Operator:

Thank you for standing by. My name is JL, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 2024 ServiceNow Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Darren Yip, Group Vice President of Investor Relations. You may begin.

William McDermott:

Thank you, Darren, and thank you, everyone for joining us today. By now you've all seen the press release, we crushed the quarter, we raised the full year guidance, and we've never been more excited about the future of ServiceNow. But before we get into all the details, I just want to comment on the leadership announcements we made today. The company received an internal complaint earlier this year regarding the hiring of an individual who had previously been a U.S. government employee. As you would expect, we took the complaint very seriously. The Board of Directors conducted a thorough internal investigation with the assistance of outside counsel and determined that our company policy was violated. Acting with total transparency, the company proactively disclose the findings of the investigation to the proper government entities. And as a result, today, we're announcing the departure of the individual who's hiring was the subject of the original complaint. We also came to a mutual agreement that CJ Desai, our President and COO, would offer his resignation from the company effective immediately. While we believe this was an isolated incident, we are further sharpening our hiring policies and procedures as a result of the situation. And when it comes to compliance, let me be perfectly clear, we are fully committed to doing the right thing. And from a continuity standpoint, I'm extremely proud that our team has the incredible depth of talent and expertise to lead forward without any disruption. In fact, Chris Bedi, a respective ServiceNow executive for the past decade, who was recently named the MIT Sloan CIO Leadership Award winner for 2024. He'll serve as the interim Chief Product Officer, while I consider internal and external candidates alike. Our entire products and engineering team is the best in the enterprise software industry, and they're focused on delivering our Xanadu release in a few weeks' time. In fact, I just got done talking with them. They're in great shape. And we wanted to give you the facts as clearly and succinctly as possible because we have so much else to cover today. So as I said at the start, ServiceNow is once again in a beat and raise situation. Our Q2 results prove that we are delivering elite level execution. Subscription revenue grew 23% year-over-year at constant currency, which is 100 basis points above the high end of our guidance. CRPO grew 22.5% at constant currency, which is 200 basis points above our guidance. Operating margin was over 27%, nearly 250 basis points above our guidance and we had 88 deals greater than $1 million in net new ACV, up from 70% a year ago, a 26% year-over-year increase. A year ago, Q2 had one deal greater than 1 million from a net new logo perspective. This year, we had six of them that were net new logos. Our first federal customer actually crossed the 100 million plus ACV threshold, and we signed our third largest net new AC deal ever. All of our workflow businesses were in more than one-half of our top 20 deals. Security and Risk, ITSM and ITOM had eight, nine and 10 deals over 1 million, respectively. Customer workflows had a big Q2 with 14 deals over 1 million, employee workflows had 12 deals over 1 million and creator had 10 deals over 1 million. What's the headline? ServiceNow is relevance is the AI platform for business transformation is soaring. This is a growth company on an unprecedented trajectory. Moving to the topic of AI. NowAssist net new ACV doubled quarter-over-quarter, significantly overachieving our expectations and it became the fastest growing new product in the company's history. We signed 11 NowAssist deals with 1 million plus NACV in Q2, two of which were over $5 million. We had impressive wins across industries, from banking, health care and manufacturing to semis, tech and many others. As an AI lighthouse customer, Stellantis is using ServiceNow. As its strategic AI platform to manage operations across HR, finance and supply chain. American Honda selected NowAssist as their Gen AI solution of choice to improve deflection and efficiency of service, delivering a world class experience to their employees. Merck is using the ServiceNow platform to streamline operations across IT and cybersecurity to advance its global biopharmaceutical business. Adobe will leverage NowAssist to optimize routine tasks for employees, which will increase efficiency across the entire organization. Dell will integrate NowAssist with its service capabilities to deliver a seamless customer and employee experience and with NowAssist, ST Microelectronics plans to enhance productivity and user experiences across their entire organization. LTIMindtree is using NowAssist for ITSM to increase developer productivity by 30% with code and flow generation. We're also collaborating together to grow and expand offerings in finance and supply chain workflows. So why are so many enterprises rapidly adopting ServiceNow's Gen AI strategy? Think about this in the context of design thinking and innovation. The first pillar is always desirability. Do we have the big idea? ServiceNow is putting AI to work for people. Our Gen AI strategy is focused on infusing intelligence into the flow of work, end-to-end across the enterprise, every department, every persona. With our native integrations, we already help people orchestrate across different systems and data sources. Now we can train the machines to do the low value work so the people can up level to the knowledge work. The second pillar is viability, does our approach to Gen AI make business sense? We set the tone on innovating with domain specific multimodal language models. This approach is more accurate. It doesn't have the hallucinations of the large models from the Internet. It's faster to train, and it's faster to deploy these models. It's more cost effective and sustainable because these models are less GPU hungry than public models. The final pillar is feasibility. Can we actually do it? This is the best pillar of all for ServiceNow because we've actually done it. When you look at our own deployment of NowAssist, the initial results are staggering. With better deflection, our IT help desk is saving 45 minutes per avoided case and customer service. Our colleagues are saving 30 minutes every time the computer generates the knowledge based article for them. Our employees will save 21,000 hours with faster self-service and our developers are completing non-complex scripts and half the time. This is a moment where business leaders are looking for the role model. What does it look like to run a business with Gen AI at the core? ServiceNow. Thanks to our engineering and our Now on Now teams is leading the way. This is an excitement for Gen AI. And it's one recent Gartner forecast global IT spending will be up 8.9% in 2024 and that's even higher than originally forecasted. By the way, more than 3 times GDP. Within software spend according to IDC, Software-as-a-Service will grow 17%. So the trend line is clear. Enterprise software buyers are moving away from consolidating the past into building for the AI future. ServiceNow has been the modernizer at many points on this journey, creating a single pane of glass into the IT estate. Expanding our core from IT to employee service to customer service, now making it easy to build new consumer grade applications on a single data model. The AI moment is the culmination of this journey. CIOs don't want 1,000 points of dim light. They're betting on a few market leading platforms working together as the great unlock. They see ServiceNow as the intelligent action platform spanning the entire enterprise. And that is why our pipeline has built from knowledge over 50% year-over-year improvement. It's why CIO surveys continue to show ServiceNow's relevance rising to the top of the charts. It's why more IT and line of business buyers alike are looking at long-term blueprints for ServiceNow and planning out the future with us. It's why Jensen Wang hit it on the head when he said, ServiceNow is the AI operating system for the enterprise. Customers are seeing us like Jensen sees us. While our performance has been consistently strong, we take nothing for granted. Every aspect of our innovation engine and our go-to-market machine is moving up to the next level. We're tracking and tackling more of the automation and market opportunities every day with both our customers and our engineers. Our new Creator Studio available with ServiceNow App Engine is extending our existing low code leadership to no code. So every employee can now build applications. Other updates to our automation engine help simplify RPA deployments. We see a great opportunity for ServiceNow there. We're moving even faster on co-innovation partnerships with major global brands, an expanded multiyear agreement will extend ServiceNow capabilities to all BT Group units. Bell Canada will develop new capabilities within the business service experience while accelerating their own internal transformation as a tech services and digital media leader. This is the largest telecommunications collaboration for ServiceNow and the first of its kind in Canada. Boomi is expanding from a small ServiceNow footprint to replace existing competitor implementations. Boomi will use all NowAssist solutions and work with us on joint product development. Deloitte is leveraging the ServiceNow platform to drive industry specific managed services to bring AI based innovations to clients around the world. We are accelerating our growth in key geographic markets and verticals. ServiceNow will help the U.S. Air Force adopt new best-in-class technology. The federal government's National Science Foundation is utilizing ServiceNow's new Gen AI solutions to support their mission to promote research, expanding knowledge and science, engineering and education. In Germany, Bayer is using NowAssist to empower their employees with Gen AI and hyper automation as they create a culture, where every employee has the potential to innovate. Our momentum in Japan continues with major wins this quarter, including Nomura, Panasonic Information Systems and Nitori Holdings. We announced plans to launch a ServiceNow UAE cloud hosted on Microsoft Azure, so we can meet the business transformation requirements of all public and private sector entities in the UAE. We announced two growth investments in our partner ecosystem in India. In Morpheus, we'll extend our presence in India and across Southeast Asia through the development of new Gen AI offerings, solutions and digital skills training. Prodapt will further develop digital business transformation through AI enabled solutions and the Now Platform skills expansion. We're also expanding into new categories, further increasing ServiceNow's total addressable market yet again. Industry analysts have reported that the number one priority for CIOs is getting their data house in order. And that's why at knowledge, we shared our plans for a powerful new database offering. RaptorDB, it's built for enterprises looking for speed and scale to support new AI use cases. RaptorDB give ServiceNow customers the capability to ingest data at massive scale from multiple data sources, so they can analyze it much faster to feed our domain specific models. We're already achieving 12x transactional throughput and 27x improvement in response time for analytic inquiries in our ProPlus version of the platform. Today, we're launching the RaptorDB lighthouse program. This is similar to our highly successful Gen AI lighthouse program. This new offering is designed for a select group of top customers at the forefront of this new AI world. We already have many signing up. We also completed a tuck-in acquisition of Raizen, an industry leading data company based in Germany, in combination with NowAssist. Raizen will further accelerate our Gen AI-powered search and knowledge management capabilities. This is only the beginning. The data opportunity is massive, and we intend to make some additional announcements on September 10, regarding our growing data ambition. As you can see, ServiceNow is not opportunity constrained. New buying centers, new industries, new geographic markets and we're fielding more inbound interest for new partnerships that at any point in our history. There's a sense of excitement here in the community, in our company, and it's all for good reason. In closing, our focus is exactly where it should be. Expanding this differentiated platform, scaling this business, and delivering great results for our stakeholders. I've got a few questions about the second half, with a rare speculation out there that elections or other macro factors will challenge the business environment. Are our customers mindful of the unknowns and the broader macro, of course, that's exactly why they are leaning in to ServiceNow. Because AI is the elixir that drives productivity, cost efficiency and new business models. Simply put, Enterprises are investing in business transformation. They are investing in AI. They are building a new reference architecture for the decades to come. This is the largest, most compelling business opportunity in the world. We are bullish on what's ahead. That's why we have not only confirmed, but also raised our full year guidance. Our brand represents an optimistic view of the world's future. It's why we're putting AI to work for people. And ultimately, why? As we celebrate the 20th anniversary of Fred Luddy's original dream, we believe the next 20 years will be even more exciting. I personally have never been more convinced that ServiceNow will be the defining enterprise software company of the 21st century. Thank you for your time and attention. I look forward to your questions. I'll now turn you over to Gina. Gina, over to you.

