Welcome to Workday's Fiscal 2025 Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. We will conduct a question-and answer session toward the end of the call. During the Q&A, please limit your questions to one. I will now hand it over to Justin Furby, Vice President of Investor Relations.

Thank you, Operator. Welcome to Workday’s second 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 in documents we file with the Securities and Exchange Commission, including our fiscal 2024 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 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 third quarter fiscal 2025 quiet period begins on October 15th, 2024. 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 will hand the call over to Carl.

Thank you, Justin. And thank you all for joining us today. I’m pleased to report that Workday delivered another solid quarter, highlighted by 17% subscription revenue growth, 16% 12-month backlog growth, and 25% non-GAAP operating margin. Though we continued to experience deal scrutiny and moderated headcount growth within our customer base, our win rates remain high and our teams delivered a very solid Q2. I couldn’t be prouder of our Workmates and partners for their continued focus on driving customer value and success. Right now, companies are focusing their investments on the areas that will help them increase productivity and improve their operations. Workday gives them the ultimate advantage. We help them manage their two most fundamental elements of their business, their people and their money, all on a unified, AI-powered platform. Workday empowers businesses to increase productivity, deliver incredible employee experience, and drive greater efficiencies across finance. And because all our products are built on the foundation of our platform, our customers can unlock value faster and reduce total cost of ownership. This is evident in the healthy growth we’re seeing in full suite wins and in our balance of net-new relationships and customer expansions. It's also contributing to our momentum, which helped us debut on the prestigious Fortune 500 list in Q2. We couldn’t be prouder to be amongst the largest, most influential companies in the US, with more than 60% of them being Workday customers. Businesses of all sizes, industries and geographies increasingly turn to Workday as their trusted partner. In Q2, we expanded with J.B. Hunt, Nissan, Target, and Trinity Health, and we formed new relationships with Lam Research, the City of Cleveland, Colorado State University System, and Johns Hopkins, among many others. We strengthened our leadership in the HCM market globally, with key wins including GE Vernova, First Bus, Sunrise Senior Living, along with several notable wins in EMEA and APAC. And our continued investment in Financials is helping us drive momentum across the platform. In Q2, we officially crossed the 2,000 customer milestone in Workday Financial Management. And, Workday was ranked the market share leader for Worldwide SaaS ERP revenue in 2023 by Gartner research. From an industry perspective, we had a banner quarter in our longest-standing vertical, Higher Education. Leading institutions including Florida A&M, the University of Mississippi, and Clemson University all selected Workday’s full suite in Q2. Clemson started as a Workday Adaptive Planning customer and added HCM and Financial Management in the quarter. The partnership with Workday represents a significant milestone in their transformation journey to modernize systems and improve experiences for faculty, staff, and students. We once again had strong momentum in Healthcare with full-suite wins at Grady Health System, Reid Health, and Children’s National Medical Center. Our success in state and local government continued in Q2 as well, with wins at Delaware County, County of San Joaquin, and Santa Cruz County. I also want to call out the expansion momentum we’re seeing with VNDLY and our ability to deliver a complete workforce management solution, spanning salaried employees to hourly, contingent, freelance, and outsourced workers. Cushman & Wakefield, Lowe’s, and Ryder Truck all added VNDLY in Q2. Beyond the wins, we celebrate when our customers go live on our platform. AutoNation, Barclays, CDW, Cross Country Mortgage, Forvis Mazars, and Texas Roadhouse all successfully deployed on Workday in Q2. Global growth continues to be a massive opportunity for Workday, and we had a strong performance in APAC and Japan regions in Q2, along with several strategic wins in EMEA. In Australia, Workday was accepted to the government's Digital Transformation Agency Software Marketplace for ERP, opening new opportunities with federal agencies. We also expanded our business with a Ministry in New Zealand and had a full-suite win at Kelsian Group Limited. We’re setting a strong foundation for our business in Japan, which performed very well in Q2. We formed new relationships with Terumo Corporation and Shizen Energy and expanded our business with Tokyo Electron. In Europe, we experienced the same deal scrutiny I discussed in Q1, but the team was able to deliver more large deals than last quarter including Emeis, Saint-Gobain, and Groupe Atlantic Synergy. Additionally, our Elevate events across the region in Q2 outperformed our pipeline expectations, and our partner momentum is building in key markets across EMEA. In fact, two of the largest deals we closed in the region were sourced from partners. We innovate to drive customer success and deliver true business value, and that’s why customers are coming to Workday for our AI innovation. They want to partner and they’re looking to us to lead them into the future. Workday