Earnings Summary

Workday Q2FY25 Earnings Analysis

On the evening of August 22nd, 2024, Workday (WDAY) reported
Q2FY25 earnings for the three months ending on July 31st,
2024.
Workday reported broadly in-line results, with its revenue and
EPS growth slimly exceeding expectations by 0.8% and
$0.10, respectively. Financial results were overshadowed by
updated guidance, lowering subscription revenue growth to
15%, and more importantly raising operating margins to
30% by FY27.
CEO Carl Eschenbach began the call by sharing top-line figures indicating Workday's selling environment
remained unchanged, with continued deal scrutiny and moderate headcount growth within the
customer base. Eschenbach also shared that win rates remained high, and sales teams delivered a solid Q2.
Sales updates included highlighted bookings in the education, healthcare, and public sector verticals, and
global HCM wins and expansions in several areas, including across EMEA, New Zealand, and Japan .
Eschenbach concluded his prepared remarks by discussing partnerships and how the momentum to partner
is driven by demand for Workday's data and AI innovation . Several partners were mentioned, such as
coselling products with Kainos under the "Built-On Workday" program, merging AI agents with Salesforce ,
and offering the new Equifax Employment Verification Connector to make employment verification easier.
CFO Zane Rowe covered financials in-depth by communicating that performance was slightly ahead of
expectations across all key metrics. While not part of official guidance, Rowe shared: “Focus areas have
been ramping up over the past year, providing us better insight into how their growth trajectories augment
our core business. As we incorporate this into our planning, along with the current environment, we now
expect subscription revenue growth in the mid-teens for both FY26 and FY27.” Finally, Rowe confirmed
that while Workday is committed to organic growth, it has an appetite for pursuing strategic M&A
opportunities and managing share dilution.
Q2FY25 Result Highlights:
Total Revenues of $2.085B (+16.7% y/y); exceeded analyst expectations by 0.8%
Subscription Revenues of $1.903B (+17.2% y/y) increased from the same period last year
Operating Income was $111M, or 5.3% of revenue, compared to an operating income of $36M, or 2.0%
of revenue, in the same period last year
Non-GAAP Operating Income was $518M, or 24.9% of revenues, compared to $421M, or 23.6% of
revenue, in the same period last year
Diluted Net Income Per Share was $0.49, compared to $0.30 in the same period last year
WDAY shares initially traded down after reporting but rallied to +11% in the after-market trading ,
following Workday's disclosure of its revised medium-term goals. The initial negative response may have been
related to revenue growth in the mid-teens (slimly beating consensus) but seemed to be offset by

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accelerated non-GAAP margin expansions due to efficiencies seen in several areas, including new offices
in Costa Rica and India.

Results Reported Guidance

Q2FY25 Result Highlights Q3 and Full Year FY25 Investor Guidance: Sales
Partnerships: Ride or Dies Efficiencies
Product: AI in Abundance
Sales Update: Wins and Expansions
Sales Update: Deal Scrutiny, Particularly in EMEA
Company Updates: Managing Dilution, Returning
Excess Capital

Impact and CI Viewpoint

CI ANALYSIS: A FRIEND TO ALL IS A FRIEND TO NONE

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Results Reported
Q2FY25 Result Highlights

Total Revenues of $2.085B (+16.7% y/y) exceeded analyst expectations by 1.0%

Subscription Revenues of $1.903B (+17.2% y/y) increased from the same period last year
Operating income was $111M, or 5.3% of revenue, compared to an operating income of $36M, or 2.0% of
revenue, in the same period last year
Non-GAAP operating income was $518M , or 24.9% of revenues, compared to $421M, or 23.6% of revenue, in
the same period last year
Diluted net income per share was $0.49, compared to $0.30 in the same period last year
Non-GAAP diluted net income per share was $1.75 (+22% y/y), coming in $0.10 ahead of consensus, compared
to $1.43 in Q2FY24
12-month subscription revenue backlog was $6.80B (+16.1% y/y)
Total subscription revenue backlog was $21.58B (+20.9% y/y)
Operating cash flows of $571M compared to $425M last year
Free cashflows of $516M compared to $360M in Q1FY24
Workday repurchased Class A common stock of approximately 1.4M shares for $309M
Cash, cash equivalents, and marketable securities were $7.37B, as of July 31, 2024

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Results Reported
Partnerships: Ride or Dies

During the call, Workday highlighted several partnerships.