Operator:

Thank you. The floor is now open for questions. [Operator Instructions] Your first question comes from the line of Keith Weiss of Morgan Stanley. Your line is open.

William McDermott:

Thank you very much for the question, Keith. I would, first of all, begin by discussing this incredible platform and the difference that it makes. If you take all the complexity that's out there, and you think about what CEOs today want, they're looking for new vectors of growth to have to radically simplify their companies and digitization is really the only way out. But the difficult thing is most people are selling into a department where they have a narrow threaded solution and that doesn't necessarily change the way work flows and the way business processes get executed. So we're able, -- especially with our Gen AI built into this incredible platform, we're able to demonstrate real value, and that ROI is undeniable and we have a culture built to deliver value. We have a team in who knows how to describe value. And obviously, we're very market connected. I do give the culture here credit for what I call an elite level of execution. So that's just built into the fabric of our DNA, great innovation, great execution, great integration between what we build, how we take it to market, and how in the post-sale world, we care for that value to be ultimately delivered quickly and provable ROI.

Operator:

Your next question comes from the line of Raimo Lenschow of Barclays. Your line is open.

William McDermott:

Yeah. Raimo, thank you very much for the question. And I think the key to our domain specific or smaller models, as you mentioned it, they're lightning quick. There's no latency because we're working with the customers' data. They are highly secure again because it's the customer's data, and they're inexpensive to run. And when companies see the bandwidth of a platform that goes end-to-end. So everywhere from the entire IT estate for digital transformation, or recreating an employee experience where employees actually get excited to come to work and do their job, because we take the busy work out of their life or the customer experience can be totally reimagined and then inspiring developers to do what they do best, which is dream about net new innovation and building new business models. You see this, obviously, you mentioned BT, I could have easily said London Stock Exchange, where they deployed us for a core business transformation, and they unified 15 siloed platforms and 14 lines of business on the ServiceNow platform. And they actually saw a deflection rates increase to 85% of the cases, and 35% time improved and summarizing incidents. And by the way, NowAssist does this in seconds. So we're talking about two days per employee improvement and productivity. I could have gone to TriMedx. A biotech company and basically, what they're doing NowAssist is they're enhancing developer productivity, which has increased for them 22%, and they saw 50% of their developers actively using NowAssist in just three months. I could have also mentioned Kainos, a digital technology solutions provider. They created 600 knowledge articles with NowAssist and they were able to improve access to their knowledge content for their customers and employees. Their satisfaction from a customer standpoint went from 80 to 99 and this is just amazing stuff. We just went general availability with our Gen AI SKUs for our government Community Cloud. This is June 28, by the way. One customer had a go live in implementation schedule for Q3, but their pilot went so well that they decided, they needed it immediately activated in Q2. So you’re into a whole different program here with rapid time to value a product that people love to use and the executives get excited because their people are so happy. Their customers are so happy. Their innovators are so happy. And we’re so market connected that we know what’s going on in every one of these instances, they know we’re not mailing it in from a deck.

William McDermott:

Thank you.

Operator:

Your next question comes from the line of Kash Rangan of Goldman Sachs. Your line is open.

William McDermott:

Thank you very much, Kash. I really appreciate your thoughtful comments and your question. I think the bottom line is consolidating the past is really not moving the ball forward and innovating the future is. I think we have a dream for the company. I think we know how to describe that dream to the C-suite. I think we're now toggling across the entire C-suite, where we've expanded the perimeter in the relationship plan and the solution road map. And obviously, internally, we've scaled the company where it's ready to make a bold move now and be the defining one in the enterprise. So I think all that's coming together once for us. In terms of the broader macro, you saw the investment in hardware, obviously, for the AI world. You saw the incredible success of the great NVIDIA company and the work that they're doing. You see great companies like Microsoft doing incredibly well with Office and dynamics and teams and copilot, so they're standard. And then you see the hyperscalers all doing well, whether it's Azure, it's AWS or its GCP, they're all doing well. And good news is we integrate with all of them. So we know the hyperscaler trend, okay? We built our Gen AI strategy with NVIDIA. We knew they were going to be the winner. We had no doubt about that. And we knew that the world of the 20th century would eventually get the picture that you can't upgrade the past and expect it to give you a different result. And any time we get a chance to tell that story and prove it with a great demo and great success cases, we blow people away with innovation. But to answer your question in terms of where are we headed? Where we're headed is we're going to transform entire industries. And if I give you an example of that, take the utility industry, for example, they have to maximize the power grid uptime. They're trying to detect and mitigate vulnerabilities of critical assets, and I need to do everything in real time, whether it's repairing things, taking care of equipment, skills, parts, field service technicians, equipment suppliers. There's a whole distributed value chain. We're going to reinvent the whole industry, and we've got to put it on the ServiceNow platform. And we've got to take the data, and we're going to connect all the disparate parts that are suffocating companies, and we're going to move it into the Now Platform, and we're going to reimagine the way work flows. And I could say that for manufacturing, think about predictive maintenance across multiple sites, combining IoT data with advanced analytics to optimize profitability, improve operational efficiency, think about consumer goods. They want AI-powered chatbots to deliver personalized shopping experiences. And just think about your own shopping experience. You could buy a great product, but if you can't return it in a streamlined way. You drop the brand. You're not doing business with them anymore. So it's a virtuous cycle to think about the quality of the product, the service experience of the customer and ultimately advocating for the customer and giving them what they want, that's all workflow, and we're going to automate that entire industry. And so rethink health care, rethink manufacturing, rethink utilities, you rethink consumer goods. We're going for it all.

Peter Weed:

Thank you and congratulations on the continued momentum. I think the big surprising news of the day was, obviously, some of the changes in leadership. CJ obviously is a really important part of the senior leadership team one of the people that I often pointed out to clients about the success and leadership there. Beyond naming Chris as the Chief Product Officer, what do you see the key operational steps to ensure a smooth transition? And what additional actions are you taking to kind of ensure continuity and one of those keys to success. And I guess it's probably not just operationally with the team, but also probably with the public sector business, given that was a bit of where this work came from.

Peter Weed:

Thank you.

Operator:

Your next question comes from the line of Samad Samana of Jefferies. Your line is open.

William McDermott:

Yeah. In terms of the companies that are buying AI products in the companies that aren't?