AI is fueled by the quality and quantity of our data set and Workday’s understanding of our customers’ HR and finance processes. We now have more than 70 million users under contract conducting more than 800 billion transactions on the Workday platform annually. This data and the context behind it gives us the ability to unlock productivity in a way no other company can. In Q2, we announced new AI innovations to help our customers hire the right talent better and faster than ever before. For instance, our new AI capabilities in our HCM product identify emerging skills and simplify job profile management to accelerate skills-based talent strategies. Just one quarter after closing the HiredScore acquisition, we made HiredScore AI for Recruiting and HiredScore AI for Talent Mobility available for purchase under one unified contract. The HiredScore team is off to a great start, and we’re continuing to build pipeline across our recruiting customers. And what better validation than this quote from our customer at Southwest Airlines, who called HiredScore a game changer that’s setting new standards in talent management. Through the power of our platform, we’re enabling AI innovation not only from Workday, but from our customers and partners as well. In Q2, at our annual developer conference, we launched new APIs in our AI Gateway. We also introduced Workday Extend Developer Copilot, leveraging Gen AI to help developers to build custom applications on our platform, faster than ever before. Extend remains one of our fastest growing SKUs. New ACV increased more than 75% in Q2, driven by Extend Pro, which taps into the power of Workday AI. Many of our customers are already realizing incredible value from Workday AI. For example, a HiredScore for Talent Mobility customer saw a 40% increase in internal application rates. For one of our entertainment customers, invoice automation is driving a 70% plus increase in processing capabilities. And for another customer, our Talent Optimization product, which is one of our fastest growing SKUs, helped reduce turnover by 39%. And the list goes on, but we’re just scratching the surface. The industry has been focusing on fitting AI into how we work now, not on what work should look like next. We see an opportunity to exponentially increase the value to our customers by reimagining end-to-end HR and Finance processes through the power of AI. At Workday Rising, we will introduce the next generation of AI to illuminate the future of work. For the past 10 years, we’ve been building towards this vision. And we’re excited to showcase Workday innovations that will not only accelerate how work gets done, but ultimately transform how customers run their businesses. We’re expecting more than 30,000 virtual and in-person attendees at Rising this year, our biggest event yet. In addition to unveiling our AI vision, we’ll also showcase new innovations across our applications, platform, and user experience. I mentioned before that our partner ecosystem is a powerful driver of customer success and it continues to grow in both breadth and depth. In Q2, partner contributions to new ACV more than doubled from last quarter, and partners had another record quarter of pipeline generation. And we’re just getting started. In the quarter, we launched Built on Workday to make it easy for our partners to build, distribute and monetize their applications on the Workday Platform. Our longstanding partner Kainos was among the first to lean into this new program, with several more partners already active early adopters. We continue to open the aperture to partners as a driver of both sales and innovation, and in Q2 we announced new partnerships that will help us deliver even greater value. Our partnership with Salesforce is a perfect example. Whether it’s accelerating employee onboarding, enabling continuous financial planning, or closing deals faster, our partnership is bringing humans and AI together to drive success for employees and customers. And it’s all made possible by bringing together the most important datasets in the enterprise. And today, we are announcing a new Employment Verification Connector for Equifax, making it easier for customers to transmit data for employment verification requests. As you can see, it was a big quarter for our ecosystem and we are looking forward to continuing this momentum in partner-led growth. Before I turn it over to Zane, I’d like to update you on how we’re planning for the medium term. We continue to build Workday as a durable business with balanced growth and margin expansion, something I’ve been saying since I joined the company nearly two years ago. Our key growth areas are already paying off and creating momentum for our future. They amplify our opportunity to bring in new customers, and to expand our footprint with existing customers. Over the past year, we’ve been able to see how our growth areas are developing, particularly in the current selling environment. And, we’ve identified opportunities to drive efficiencies across the business. In light of this, we’re making some adjustments to our medium-term plans, including a slightly moderated pace of subscription revenue growth balanced with accelerated margin expansion. Our revised medium-term outlook reflects the confidence we have to drive durable, profitable growth at scale. We’re focused on continuing to gain share in our core markets of HR and Finance, while delivering strong operating income growth and continuing to innovate for our customers and partners. I couldn’t be more excited and energized about the opportunity ahead, and we are thrilled to have you on the ride with us. With that, I’ll turn it over to Zane.

