Q1 2027 Earnings Call Transcript

Ladies and gentlemen, welcome to Workday's first Quarter Fiscal Year 37 Earnings Call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the call. During Q&A, please limit your questions to 1. I will now hand it over to Justin Allen Furby, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Welcome to Workday's first quarter fiscal 27 earnings conference call. On the call, we have Aneel Bhusri, our CEO; Garrett Katzmeyer, our President, Product and Technology Rob Enslin, our president and chief commercial officer and Zane C. Rowe, our CFO.

Following prepared remarks, we will take questions. Our press release was issued after the close of market and is posted on our website. where this call is being simultaneously webcast. Before we get started, I 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 in the documents we file with the Securities and Exchange Commission including our fiscal 26 annual report on Form 10 k 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 disclosure 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 90 days on our company website under the Investor Relations link. Additionally, the prepared remarks of this call and our quarterly investor presentation will be posted on our Investor Relations website following this call. Our second quarter fiscal 27 quiet period begins on July 15, 2026. Unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal 26. With that, I will hand the call over to Aneel.

Thanks, Justin, and thanks to everyone for joining us today. it is great to be with all of you. I now have a full quarter under my belt since returning as CEO and I truly feel the energy building at Workday every day. both throughout our path Forward On AI And The Company As A Whole. We are in New York City this week for the Sana AI Summit, where we brought together some of the brightest minds in AI with our top customers. it is an incredible event, and it was great to see a few of you there. A few weeks ago, we hosted our top industry analyst at our annual innovation summit.

Typically, a skeptical group, they came away generally impressed by the pace of innovation and by our renewed focus on operating like a start up. 1 of them even called it the reinvention of Workday. Indeed, their reaction to our vision and execution around AI told me that we were absolutely on the right path. So do our Q1 results. We had a great first quarter.

In fact, it was the best first quarter of new ACV growth in 5 years anchored by the strength of our core business and the traction we are seeing with AI. Following slower ACV growth in fiscal year 26, we are seeing momentum once again building in the business. I am confident in our ability to drive accelerated new ACV bookings this year as we bring new agents to market for our customers and drive even greater adoption. Last quarter, I mentioned I came back to help Workday lead again during the biggest technology transformation of our lives, After being back for 3 months, I have even more conviction that this is Workday's moment to lead.

But to do it, we need to operate differently than we have been. In coming back, I was very focused on returning Workday to a start up orientation and a growth mindset. Indeed, I watched a lot of Steve Jobs videos where he talked about his management approach when he returned as CEO. What struck me most was not about what Apple built after he returned.

Which was obviously incredible. It was more about his management philosophy. There was 1 interview in particular from AllThingsD where he called Apple the biggest startup in the world, and said it was the startup mindset he brought back. Fewer layers, faster decisions, the best ideas winning, more ownership.

We are trying to emulate that startup playbook. As a great philosopher Yogi Berra once said, and apropos that we are in New York City this week, it is like deja vu all over again. And so we are going back to our founding principles. I have said before, Chapter 4 is a refounding moment for Workday.

With AI, we are essentially a start up again. We are startups sitting on 1 of the most important enterprise platforms ever built, and the trust of more than 11.5 thousand customers. We need to embrace that mindset. it is all about focus and trust, clear ownership, and the best ideas winning. that is how we are leading Workday now. it is how David and I led the company early on. As part of this mindset, we have simplified our priorities to 3. Number 1, build and deliver the AI future.

Number 2, grow with our customers. And number 3, live our values. We have also streamlined ownership across the organization so every workmate knows exactly how their work connects. to get things done with greater focus. A dedicated AI agent factory building agents across all of our application areas.

Clear ownership and accelerated development of our AI APIs. We have got the right people to do it. We have some incredible leaders from the companies we have acquired, now in key roles at Workday. 1 of them is Joen Hellermark, the founder of Sana, who we named our chief AI officer just today. that is by design. These leaders know the startup mindset, they are helping Workday move faster and stay focused.

I have also thought a lot about how Workday wins in this new chapter. I have met with dozens of customers since I have been back, and I keep hearing the same thing. Not 1 of them is looking to replace Workday with something they are building internally or from a start up. Instead, they were looking to us first for AI solutions for the HR and finance worlds, and, hopefully, IT in the future. it is really our opportunity for the taking, but we need to execute flawlessly and with speed.

We have all the requisite components. 1 day in a model for all customers, 1 security model, and a true cloud architecture. Our business process framework gives AI the rails it needs to operate safely and accurately in the enterprise. And over the past several years, we have completely rewritten our tech platform to be AI native in the way we manage transactions, reports, and the UI requests. that is basically the foundation we spent 21 years building, and now been modernized for AI. Down to the core OMS.

And we are delivering the results as well. Q1 was our first quarter with both Sana and Paradox fully integrated. With Sana, we are giving our customers a completely new workday experience. it is a new front door to Workday that is simple and modern. The Sana platform is also the foundation for everything we are building in AI going forward.