William McDermott:

Yeah. It's a really important question, Samad, because I think what's happened is they've heard so many whitewashed AI stories from pretenders that they are a little jaded. So we have to get in there and show them all the use cases, show them the demos, show them the customer success stories, give them the handful of references that are already doing it. And before you know it, were off to the races. And then we show them our road map for where we're taking the company and they realize they don't want second-mover advantage, because if other participants in their industry move out and they don't, they could lose. And also, if you think about employees, soon, employees won't tolerate the nonsenses going on with 800 numbers, busy work, silly work that doesn't make a difference and they'll go work somewhere else. So the same thing is true with customers. So I think that it's an education. It's a demonstration. And it's having the validity of success where you have permission to go into the C-suite and they're interested in listening to your story. Once they hear our story and once they see us in action, it's an order. And then it's a quick install and then it's a go-live and then it's amazing productivity. That's what's happening.

William McDermott:

I think Gina makes a great point there, and I did hear one analyst one say, yes, I've been talking to the partner checks and the channel and I'm not hearing a lot from the partners. Yes, that's because, as Gina said, they're still getting activated. But can you imagine when they do, if you see these results when we're doing it on our own and then you get thousands and thousands and thousands of more feet on the street telling the same story, it's a wow factor.

Karl Keirstead:

Well, thanks. Maybe I'll direct this one to Gina. Gina, three months ago, you had signaled an expected pretty solid sequential acceleration in CRPO in 3Q. I know things change. So I'm just wondering if you might revisit that second half outlook. And specifically, given the second half election uncertainty that Bill flagged I'm wondering if you're being a shade more conservative on the 3Q CRPO guide, given how big 3Q is in the public sector.

Operator:

Thank you. Your next question comes from the line of Brad Sills of Bank of America Securities. Your line is open.

Gina Mastantuono:

Yeah, Brad. I would say, it’s very much across the board. Similar to the results that you saw in Q3, it’s really strength across the platform. Whether it’s IT, customer employee creator as well as NowAssist. And so what I would say is, we’re operating on all cylinders here and pipeline being generated is really very across the board. But as you would imagine, with respect to Gen AI, there is such excitement and such attention there that we absolutely see very strong pipeline as we think about Gen AI in the back half and then moving into ‘25 and beyond.

Kirk Materne:

Yeah. Thanks very much And I'll echo the congrats on a really nice quarter. Bill, you alluded to this a little bit earlier in one of your answers, but I was just wondering if you could expand a little bit on the opportunity around operational technology for you all. Where are you in terms of starting to have those conversations with customers? And can you just expand a little bit on your thoughts and hopes for that product set as we look out over the next six, 12 months? Thanks.

Operator:

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

Gina Mastantuono:

Yeah. So you're absolutely right. RPO growing at 31% year-over-year is pretty incredible, especially at our scale. We continue to see average contract terms increase right? And so Q2 had the largest quarterly average contract term for Q2 since 2018. And so we're seeing TCV from five plus year deals more than tripling. I said that in my script. And so we're really seeing a meaningful uptick in multiyear duration contracts as customers are really seeing the power of the Now platform and just making longer, more strategic deals, which is resulting in that. And so no big differences in kind of any pull forwards of deals, a slight uptick in early renewals, as I talked about, but that was only against a prudent guide. So again, it's really about the power of the platform customers really understanding how we're using Gen AI into that platform and really becoming the AI platform for business transformation. That's it.

Gina Mastantuono:

Yes. So linearity in Q2 was good. I feel really good about what we saw. And absolutely, AI is AI conversations are driving very strategic engagements and obviously, driving larger average contract terms, right? Again, it's customers really leaning into a longer strategic partnership and getting it now. And so I think all of that is a big part of what you're seeing in our results.

Operator:

Your next question comes from the line of Mark Murphy of JPMorgan. Your line is open.

William McDermott:

Okay. Well, I'll start off and then Gina can talk about our hiring strategy, and thank you for your kind remarks, Mark. There was 0 impact on customer systems from CrowdStrike outage on July '18 as it relates to ServiceNow. There was zero impact to data integrity financial systems and the integrity of the operations of the companies as it relates to ServiceNow. And thanks to our CMDB, I think you're onto a very good marketing and sales idea and the service mapping of the CMDB we had instant visibility into which systems, which business services and infrastructure were impacted in our customers' environment. And our automated workflows sped up the remediation and the employees were kept up to date via our ServiceNow portal. So I think this could actually lead to more sales opportunities once non-ServiceNow customers see what's possible with a platform like this.

Operator:

Your next question comes from the line of Joel Fishbein of Truist Securities. Your line is open.

A – William McDermott:

Thank you very much, Joel. We have a really fantastic partnership with Microsoft. And I think that has actually opened additional addressable market for ServiceNow. And there is a co-sell motion with Microsoft’s enterprise sales team. We do work together very closely with them. And we’re a good teammates, and we’re good partners. And we know that both of us working together is what the customer wants. That’s why we do it. And ServiceNow is really helping customers streamline their migrations to Azure. And while Azure exposes us to a much wider spectrum of customers, I think we also help the relevance of Azure because we’re getting big. And we’re expanding in multiple industries and geographies. And we’re really thinking strategically about how we can win net new logos together, and we’ve had some examples of them. We closed seven $1 million-plus now on Azure deals in Q2, with two of them as new logo wins, and one deal, in fact, was over $30 million in net new ACV. So we’re quite confident that the partnership and synergy will enable us to bring value to more customers and we’ll do it at unprecedented speed and scale. And I have been very straight up with everybody. I don’t go any place without acknowledging Microsoft as a standard. And I recognize the copilot does very important things, and it gets even more interesting when all the capability of NowAssist and the things that we built our platform to do is complementary and fully integrated into Microsoft. And that’s really the winning formula, and it has been from day one.

Robbie Owens:

Great. Thank you very much for taking my question. Bill, somewhat curious just where customer conversations are around data governance as we think about these modern architectures as you're thinking about RaptorDB, is that an area that we should expect ServiceNow to play in directly or play in via partnership? Thanks.

Operator:

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

Gina Mastantuono:

Yeah. So I’ll take that second question first. So no, there’s no federal business that we foresee we will need to unwind full stop. And then with respect to the step-up in CapEx, it’s more quarterly timing than anything else. Expectations for full year has not changed. And as you would imagine, focus of our CapEx is on AI and Gen AI. But as we talked about at Financial Analyst Day, it’s already baked into any guidance that I would have given you. So I wouldn’t take into account an any quarterly kind of timing-related stuff.

Gina Mastantuono:

Thanks, Brad.

Operator:

Your next question comes from the line of Mike Cikos of Needham & Company. Your line is open.

Gina Mastantuono:

So yes, that headwind to Q2 CRPO did play out as expected. And yes, it will normalize in Q3. But remember, depending on the size of our Fed business in Q3, it could pop up again as we play out Q4 and beyond. Obviously, we’ll let you know as that comes to fruition or not. But yes, it should normalize now in Q3 as expected.

Gina Mastantuono:

Thanks so much, Mike.

Matt Hedberg:

Great. Thanks for taking my questions. Maybe just a quick one for Gina. Kind of following up on the last few questions. Subscription revenue has been decelerating here, but CRPO has been accelerating and obviously, even put the guide. Is that just a function, Gina, of the renewals that we’re seeing, whether it’s Q2 or Q3? Just maybe a little bit of the divergence between subscription revenue and CRPO growth.

Matt Hedberg:

Great. Congrats on the quarter guys.

William McDermott:

Thank you very much, Matt.

Operator:

Good day, everyone, and welcome to the First Quarter 2024 ServiceNow Earnings Conference Call. Today's call is being recorded. I would now like to turn the call over to Darren Yip, Group Vice President of Investor Relations. Please go ahead.

Operator:

[Operator Instructions] We'll now take our first question from Kash Rangan with Goldman Sachs.

William McDermott:

Thank you very much for the question, Kash. As I said, process optimization is the single biggest GenAI use case in the enterprise. And any process that exists in the enterprise today will be reengineered or engineered depending on how messy the process is with GenAI. So every workflow in every enterprise will be rethought. So just think about the sales process, for example, and the whole order to cash process, for example, or think about employees and onboarding and training them and providing all the services to them. Think about agent productivity, which is something that we're obviously moving very quickly on where you can bypass the systems that don't integrate very well. And instead of swivel sharing around or putting customers on hold or I'll get back to you tomorrow, have real-time data where most of the cases are deflected from virtual agent. But if an agent is involved, they have choice A or B, which one is more pleasing to the customer.

Gina Mastantuono:

Yes. And Kash, on your question around seasonality about the cRPO. So first and foremost, really proud of the fact that we beat our guide in Q1 by 100 basis points. That beat was twofold

Karl Keirstead:

Bill and Gina, maybe even CJ. I wonder if you could just comment on the environment that you're seeing. I think in prior quarters, you've described it as after a pretty rough, call it, year stretch, it started to stabilize in 3Q and stabilized again in 4Q. Was that still the case in Q1? Were there one or two verticals that maybe lag? Maybe some of the puts and takes about how the environment broadly felt.