Thanks, Carl. And thank you to everyone for joining today’s call. Our Q2 performance was slightly ahead of our expectations across all key metrics. Subscription revenue in the second quarter was $1.903 billion, up 17%. Professional services revenue was $182 million in the quarter, leading to total revenue in Q2 of $2.085 billion, also growth of 17%. US revenue in Q2 totaled $1.56 billion, up 16%, and international revenue totaled $524 million, growing 18%. 12-month subscription revenue backlog, or cRPO, was $6.80 billion at the end of Q2, representing growth of 16%. The year-over-year growth rate was impacted by the strength in last year’s renewal activity, including early renewals. Gross and net revenue retention rates remain strong at over 95%, and over 100%, respectively. Total subscription revenue backlog at the end of the quarter was $21.58 billion, up 21%. Our non-GAAP operating income for the second quarter was $518 million, resulting in a non- GAAP operating margin of 24.9%. Q2 operating cash flow was $571 million, growing 34%, driven by strong collections. We accelerated the pace of our buyback in Q2, repurchasing $309 million of our shares at an average price of $223.10 per share. With our existing $500 million buyback authorization nearing completion, our Board has authorized a new $1 billion share repurchase program. We remain committed to investing in organic growth, pursuing strategic M&A opportunities, and managing dilution while returning excess capital to shareholders via share repurchases. We ended the quarter with $7.4 billion in cash and marketable securities. As of July 31, headcount stood at over 19,900 workmates around the globe Now turning to guidance. As Carl indicated, we continue to see the macro environment consistent with our last quarter, including moderated headcount growth within our customer base - and as we discussed last quarter, we expect these trends to continue. We are reiterating our full-year FY ‘25 subscription revenue guidance of $7.700 billion to $7.725 billion, growth of approximately 17%. We expect Q3 FY ‘25 subscription revenue to be $1.955 billion, growth of 16%. We expect FY ‘25 professional services revenue of approximately $680 million to $690 million, driven by customer demand. For Q3, we expect professional services revenue of $175 million. Turning to backlog. In Q3, we expect cRPO growth also to be impacted by last year’s strong early renewal activity. As a reminder, last year the gap between cRPO growth and subscription revenue growth was roughly four percentage points in Q3. As we lap the strong renewal activity from last year, we expect cRPO growth of 14% to 15% for Q3. While the growth rate is impacted by the timing of renewals, the aggregate cRPO level supports our view of subscription revenue growth of approximately 16% for the second half of the year. We continue to balance both targeted investments in key growth areas with increased focus on end-to-end companywide efficiencies and transformation. We now expect FY ‘25 non-GAAP operating margin of 25.25%. For Q3, we also expect non-GAAP operating margin of 25.25%. GAAP operating margin for the third quarter and full year are expected to be approximately 19 and 20 percentage points lower than the non-GAAP margins, respectively. The FY ‘25 non-GAAP tax rate remains at 19%. We are increasing our FY ‘25 operating cash flow expectations to $2.350 billion and we continue to expect capital expenditures of approximately $330 million. Over the past year, we’ve made good progress across our key growth areas. While a number of these initiatives are still early in their development, they are already supporting growth in FY ‘25 as well as for future years as they scale across our products and geographies. Our focus areas have been ramping 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 FY ‘26 and FY ’27. We’re seeing success across full suite opportunities, the partner ecosystem, and international markets, along with emerging areas like Federal and Built on Workday, which help reinforce our conviction in enduring growth as we strengthen our market leadership in cloud ERP. In addition, we now expect to deliver greater margin expansion than previously planned. Investing to support durable growth remains a core focus, and at the same time, we’ve made progress driving efficiencies as we continue to scale the business globally. We are relentlessly focused on scaling all of our processes across the company as we review our product and go- to-market initiatives. We are also becoming increasingly more targeted in our growth investments, balancing product development with go-to-market resources. With this, we are driving to enhance ROI across our portfolio, while we continue to execute on opportunities to drive growth in the business. With that context, and assuming M&A levels consistent with recent history, our updated expectations for FY ‘26 and FY ‘27 are for annual subscription revenue growth of approximately 15% while expanding non-GAAP operating margin to 30% over the same period. This updated framework also increases our expected FY ‘27 cash flow. Our focus remains leveraging the power of the platform to deliver durable, long-term top- and bottom-line growth. We look forward to sharing more at our upcoming financial analyst day on September 17. With that, I'll turn it back over to the operator to begin Q&A.

