrin, Wells Fargo.
Given there's a few moving pieces you're contemplating and it's not -- that that's not the case across software. Maybe if you could add some more context on what informs the Q4 guide given just a bigger seasonal profile for Workday there. Any commentary and if there's any FX impact or other layers to consider? And anything you can just add around how that closed the year could inform your views on the trade-off between growth and margin into next year as it all progresses is helpful.
Yes. Thanks, Michael. We have a solid pipeline coming into Q4. One that is reflected in the guide that we did give you for the quarter. We also, as I said, we have a lot of momentum in the business right now, especially when you think about some of our AI solutions like the Recruiter Agent, what we're doing with Talent Optimization and Extend Pro.
I mean, in the quarter, selling back into our customer base where 30% of our deals now include an AI SKU is a pretty rapid uptake of these technologies. And what's really interesting is that our customers are willing to pay for these solutions because they have tangible ROI that they can get from these products.
So it's the momentum, it's the pipeline. It's the large deals that we have in the quarter. And as you always know, Q4 is historically the largest quarter of the year for us, and I don't think it will be any different this quarter as well.
Yes, Michael, I would just add, obviously, we feel good about the CRPO. It's just one of the elements we look at the growth that we saw in the third quarter, we believe, positions us well exceeding our expected range by a number of basis points. So we feel good about the setup.
FX is an impact, but obviously, where the majority of our business is still U.S. base, so we don't see it as being that significant this close into the fourth quarter. So we still feel good about the guide and the outlook for the quarter.
And then we're always balancing that top line opportunity with margin. We've done, I think, a good job over the last number of years in thinking about people, process and systems, and we'll continue to focus on efficiencies and continuing to scale the business.
So we feel great about the margin outlook not only for the remainder of this year, but into next year and beyond that as we grow margins beyond 30% over the next 2 years.
And our next question comes from Brad Zelnick, Deutsche Bank.
Guys, it's really great to hear about many of the strategic wins, seeing the partner leverage shining through. But I wanted to ask about Europe, where, frankly, we picked up some mixed things in talking to partners. Can you just talk a little bit about what's happening there in that theater? And if you could distinguish between environment and execution and any more granularity would be helpful.
Yes. Thanks for the question, Brad. So let me start with the thesis. That has not changed, and that is 50% of the addressable market for Workday is outside the U.S. That has not changed.
Yes, while we have seen some headwinds in the economy, specifically, if you will, in EMEA, and I think a lot of people have called that out, our business still remains intact. Our leadership team is stronger than ever. And at the same time, when people do ultimately make a decision on a large transformational opportunity, whether it's HCM or Financials or both, we are winning a significant portion of those deals.
Our win rate in Europe when these customers do decide to go forward is very strong. So while there are some headwinds, we can't control that, obviously. What we can control is continuing to innovate, continuing to work with our customers and prospects so that when they do make a decision to do a transformational project, we are continuing the win rates that we've seen over the last couple of quarters. I'm very confident in what we're doing in Europe and the opportunity ahead.
Our next question comes from Brad Sills, Bank of America.
I wanted to ask a question around some of the strengths you're seeing in government and higher ed. Obviously, this has been going on for quite some time, and you cited some platform deals there that are going well. Just curious, what's working in that vertical? Is there a certain application that you found that is really driving that kind of combined fins plus HCM glue, if you will? And are there others that are kind of up and coming that we should be thinking about that might become the next source of strength across the verticals?
Yes. Thanks for the question, Brad. I think historically, we've always had a pretty damn strong business in both government, state and local government and higher ed. In this quarter, we called out that 90% of our wins this quarter included full suite and full platforms. So when you're dealing with a state and local government or even the federal government and then you do it in higher ed, these people have a tendency to make a decision for full platform, full suite at the same time.
I also think because of the student product that continues to gain momentum in higher ed, it gives us an advantage over the competition. The one we also called out that performed quite well, it didn't have the exact growth rate we've had over the last couple of quarters that we've called out is health care. We continue to win in health care. In fact, I think it was probably the largest deal on the table over the last 12 months in the health care market, Common Spirit. We were able to win that which is a testament to -- not only our platform, both our HCM and financials, but it's also our supply chain product as well.
So I think these are 3 industry verticals we'll continue to have momentum because they look at full suite and in certain industries, we have products like student for higher ed and then we have supply chain for health care.
And our next question comes from Karl Keirstead, UBS.
Maybe Zane, a couple for you on the outlook for next year. Just first of all, on Q1, you mentioned that it will likely be sub 14%. So that would be, call it, a 150-plus bps decel from the second half this year. Typically, it doesn't fall that quickly. So it seems to me there must be some -- maybe some onetime issues there. Maybe you could unpack the Q1 performance that you expect?
