Q3 2025 Summary
Published Mar 11, 2025, 7:18 PM UTC- Strong AI Momentum and Customer Adoption: Workday is experiencing significant momentum with its AI solutions. In Q3, 30% of deals with existing customers included an AI SKU, demonstrating rapid uptake of these technologies. Customers are willing to pay for these solutions due to the tangible ROI they provide, indicating a strong potential for future revenue growth driven by AI.
- Confidence in Sustained Mid-Teens Growth Supported by Multiple Initiatives: Workday reiterated confidence in achieving mid-teens growth over the next couple of years, supported by solid execution and multiple growth drivers. These include building out the partner ecosystem, expanding opportunities in the U.S. federal government sector where over 80% of HCM and ERP systems are still on-premises , focusing on industry verticals, increasing full suite sales (more than 35% of net new lands included full suite solutions in Q3), and moving into the medium enterprise segment.
- Solid Pipeline and Strong Q4 Expected: Workday has a solid pipeline entering Q4, which is historically its largest quarter. The company expressed confidence in delivering against its guidance, with significant large deals expected . This positive outlook suggests potential for exceeding expectations and driving share price appreciation.
- Macroeconomic headwinds and increased deal scrutiny in Europe (EMEA) are impacting Workday's sales cycles and potentially affecting revenue growth from the region. While the company maintains strong win rates when customers decide to proceed, the economic challenges are causing delays and uncertainties.
- Workday expects a deceleration in Q1 FY26 subscription revenue growth, anticipated to be slightly lower than the overall 14% target due to factors like the leap year effect. The company's reliance on emerging AI opportunities to drive acceleration in the second half introduces uncertainty, as these opportunities are still early in development and may not contribute as significantly to revenue as expected.
- Operating cash flow in Q3 was $406 million, down year-over-year, impacted by timing of collections. The company maintained its full-year operating cash flow guidance, suggesting potential challenges in cash flow generation and limited upside in the near term.
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Deliverable Issues Impacting Revenue Recognition
Q: How are deliverable issues affecting guidance and revenue?
A: Management explained that certain strategic deals in Q3 had product deliverables that delayed revenue recognition. This is expected to impact approximately $8 million to $10 million in Q4 revenue. For FY '26, these delays contribute roughly 0.5 percentage point to the growth rate, with the revenue expected to ramp up over the course of the year. -
Confidence in Mid-Teens Growth Guidance
Q: Are you confident in achieving mid-teens growth in FY '26 and '27?
A: Management expressed confidence in maintaining mid-teens growth over the next couple of years, citing strong Q3 results, momentum in AI solutions, increased sales back to the customer base, and strategic investments in areas like the federal government and partner ecosystem. -
AI Solutions Driving Growth
Q: How are AI solutions contributing to growth?
A: The company is seeing significant momentum with AI solutions. In Q3, over 30% of sales to the customer base included an AI solution. Products like Recruiter Agent and Talent Optimization are gaining traction, with customers willing to pay for these offerings due to tangible ROI. New AI agents are expected to contribute to bookings and revenue in FY '26. -
Federal Government Business Momentum
Q: What is the outlook for the federal government segment?
A: Management believes there is a huge opportunity in the federal government, with over 80% of HCM and ERP systems still on-premises. Strategic wins like the Defense Intelligence Agency deal are driving demand, and government efficiency initiatives are expected to be a tailwind as agencies look to modernize and reduce costs. -
Impact of U.S. Election and Interest Rate Cuts
Q: Has the election or interest rate cuts affected customer behavior?
A: Management did not see any significant impact from the U.S. election or interest rate cuts on customer behavior in Q3. Deal scrutiny remained consistent, and there was no change in business momentum. -
European Market Performance
Q: How is Europe performing amid mixed signals?
A: Despite economic headwinds in EMEA, Workday continues to win a significant portion of deals when customers decide to proceed with transformational projects. The company's win rate in Europe remains strong, and management is confident in the long-term opportunity. -
AI Monetization Strategy
Q: How will you monetize AI solutions?
A: Workday is taking a multi-pronged approach to AI monetization. Customers view investment in Workday as part of their AI strategies, which is reflected in high win rates and customer satisfaction. The company is pricing new AI agents based on the value delivered, with customers willing to pay for solutions like Recruiter Agent due to significant productivity gains. -
Leadership Transition with Rob's Appointment
Q: Will Rob's appointment lead to changes in strategy?
A: Management does not anticipate any negative impact from Rob's appointment as Go-To-Market co-President. Carl Eschenbach has known Rob for many years, and with a six-month overlap period with the outgoing executive, they expect a smooth transition without any disruption to the business or strategy. -
Guidance and Growth Outlook
Q: What informs your Q4 and FY '26 guidance?
A: The Q4 guide reflects a solid pipeline and momentum in AI solutions. For FY '26, the initial guidance of approximately $8.8 billion in subscription revenue considers the impact of strategic deals and a leap year compare affecting Q1 by about 1 percentage point. Growth is expected to build throughout FY '26, with higher growth in the second half due to revenue recognition from strategic wins and continued AI momentum. -
Operating Margin Expansion
Q: How are you balancing growth with margin expansion?
A: Workday is focused on driving durable growth while expanding operating margins. Management has emphasized scaling the business efficiently through improvements in people, process, and systems. They expect to grow margins beyond 30% over the next two years while maintaining mid-teens growth.