[Operator Instructions] Our first question is from Kirk Materne with Evercore. Please proceed with your question.

Hi, yeah, thanks very much and appreciate the early update on the midterm outlook as we look forward to seeing you guys out in Vegas in a few weeks. But, Carl, can you just talk about where you think you can get some additional efficiency at scale while still investing obviously in places like international? I'm sure you'll go through this all at the Analyst Day, but I was just kind of curious where are some places that you guys can continue to get that efficiency because I know you're not going to want to stop investing in some of these green shoots that you're seeing right now.

Yeah, thanks, Kirk, for the question. And by the way, thanks for your preview note. I thought it was really well written. As you can see, a lot of things you highlighted in your preview note we actually spoke about in our prepared remarks and part of it is what you just asked. I want to start by just reinforcing our thesis for long-term profitable growth at scale at Workday. We remain very excited about the opportunity we have ahead, and we think we'll continue to take share in our core markets around HR and finance, while at the same time continuing to innovate and drive additional operating efficiencies as we think about the broader market. As far as where we think we can get efficiencies, let me start and remind people by saying over the last 2.5 years we've expanded our operating margin by 500 basis points, and now we're talking about moving it up another 500 basis points over the next few years. So we are finding efficiencies. Some examples of where we're finding efficiencies is in our global workforce strategy, which includes leveraging our current global workforce, as well as some of the new offices we've brought online in the last 6 to 12 months, like India and Costa Rica. We're also being smart and prudent about what we're hiring going forward, and specifically we're focusing on quota-carrying capacity, as well as continuing to invest in software development on our product and technology side of the business. We also are finding operating efficiencies internally across our systems and our technology. We're using AI in our finance organization. We're using AI in our call centers and our support organization. And we're also using AI like copilots in software development to drive efficiencies. And the last thing I'd say, Kirk, to kind of combine your questions here is, number one, some of the investment areas we've leaned into over the last two years are actually starting to drive operating efficiencies at scale for us. For example, we spent a lot of time talking about partners. We've highlighted once again our partners today continue to drive a significant portion of our pipeline and actually were responsible for a 2x growth in new ACV from what they participated or drove in Q1. We're actually starting to see scale now with the big build-out we did in our financial sales force. They're all starting to ramp and we're seeing better productivity going forward. So There are a number of different areas that we're investing in, and it's actually not only helping us maintain this durable growth over the next few years, but it's also giving us operational efficiencies at the same time.

Hey, Kirk, I'll just add, this is Zane. We look at all of these investments with an ROI mentality, and as you've seen over the last number of years where we've outperformed and really leaned in, we've been able to drive bottom line growth and increase our operating margin, even versus our expectations. So you should expect to hear a little more in this area in 3.5 weeks in Vegas, but we're pleased with the progress, have a lot of work to do, and we feel like we're never done on just coming up with more efficiencies across the business.

Great. Thank you very much, guys. I'll turn it to someone else.

Thank you.

Our next question is from Kash Rangan with Goldman Sachs. Please proceed with your question.

Hi, thank you very much. Good to see that you guys are taking a more balanced approach to growth and margin. One short-term question, one long-term, if I could. Short-term, the impact of elections and potentially lower rates, how do you see this playing out, Carl? I know that you were not here eight years ago, but Aneel famously warned about volatility in the upcoming Q4 back then and ended up surprising us on the upside as contract activity and renewal activity happened on the upside. So what is your take on the short term? And then one for you Zane, longer term the expansion and margin, how comfortable can we get that it's not coming at the expense of the ability to reinvigorate growth if you do see that opportunity open up if we get a better spending environment? Thank you so much.

Yeah. Thanks, Kash. I’ll take the first one. Listen, I can't predict the future and the impact of the election one way or the other but what I do know is the current macro environment we're selling into hasn't changed at all from what we saw in Q1. In fact, we think the current environment of IT spending and the environment we're selling into isn't something that's just been here the last couple quarters. We think it's the new norm going forward. We're prepared because we have a great product. We provide a tremendous value proposition to both customers and prospects and regardless of what we're dealing with in the macro or the elections, we're going to continue to grow our business over the short term and long term because of that powerful value proposition we have.

Yeah. And Kash, just to add to your question on longer term, I mean we've done a good job investing and measuring those investments. When it's opportunity for us to increase that investment level depending upon growth or where it comes from, we'll be agile and quick to adjust accordingly. But we feel good that we can grow both the top line and the bottom line in this business and make sure that we're investing sufficiently to continue that growth and innovation across the company. So we feel like we've got a good balance here.