And then secondly, on the second half acceleration, I'm just curious, you had mentioned it's a function of the strategic wins finally ramping, but also emerging AI. Are you able to rank order, which is the bigger driver of that second half acceleration? And if it is AI, maybe help us get a little visibility into what you're seeing to give you the confidence that you can monetize second half next year?
Sure. Yes, let me start with Q1. I highlighted that obviously, we have the leap year compare, which was about 1 point. We haven't given any linearity or any more detail into FY '26, Karl, other than to mention that, obviously, we see the pressure there in Q1. And obviously, it will build through the course of FY '26.
Yes, as it relates to AI, and the strategic wins. This is a small part of, obviously, the [ 8.8 ]. I just wanted to highlight on the strategic wins that as we recognize it, we expect to see 0.5 point of improvement just related to those deals for the second half. So we do expect to see slightly higher growth in the back half.
And then I'll let Carl talk about some of the momentum and what we're seeing on the AI front through the course of FY '26.
Yes. So Karl, a couple of things on AI. Remember that we just closed earlier this year, the acquisition of Hired Score and we highlighted some of the success we had in Q3, selling the Recruiter Agent back into our customer base. That typically gets sold back into customers who have our recruiting platform. That's 4,000-plus strong. So we're only in the low single digits of penetration or attach rate to our existing customer base to sell, for example, our Recruiter Agent.
When you couple that with the momentum we're seeing around Talent Optimization, which is an internal workforce mobility AI platform and things like Extend Pro, which has an AI API gateway and a Copilot for developers to write and build applications on top of us, these are all indications that the customers are seeking AI solutions from Workday.
And then later this year and into next year, we have 3 new agents that will come out. We'll have an Expense Agent. We'll have a Successor Agent, and we'll have an Optimized Agent. These are all agents that will bring to market that are built deep into the core of Workday. The data doesn't have to be extracted. It stays within the core of the platform, which is different than most AI solutions out there and we think they're going to have a nice impact on bookings and revenue as we go into the new year.
So the momentum is there. We see it building. Customers are willing to pay for our AI solutions. And I didn't even mention oh, by the way, [ Evesort ], which is an AI platform for scanning and looking at documents, especially in the unstructured world the data we live in today. That's very powerful and we're excited with the early indications and sign that, that's driving to.
Our next question comes from Brent Thill, Jefferies.
Zane, on the guide, are you taking the same methodology as you've had before? Or are you injecting a little more conservatism given the guidance had to be walked down a few times now. Everyone's asking a new guide or kind of the same pipe that you're looking at? You -- can you give us any color on that methodology?
Sure. Yes, Brent, thanks for the reminder. Yes, I would say, look, this is our current line of sight as we look at FY '26. For that reason, we didn't want to give sort of a broader range as we roll up now, we are confident in approximately $8.8 billion, as I mentioned. We're very excited but we think it's still early days in a number of these AI opportunities in particular. And also, I wanted to highlight just that this is first off, an early look. And then as we look to next year, we have the leap year overlap. And in the second half, we've already closed a number of transactions that will impact the growth rate heading into the second half of next year.
But we'll leave it there and obviously look forward to providing more color next quarter as we lay out FY '26 in more detail. But we feel good about the initial guidance, but that's what it is. It's just an initial look.
Okay. Great. And then quickly for Carl. With Rob coming on, there have been a lot of questions about is impact usually when you bring someone new in at his caliber, there tend to be changes. And I know you've already made a lot of proactive positive changes for the go-to-market. But how do you kind of give confidence to investors that or there's -- not another way turbulence that comes through with another go-to-market exec? How do you -- how should we think about that?
Yes. Thanks for the question. I am very confident that we're not going to have any negative impact with Rob joining. It's all going to be positive because of his experience and his knowledge of the industry. I also believe we have enough overlap with Doug for the next 6 months, we will be sticking around and ensuring that it's a smooth transition. So I'm not nervous at all about any impact from him joining the team and think -- in fact, I know it's only net positives from here.
We will now take two more questions. And our next question comes from Raimo Lenschow, Barclays.
Can I go back to the AI question for the acceleration for the next half. Carl, how is your thinking in terms of monetization changing in industry? If you think about a lot of players in Eurospace are kind of seeing it more as a -- as an add-on solution, as a kind of bundled add-on solution that is coming in there, how do you make sure you kind of get paid for those solutions?
Yes. Thanks for the question. As we've stated in the past, we take a multipronged approach to AI monetization. It starts with, number one, when we meet with customers or prospects, they truly believe that an investment in Workday is an investment in their AI strategies and that gets reflected for us in our customer win rates on new opportunities, our expansion rates with our existing customers and our renewal rates as well as our customer satisfaction. And a lot of times, our customers are leaning into us with a core platform that already has a whole bunch of AI built into it. It's not bolted on.
At the same point, as we bring new solutions to market, like Recruiter Agent, it's a great example where customers are willing to pay us for that platform. Our customers are seeing upwards of 30% productivity gain in the recruiters, which is significant when you think about recruiting being one of your biggest costs associated with HR. So our customers are willing to pay for it and we monetize it.