William McDermott:

And I would just build on that, Karl, just for your benefit on the budgets themselves. The budgets are going up. And what I definitely see is the preference for GenAI now. I think we're ending one era in the enterprise, and we've begun another. And we're into a new frontier now where GenAI has opened up the eyes of the customer to say, there might be a different way of doing this. And that's creating real opportunity for us.

Matthew Hedberg:

Bill, given your comments on Pro Plus net new ACV growth, are you seeing faster Pro Plus deal cycles relative to what you saw when the Pro was first launched? And anything you just need to call out from a discounting perspective on Pro Plus relative to maybe some of your initial expectations?

Bradley Sills:

A question for Gina, please. Real nice results on RPO. I think this is the second quarter since we've seen significant outperformance there versus cRPO. Just curious what's driving that? And does that give you some visibility perhaps for cRPO to ramp from here given perhaps a ramping component in there?

Operator:

We'll take our next question from Keith Weiss with Morgan Stanley.

Chirantan Desai:

This is CJ. And here is where I would say that specifically, we absolutely believe, and we have seen it that GenAI is helping our software engineers code faster. I mean, straight up. It helps us our software engineers code faster, whether they are junior software engineers or very senior software engineers, they still can leverage and continue to leverage generative AI. So I'll start with that, that is increasing our engineering productivity and it varies depending on how senior the engineer is or how junior the engineer is. And number two, it helps us increase our innovation velocity. So that is really, really important to us that it increases our innovation velocity.

William McDermott:

And one thing just to share with you, Keith (sic) [ Sanjit ], we have 20 -- 20 GenAI cases on the Now on Now story within ServiceNow. And our Chief Information Officer, Chris Bedi, put a very interesting LinkedIn post out there. Please take a look at it. Not only is he doing a great job. But if you think about ServiceNow, we have a financial system in ServiceNow. It's a system of record. We have one of them. Unlike many customers out there that have hundreds, we have a CRM system. We have one of them. And we have an HR system. We have one of them. But they are feeding the ServiceNow platform.

Gina Mastantuono:

Yes. And I would just add -- I think I would just add, we are absolutely customer 0, 100% on all of our GenAI use cases. Deflection rates have doubled for both our employees and customers and they're improving every month. Right? It's really early days. So it's learning faster and faster. Software engineers are accepting 48% of text to code generation. So there's absolutely the ability to see leverage in our R&D as we look to the mid- and long term. So thank you for the question.

Keith Bachman:

I have two questions, but I'll ask them as one. First, Gina, I don't know if this is for you or not, but acknowledge that the adoption does seem quite strong for the various GenAI offerings, and so how would you characterize? And yet you're pointing to decelerating growth through 2024. So what's not growing as well? If GenAI is getting great adoption, probably small dollar amounts contribution. But what's not growing as well?

Gina Mastantuono:

Yes. So we'll definitely give you a lot more details on all things GenAI at Investor Day, and that's in a week and a bit. So stay tuned there. Yes, the adoption curve is stronger than we've seen in any new product category launch, but that's starting from 0, right? So it's a small dollar at this point in time, but the speed at which it's going to grow to be a really meaningful contributor is faster than anything we've seen.

Chirantan Desai:

Yes. And the only thing I would add there is every single workflow continues to still grow double digits plus, plus. So we have no, hey, this has been taken out of x or this been taken out of y besides Gina individually calling out all our growth vectors, whether it's our core, which is ITSM and ITOM or whether it's our growth, which our CSM and other products, AppEngine, part of creator and customer, all of them continue to grow very nicely, and they grew very nicely in Q1.

Tyler Radke:

I wanted to ask you how you're seeing the momentum just in terms of Standard to Pro migrations. We talked a lot about Pro Plus, but it would seem that still a huge opportunity in terms of, I think, close to 50% of the installed base on Standard. Have you started to see an acceleration in those migrations? Can you just talk about the opportunity there?

Gregg Moskowitz:

Bill, getting back to the topic of IT budgets as it relates to ServiceNow broadly, you took a sense of how much of GenAI software spend is incremental today as opposed to perhaps coming from other areas of IT.

So they want to rethink things. And so I think there's two things that are going to happen:

one is business budget is going to move into the GenAI category, and it's not going to take away from the IT spend in the end; and two, there's going to be real winners and real losers. And real winners and real losers has already begun its formation because if you don't plant the AI flag in the ground in the next 8 months, there's not going to be an AI flag to put in the ground and ours are getting put in the ground all over the global economy. And the company that I see out there doing extremely well in that regard is what Microsoft is doing with Copilot.

Operator:

We'll take our next question from Mark Murphy with JPMorgan. I do apologize. It looks like Mark has disconnected. We'll take our next question from Brad Zelnick with Deutsche Bank.

Gina Mastantuono:

Brad, thanks so much for the question. So we're really excited about the investment in Saudi. And rest assured, that $500 million is a long-term investment over a long horizon period. It will be in -- most of that investment is in data center, so it will be in cost of sales, but you'll -- again, we manage our margin very tightly. And the growth that we're from that investment is huge. The opportunity that we see in Riyadh and Saudi, NEOM, is great. And Bill spent a nice time there at the LEAP conference, and we're really excited about really pulling our technology to really help that society grow and become a digital-first economy.

Operator:

And Mark Murphy has dialed back in. We will go to Mark Murphy with JPMorgan.

William McDermott:

Yes. First of all, Mark, thank you very much. Incidentally, my compliments on the research that you put out. I read your e-mail this morning and you called the quarter exactly as it was. So super well done on your part, not surprising considering the great company you work for.

Operator:

We'll take our next question from Samad Samana with Jefferies.

William McDermott:

Yes. Samad, we see the biggest opportunity we've ever seen. And we know the GenAI revolution is real, and we're doubling down. What you're seeing our investments are very focused on building the best software in the world, and selling the best software in the world. So we have great leadership on both the engineering side and the go-to-market side and we're going to have more clarity of focus in the way we drive the go-to-market.

Gina Mastantuono:

And I would just add to that, Samad. I would just add that last year, might have looked like we slowed down sales and marketing, but there's a lot in that number, and we talked about this, a lot of operations, sales ops. And we actually were very focused even last year on continuing to hire quota-bearing feet on the street sales folks. We're entering -- we entered 2024 with the higher -- the highest increase in ramp reps that we have in a while.

Samad Samana:

Very helpful. And then Gina, I had a quick follow-up for you. On cRPO, you mentioned, I think, in response to another question about maybe some early renewals in 1Q. Can you maybe just help us understand if it was material enough to impact the Q2 guidance or just I know the guidance was good, but just trying to think through on that timing, if there's anything we should consider for 2Q and then maybe even the back half based on your expectations on renewals?

Samad Samana:

Awesome. See you guys in a week and a bit.

Operator:

We'll take our next question from Patrick Walravens with JMP Securities.

Chirantan Desai:

I would say it is extremely important, Patrick, is the simple answer. Here are the three things we are solving for with our own LLMs. First of all, they are use case specific. And ServiceNow has many use cases that are used by our customers, whether it's IT service management, customer service, our ITOM, all of our key product lines. These are use case specific. And sometimes you would say, even for what Bill talked about agent summarization and other things or text to code, we always want use case-specific LLMs.

Operator:

We'll take our next question from John DiFucci with Guggenheim.

Gina Mastantuono:

Absolutely, John. Thanks for the question. I didn't mention it because we had such great results in so many other industries and sectors. But our federal business also was strong and had its biggest Q1 ever with $8 million plus deals and net new ACV growth that accelerated. And so we hosted our largest Fed forum ever with customers representing more than $1 billion in ACV and triple the number of attendees at our executive circle and over 35 partner sponsorships and so really strong federal business. And actually, our GenAI offerings are reinforcing our ability to help accelerate the transformation journey for our federal customers. And so we're seeing early adopters and healthy industry -- sorry, healthy interest in our domain specific models, which offer better security that CJ just talked about and really can drive tremendous efficiency gains. And so exciting themes ahead for 2024 and feel really good about what the federal business will continue to do for us as well as public sector as a whole. So thanks so much for the question.

Aleksandr Zukin:

This is Alex Zukin from Wolfe. Maybe just the question that you guys have gotten a couple of times on Pro Plus adoption. Listen, it's very clear that the enthusiasm is there, the interest level is there. You talked about it at length in terms of the new product launch being the fastest ever. Is there a way to kind of stratify? Or at a high level, just give us a sense for what percentage of your deals or pipeline either for Q1 included Pro Plus? And how it looks for the rest of the year? And how like that compares to your kind of expectations when you set on this journey? And then I've got a quick follow-up.

