Q2 2025 Summary
Published Mar 11, 2025, 7:17 PM UTC- Workday's AI Advantage: Workday is leveraging AI and Gen AI powered by its highly curated HR and finance data, which provides a significant competitive advantage. Customers recognize that the value of AI is only as good as the underlying data, and Workday's data sets are among the cleanest and most comprehensive in the industry. This has led to customers investing in AI as they invest with Workday, boosting competitive win rates and driving innovation.
- Successful Growth Initiatives Driving Durable Growth: Investments in key growth areas such as financials, international markets, and the partner ecosystem are paying off. The partner community, in particular, has contributed to a 2x growth in new ACV from the previous quarter and is driving significant pipeline generation. These initiatives give Workday confidence in achieving mid-teens subscription revenue growth for the foreseeable future.
- Operational Efficiencies Enhancing Profitability: Workday is finding efficiencies through its global workforce strategy, leveraging locations like India and Costa Rica, and by implementing AI internally across finance, support, and development. These efforts have led to an expected 500 basis point expansion in operating margin over the next few years, allowing Workday to continue investing in growth initiatives while driving profitable growth at scale.
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Confidence in Growth
Q: What underpins your confidence in mid-teens growth?
A: Carl stated that several factors give confidence in achieving a 15% growth rate as they scale beyond $10 billion. Investments in their partner ecosystem are paying off, with partners building pipeline, innovating on the platform, and co-selling. International opportunities are significant, with more than 50% of their addressable market outside the U.S., and they've hired talent across Europe and new leadership in APAC and Japan. There's a strong opportunity in financials, with over 75% of workloads still on-premises moving to the cloud. Continued innovation, especially leveraging AI and Gen AI, and being inquisitive about M&A opportunities also contribute to their confidence. -
Operational Efficiencies
Q: Where can you achieve more efficiency while still investing?
A: Carl highlighted that they have expanded operating margin by 500 basis points over the last 2.5 years and plan to increase another 500 basis points in the next few years. Efficiencies come from their global workforce strategy, including new offices in India and Costa Rica, and prudent hiring focusing on quota-carrying capacity and software development. They're using AI in finance, support, and software development to drive efficiencies. Investments in partners and the financial sales force are starting to drive efficiencies and scale. -
AI Impact and Strategy
Q: How is AI impacting Workday, and what's your monetization strategy?
A: Carl explained they're taking a measured approach to monetizing AI, focusing on competitive win rates, with renewals remaining high and customer satisfaction strong. They are not increasing prices despite having over 50 AI use cases on the platform, believing customers are entitled to that innovation. They will introduce new SKUs when appropriate, like power optimization, talent optimization (one of their fastest-growing SKUs), Xtend Pro (an AI platform for building applications), and HiredScore, which is gaining traction. Customers are investing in AI when they partner with Workday, recognizing that AI's value depends on high-quality data, which Workday provides in HR and finance. -
Market Environment
Q: Is the current market a new normal for IT spending?
A: Carl believes the current macro environment is the new norm and bases their medium-term outlook on this assumption. While they can't predict the future or the impact of events like elections, they are prepared to continue growing due to their strong value proposition. If conditions improve and they get tailwinds like increased employment and headcount growth, they will update their model. -
Growth Initiatives
Q: Which growth initiatives are you most bullish about?
A: Carl stated that after reviewing their growth initiatives, they believe investments in financials and international opportunities are the right ones. The partner community is paying off, and they wouldn't pull back on any initiatives. Operating margin expansion allows them to invest back into the business across technology, go-to-market, and potential acquisitions, supporting durable growth. -
Down-Market Success
Q: How do you view your success in moving down market?
A: Carl mentioned they are aggressively pushing into the medium enterprise or emerging enterprise market, an area of strength. They are successful in selling full suite deals combining financials and HCM. They've modified pricing and packaging and introduced new delivery capabilities to accelerate deployment, providing faster value to customers. Partners are helping drive faster adoption, and they're expanding this strategy globally. -
Vertical Strengths
Q: Which industry verticals are showing strong pipeline growth?
A: Doug Robinson noted strong pipeline growth in industries like health care and higher education, which are multiyear opportunities for Workday's full suite. State and local government, and the federal business are also seeing strength, with good news expected in the second half of the year. In financials, products like Accounting Center, initially for financial services, are now selling across industries. Workforce Planning is also gaining momentum. -
Headcount Growth Impact
Q: Are you seeing slower headcount growth affect renewals?
A: Zane reported that assumptions about headcount growth have remained consistent with Q1, considering it the new norm, with no significant change. They made an adjustment of approximately $17 million over the year for this. It's contemplated in their FY '25 guide and midterm outlook, with no significant impact on revenue or bookings today. -
Free Cash Flow Margin
Q: Will free cash flow margin increase with higher operating margin?
A: Carl indicated that while broadly this might be expected, more details will be provided at their Investor Day. He noted that they are ramping industries where payments don't initially correlate with revenue, like Edge and federal. They're also now a taxpayer in the U.S., which may affect the correlation. -
Investment Mix
Q: How will you balance R&D and sales & marketing efficiencies?
A: Zane stated that opportunities exist across both areas. They've looked at innovation and R&D spend, including how AI can help. It's a balanced approach, with efforts to innovate, build out the product, and grow efficiently. They also focus on G&A efficiencies and balancing global growth with a well-represented workforce.