Another example is Talent Optimization, where we have over 3,000 customers using it to drive internal mobility and reduce attrition. And then lastly, our current example of Extend Pro, how people are leaning into it and buying it. It's actually a significant uplift from our Extend Essentials platform, and people are paying us for it as well.
And as we bring out new products and new agents, like I said earlier, we're going to bring out an Expense Agent, a Successor Agent as well as an Optimized Agent, we're going to be pricing them based on the impact and the values our customer gets. So I think we have a good strategy around AI monetization. And I think it's going to continue to help drive a sustainable growth over time.
Okay. Perfect. And then, Carl, one -- Zane, sorry, one for you. On the cash flow side, you kind of didn't change the cash flow guidance. Can you talk a little bit about the puts and takes like this quarter and what drove the guidance decision?
Raimo, we mentioned last quarter that collections came in really strong. So if you balance out the 2 quarters that gets you back to a more normalized rate. And if you recall for this fiscal year, also mentioned that we had an additional pay period, which actually comes into the fourth quarter.
So a lot of this is expected. We haven't changed our guide for some time, obviously, for FY '25. You may recall as well, we had sizable collections last fiscal year, which impacted FY '25, and we called that out early in the year as well.
So I feel really good about OCF generation through the course of the year and in line with our expectations, even though I understand that you're picking up on the variability we saw in Q3, we were off about 10%. But net-net, we feel good about OCF.
And our final question comes from Alex Zukin, Wolfe Research.
I want to -- maybe just the first one on the quarter itself. Your quarter ended during a pretty anxious time in the marketplace. And I'm wondering if the election either caused any kind of late minute deal slippage, or just incremental friction, in the quarter itself that maybe unwound, if you will, post. And maybe comment both on that. And the conversation with customers as we're coming out of it, you got asked the question on the federal vertical, obviously, in [indiscernible]. But any other verticals that you feel incrementally more positive about would also be interesting. And I have a quick follow-up.
Yes. Alex, thanks for the question. Listen, we were pleased with our execution in Q3 and the results were in line with our expectations that we had internally. We had a good bookings quarter. We closed a number of significant deals and we saw tremendous momentum on AI.
So what I would say is we're happy to have the election behind us for any distractions that it may created. It's good to have that behind us. But we didn't see any impact one way or the other in the quarter, or any change in deal scrutiny or anything else. It was pretty consistent, both preelection and postelection.
Perfect. And then as we think about the deliverables, kind of taking a little bit of a change of pace in terms of [indiscernible] for the impact to numbers. Was that a -- was that a surprise in terms of you were able to sign these larger deals, and you knew you were going to sign them, but you didn't necessarily know that they would ask for these incremental things and -- or you -- help us understand that because it's the first time we're kind of hearing of this thing, if you will, impacting the quarter really for any of the companies, at least that I cover. So I'd love to just understand a little bit was the mechanics and logistics of this issue?
Yes, Alex, as you get into a number of these strategic deals. They're obviously deliverables, and in some case, you recognize revenue sooner in some cases later. Just so happened that these two were later. As it -- whether or not it was a surprise, obviously, we've been working these for some period of time. And you traditionally look at the accounting and everything that you have to produce through the course of the negotiation.
So obviously, if you had perfect line of sight into these, you may have either structure them differently or there may be some different elements to it, but we feel very good about these transactions. They are incredibly strategic. I just wanted to call it out as one of the elements as we went into -- as we looked out at Q4 and into FY '26. They together were large enough where they had an impact on our revenue.
And to your point, only recognize revenue shortly after signing, but we are encouraged by the nature of these types of transactions. They're very strategic. We expect them to grow significantly over a number of years. So we're very excited about them. again, I wouldn't read too much into it. It's just one part of the business that we just decided to call out this quarter.
So it doesn't -- basically, it doesn't change the ACV. It's just a timing element that maybe moves a little bit to the latter period?
Correct. I mean, in some cases, you can't necessarily capture the CRPO element because of the nature of the deal. But yes, it's just a timing element. That's exactly right.
Ladies and gentlemen, thank you for your participation on today's conference. I'll now turn it over to Mr. Eschenbach for final comments.
Thank you, operator, and thank you again for everyone for joining our call today. Before we go, I'd like to thank our Workmates, our customers and partners around the world who continue to fuel Workday success.
We continue to believe Workday can be amongst the most enduring and profitable software business of our time. We're focused on driving durable growth at scale and expanding operating margins and we once again achieved this in Q3, all while executing on our platform strategy to deliver the world's best AI solutions for our customers. Thanks again. And to those of you in the U.S., happy Thanksgiving.
With that, I'll turn it back to the operator to close out the call. Thank you, everyone.
Thank you. This does conclude today's teleconference. You may disconnect your lines at this time.