Joe and his team have created something remarkable and the integration has gone further and faster than I anticipated. We have already proven that customers trust Workday to deliver AI through the agents we acquired. This is the year we proved that they also buy the agents we are building organically. Agents that only Workday can build and Garrett will share more on that momentum in a moment.

While there are some who believe that AI can disrupt Workday, I see something different. Our chance to once again be a disruptor with AI clearly driving that disruption. To that point, Garrett will talk about Sana for ITSM the new travel agent we announced today at the summit. These are early examples of what it looks like when we use Sana to rapidly innovate on top of our data and context.

What ties all this together is 1 simple truth. Customers do not want AI for AI's sake. They want AI that adds value to how they run their businesses. Our early adopter customers are already seeing that, and they want more from Workday.

To close, I am confident that Workday is ready for this AI moment. Our core business is strong. and our AI strategy is working. Our execution is accelerating starting with Q1. Seeing the agents' garage building and the success Rob is having selling and deploying them with customers I could not be more confident in our path ahead and our ability to lead. Garrett, over to you.

Awesome.

Thanks, Aneel, and hello to everyone. For AI, the world model is like the holy grail. Today, a large language model, it just predicts the next token in a sentence. And the world model it is the step change needed to understand the physics of its real environment. it is about how things actually work.

And the laws that govern them. On Workday's platform, we have over 80 million users under contract. And approximately 1.4 trillion transactions annually. That is giving us a set of data and context that no other competitor can replicate.

For more than 20 years, we have been on the journey of building the world model of work. And here is what we have done. We have mapped the patterns of work at scale. Who approves what?

How money moves? How people get hired, assessed, developed, and scheduled for their work? And the policies, the processes, and the exceptions around them. And here is the key insight for you.

This world model of work is the best context extension for generative AI for HR, finance, and beyond. It unlocks unmatched enterprise grade accuracy for AI automation. All of this is adding up to agents that our customers can trust to perform actual work inside real business processes. And you can see that clearly in the impact that they are delivering already for our customers.

In Q1, for example, we have supported 14 million hiring processes with our recruiting agent. That is up 44% year-over-year. And we have analyzed more than 1.1 million contracts with contract intelligence. That is up 53% from last quarter.

Now that is the world model of work at work. And while we are driving all of this amazing impact, the pace of innovation here at Workday, it is accelerating. We now have 20 organic agents in GA or EA. And the number of customers using these agents has more than doubled quarter over quarter with over 4 thousand customers using at least 1 organically developed agent as of today.

And here are just a few highlights for you. Deployment agent is now being used in our first end to end customer project. It is designed to deliver an estimated 30% reduction in implementation hours and cost. And in our next wave of AI driven projects, we are aiming to get that reduction up to 50%.

And here is why this is so important. This reduction in time and cost of deployment is removing a historic barrier to choose Workday. Particularly in the mid market segment. Further, customers like University of Arkansas System, GE Vernova and Mohegan they are using Deployment Agent across their Workday systems instantly resolve issues and answer questions.

So admins can spend their time moving their projects forward. Also, we are seeing a super fast takeoff of our self-service agent. This quarter, our first Fortune 500 customers are expected to go live on self-service agent. And we will take another big step at the end of this month.

All HCM and finance customers on our AI terms of service they will get Sana for Workday and our self-service agent as a part of their existing contract. So now let's talk about our accelerating AI business momentum. In Q1, our new ACV from agentic AI products it grew more than 200% year-over-year. And we are also approaching $500 million in ARR from our agentic AI solutions.

But we are not stopping here. AI lets us break free from the narrow definition of legacy business applications. That lead to frustrating user experience breaks and outsized spend for so many companies out there. With Sana as our AI platform, we are pushing the boundaries of HR and finance and IT with new AI solutions.

Just today, here in New York City, we announced 2 new agentic solutions from Workday that proved this out. our Sana Travel Agent, brings business travel planning, booking, and expenses into a single conversational experience. With more than 5 million expense reports processed monthly on Workday, and much of it is travel, this agent takes on the heavy lifting. It can automatically handle bookings, receipts, policy checks, and expenses. So employees get a more seamless travel experience.

And finance teams they get real time visibility into current spend and future travel commitments. We have also announced Sana for ITSM, which automates workflows for employee on and offboarding access changes, and everyday IT requests. Many service requests start with employee life cycle changes that Workday already knows about. Like joining a company, moving across teams, or even exiting.

And with the key data the work identity, the org chart, job profiles, and so much more running on Workday we inherently know the chain of approvals the required policies, and the right work context. That allows us to simplify and automate ITSM requests at a whole new level. Lastly, let's take a look at the Workday platform and our AI momentum there. Workday Extend Pro enables customers to build their own AI powered solutions on our platform, taking advantage of our AI APIs.

In Q1, Extend Pro continued to be 1 of the fastest growing products with new ACD nearly doubling year-over-year. And here is our approach. At workday, we embrace the AI ecosystem, and we design for openness. So our customers and our partners they can build their own AI innovations without locking them in into a single vendor stack.