Michael Turrin:

I appreciate you squeezing me in. Gina, 47% free cash flow margin certainly stands out, maybe walk us through the drivers of strength there for Q1. Anything onetime for us to consider? And maybe just given we're holding on to the margin guide for the year, just how we should think about seasonality of free cash flow throughout the rest of the year.

Operator:

And we have time for one last question. We'll take our last question from Derrick Wood with Cowen.

Chirantan Desai:

So first of all, thanks for the question, Derrick. Here is how I would describe it. Our design goals and engineering goals were, this has to be super simple to turn it on, as in Pro Plus, once you are on Pro, and you can start using our Pro Plus capabilities, whether it's for agents, employees and so on. That has been our design principle. The setup is super simple, and customers are turning it on and seeing where they are seeing improvements on productivity, whether it's for agents or employees. So that's number one.

Operator:

Ladies and gentlemen, thank you for standing by. My name is Terrell and I will be your conference operator today. At this time, I would like to welcome everyone to the Q4 2023 ServiceNow Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Darren Yip, Vice President of Investor Relations. Darren, the floor is yours.

Bill McDermott:

Thank you, Darren and thank you very much everyone for joining today's call. ServiceNow closed an outstanding 2023 with a beyond expectations Q4. Here's the state of our business. Artificial intelligence is injecting new fuel into our already high-performing growth engine. The company's Q4 results tell that story. Subscription revenue grew by 25.5% at constant currency, that's 200 basis points above the high end of our guidance. cRPO growth is 23% at constant currency, also 200 basis points above our guidance. Operating margin was over 29%, that's approximately 200 basis points above our guidance. We had 168 deals greater than $1 million in net new ACV, up from 126 a year ago, a 33% increase. ServiceNow's Q4 performance is packed with milestones spanning the full breadth of our portfolio. With technology, customer, and creator, we now have three workflow businesses over $1 billion in ACV. We have 11 individual product lines with north of $250 million in ACV. ITSM, ITOM, and ITAM, each had double-digit deals over $1 million in Q4. Security and risk combined for 12 of the top 20 with nine deals over $1 million. Customer, Employee, and Creator workflows, each had double-digit deals over $1 million. Our large new logo count continued to accelerate in Q4. We had a record 10 new customers signing deals over $1 million in NNACV, including a $10 million win with a very large global financial services firm, which is our largest new customer logo in history. Global iconic brands such as Chipotle, Air France, TIAA, NTT, Data Group Corporation, and Busch are digitally transforming with ServiceNow. We are proud that TIAA, one of our first 10 customers, is still expanding their business with us through new out-of-the-box functionality so they can accelerate time-to-market. Following a record Q3, public sector continued its strong growth in Q4 with key wins including in the United States Army, US Postal Service, and Australian Department of Defense Digital Delivery Group. We are extremely proud to have finished 2023 operating at the rule of 55 plus. As you'll hear from Gina, our 2024 guidance reflects our ongoing belief and ServiceNow's strategic relevance. Our core business is rock solid and growing. Our perimeter is growing. Our platform adoption is growing. We are, in fact, in a new era of business transformation powered by AI. This is unlocking massive opportunity in the enterprise software industry. And ServiceNow is extremely well-positioned, not only to lead this movement, but to define it. 2023 was the latest successful milestone on this journey and we intend to make 2024 an even greater success. To say we're fired up would be an understatement. Let's spend some time framing the dimensions of this new AI world. Gartner estimates $5 trillion in tech spending in 2024, growing to $6.5 trillion by 2027. That means that spending will grow another $1 trillion in only two years, accelerating from the decade plus it took for us to get to $5 trillion. For the first time in a decade, IT services will become bigger than communication services in 2024. Gartner estimates that by 2027, nearly all of the growth in worldwide IT spending will come from software and IT services. And when you drill deeper into the Gartner forecast between 2023 and 2027, $3 trillion will be spent on AI. What we have here is a strong, durable market being supercharged by a once-in-a-generation secular trend. ServiceNow has been investing, innovating and preparing for this wave for years, which is why we're catching it so early. We have a long track record of commercializing breakthrough technologies. When our Pro SKUs were introduced, we saw very exciting traction and customer adoption. Our Pro Plus offerings, which we launched just four months ago with our Vancouver release, are outperforming the pace of the Pro upgrade cycle. Exciting. The results in our first full quarter since launch validate this trajectory. Siemens AG is using Now Assist for HR service delivery to resolve HR cases faster for its entire global workforce. This is one example of many and as always, ServiceNow's strength and our capacity to deploy net new innovation, especially our ambitious Gen AI road map. In Q4, we released significant new capabilities, Virtual Agent Update drives faster issue resolution through advanced conversational AI chat. Employees get the immediate answers they need. Businesses get higher self-solve rates, and it only takes 15 minutes to set it up. Our text to workflow capability dramatically increases developer productivity. ServiceNow's developers have been using text to code for several months. They are generating high-quality code using text to describe the type of code they want. This has increased our developer innovation speed by 52%. Now Assist for field service management reduces cost, while increasing revenue by helping technicians get the job done in the first visit; identifying the necessary equipment, providing repair recommendations, and automating follow-up at speed. Beyond the platform itself, we see AI as a 360-degree strategic imperative. It's why ServiceNow joined the AI Alliance to advance open, safe, and responsible AI. It's also why we are continuing to grow our strategic partnerships to ensure every enterprise can use AI as the cornerstone of business transformation. Today, we expanded our strategic alliance with EY to co-create solutions for generative AI governance for our customers. And of course, EY will also be using ServiceNow's generative AI capabilities to enhance experiences for all of their employees. We also unveiled another major expansion to our partner program, the latest addition in a series of investments as partners are building new business models on the ServiceNow platform. These are two examples of many. I've told ServiceNow's team worldwide that the company is now moving into Phase 5. The culmination of our long-term goal of surpassing $10 billion in ACV, which incidentally only a handful of software companies have ever achieved. We have so much runway ahead for the long-term growth of this company. There are two key elements of our strategy, execution and scale. Execution, we know is an art form. Scale is all about capitalizing on new opportunities as a truly global platform company. One of those in our market making alliance was Visa. Today, ServiceNow and Visa announced a five-year strategic alliance to transform payment service experiences. In the initial phase of the alliance, the companies will launch ServiceNow Disputes Management built with Visa, a single connected solution for dispute resolution. This Gen AI-powered solution will offer end-to-end dispute resolution for customers globally, everything from the first indication of a questionable charge through early investigation to final resolution. Another example is our growing partnership with AWS. Beginning this month, ServiceNow will be available as a SaaS offering in the AWS marketplace. From an automation perspective, we have long believed that identifying legacy process challenges is an active stimulant for new workflows. That's the beauty of our platform. The architecture gives us limitless ways to accelerate speed to value for our customers. And the more workflows we drive, the more value we create. That's why we tucked in UltimateSuite, a task mining company to enhance intelligent automation across the Now platform. If we can help customers find it, ServiceNow can fix it. And we fix it in complete harmony with any existing software landscape, delivered in a consumer-grade user experience. CEOs don't want to wait another decade for technology to finally deliver on its promise. One told me, I'm tired of excuses coming into my boardroom. We need new innovation and new experiences, and we need it now. That's obviously music to our ears and nicely on brand for ServiceNow. There's plenty more to discuss about the company we are building and the progress we're making. We have more accolades than time to listen to them. Top analyst firms ranked ServiceNow as a leader in 14 separate reports in 2023 for our automation and AI capabilities. Glassdoor's recent US Best Places to Work lists ServiceNow as Number Three overall and Number One in software. One of our proudest achievements is the American Opportunity Index. This index is databased. They study what really happens to employees at America's largest companies over time. ServiceNow scored Fifth, and that's out of 400 companies overall and ServiceNow was the Number One technology company on the index. That means that people who have fought hard to build a great company are being rewarded with a great life. This all means so much to us because culture is the glue that binds a winning team together. We have world-class professionals at ServiceNow who care deeply about our customers and our partners. Since Fred Luddy invented the company, we've all made our contributions to help ServiceNow emerge as the hungry and humble winner it is. We believe in our platform. We stick together and we try to have some fun along the way too. That's why the results show up the way they do. It's also why over 1 million people applied to work here last year. To all of our shareholders who continue to invest your trust and ServiceNow, we thank you, and we've got you back. We're building a masterpiece here, and we're only getting started. 2024 will show that we're putting AI to work for the world because now, as ever, the world works with ServiceNow. I look forward to the questions and the discussion we'll have shortly. In the meantime, I'd like to turn the call over to our outstanding Chief Financial Officer, Gina.

Operator:

[Operator Instructions] Your first question comes from the line of Brad Zelnick with Deutsche Bank. Brad, your line is open.