Equifax : announced a strategic partnership to modernize employment and income verification process . By
integrating Workday Payroll and The Work Number® employment and income verification service from Equifax,
Workday customers will be able to offer their employees instant verifications. Workday's new opt-in
“Employment Verification Connector For Equifax integration” is expected to be available to all U.S. Payroll
customers in 2025, which is being provided at no additional cost.
Kainos : one of the first partners to adopt the “Built On Workday" program by rolling out implementation
testing, auditing, and document management products . “Built on Workday" allows partners to build,
distribute, and monetize their applications on the Workday platform. Kainos has been an integral part of
Workday's growth in EMEA, as they offer a program called “Spark & Grow” to quickly deploy Workday for mid-
sized companies.
Salesforce : partnered by combining Salesforce's new Agentforce Platform and Einstein AI with the Workday
platform and Workday AI for employee service for onboarding, health benefit changes, career development
and others. This partnership also integrates sales data with financial/HR data for a single set of queries.
Strada : Workday announced new innovations to bolster its global payroll strategy, which include the global
availability of Workday Payroll provided by Strada , and it's new Global Payroll Connect Hub , a unified
global payroll solution that can connect with any payroll provider.
CI Analysis. Workday's partner ecosystem continues to grow in both breadth and depth, leveraging partners for
everything from pipeline sourcing to AI innovation. Workday's Q2FY25 partner contributions to new ACV more than
doubled from last quarter, with partners having another record quarter of pipeline generation.
What is even more important than growing the pipeline is the innovation these partnerships provide. These
partnerships quickly make the Workday platform easier for clients to use, provide a more efficient way to grow the
platform in new market segments, and expand Workday's dataset for generative AI.
Data rules in a world of AI. Workday believes that expertise and data, rather than just models, will be the key to
differentiation in AI. While Workday is quick to point out the size of its data repository, each client who uses Workday
will need to opt-in to allow its data to be used. Workday will need to be cautious with data security, as it operates
under new ways to share data with outside platforms.
With Global Payroll Connect Hub, Workday is looking to capitalize on the demand from organizations to have a single
view of payroll with visibility into workforce costs and data integration. Taking a page from Dayforce book, Workday
is positioning this partnership as a way to consolidate the tech stack and is promising to reduce implementation
costs by 50%--which is critical as Workday continues to expand in the mid-market.
This means that Workday can tell the story of serving payroll in 160+ countries because the Hub has APIs that flow
the data through any payroll provider , being able to capitalize on existing compliance and currency conversion
features of localized payroll vendors. Other companies actively working with Workday to adopt the Global Payroll
Connect Hub are CloudPay, PwC, Payslip, Safeguard, and SHAPEiN. However, the Hub provides Workday with a way to
work with any payroll provider, leaving room for further expansion.

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Results Reported
Product: AI in Abundance

Below is a summary of the products discussed during the earnings call:

Accounting Center : a product for FINS that unites the front-office and operational systems with the back office
by integrating business events into detailed accounting data. Workday has dedicated teams for vertical
selling by industry , each with solution consulting, which has developed innovative use cases across the
industry. Note: The Accounting Center was initially developed for Financial Student products.
HiredScore : Workday announced that HiredScore AI for Recruiting and HiredScore AI for Talent Mobility is
now available through Workday under one unified contract .
Workday Extend Pro - announced two products at the Annual Developer Conference:
AI Gateway : Workday announced that it had added new APIs.
Developer Copilot : official roll-out of the Workday Extend Developer Copilot , which leverages AI to
generate coding that can be dragged/dropped for custom apps on the Workday platform.
CI Analysis. The developer copilot was initially featured at Workday Rising in the Fall of 2023. Extend is currently one
of Workday's fastest-growing SKUs, with new ACV increasing more than 75% in Q2, driven by Extend Pro, which uses
Workday AI. This product helps build extensibility on the platform for developers and clients alike, making the
platform stickier and improving the user experience.
Six months after the acquisition, Workday announced the general availability of its HiredScore talent orchestration
product. With patented AI parsing capabilities, Workday has an unrepeatable feature set and a new revenue source,
positioned to an existing base of 4,000+ recruiting customers. We expect Workday to continue to build out both talent
products to support its strategy of promoting a skills-based economy. Workday is already reporting a 25% increase in
recruiter capacity for this product, forcing talent intelligence partners to step up their game and accelerate their own
AI innovation in this field.
Workday will take a measured, multi-pronged approach to monetizing AI. First, monetizing through competitive win
rates that are up again this quarter. Workday will not rush to market and increase pricing for customers because there
are 50+ AI use cases. When leadership brings the new SKUs to market, it will help customers justify spending
incremental dollars on AI through productivity gains.