We are giving our customers choice and free clear paths to run agents on the Workday platform designed to meet them wherever they are. First, our customers can build their own AI agents with Workday's agent ready tools. These are a new class of Workday connectors and APIs that are purpose built for autonomous consumption by AI agents at enterprise scale. And available via open standards like MCP.

Second, our customers can plug in Workday agents into their agentic front door using the a to a protocol. And already in Q1, we have made self-service agent available in Microsoft Teams Microsoft Copilot, and Google Gemini. And third, they can use Workday's agents in Sana. For the fully optimized work experience.

Their Workday provides the reasoning, the context, and ultimate AI user experience. it is the AI workbench for work. These options give our customers and partners the flexibility to adopt AI the way that best fits their business. So stay tuned for our upcoming developer conference, DevCon, the first week of June in Las Vegas. There, we will announce new Workday AI platform innovations.

And here is the bottom line of all of this. Enterprise AI starts to pay off when agents can perform actual work. With the same approvals security, policy, guardrails, that govern the rest of the business. that is exactly the future we are delivering for our customers. Powerful AI agents harnessing the world model of work built on an open platform.

And with that, over to you, Rob.

Thank you, Garrett, and hello, everyone. We are proud that more than 11.5 thousand customers around the world trust Workday with the most important parts of their business. From payroll to closing the books, And as Aneel said, growing with our customers is 1 of our top priorities. You see that in our results.

In Q1, expansions once again drove roughly 60% of our subscription revenue growth. With customers like Queensland University of Technology Rakuten Group, and Bank OZK expanding their relationships with Workday. We also continue to go deeper in federal, and had a record turnout at our 4th annual Fed Forum in DC last month. With nearly 600 attendees.

And in Q1, we kicked off the next phase of our contract with the Defense Intelligence Agency. net new business drove 40% of our subscription revenue growth, Also in Q1, We formed new relationships around the world with key brands including Harley Davidson Del Monte, Australian Gas Infrastructure Group, Smiths Group, Heartland Dental, and AC Hotels by Marriott. State and local government was also a standout this quarter, where we signed statewide deals with the state of Delaware and the Commonwealth of Massachusetts. Turning to AI. The numbers this quarter tell a clear story.

More than a quarter of new ACV from customer base expansions came from AI, and expansion deals that included AI were over 50% larger on average. The pattern is consistent. Customers who adopt our AI go deeper on the platform. The University of Arkansas System is a great example.

They have 21 institutions, including research universities, community colleges, and an academic medical center. All on a single Workday instance. They process over 2 million transactions a month And in Q1, they used our deployment agent to cut support tickets and uncover configuration insights that once required manual searches. Deployment agent has significantly increased the operational velocity and allowed them to scale Workday with less reliance on external consultants.

Our flex credits pricing model is quickly gaining traction. Flex credits have unified AI monetization across Workday, 1 model for agents, AI APIs, and data cloud. It makes AI adoption simpler for our customers. While still early in the journey, we are seeing a growing mix of AI monetization coming through flex credit.

And as we bring our new agentic innovations and acquired agents, onto the model throughout the year, this will become a more meaningful part of how we grow. We are also continuing to make progress outside of North America. In APAC, we expanded our operations into Vietnam, which opens up a brand new market for Workday. This strategic expansion is made possible by 5 global and regional partners.

All dedicated to meeting the growing local demand in Vietnam for digital transformation. And in EMEA, we launched an EU based data residency in Frankfurt. This was a significant milestone for European customers with data sovereignty requirements. We are also expanding Workday Go, globally to help these customers get up and run faster in a more standardized way.

EMEA is now our second largest region for medium enterprise. which we define as 500 to 3.5 thousand employees. A new ACV in that segment grew by more than 50% in the quarter. Workday Go is now available in France, Germany, and The UK, with an additional 14 countries available through our partner network. Speaking of partners, our ecosystem continues to be a meaningful driver of our growth.

In Q1, roughly 30% of net new ACV was sourced by partners. We also hit several milestones worth mentioning. Including Insperity's HR scale solution is now generally available. Bringing Workday to the PEO market for the first time to deliver full service HR for growing businesses.

Workday recognition powered by Achievers is live. And we expanded our workday wellness program with Morgan Stanley at work and Perkspot. Momentum this quarter was broad across expansions, net new AI and international. We are growing with our customers and continuously evolving.

To meet their needs. Now over to Zane to share more on the financials. Thanks, Rob.

And thank you to everyone for joining today's call. As Rob mentioned, our results this quarter demonstrate ongoing customer adoption across our platform as enterprises around the globe turn to Workday to manage and empower their most important assets. Subscription revenue in was $2.354 billion, up 14%. Professional services revenue was $188 million, resulting in total revenue of $2.542 billion, a growth of 13%.

From a geographic perspective, US revenue in Q1 totaled $1.89 billion, up 13% and international was $649 million, up 16%. 12 month subscription revenue backlog, or CRPO, was $8.81 billion at the end of Q1, growing 15.5%. This was driven by continued customer expansion, bolstered by our AI solutions and growth from new customers. Total subscription revenue backlog at the end of Q1 was $27.29 billion, up 11%. Gross revenue retention rates remain strong at 97% in the quarter.