Bill McDermott:

Yes, Brad, thank you very much for the question. Things are going very well out there, and the momentum is terrific. What's really happening and I can say this after 186 CEO meetings in the last six months, the CEOs are now getting very involved with the Gen AI revolution. They realize there has to be architectural adjustments to their environment and the manner in which they manage their data and the platforms they're beholden to actually take advantage of Gen AI. And if you think about the half a century mess that exists out there with legacy systems, in many cases, multiples of the same system, we have one unifying force in these conversations, which is the Now platform because we cooperate with the complexity of this landscape without putting people in a position to rip and replace. So, they're looking for platforms that matter. We're one of those and I think as Gina said, we are the intelligent platform for end-to-end digital transformation. When you have that C-level executive meeting, they really get it now and with regard to Gen AI, the momentum is outstanding. As I said, that SKU has outsold any other new introduction we put into the marketplace. So, there's a real appetite to invest in Gen AI, and there's no price sensitivity around it because the business cases are so unbelievable. I mean if you're improving productivity, 40%, 50%, it just sells itself. So, I think we're in a really, really good place. The Gen AI investments are coming. We're actually getting orders because we have great product, thanks to CJ and his unbelievable engineering team. So, I would tell you at this time last year, compared to this time this year, you should be more bullish now.

Bill McDermott:

Thank you, Brad.

Mark Murphy:

Thank you very much. So, Bill, I don't think I've heard any other software companies say that its Gen AI products produced the strongest net new ACV of any product family. We had a contact saying it's really the only platform with real-life uses of AI right now. So, I'm wondering if you think that is accurate, and that's what's driving it or should we relate it more to the work you've done getting ahead on pricing and packaging? Should we think back to the efforts of that element AI team, which is so fantastic or maybe it's some other factor in your mind that's really allowing you to see faster adoption of AI?

CJ Desai:

Thank you, Bill. And Mark, here is how I would say some of the questions that you asked are absolutely spot on. Element AI team was absolutely a game changer from talent perspective. And our investments in AI, that you're very familiar with since 2017, continue for us, not only on the speed of innovation, but what we learned from our customers. Let me give you a couple of quick insights. We were the first ones -- one of the first ones to release the product with use case specific generative AI starting in September. So we definitely had first mover's advantage from that perspective. However, from a customer sentiment perspective, I will tell you there were two Wall Street banks telling me specifically that they wanted to be the first ones on the Street, Wall Street in New York, to go with our Gen AI solution and one of them signed with us. And you work for one, but in the sense that this is a highly regulated environment, regulators want to know how AI is done, and we were able to sign with the first Wall Street Bank in New York in Q4. In addition, we also signed with a large manufacturing company that wants to fundamentally transform their employee productivity. And then we also signed with a very large restaurant food retailer who wanted to transform employee experience and overall shared services productivity so that their margins can go up. This is definitely a game changer. We are learning a lot from our customers. We are seeing very significant momentum and I was here when we launched 2018 September, ITSM Pro, and as Bill and Gina shared that this has exceeded all of our expectations on how well we did on the monetization of our Pro Plus SKUS. Thank you, Mark.

Bill McDermott:

Thanks a lot Mark.

Arjun Bhatia:

Perfect. Thank you guys so much and I'll add my congrats. I wanted to maybe touch on the strength that you're seeing in customer and employee workflows because if I look at the net new ACV that you're driving there, the mix is relatively stronger than IT workflows there this quarter. Is that attributed to some of this AI adoption and plus SKU? Or are there other drivers there that you're seeing driving momentum in those solutions?

CJ Desai:

Thank you, Bill. And Arjun, some of the questions that you asked, you're spot on. So, AI and specifically Pro Plus SKU was a catalyst, both for our employee and customer workflow. So, that's number one. Number two, within customer workflow, which had an amazing quarter, and I'm so proud of that team and ServiceNow to cross $1 billion which just a few years ago was $10 million. That's a multiple orders of magnitude growth on the difference we are making in customer service because we are ServiceNow, and we know how to do customer service. So, ServiceNow growth was unbelievable from customer service and customer workflow perspective. Two sectors, I'll call out besides Bill's point on Field Service Management. Number one, our telco products, specifically designed for telco industry, saw triple-digit growth with some of the largest telcos in the world related to customer service. And also, we saw in public sector from a direct to citizen perspective, Customer Service Management Did really well in Q4. And on employee workflow, as Gina outlined, we had many million-dollar deals across the industries, including public sector and that business, in addition to HR service delivery with workplace service delivery and legal service delivery, continues to do very well, growing very strongly.

CJ Desai:

Thank you so much Arjun.

Operator:

Your next question comes from the line of Kash Rangan with Goldman Sachs. Your line is open Kash.

CJ Desai:

Hey Kash. So, I will touch on this from a couple of things. demand environment, as Gina has outlined, it continues to be still tough, right? We are not ready to say that things have improved significantly. It is our platform's strategic relevance, as Gina called out, is very high, which has allowed us to what you saw million-dollar deals and large deals that happened in our Q4 across the globe, across the industries, the performance was very strong. So, let me just touch on that. On generative AI the demand for generative AI varies by industry, but we are -- I'll give you an example of a large manufacturing company, the CIO reached out to me in October, wanted to do a four weeks POC and purchase it in December. So, from a sales cycle perspective, that was a top-down decision moving very, very fast. A large retailer is currently also doing a proof of concept with ServiceNow Pro Plus SKU because it is a CEO initiative that Bill talked about. So, from a demand on Gen AI specifically, it is very, very clear that customers are pulling us in that direction in certain industries. And for those sales cycles, yes, they are very fast. They want to see a large manufacturing company CEO that Bill met in Germany, I had a follow-up call in December, and he said, CJ, I want to kick off on Pro Plus SKU for the specific use cases on ITSM. And you and I should review the results end of February. This is faster than ITSM Pro sales cycle. And so I would say overall environment is still similar from what we saw in Q3 to Q4, and Gina will touch on it, but Gen AI, it's on a faster cycle.

Kash Rangan:

Amazing. Thank you so much.

Operator:

Your next question comes from the line of Keith Weiss with Morgan Stanley. Keith, the floor is yours.

Gina Mastantuono:

Hi Keith, this is Gina. Thanks so much for the question. So, yes, we're really proud of the beat on the topline as well as the bottom-line in Q4 and obviously continuing to expand those margins in 2024. Specifically, when you think about investments in R&D head count, it's all around continued innovation and our investments in Gen AI and AI. And so not surprising given the commentary that you've already heard, we're continuing to double down in investments on fingers on keyboards, engineers really driving the Gen AI revolution. So, you'll continue to see more of that. On the sales side, it's really about scale and leverage, right? And so sales and marketing head count, there's a lot in there. It's not just quota-bearing feet on the street sales, right? So, you've got marketing, you've got marketing operations, you have sales operations in there. If you actually were able to break it down to feet-on-the-street quota-bearing sales, you would see that growth rate much higher. And in fact, as I think about sales capacity going into 2024, we have a larger increase in ramped reps going into 2024 than we've had in years. So, from a capacity perspective, we feel great about how we're entering 2024.

Gina Mastantuono:

Awesome. Thanks for the question Keith.

Gina Mastantuono:

Absolutely. Productivity and efficiency is going up as well as the fact that from a scale perspective, you're not growing some of the operational heads as much.

Gina Mastantuono:

And we'll be definitely increasing hiring as we go into 2024 as you would expect.

CJ Desai:

Yes. And Keith, Gina handled this really well in terms of sales efficiency. But one of the things that Bill mentioned that I just wanted to call out that we are really proud of our sales teams besides expansion of our platform in different buying centers, but also the new logo growth. The new logo growth for 2023 was way ahead of what our expectations were specifically in Americas and Europe compared to 2022, including the large transaction that Bill referenced. But when your sales capacity and sales efficiency specifically is improving, while you're also gaining new logos, which is just a very super proud moment for us in 2023.

Samad Samana:

Hi, thanks. Congrats on a great close to 2023. Gina, I was wondering if maybe you could help us understand that on the cRPO upside, if you think about the 200 basis points and could you kind of break down for us how much of it was adoption of Gen AI and the net new ACV that, that drove exceeding expectations versus just kind of more strength than expected on the renewal cohort and what drove -- what's the mechanic of the upside was in the quarter?

Samad Samana:

Great. And then, Bill, this is maybe for you or for CJ. But as you think about the product portfolio and some of the newer products you've talked about over the last year or so beyond Gen AI's observability or ERP workflows, where are you seeing the most demand or interest outside of Gen AI? And what are you most optimistic about in 2024 beyond Gen AI?