Wonderful, thank you so much. Well done.

Thank you. Our next question is from Mark Murphy with JPMorgan. Please proceed with your question.

Thank you so much. Carl, how would you characterize the cross currents of AI on the software landscape in Workday itself at the moment? The reason I ask is you're sitting on this wealth of data, you have the sole ability to unlock it, you're not overcharging for AI services like others are, and I'm wondering if that is giving you some type of advantage in the actual AI product adoption and usage somehow under the radar. But then on the other side of the ledger, as you do re-tweak the growth and margin, the midterm target, do you sense any customers pausing to digest application purchases broadly just as they're trying to understand the GPU landscape, the AI landscape at the infrastructure layer?

Yeah, so I think there was two questions in there Mark, so I'll try to answer both of them. First, I'll talk about our approach to monetization. So first, we've said we're going to take a very measured, multi-pronged approach to how we monetize AI. First and foremost, we're monetizing it to our competitive win rates that are up once again this quarter. Our renewal rates remain very high and our customer satisfaction remains very strong. We are also at the same time not rushing to market and saying to our customers, we're going to have an uplift on our pricing just because we have now have more than 50, for example, AI use cases in the platform. We think they're entitled to that innovation. We will, though, when we see opportunity to do so, Mark, we will bring new SKUs to market where we can help our customers justify spending incremental dollars on AI from Workday. For example, talent optimization. Talent optimization is one of our fastest growing SKUs. Extend and now Extend Pro. Extend Pro is an AI platform that allows people to develop and build new applications on top of us. There's a new AI API gateway associated. We have a copilot to help people develop software faster leveraging the AI API. And we also as you know last quarter talked about HiredScore. HiredScore is something we're very excited about. We're in the very early days of this going into the market, but we're seeing a rapid build of the pipeline as people are trying to reduce their recruiting spend because it's one of the biggest spends they have across their platform today when it comes to recruiting. And now let me address what we're seeing, because we get asked this question all the time, Mark. Are we seeing people spend on AI and not spend, for example, in our case, on Workday? We see just the opposite. What we see and we hear from our customers, our customers believe and new prospect as we engage with them, they are investing in AI when they invest and partner with Workday. The reason for that is because of what you said. I think customers are now recognizing the value of AI in GenAI is only as good as the data you're using to train. And we have one of the most clean, highly curated data sets around HR and finance to drive value for our customers. And we think that's a huge differentiator for us both today and going forward. And we can't wait to share more of the AI innovation with everyone, including the entire world at Rising in September.

Thank you very much.

Thank you. Our next question is from Brent Thill with Jefferies. Please proceed with your question.

Thanks. Carl, many have asked your confidence in mid-teens growth. What is giving you that underpinning of that the market's going to be there versus continuing to ratchet that number down, which you've lowered that growth rate a bit? What is still giving you the confidence that that market is still in place?

Yeah, thanks, Brent. Well, there's a number of reasons, I think, not just myself, but all of us here at Workday are confident in that 15% growth rate for the foreseeable future and that says we scale beyond $10 billion. Number one, the investments we've made for example in our partner community and the ecosystem are paying off. They're building pipeline. They're innovating on top of the platform. They're co-selling with us. They're reselling with us, and we see them continuing to lean into the Workday opportunity more than we've ever seen in the past. We still believe we have a tremendous opportunity internationally. We've hired some amazing talent across Europe. In the last six months, we've talked about new leadership in APAC and in Japan, and we highlighted some of the success they had here this quarter. And we continue to believe that more than 50% of our addressable market opportunity is outside the US that we can go attack. We also continue to believe in the opportunity around financials. As all of you know, for the last couple years, we've leaned in heavily to the financials opportunity because we still see greater than 75% of workloads on-premises and they're moving to the cloud. It's not if, it's when. And when they move to the cloud, we see competitive win rates on our financials platform and full suite or full platform financial solutions with Workday and HCM continuing to rise. And the last thing that gives us confidence is innovation. We are driving so much innovation on the Workday platform, leveraging AI and GenAI. We also continue to believe that the ecosystem will innovate on top of us, leveraging a powerful platform called Extend. And then finally, M&A. We are, I'd say we're inquisitive. We continue to believe there's assets out there that we can look at to help us continue or maintain our growth, but we're going to be smart and prudent as we think about it. So that's the reason that gives us confidence to be able to drive this profitable growth at scale for the next few years.