Net customer expansion rates remained consistent with what we observed last quarter, contributing roughly 60% of our subscription revenue growth for Q1. Non GAAP operating income for the first quarter was $809 million representing a non GAAP operating margin of 31.8%. Margin strength was the result of the revenue outperformance combined with favorable spend versus expectations. Q1 operating cash flow was $696 million, a growth of 52% and free cash flow for the quarter was $616 million, a growth of 46% and in line with our expectations. We repurchased $1.6 billion of our shares during the quarter and had $1.3 billion in remaining authorization as of April 30. We ended the quarter with $4.4 billion in cash and marketable securities.

Our headcount as of quarter end stood at 20.8 thousand workmates around the globe. Now turning to guidance. We remain focused on driving adoption of our agentic solutions across HR and finance. While expanding into adjacent market opportunities providing a foundation for long term growth.

We are pleased with our performance in Q1 and we are reiterating our fiscal 2027 subscription revenue outlook of $9.925 billion to $9.95 billion, a growth of 12% to 13%. We expect Q2 FY 27 subscription revenue to be approximately $2.455 billion, a growth of 13%. We anticipate CRPO to increase between 13.5% and 14.5% in Q2. For Q2, we expect professional services revenue of $180 million. As Anil mentioned, we are streamlining how we operate the business, and we are focused on investing in areas with the highest returns.

We are increasing our FY 27 non GAAP operating margin guidance to 30.5%. For Q2, we expect a non GAAP operating margin of approximately 30%. We expect Q2 GAAP operating margin to be approximately 19 percentage points lower than our non GAAP operating margin and the full year fiscal 2027 GAAP operating margin to be approximately 18 to 19 points lower. The fiscal 2027 non-GAAP tax rate is expected to be 19%.

We are maintaining our fiscal 2027 operating cash flow outlook of $3.45 billion and we continue to expect fiscal 2027 capital expenditures of approximately $270 million, resulting in free cash flow of $3.18 billion, a growth of 15%. In closing, we remain focused on the potential for AI to transform our HCM and finance solutions. While still early in this journey, we are beginning to see the benefits from AI to our business model across both the top and bottom line. And we are executing on a framework to drive long term growth while expanding GAAP and non-GAAP margins.

We look forward to updating you on our progress in the quarters ahead. With that, I will turn it back over to the operator to begin Q&A.

Thank you. And we will now begin the question-and-answer session. If you have dialed in and would like to ask a question please press star 1 on your telephone keypad to raise your hand and join the queue. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question.

To be able to take as many questions as possible, we ask that you please limit yourself to 1 question. Again, it is star 1 to join the queue. Our first question comes from the line of Keith Weiss with Morgan Stanley.

Analyst (Keith Weiss): Thank you guys for taking the question. And congratulations on really nice start to the fiscal year. A lot of really bullish signals that we are getting on sort of the net AI adoption. I want to ask a broader question, and maybe, Aneel, ask you to kind of do my job for me because I am trying to create a broader argument. You said at the beginning of your remarks that nobody is looking to sort of rebuild the core Workday system and that core transactional engine. And I agree, and I think most investors agree with that statement. I think where more of the concern is the additional functionality that Workday can be selling to these organizations, which kind of drives growth, that there is a new competitive dynamic there. And they need a new value proposition there. And I think where investors perhaps are getting it wrong is assuming that because the cost of software development is coming down with code-generation tools, there is a change a significant change in sort of the TCO of getting that additional capability from Workday versus building it themselves. And I think what investors get wrong is they are looking at it too narrowly in terms of what creates that TCO So can you help me, like, kind of round out that equation of when your customers are looking for those innovations, obviously, the innovation has to be there, but they are also looking for a good TCO. How does Workday now stack up in that TCO versus building it yourself using these agentic code-generation tools?

So, first of all, Keith, thank you for all the time that you spent on Workday. I know it is your last call, and we very much appreciate all the time you spent with us and wish you all the best in whatever you choose to do next. Thank you. So I guess I would answer it in 3 prongs, and I would hand it over to Garrett.

When I look at the world of agentic AI, in the enterprise, we have this concept of lawful and lawless agents. Lawful being done the right way, lawless going directly against the data, and getting results that bypass security or bypass the business process framework. I have yet to meet a single customer that wants to do things in a lawless way. They all have to follow lawful.

If they follow lawful, there are 3 paths for us to be successful. 1, the best path is for us to sell our own agents, and there is a clear TCO on those agents. And I think we have defined that, and we are seeing the success with those agents. Second is they can use ExtendPro to build their own AI applications, again, leveraging our platform. And the third is as we roll out these AI APIs, on a consumption basis, that is the way that, third parties could build agentic applications, but they still have to use the rails, the security, the governance, the business process framework, to make sure they are doing it in a lawful way.

And, again, I will just say there is not a single customer that wants to do things in a lawless way. now in the world of HR and finance. And so I do not know if you wanna add anything, Garrett, but I think it is I think we I feel pretty well covered, Keith, in having a solution for whatever customers would like to do.