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Results Reported
Sales Update: Wins and Expansions

New Bookings: Lam Research, City of Cleveland, Colorado State University, & John Hopkins
Go-Lives: AutoNation, Barclays, CDW, CrossCountry Mortgage, Forvis Mazars & Texas Roadhouse
HCM Expansions: J.B Hunt, Nissan, Target, and Trinity Health
HCM Expansions and Renewals: Clemson University, County of San Joaquin, and Presbyterian Healthcare
Services
HCM Global Wins: GE Vernova, First Bus, and Sunrise Senior Living
Non-HCM Global Wins & Expansions
EMEA : EMEIS, Saint-Gobain, and Groupe Atlantic Synergy
New Zealand : Ministry in New Zealand & Kelsian Group Limited
Japan : Terumo Corporation, Shizen Energy, and Tokyo Electron
VNDLY: Cushman & Wakefield, Lowe's, and Ryder Truck
Verticals - Full Suite & Wins
Education : Florida A&M, University of Mississippi, and Clemson University
Healthcare: Grady Health System, Reid Health, & Children's National Medical Center
Public Sector: Delaware County, County of San Joaquin, and Santa Cruz County

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Results Reported
Sales Update: Deal Scrutiny, Particularly in EMEA

FINS : leaning heavily on the financials opportunity because Workday sees 75% of workloads on-premises
moving to the cloud . Workday shared that they are starting to see scale with the extensive build-out of its
FINS salesforce in 2023.
Global: EMEA continues to experience heightened deal scrutiny , but the Workday Sales Team delivered
larger sized deals in Q2 . Leadership continues to believe that over 50% of its addressable market opportunity
is outside the U.S.
Mid-Market : while historically seeing success in large enterprise, Workday continues to push down into the
medium enterprise or emerging enterprise quite aggressively.
Partners : continue to drive a significant portion of the pipeline, responsible for a 2x growth in new ACV
quarter-over-quarter.
Retention : gross and net revenue retention rates remained at over 95% and over 100%, respectively, in Q2.
Users : more than 70M users under contract and 2,000 FINS customers.
WFM : the VNDLY product received a call-out for expansion momentum.
CI Analysis. While Workday continues to deliver on it's growth initiatives (for FINS, global, and partnerships) and
penetrate with HCM full-platform down-market, continued macro pressure and likely some saturation in HCM large
enterprise is causing a deceleration in growth. This is consistent with last quarter's cut to FY25 revenue.
Workday is generating growth by any means necessary, particularly since large enterprise HCM demand has slowed in
the past 18 months. Workday will continue to push more services to its channel partners. Also, demand in North
America appears to have been more resilient than in Europe, with a heightened focus on mid-market and new SMB
customers, along with some FINS traction.

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Results Reported
Company Updates: Managing Dilution, Returning Excess Capital

Headcount for Q2FY25 was 19,900 , up from 19,400 for the quarter ending April 30th, 2024.
Workday reports having offices in over 30 countries .
Workday Rising 2024 is being held at the Mandalay Bay Convention Center in Las Vegas, NV from September
16th-19th; the Financial Analyst Day will be held on Tuesday, September 17th during the conference.
Workday joined the Fortune 500 list for the first time, ranking it among the largest U.S. companies by revenue.
The company also accelerated the pace of its share buyback in Q2, repurchasing $309M shares (average price
of $223.10 per share). With Workday's existing $500M buyback authorization nearing completion, its Board
has authorized a new $1B share repurchase program .