Thanks, Carl.

Thank you. Our next question is from Brad Sills with Bank of America. Please proceed with your question.

Wonderful. Thank you so much. I wanted to ask a question, Carl, on some of the comments you made earlier. It sounds like you took a hard look at some of the growth initiatives to determine which ones are going well and which ones perhaps could be sources of upside that are now backing that 15% -- or sorry, the mid-teens rather growth outlook. Just curious for some color if you will on what were some of the puts and takes, what were some of those growth initiatives that you felt more bullish about after having gone through the one-year review process? Which are ones that could perhaps be potential sources of incremental growth in the future? Thank you so much.

Yeah, thanks for the question, Brad. We did pause and we looked at all of our growth initiatives. Some of them I just articulated answering the prior question from Brent. And I must admit, as we sat and looked at them and as we see here today, we think the growth initiatives we lean into are the right ones, the opportunity around financials, the international opportunity. We thought very hard about the investment we've made in financials and we think that's the right one. The partner community is clearly paying off. So I don't think at this time when we look at those growth initiatives, we would have pulled back on any of them. We're moderating how we're thinking about it going forward but I think we have the right investments in the growth opportunities and that's what gives us confidence and conviction to go attack this big market opportunity we have globally. So, again, I won't pull back on any under the right investments. They've already started to pay dividends throughout last year and this year, and we think we'll be able to lean into them even more as we go forward. One of the things that's really important as we think about driving operating margin expansion by doing so and becoming more efficient, it allows us to continue to invest back in the business across both technology, go to market and potential acquisitions. It all comes together to this durable growth that we’re mapping out over the next few years.

Hey, Brad, I would just add, Carl talked about the M&A component, we remain curious in the market, but over the last year you haven't seen significant M&A on our side driving any incremental growth either as you contemplate the updated outlook. So, that's a component of it as well.

Thanks so much, Carl and Zane.

Thanks, Brad.

Thank you. Our next question is from Michael Turrin with Wells Fargo. Please proceed with your question.

Hey, great. Thanks very much. Appreciate you taking the question. I was hoping to go back to what drove the change in tone towards more margin here. I think it's what investors have been hoping for, but maybe you could speak to the thought process there and confidence you have in managing the trade-offs and giving a bit more margin here but making sure you're still well positioned for any rebound? Thanks.

I think there's a couple things. The current environment that we're selling into, we actually think that's the normal IT spend environment that we will be seeing going forward. It's not something every quarter we're going to say how does it compare to last quarter, how does it compare one quarter to next year-over-year. We think this is now a normalized and the new norm of IT spend. That on the back of some of the growth initiatives that we just talked about, we think this is what gives us conviction and confidence in this 15% growth profile going forward. We also think by driving more operating margin, it gives us more OpEx dollars to invest in these key growth initiatives as well. So, we take a look at the market, we take a look at the opportunity, we take a look at how we're driving the business, our growth initiatives, and all of this came together for us to think about, you know what, we can drive really durable growth over a long period of time, and we can do it profitably while all investing in the business.

Yeah, I would just add, we've come to a better understanding as far as each of these areas of growth, what they cost, how we think about those returns over a multiyear period. Carl mentioned some that require some upfront cost, but we're able to actually ramp a number of those initial investments over this multi-year period. And then there's just increased focus and discipline around spend across the company. We recognize we need to focus on efficiencies, systems, people, and process. And we're heavily involved in looking at all of those as we scale the business. So we're excited about the future. We believe we can truly invest and innovate and yet still drive margin improvement. And you've seen us do it over the last number of years. So we just want to continue that momentum.

Thanks, very clear. Nice job.

Thank you.

Thank you. Our next question is from Raimo Lenschow with Barclays. Please proceed with your question.

Hey, perfect. Thank you for the long-term outlook from me as well. Carl, if you think about the growth in the market, and I get it that you kind of, what we see now is what we have in there. If you compare the current times and what you were assuming in your planning assumption to what we've seen in the past in terms of spending behaviors and take bubbles away, is this kind of what you think is kind of also long-term something that will continue like this, or is this like for the foreseeable future, let's kind of work with the planning assumptions that there could be a better market at some point in the future? We don't know when, but at some point. Just trying to understand, like, has the market changed towards kind of a different growth trajectory or is it just like what we see in the economy at the moment?