And I think Aneel has said it well. First of all, we embrace the ecosystem of builders. Actually, you know, we provide APIs as part of the Workday platform, so they can continue to build their own solutions and partners can continue to build their own innovations that are part of the Workday platform and ecosystem, that in itself for us is a huge accelerant and value-add and captured in our API flex credit model. But I think the real point here, Keith, is that for differentiated AI solutions that drive real value, which are not just augmentations, but actually redefining how HR and finance operates by taking big labor spends and making them smaller software spends.

You need to have the 3 ingredients that only Workday has. You know, 1 is the world model of work, our compounding dataset, which lets you actually contextualize AI systems, Secondly, what Aneel spoke about, all of the deterministic business process logic that defines, you know, policy compliance, correctness, in the key processes, you know, from managing people to closing the books. And then thirdly, not to forget, it is all about being deeply embedded in the flow of business. You know, us you know, providing that as part of the business process as they happen, you know, financial transactions, hiring decisions, pay cycles, allows us to actually automate the work in the background and not just being a site panel that comes in without a true integration in the flow of work.

So we feel really strong about both our platform and openness, and the differentiation of our first party agents.

Analyst (Keith Weiss): Outstanding. that is super helpful, guys. And Aneel and team has really been a privilege covering Workday over these 2 decades and seeing what you guys have built here. So thank you very much.

Thank you, Keith. Appreciate it.

And our next question comes from the line of Gabriela Borges with Goldman Sachs. Your line is open.

Analyst (Gabriela Borges): Hi. Good afternoon. Thank you. I would love to hear a little bit more about the feedback you are getting from customers as you do deploy agentic AI. Sometimes what we notice is there is a gap between how these products and technologies perform in a sandbox or on a demo, versus what customers are actually able to implement. So maybe just walk us through. When you present some of the newer technologies like Sana or some of the organic agentic development, what is the gap that you have to work with customers on, or what are the limiting factors to them fully getting the value out of the agent, and how do you work with the customer to solve them? Thank you.

Yeah. First, I will put it to Garrett and to Robert. I think there is a piece for both of them in that Yeah.

First of all, you know what? What we see, Gabriela, is that for us, you know, the big difference is we engage on very specific problems when we speak about AI. They are not coming in generically with a broad exploration of what may be possible We are solving concrete problems in the value chains from hire-to-retire to our financial processes from record to report. And that makes it very focused and value specific.

So that alone in itself allows us to avoid that POC-driven, unclear ROI scenario And because of all of the success that we have in that space, we can actually guide customers to the best practices. We know how Chipotle and so many others have transformed hiring. How NetApp transformed procurement. And that allows us to have a very specific value oriented conversation.

What we are seeing actually right now is a very fast takeoff on our first party agents And frankly, you know, for us, the challenge is how do we meet this demand curve. So we are now starting to provision self-service agent to all of our customers. Because, actually, we got so many inbound requests that we felt it is easier for us just to turn it on by default than to have, you know, services engagement being wrapped around it. And the last part before I hand it over to Robert, I think what you are pointing to the true change is in the business processes and the operating model of companies when they drive a much higher degree of automation And that is not a technology change. that is a workforce transformation that is happening at multiple levels at the same point in time, and this is why we have created our forward deployed engineers and our AI consultants So they go in, and they are not just bringing the technology.

But they are really engaging on the business process transformation itself and guide our customers through it. Robert?

Yeah. I would just add, Gabriela, that we have had I do not know. Maybe 100 customer touchpoints between Aneel, myself, and Garrett in the last 3 months? And the feedback from all of them have been overwhelming, actually positive.

Where these customers are really focused on how our agents can help them in the flow of work and what they are doing, and certain agents have you know, had tremendous success early on, like deployment agent where existing customers can see the value immediately and selling to other customers and customers are your best salesforce. I would say that is super optimistic, and they all come in with questions on where we are, and then we will leave with how do we actually get started. And as Garrett said, as Garrett said, as the front door, we are launching that in a in a big way. And then I would say with Sona Enterprise, we are more focused on use cases, working with our customers to hone use cases that add tremendous value to them.

The uptake there on big brand names has been incredible. We ran the Sana Lighthouse program, and the demand has been, as I said, overwhelming early on. I would say the same year.

Analyst (Gabriela Borges): Thank you so much. I appreciate the detail.

And our next question comes from the line of Michael Turrin with Wells Fargo. Securities.

Analyst (Michael Turrin): Hey, great. Thanks very much. Appreciate you taking the question. Aneel, maybe you could speak to just the early progress. I know last quarter, there was commentary just around reprioritizing growth. This quarter, you mentioned best new ACV in Q1 in 5 years. So maybe just speak to the progress and what you are seeing within flex credit or agentic usage or some of the efforts there. And then, Zane, maybe just to complement how you are able to expand margin while still prioritizing growth at the moment.

Thank you. So I guess I would say a lot of the right work was already being done when I came back. Garrett and team were on the right path, building the right agents, building the right infrastructure, and we are now seeing the fruits of that of those efforts. And we are just getting more focused on what those efforts are.

