Workday reported better-than-expected third quarter earnings and raised its outlook for the fiscal year.

The cloud HR and finance application company reported third quarter earnings of 43 cents a share on revenue of $1.87 billion, up 16.7% from a year ago. Subscription revenue for the quarter was up 18.1% from a year ago. Non-GAAP earnings were $1.53 a share.

Wall Street was expecting Workday to report third quarter non-GAAP earnings of $1.41 a share on revenue of $1.85 billion.

Carl Eschenbach, co-CEO of Workday, said the company was seeing momentum from "AI innovation, strength in full platform deals, expanding partner ecosystem, and international growth." Aneel Bhusri, co-CEO of Workday, said the company's strategy to build AI into its core products is resonating with customers.

Workday's approach to generative AI revolves around building it into its core products instead of going the add-on route that has been popular with vendors. Workday passed the 5,000 core HCM customers in the third quarter. Company executives say Workday is playing the long game and aiming to take advantage as enterprises move to consolidate vendors. 

On a conference call with analysts, Eschenbach said:

"Generative AI is becoming a business imperative. As a trusted partner and a market leader with over 65 million users under contract we can uniquely drive efficiencies and improve the employee experience. What we are doing and not just saying is resonating with our customers. Simply put, our value proposition has never been so relevant and powerful."

As for the outlook, Workday projected fiscal 2024 subscription revenue of $6.598 billion, up 19% from a year ago. Non-GAAP operating margins will come in at 23.8%, which is higher than expectations.

Bhusri said:

"We're infusing generative AI into our platform is through our investment in conversational AI. While we are still in the exploratory phase with this technology. We believe conversational AI will fundamentally change how users interact with Workday. By enabling them to easily surface information they need and interact with data through simple conversation. We're also leveraging generative AI to create a conversational experience for Workday Adaptive Planning customers. The use of conversational text will simplify the process of surfacing key planning insights. Enabling users to make quicker, more strategic decisions about their businesses."

Eschenbach had some interesting comments on how customers are thinking about AI and factoring it into their evaluations. 

At this point, I don't think people are making decisions yet, just purely on AI. I think it's something that every customer looks at to make sure that they're going to be covered with a new deployment or a customer knowing that Workday has them in a strong place, but they're still looking first and foremost at running their business and moving off of crappy legacy applications into the cloud. And we're unmatched in that category. And then when we add the AI stuff, I think it just checks that AI box.

But, I would say that despite all the hype, it's still in the early days of actual large scale deployments of AI in HR and finance, we're ready."