Yeah. As I said earlier, we think the current environment is the new norm, and that's what we're basing our medium-term outlook on. That being said, things could change in one direction or the other. We could get tailwinds, and we could get employment and headcount growth. We've taken a moderate approach when we look at headcount. We think people who are doing large transformations of their HR in their finance systems today at times they pause and they think about it and they sweat their existing asset a bit longer. And when they do so, by the way, those opportunities don't leave our pipeline at all. And in fact, a lot of times the customer chooses Workday and they just push it out a quarter or two. Things like that could re-accelerate. So we think it is the new norm. Do we think things can change in the future? They potentially can and if so when we get more tailwind, we'll update our model as we think about the next few years. But right now, we do think the current environment is consistent in what we'll see going forward.

Perfect. And then a question for Zane. If you think about, like, Workday historically has been probably over-indexing on R&D and probably under-indexing a little bit of sales and marketing. As we think about the efficiencies going forward, et cetera, how do you think about that mix between those two major drivers? Thank you.

Sure. Yeah, broadly I'd say it is a mix and there's always opportunity. We've looked at both innovation, R&D spend and how AI can actually help those efforts and we've got a terrific team, we're doing a lot of innovating, a lot of building out the product and a lot of growing. So I would say, look, it's balanced across all areas. Even on the G&A side, we all believe we can continue to not only innovate, but be more efficient and really think about as we grow around the globe, how we balance that growth with a workforce that's better represented around the globe as well. So I'd say generally speaking, opportunities on both sides, but we're leveraging those investments we're making. We're also excited about our roadmaps and all the investments that we're making for the future as well.

Thank you.

Thank you. Our next question is from Karl Keirstead with UBS. Please proceed with your question.

So you set your midterm free cash flow margin target at 25%, which was pretty well right on top of your non-GAAP operating margin target. So given that you're raising the latter by 500 bps to 30%, I can imagine some people on the call will just raise the free cash flow margin up to 35 to keep that relationship solid. I don't know whether you want to comment on that or maybe punt to the Investor Day, but just on this call, is there any reason why that correlation between those two metrics might be different than what you were thinking a year ago? Thank you.

Sure, Karl. Yeah, broadly speaking, I would say yes, but I don't want to give you all the answers because I'd still want to see you at Investor Day in 3.5 weeks. I mean, I would point out that we’re still ramping in a number of industries where the payments don't necessarily correlate with the revenue. These are industries like edu and other industries like federal where we've seen good growth there. We're also a taxpayer in the US now. So stay tuned for what we'll disclose in 3.5 weeks. I don't want to get ahead of myself, at least some material for then.

Got it. See you then. Thank you.

Thank you. Our next question is from Alex Zukin with Wolfe Research. Please proceed with your question. Alex, is your line on mute?

Hey, guys. Sorry, it was on mute. Can you hear me now?

We hear you, Alex.

Guys, thanks for taking the question. I guess maybe for me, talk a little bit about the vertical, what you're seeing from a pipeline perspective. Should we expect kind of the same vertical strength that we saw in the first half to drive the booking strength in the second half? And then on the midterm targets, particularly on margins, should we expect that to be linear? Should we expect that to be more back-end loaded? And M&A, in the context, it sounds like there's no change to the kind of M&A strategy that you guys have conducted. I just want to be sure that's what you're implying in the term target setting?

Zane, why don't you start take the last question and I'll jump in.

Sure. As we think about that growth I'd say evenly balanced. Some of the what I mentioned, Karl will give you a little bit more detail on that in 3.5 weeks. But generally speaking, evenly balanced, maybe a little more skewed towards FY ’27, but we've got a number of initiatives and obviously we're pleased to see the growth that we've seen even this year. So more to come on that front. I'll hand it over to Carl.

Yeah, and on the industry verticals we highlighted some in the script, but I'd ask Doug to give a little bit more color on what we're seeing there.

Yeah, hi Alex, Doug here. My ears perked up when you asked about pipeline. So yeah, pipeline growth in the industry, as you know us to be strong in is where we're seeing continued strength. So that includes healthcare, of course, but also higher education. And we think both healthcare and higher education are multi-year opportunities for Workday for full suite. In addition to that, state and local and increasingly the federal business. And hope to share more good news around the Fed business in the second half of the year with you as it progresses.

Perfect. And then maybe just if I sneak one more in. If I think about the construction of the growth curve over the next couple of years, when we think about your success going down market, versus some of the trends we're seeing in large enterprise, what percentage of -- how do we think about that balance? We used to ask that question about financials versus HCM. But if we actually recast it more to the lower end of the market versus the higher end of the market? How would you characterize it?