We are focused on building organic agents, and that is going extremely well with self deployment agent and deployment agent. Sorry. Self-service agent and deployment agent, the acquired agents continue to be strong, and as we roll out more of those agents, you know, we are gonna see continued momentum But we are also doing some really great work on the APIs, which is gonna be the way we monetize the headless transaction. So the pieces are coming into places.

So it is really about reprioritizing to be AI first. And AI native, as opposed to AI being part of our story. When you go through a technology transition, and I am old enough to have been through a lot of them, you have got to put that technology transition front and center. And, you know, our core business is strong.

But the hundred and fiftieth feature in HR or finance is not gonna move the needle for our business. The next agentic application will. I do not know if you wanna add anything, to that, Garrett.

I think you said it well. And, Aneel has described, you know, what we have changed at Workday and have laser focus now is either building APIs for AI or building AI agents. And that allows us really to be fully focused on the biggest opportunity ahead of us.

So, Michael, I will just add on the margin side. We are very pleased with the revenue performance in Q1, which always helps you on margin. The same being said, as Anil said, coming back with focus. and the teams across the company are focused on how we work faster, how we stay focused in each area and disciplined in where we make hires and the work that they are doing. And on top of that, we are recognizing the benefits from AI itself.

So within Garrett's team in R&D, we are seeing tremendous productivity improvements Whether it is our customer success business, we are seeing productivity improvements there. A lot of Robert's team on go to market as well. And we are using our own product as you would expect us to. So very pleased with the progress we are seeing enabled us to move up the guide 50 bps, over the course of the year.

And we look forward to continuing to increase our margins over time. So we remain focused in both the top line and the bottom line and investing in key areas here.

Yeah. And if I could just say, this is more, aspirational than anything else. I would love to see us continue the growth that we had in Q1, but keep headcount as close to flat for the year as possible. Because we are getting the benefits of using our own products and other AI tools, and I think that is where I think I am hopeful and believe that we are gonna have, you know, additional margin expansion as we get those benefits.

And I would say that is different than what my view was coming in 3 months ago.

Analyst (Michael Turrin): Thanks a lot.

And our next question comes from the line of John DiFucci with Guggenheim Securities. Your line is open.

Analyst (John DiFucci): Thanks for taking my question. Aneel and team, really nice job on the execution this quarter. But I actually have a question related to the Sana AI Summit today in New York. Your new Chief AI Officer, Joen Hellermark, talked about not playing it safe in what is a technology paradigm shift. This all sounds good, and Workday has a leadership position. And, Aneel, you know this as well as anybody. The innovator's dilemma is a strong force. So, with that context, I sort of have a high level question for Garrett and maybe Aneel if you wanna join in too. Garrett, how do you as the product leader at Workday, ensure that you do not only enable this paradigm, shift happening with Workday, but actually lead through it. And is it possible to do that while leveraging the leadership presence you have built since the last paradigm shift, or do you have to sort of abandon stuff?

Yeah. You know, thank you for that question, and thank you for attending Sana AI Summit today here in New York. Truly a landmark moment. I think, for us and for the industry.

And what do you have heard today, you know, I just wanna break it down very clearly. So, you know, we all understand what we say know, we are not playing it safe. And driving deep AI innovation. You know, for AI, it is all about understanding what the key value levers are.

And as you have said earlier, right, with Workday's world model of work, we have a set of data which allows us to rethink business processes that were not part of Workday's remit today. And because of the AI leverage that we are getting, that is saying this described in just productivity, we can execute so fast So today, what you have heard that, you know, we announced our travel agent know, we did not do travel before, but we did expenses. We did projects. We have the worker profile and the pay cycle.

Rishi? So now, you know, we can actually venture in this new area by just bringing this together in 1 seamless experience without taking on, you know, a high degree of functional development cost in the travel space. Because BrewAI you know, the data that we have and the productivity leverage, we can bring it together on the Workday platform. And I think the even bigger 1, I think this was the context that Joel spoke about, We also launched Sana for ITSM today.

And it is all about being really intentional here. The most complex, the most expensive journeys in ITSM are related to the employee life cycle. Those are all events that we have inherently in the Workday platform already. Recruiting, onboarding, offboarding, team changes, relocations, Now taking that actually extending that out now to the complete workflow automation that sits beyond HR service delivery to IT service delivery.

Suddenly feels supernatural. Basically, AI makes us boundary less or limitless, right, in the opportunities that we can pursue. And then Joel, you know, spoke today at the Saana AI Summit, is that we think of ourselves as an AI challenger. Not as a defendant.

And we are putting intentional investments into areas where we know we have all of the benefits already at Workday today to go out and disrupt places. And I would just add to what Garrett said.

John, and, I will echo what, you said about thank you for attending the event earlier. Playing it safe is not playing it safe is not like we are gonna take risks with security. Or governance. it is more that, I think AI sort of resets competitive boundaries and we can make bets in a bunch of new markets. All the bets do not need to work.

You know? If we make 3 or 4 bets and 2 of them work, that is a huge success. And I think that what you are gonna see is us take is first of all, doubling down on what we are doing in AI with our within our HR and finance world, but also taking some bets that expand our TAM. Because they are they are there for the taking.