Samad Samana:

Great. Thank you so much for taking my questions.

Alex Zukin:

Thanks guys. So, first of all, congratulations on a fantastic quarter. And I think the amount of conversation about Gen AI and the tangible impacts of it on the model and the quarter were really great to hear about and see. I just -- I wanted to dig in a little bit to see if you could dimensionalize further either from a revenue contribution kind of cRPO or bookings contribution in the quarter or attach rate that you're seeing with Pro Plus as you go to market? And how should we think about that for fiscal 2024? What's the aspiration here for Q1? Just give us a better -- I'd say, a better indicator or something that we can kind of monitor and track where we can see the Gen AI penetration going forward? And I have a quick follow-up.

Alex Zukin:

Super helpful. And then I guess, if I think about just the opportunity around or actually just cRPO linearity throughout the year, you talked about the headwinds in the first half. How does that trend through the second half of the year? And then what other things should we be paying attention to there?

Alex Zukin:

Perfect. Thank you guys. Congrats again.

Gina Mastantuono:

Thanks Alex.

Mike Cikos:

Hey guys, thanks for taking the question here and I'll echo my sentiment as well along with my peers. I just wanted to come back, I think earlier during the Q&A, CJ had kind of teased and maybe the monetization here for the Plus SKUs relative to the Pro SKU exceeding your expectations. And just wanted to make sure I was interpreting that properly. Can you give us any indication for what that price capture is like relative the Pro SKUs which we've had out in the market now for a couple of years?

Mike Cikos:

Terrific. Thank you very much guys.

Gina Mastantuono:

Thanks Mike.

Karl Keirstead:

Okay, great. Maybe I'll direct this to Bill and CJ. You both mentioned ServiceNow's largest ever new customer win with the bank. I guess I'm surprised that there's big bank out there that's not already on ServiceNow, but I'd love to hear a little bit more about that, and I'm not even sure how big a deal would have to be to be your largest new win? So, any size and color would be fabulous.

CJ Desai:

Yes. Karl, great to hear from you. I would say fundamentally, when I look at that particular financial services institution, 100% is true that it is on our core of the core. So, from an IT service management perspective, IT operations management perspective, this is not generative AI-specific deal, but it was very much a very strategic transaction on the foundational platform for automation and digital services at this large financial services institution. It is the largest new logo win that we had there, and it is in eight-figures of net new ACV. So, that is material.

Bill McDermott:

Thank you very Karl. Appreciate it.

Operator:

Your next question comes from the line of Joel Fishbein with Truist Securities. Joel, the floor is yours.

Bill McDermott:

Yes. Well, thank you very much for the question. I really appreciate it. Our federal business is really outstanding. And for the benefit of our shareholders, I think that there's a tremendous opportunity to replicate what we're doing in the United States federal and many other governments around the world. That is clearly an ambition that we have, and we have many use cases and many references to back that up. So, CJ, I think you spent a lot of time with our team. And I know that I mentioned some of the names like United States Army, United States Postal Service as an example, really marquee wins, really, really important stuff. Why don't you build on that?

Joel Fishbein:

Great. And just as the follow-up on the public sector adopting AI. Can you just give us a little color on what you think the trajectory is there?

Joel Fishbein:

Great. Thank you so much.

Operator:

The next question comes from the line of Peter Weed from AllianceBernstein. Peter, the floor is yours.

Gina Mastantuono:

Thanks Peter for the question. What I'd say is that we are -- we feel great about our expansion rates at the scale that we're at as well as on new logo growth. So, CJ mentioned earlier, our new logo growth, especially in our larger customers, has been an accelerating each and every year and each and every quarter over the last several years. And so at our scale, our expansion rates remain extremely strong, and as does our net new logo growth. And so you will continue to see a nice mix of existing customers upselling with us as well as new logos joining us. And so we hit $8.7 billion in revenue going to $10.575 billion next year. At our scale, these expansion rates are best-in-class, and we remain extremely proud of them.

Brad Sills:

Great. Thank you so much. I wanted to ask about the large new logo strength. We just haven't heard from a lot of enterprise applications companies around that this year. It seems like a tough environment to close big transformational new application deals. So, I wanted to ask why now? I know this has been a focus, but any color on where you're at in kind of closing that gap on some of these large global organizations? And then also, what does that mean for your expansion opportunity, does this give you more line of sight to that given that these are large organizations with big wallets just getting started with ServiceNow? Thank you.

Brad Sills:

Thank you, CJ. Great to hear.

Gina Mastantuono:

Thanks Brad.

Operator:

Good day everyone and welcome to the Third Quarter 2023 ServiceNow Earnings Call. Today's call is being recorded. All lines have been placed on mute to prevent any background noise and after the speaker's remarks there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Darren Yip, Vice President of Investor Relations. Please go ahead, sir.

Bill McDermott:

Thank you, Darren, and thank you everyone for joining us today. On behalf of Gina, CJ, and our entire company, I'd like to first make a brief statement about recent events. ServiceNow has a very special team in Israel. One of our own colleagues Shlomi Sividia was at the Supernova Music Festival. He was murdered in the unprecedented and heinous attack. Shlomi was highly respected, admired, and a good friend to many. We stand in solidarity with our team and with their families. Terrorism has caused the unfathomable humanitarian crisis and now engulfs millions of people in Israel and Gaza. Our hearts pray for the innocent on all sides. Even with optimism in short supply, we choose to honor the dream of a peaceful and prosperous future for the Middle East region. God bless and protect all those in harm's way. Now for business. Of course, that's the reason we're here to discuss ServiceNow's Q3 results. We're proud that our company once again delivered beyond expectation. ServiceNow has delivered subscription revenue that grew by 24.5% in constant currency, over one point above our guidance. cRPO grew a strong 24%. That's 2.5 points above our guidance. Operating margin was 30%, more than 2.5 points above our guidance. We had 83 deals greater than 1 million in net new ACV, up from 69 a year ago, a 20% increase year-over-year. Our focus on landing the right new customers, continued to deliver. Large new logo growth accelerated for the third consecutive quarter. ServiceNow's traction as the intelligent platform for end-to-end digital transformation has intensified. All of our workflow businesses were in 14 or more of the top 20 deals, ITSM, ITOM, ITAM, security and risk, customer, employee, and creator. Within our technology workflows, security and risk had a very strong quarter, with 10 deals over 1 million. Employee workflows had a stellar quarter with seven deals over 1 million and one deal over 10 million. From an industry perspective, this was the best US Federal quarter in ServiceNow's history. NNACV was up over 75% year-over-year. US Federal agencies are standardizing on a single platform with a core set of end-to-end solutions. We had 19 federal deals over 1 million, including three deals over 10 million. Our top deal in the quarter, the United States Air Force was the third largest deal in the company's history. You'll hear from Gina that this performance has heightened our confidence for a strong Q4. We're increasing the full year guidance on the top line and the bottom line and here is the key takeaway. AI has strengthened the market dynamics for enterprise software. ServiceNow is the fastest-growing company in this market at relative scale. We have the highest rule of 50 plus across our peer set with the highest growth of any other large-cap software company. We are the best performing enterprise software company to IPO. This is a unique, highly differentiated company that is rewriting the benchmarks to be best-in-class in the SaaS industry. Looking beyond the quarterly results, while the world's challenges are sobering, the digitization imperative is stronger than ever. Gartner forecasts that $3 trillion will be spent on AI and GenAI between 2023 and 2027. GenAI represents 36% of AI spending overall. We believe every dollar of global GDP will be impacted by AI over the next several years. This isn't a hype cycle. It is a generational movement. In the last year, ServiceNow has doubled down on our AI investments. Our Vancouver release includes generative AI-powered Now Assist for every workflow. Others issued press releases. We released product. At ServiceNow, our strategy isn't about exuberance. It's about execution. We carefully laid the groundwork for success and talent and resources and technology. This investment is accelerating our already robust pipeline with customers lining up to be first-movers in this next wave of business transformation. The question we've been asked repeatedly, does AI drive growth? The definitive answer is, yes, it does. GenAI represents a tailwind of growth for ServiceNow. We have over 300 customers in our pipeline from every industry, every buying center and every stage of testing. Our GenAI SKU drove the highest number of customer requests for a pre-release product in our history. We launched Vancouver on September 29th. That left us one day in Q3 to sign deals, and we signed four large deals. A US government agency selected our premium SKU offerings, to be an early adopter of GenAI. Real estate leader, CBRE is harnessing generative AI with ServiceNow to deliver superior service to customers and employees, while reducing costs. NVIDIA is accelerating its own ServiceNow journey with generative AI. Among other leading companies, Teleperformance joined ServiceNow's AI Lighthouse program. They will collaborate on new generative AI use cases that boost productivity while increasing customer and employee satisfaction in key industries. We have a wide range of other customer wins in the quarter as well. FedEx is using ServiceNow to simplify their IT workflows, while building a universal employee portal to improve employee experience for a 0.5 million global employees. One of the world's largest automakers selected ServiceNow to help consolidate dozens of applications into a new modern platform to accelerate their push into the EV market. Philips, Mars, Bank of California, Cleveland Clinic, the US Department of Defense, Fujitsu, Asahi Mutual Insurance, and the State of California are among many others. We see a meaningful path for all customers to recognize value from generative AI, in the quarters to come. Our innovation velocity is very high. Pipeline is growing fast and capacity to execute is well proven and this is just the beginning. Looking holistically at our business, we see progress everywhere. We have an aspiration to significantly increase the percentage of net new revenue, sourced by our partners in the coming years. This is about partners making the ServiceNow platform the core of their emerging business models. One exciting example is our customer Trane Technologies. They are a global climate innovator, which recently announced plans to acquire ServiceNow partner Nuvolo. With Nuvolo, Trane Technologies can bring world-class digital solutions, engineered on the ServiceNow platform to their global customer base. This creates a flywheel effect to ServiceNow, more use cases, drive more workflow automation. And today, we're excited to share that Deloitte and ServiceNow announced an expansion to our alliance. Deloitte will become a pioneering partner, integrating our generative AI capabilities into their leading operate services globally. This addition underscores Deloitte's commitment to enhance performance with cross-industry solutions built on the ServiceNow platform. We're also scaling our ecosystem globally, with today's announcement of a co-investment in ANSR, a market leader in enabling companies to scale technology centers. Another area that we expect to fuel long-term sustainable growth is industry verticalization. Our product development roadmap is expanding with use cases and telecommunications, financial services, retail and the public sector. And beyond any one industry, we increasingly see both intra and inter-enterprise workflow opportunities on the ServiceNow platform. This new generation of business networks is creating value chains that transcend traditional business boundaries. Our rapid pace of workflow innovation creates an even greater demand for our training and skills initiative, RiseUp with ServiceNow. As one example, FutureSkills Prime, a digital skilling initiatives of the Indian government will train thousands of learners across India in new digital skills. This partnership offers clear pathways to build careers as businesses worldwide grow at ServiceNow workforce. Bottom line this all points to grow at ServiceNow. In closing, we are building a company for the ages, by concentrating on customer value, we are creating immense shareholder value. At a strategic level, we chose to set the bar high, to be the defining enterprise software company of the 21st Century. We have an inspired team that is committed to our exponential dream. A company is only as great as each member of the team and the team is only as great as the company. That is what culture is all about. Our employee engagement scores increased across the board this year, so did our retention rates, which are already best-in class. We never went for layoffs. We went for thoughtful, careful expansion. When you look at the ongoing momentum from Knowledge '23, it's clear the approach is working. A profitable growth profile of this company speaks for itself. The market is there for us and now we're focused on Q4, delivering a strong full year and a fast start in 2024 as well. Thank you for your time today. I look forward to your questions. Now, I'll turn it over to our outstanding CFO, Gina Mastantuono. Gina, over to you.