Yeah. So let me answer that question. As you know, we've had historically had a lot of success in large enterprise and in industries and verticals like Doug just mentioned, and we've been pushing down into what we call the medium enterprise or the emerging enterprise quite aggressively. One of the reasons we're doing that is because we're having a lot of success selling full suite or full platform deals, which is a combination of both financials as well as HCM. And we continue to see that as an area of strength for us going forward. We've modified our pricing and our packaging for those markets. We've also now have new delivery capabilities to accelerate deployment. So customers get better and faster value from the medium enterprise market. And our partners are also leaning in and helping us drive faster adoption in that market as well. So the media enterprise, both here in the US, we've taken the playbook from the US. We're pushing it globally. It's in the UK, and it's spreading throughout Europe, and we'll be doing the same in APAC. So it's an area of strength. It's an area of opportunity and it's something we'll continue to lean into on the go-to-market side as well as the product side as we think about pricing and packaging.

We will now be taking two more questions. Our next question is from Derrick Wood with TD Cowen. Please proceed with your question.

Thanks. I guess for Zane, I know you called out pockets of slower headcount growth during renewals in Q1. So I'd be curious, a, are you seeing this broaden out to more verticals aside from the ones you called out last quarter in tech and retail. And b, are you able to quantify what the degree of change is? Like, what was the average headcount growth historically? And what do you think in the new normal is? And did you adjust for these assumptions in your new medium-term growth outlook?

Hi, Derrick, yeah, this is Zane. If we look quarter-to-quarter, our assumptions have been very similar to what they were in the first quarter that we extrapolated for the year. We've seen consistency there. We made the adjustment for the year. If you recall, last time, I think I mentioned it was approximately $17 million over the extent of the year. So, no significant change there, if anything, on a quarter-to-quarter level, we believe the baseline has been about the same. So it's been consistent. We consider it the new norm. It's contemplated in both our FY '25 guide as well as our midterm guide. It's not a significant impact on revenue or bookings as we think about it today.

Okay. Thank you.

Thank you.

Thank you. Our last question is from Brad Zelnick with Deutsche Bank. Please proceed with your questions.

Great, thanks so much. My question is for Carl or perhaps Doug. Curious if there are specific areas within FINS that you're particularly excited about because we still keep hearing great things about accounting center, not just in financial services but across verticals and even down market. But what would you call out as particularly exciting that can compel customers to adopt and maybe even drive upside ahead.

Yeah, Doug, do you want to take that.

Yeah, I'll go first. Hi, Brad, nice to hear from you. You hit the first one, I'd hit, which is accounting center. And increasingly, as we've dedicated teams to vertical organizations and vertical selling by industry, each of them with solution consulting have come up with really interesting and innovative use cases for accounting center across industry. So while the original thesis of accounting center go back 5 years or so, 5 plus years, was for FSI and to support that vertical, it now is selling across industry, as you point out. The second one I'd point out is student, and so student changes the game in higher ed and can drive sort of not just full suite opportunities, but pull through that, what you would consider operational ERP in that particular industry. So as I answered the earlier question around industries where we see strong pipeline growth, and I mentioned a multiyear opportunity for both health care and higher education. Those are two that get me excited.

Another one, Doug, might be workforce planning. We think there's a tight correlation between our HCM platform and financials and workforce planning is something we continue to see momentum, which is an adaptive product that we got a few years ago.

Awesome. Very helpful color. Keep up the good work. Thanks, guys.

Thank you.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I'll now turn the call over to Mr. Eschenbach for closing comments.

Thank you, operator, and thank you again to everyone on the call today. Before we go, I'd like to give a special thanks to our workmates, customers and partners around the world who continue to fuel Workday's growth and success. We're heading into the second half of our fiscal year with strong customer momentum and exciting innovation on our road map, and we clearly have a strategy to support our durable growth at scale. Workday's value proposition, I believe, and all of my workmates believe, has never been stronger. Organizations of all sizes, geographies and industries are turning to us to manage their most precious and most important assets, that's their people and their money, and it's all on an AI-powered platform. And with the new innovations we're launching at Rising, we've never been better positioned to lead them into the future. I look forward to seeing you at Rising and Financial Analyst Day in a couple of weeks. Operator, we can now close the call, and thank you again for everyone attending.

This concludes today's conference. You may disconnect your lines at this time. Thank you again for your participation.