Our data model with HR and finance happens to be a very robust data model that really captures every business object under the sun for to build other applications. I think that is that is 1 of the reasons why we have that flexibility.

Analyst (John DiFucci): Thank you very much. I gotta say this is the 1 of the first times I have heard an application company talk about things. And it is not restrictive when it comes to AI. it is actually expansive. So it is still early. But thanks for those answers.

And our next question comes from the line of Brad Zelnick with Deutsche Bank. Your line is open.

Analyst (Brad Zelnick): Gentlemen, I wanted to ask about deployment agent. You know, reducing the cost and time of deployment, I remember the impact of launch years ago which was targeted at the mid market, but then we saw it become a competitive weapon. Even in the low end of enterprise. How would you compare deployment agent perhaps to launch as an incremental unlock helping to reduce TCO and make you even more competitive, but also could it positively impact seasonality of your business and being able to sign deals even later into the calendar year for customers that might wanna go live by the beginning of their next fiscal year. Any additional thoughts about deployment agent would be great. Thanks.

I think it is Robert and Garrett. Yeah. Let me go first. So I mean, for deployment agent with new implementations and work they go, we see what are the numbers we are seeing? 30% in current projects and 50% in the projects that we are just starting now.

Yeah. And so that and that will continue to improve and change the whole dynamics around implementation and speed to implementation. So goes to your point early on about you know, 10 customers go live faster. For sure, we would we would definitely think that is a possibility, and we will definitely get there much quicker.

Know, the hard work in the implementations, master data, testing, and that becomes just so much more effective and faster. So that is benefit. And the part that I am really quite excited as well is the existing customers. That are deploying deployment agent.

I mentioned the state of Arkansas and the benefits that they the existing customers. Using the deployment agent when they wanna change configuration and they wanna do things. They do not have to go out to RFP. They do not have to go talk to a systems integrator.

They can see what they need to do themselves. And that makes it, you know, very self-service in these large institutions. And that and that enables them to move much faster to deploy different business models as well. So I think this broad coverage with it, and there is gonna be broad impact with it as well.

And, Brad, since you asked about launch, so launch is a method which basically has a scope of workday and an implementation method that allowed us to super streamline it Now deployment agent is actually now applying a AI to automate that entire process. it is the next logical step if you think about it from improving that method further to make it AI automated. And the mission of that team, right, the mission statement itself is the $0 deployment of Workday. In a month. So we are doing exactly what you already have to.

We are taking now the launch scope and basically drive it with deployment agent to significantly increase the automation, which directly translates to the reduction in project time and customer cost at virtually the same amount. And we are still at the beginning of that. We are super confident that with that, we can complete the squash migration complexity and deployment times for customers to a degree. Where the whole consideration in the mid market, for instance, if you move to work there or not because time of migration, cost of migrations are consideration.

And our ambition is to make this a completely nonissue. And with that, you know, unlock, you know, for our customers' workday at scale.

Analyst (Brad Zelnick): Thank you very much. Really appreciate it.

Our next question comes from the line of Alex Zukin with Wolfe Research. Your line is open.

Analyst (Alex Zukin): Hey, guys. Thanks for taking the question. Maybe just a quick 2 parter. Aneel, you know, it is rare when, you know, Q1 has a net new ACV acceleration. It sounded like it was something that was a little bit different this quarter. Particularly on the net new side. So maybe just dive in. What are you seeing out there in the demand environment? that is not happening for every other application software company clearly. So kind of what do think is different from a Workday perspective that drove that, you know, incrementally better execution, And then, Zane, just maybe any high level commentary on how much, if any, DIA benefit you guys saw in the quarter that I think Robert alluded to in the prepared remarks. And just kind of when do you think we will start to see some of this accelerating bookings that seemingly, is kind of happening under the hood actually reflect in some of the CRPO dynamics?

So I would say, first of all, 1 quarter does not make a year. So we are optimistic heading out of Q1, but we have got a lot to play for the rest of the year. I do think, you know, candidly, I think there were some deals that slipped from Q4. We Talk about how the deals slipped from Q4. We will close them in Q1. Well, Robert team--Robert's team really did close a lot of great business in Q1. But the reality is if you look at the split, the AI products are driving the growth. And what is exciting to me is that, the organic products are showing great promise, and they are getting early acceptance and deployment, but they are still in the early days.

And I think towards the second half of the year when they are deeper into general availability and more customers are using it, and we are on the flex credit model. I think it is just all goodness this year as we build towards that AI growth. And Rob has done a great job of making sure the Salesforce and services teams are aligned to driving that growth, not just out of the core, but really focused on the AI growth.

Yeah, Alex. And as you touched on, we were pleased to see DIA come into the first quarter. As Anil alluded to, it was a great quarter for a number of reasons with linearity. We recognized some DIA revenue, not significant, but some DIA revenue in the quarter And unlike last year, we expect to recognize that revenue over the course of the year.