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Guidance
Q3 and Full Year FY25 Investor Guidance: Sales Efficiencies

Workday now looks for its non-GAAP margin to increase to 30% by 2027, up from the prior outlook of 25%. This
revised margin expectation is based on several efficiencies, including:
Offshoring : Workforce strategy of leveraging its current global workforce, along with two new offices brought
online in the last six to 12 months in India and Costa Rica.
Quota'd Sellers : Hiring will focus on quota carrying capacity and continued investments in software
development on the product and technology side of the business.
AI : AI is being used in its call centers, finance organization, and support organization, while AI copilots are
being used in software development to drive efficiencies.

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Impact and CI Viewpoint

CI ANALYSIS: A FRIEND TO ALL IS A FRIEND TO NONE

A New Normal
Workday has found a way to avoid the post-earnings call stock slump. This quarter, Workday announced adjustments
to its medium-term guidance, which included a dialed-back pace of subscription revenue growth balanced with
accelerated margin expansion. By doing this, the company resets the growth rate floor and redirects attention to
increasing margin improvements. If Workday can drive significant margin improvement, in the long-term, it could
have one of the highest operating margins for cloud companies.
The new guidance of 15% subscription revenue growth, year-over-year, is in line with consensus expectations. So,
lowering guidance here helps de-risk Workday, as the company reported a steady decline in subscription revenue
growth--once around 20%, and dropping to 17%-18% in the last six quarters. These margin improvements will be
seen by outsourcing pipeline growth, increasing channel partners deployments, and pushing additional investments
in AI technology to drive efficiency across all business segments. But all of these strategies also being adopted by
other large enterprise competitors. What makes this different for Workday? While this may be the “new normal” for
Workday, it's not a market norm that we can identify at this point.
Partnership Quid Pro Quo
Workday called out continued momentum with its partner network, with management highlighting that the company
added hundreds of partners in the first half of fiscal 2025. Partners serving in a reseller capacity will help drive
incremental growth with little effort and low financial investment by Workday. If Workday maintains these
partnerships as mutually beneficial, it sets them up for easy revenue streams.
However, some of these relationships seem to be one-way streets in the direction of Workday. Take the Insperity
partnership, for example. I see it is a much better deal for Workday than Insperity when reading through the details.
Insperity is investing ~$150M in the partnership over the next five years, including being responsible for setting up
the client in-tenant deployment team, Insperity's corporate in-tenant version of Workday, and for training the
necessary Insperity implementation/service teams who will provide support for the new PEO solution.
Another example, involves the new Global Payroll Connect Hub, where Workday gets the branding and recognition
with the partnered payroll provider lending the bulk of the product. It feels that Workday wants to ride the coat-tails
of international payroll vendors already established in the region. If anything, Workday should want to benefit from
the branding of that vendor as they are the no-name in spaces like EMEA.
A View to the Market
It will be interesting to see if the move to reduce revenue growth guidance and slightly increase margins will direct
the rest of the competitive market to follow suit in other similar ways. Workday's stock has already benefited, seeing
new share price targets of $270 from $260. This is big as the company's share price dropped over 21% since February
of 2024, which was happening due to the steadily declining revenue growth. Is it safe to say that 20% growth in this
industry is unrealistic?
After Dayforce's last earnings call, there were questions about how Dayforce could move the needle of its stock price.
Workday's stock price is already near the top of the heap, so ADP is the only competitor it has to catch. Eschenbach is
looking to attach his wagon to anyone who will partner with Workday, but it seems like a risky move. With all of the
moving parts, there are bound to be missteps that damage Workday's reputation as a partner.
As Workday moves forward, with the strategy to utilize partners for both channel growth and AI innovation, there is a
lot of pressure on Eschenbach to make this successful. He will need to balance the incentives of partnering with
Workday and the motivations of each partner. We all know that building out an ecosystem is essential in the HCM

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world, but once you rely too much on other people, driving the bus becomes more complicated and you start losing
control of vital components like quality and accountability.

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Earnings Call Transcript

Earnings Press Release
Investor Presentation
Workday Avatar (Wendy)
ADP CI Portal

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