If you recall last year, it was back end loaded. So we are pleased with how we will recognize that revenue, over the course of the year. And then you know, as Anil mentioned, with a lot of the flex credit sales and the momentum we have in our sales and in AI, we expect to see those bookings ramp up over the course of the year. so we will have a larger booking impact into the second half. And we would expect because of the recognition of revenue to see that impact fiscal 2028 to a greater degree.

Analyst (Alex Zukin): Perfect. Thank you, guys, and congrats on a great summit.

Thanks, Alex.

Our next question comes from the line of Brent Thill with Jefferies. Your line is open.

Analyst (Brent Thill): Thanks. Aneel, for Sana, when does this start to get fully integrated? And when do you feel like this starts have an impact on deals? and maybe the answer is right now. And second with Robert and Zane. Just on the quarter just to follow on Alex's point, were there any were there less changes to the sales force for the market this Q1 than you have had maybe in past Q1s? And I know you mentioned there are some slipped deals, but perhaps there is also less tinkering with the go to market team that gave them more time in the field to sell. On the first 1, it is available today.

it is fully integrated. We need to move more customers onto the our equivalent of the innovation service agreement. But the uptake has been super rapid. On the sauna learning piece, that was also a good we also had a good quarter there.

And the rest of Asana is more about what comes next with some of these newer applications. I do not care if you wanna add anything, but it is now the new front end for Workday.

I mean, that is de facto default. That is the new front end for Workday. The only piece to add is that, you know, at the end of May, we are gonna provision Sana for Workday and self-service agent to all of our customers and our current AI term service and make it basically the default deployed solution as part of their contract. Further unlocking it. So it is gonna be a huge search for us again.

Yeah. And on and on the field and the you know, and was it less changes year over year, would say we were very prepared for coming into 2020 financial year 2027. We had planned this very early on. We knew that we needed to move to a dense model with customer base because of the agents and what we are doing with organic a and inorganic agents. So we were super ready for that.

And we had broad-based success, you know, on a global basis. North America did really well. Sled came back strong. Our international business with Europe was very good.

Japan was very good. A strong net new quarter and a strong large enterprise quarter. I would say, you know, we were ready for whatever changes we put in place, and it was not disruptive, obviously. And we had very good linearity all through Q1.

Analyst (Brent Thill): Thank you.

And we will now take 2 more questions. Our next question comes from the line of Karl Keirstead with UBS.

Analyst (Karl Keirstead): Thanks. Maybe, Rob, just sticking with you, Just as investors, and I watch the number of risks tick up in the tech sector and we worry a little bit about seat compression spilling over into the nontech sector. I just wanted to ask you what you are seeing in terms of seat growth versus module expansion as drivers of that nice overall expansion that you highlighted on the call. Thank you.

Yes. So I would say we see a long runway with the value sales on the agents and what we are doing with flex credits, the launch of Sana into the market, in broad based. We see that and we said early on, I think last quarter, we mentioned the back half of the year, we continue to see and that we definitely continue to see that. On the FSE expansion, I mean, we continue to see expansion in the overall when we when we look at the amount of customers as we acquire net new customers, we bring in new customers.

Onboard, and we continue to do pretty well in the net new space, and I still think there is opportunity there. But I would say, you know, ultimately, a broader part of our business is gonna move to the flex credit type environment with APIs, and consumption.

Karl, I will just add, you know, we have commented over the last number of quarters on as it relates to FSCs. And as Robert alluded to, it is been flat or marginally up. And this quarter, I would say flattish. But to your point on the technology sector, obviously, we have got diverse customer base.

I mean, we have seen any declines in the tech sector more than offset in other areas. So there is been a balance definitely been movement. We did see it in the tech sector specifically. But we have been flattish.

And, you know, as I as I point out in my prepared remarks, we have seen good, net expansion more broadly. So it is it is not a meaningful part of our revenue growth.

Yeah. And I think, you know, it is it is really important to recognize that if FTE count does get go down, it is being replaced by you know, AI is replacing labor, not software right now. And as long as we do what we are doing right now and continue to execute, you know, we are a beneficiary of the of the shift to agentic work.

Analyst (Karl Keirstead): Very helpful. Thank you.

And our final question comes from the line of Raimo Lenschow with Barclays. Your line is open.

Analyst (Raimo Lenschow): Hey. Thanks for squeezing me in, and congrats from me as well. Just a quick 1 for Zane. RPO, CRPO, you know, as we expected, RPO was slightly lower growth. Can you talk a little bit about is that kind of customer signing shorter contracts, there is a bit duration effect? Can you just talk to the puts and takes there? Thank you.

Yeah, happy to. I mentioned on the last call as well, we have actually seen real consistency in duration. And RPO at the highest level is more driven by the mix of customer base versus net new offerings. And over the last couple quarters, I have called out that we have been pleased with the growth on customer base as a mix and the duration for each of those has been pretty consistent.

But when you do a renewal, it tends to have a slightly shorter duration than a net new So it is simply been that mix that is driven any difference between CRPO and RPO. Okay, perfect. Thank you.

And ladies and gentlemen, thank you for your participation on today's conference. You may now disconnect.