Operator:

Thank you. [Operator Instructions] We'll take our first question from Raimo Lenschow with Barclays. Please go ahead.

CJ Desai:

Hey, Raimo, thank you so much, this is CJ, for the question. Great to hear from you. ITSM and ITOM which we define from a solution perspective as service operation is code of our core. So, as Bill outlined that we had very strong new logo business, and new logos that matter, where we almost always plan with ITSM and ITOM, and in general, we are seeing that ITSM continues to have expansion rates, whether it's via Pro SKUs, or just recently added Pro Plus, and with ITOM and our AIOps strategy, we continue to execute on not only the product roadmap, but how our customers are leveraging those innovations from visibility all the way to health in that digital real estate.

CJ Desai:

Thanks.

Kash Rangan:

Hello. Thank you very much. Congratulations, Bill, CJ, and Gina. Outstanding results. Bill, we've -- we've all been waiting for this recession. Some houses have been calling for a hard landing, and some others aren't. It looks like we've been waiting for ever since the recession to happen, it's not happening. And I'm sure that CEOs that you do business with are -- have been somewhat cautious the last three to four quarters, but it looks like things are stable, and with the tailwind of potentially a soft landing, if I could use that expression, a software landing and AI, as wind -- as wind in your sales, what does the company's growth prospects look like in '24 versus the last couple of years that we've all been slogging through this, granted that you have been executing really well outperforming your peer group. What does the growth curve look like with all these tailwinds ahead of you? Thank you so much and congrats.

Kash Rangan:

Amazing. Thank you so much. Very inspired.

Operator:

We'll take our next question from Tyler Radke with Citi.

Gina Mastantuono:

So, thanks. Tyler, thanks so much for the question. So yes, we're very excited. Q3 results were just phenomenal across the board, and the beat on constant-currency cRPO was two things, specifically strong net new ACV growth, and that was primarily driven, but not entirely, primarily, not entirely driven by very strong federal business, which was just fantastic and great business for us. We also did have better federal early renewals. If you remember, we've been really prudent in how we've been forecasting early renewals, given the current macroenvironment. And so the beat this quarter was two-pronged right. So strong net new ACV growth as well as strong early renewals. To your question on the impact of Q4 cRPO and the one point headwind, how Federal agencies usually contract is one year out, right. So their contracts are only 12 months in duration. So it doesn't have a negative impact on Q3, right, because at the end of Q3, you have it in their peripheral year. But at the end of Q4, with one quarter of those contracts roll-off cRPO, it means that there is a headwind to Q4 and because Q4, sorry, because Federal was so strong, and the mix of federal in Q3 was stronger than we've ever seen before, there is that headwind into Q4. But again, as you think about the underlying business, extremely strong results, in fact, Federal business has a strong renewal rate at 99%. So as you think about the underlying health of the business going into '24, it remains very strong.

Bill McDermott:

Thanks.

Operator:

We'll take our next question from Keith Weiss with Morgan Stanley.

Bill McDermott:

Well I can -- I can tell you that we, first of all, I appreciate your question, Keith. You know how well we have done with the Pro version of the platform and there's still plenty of room to expand on that, but the demand that we've seen so far for Pro Plus, and the transformational nature of what customers are now able to do on the Now Platform has led to the single best type that we have seen at ServiceNow. I'll let CJ give you some color on individual customers and some of the actual stories that, I think, you'll find illuminating.

Sanjit Singh:

I appreciate the additional thoughts, CJ. Thank you very much.

Sanjit Singh:

Well noted. Thanks Bill.

Operator:

We'll take our next question from John DiFucci with Guggenheim.

Bill McDermott:

Yes. John, I'll start off and then let Gina give you some of her color as well. But our federal business, as I said, had the biggest quarter in ServiceNow's history with 75% year-over-year growth in NNACV, and we had 19 deals that were more than 1 million, including three over 10 million with the US Air Force as the third biggest deal in the history of ServiceNow. And what we're seeing is across all areas, federal agencies are really looking to consolidate contracts, point solutions, the messy middle, and they really want to standardize on a platform with a core set of products that they can grow with. And our GenAI offerings, for example, are really reinforcing our ability to help accelerate their transformation journey, and they're seeing really tremendous opportunity in GenAI on our platform. And we're already seeing early adopters show an interest in domain-specific models, which offer better security, as CJ said, and we're working with some agencies that I can tell care a lot about security. So I think it's really a tribute to ServiceNow's engineering and the way ServiceNow runs our cloud and the manner in which we care for our customers at a deep technical level and they know that they can count on that. And every agency where we've done business is highly referenceable and they're telling our story to other agencies for us. It's really a beautiful force multiplying situation. But I want to leave you with one thought. We're only getting started. With federal, with state, with local, the business transformation that's going to go on in the next decade across all of those categories will play beautifully into our growth agenda, and we'll continue to service it with 100% customer satisfaction. We are fired up with what we're able to do to transform government and make it run like a best run business.

John DiFucci:

Thank you very much.

Bill McDermott:

Thank you, John.

Mark Murphy:

Thank you very much. Bill, the level of confidence that we hear from SIs on maintaining this kind of 20% plus growth trajectory for their ServiceNow practices is truly standing out across the software landscape. One of them surveyed their customers, and the top three topics of interest that came back were Microsoft, Azure, and ServiceNow. So, just in light of that, that joint prioritization there, could you shed a little light on traction with your Microsoft relationship? Is that kicking in already at this stage, and are you able to go to market as a bit of a one-two punch with the Azure co-pilots and Now Assist?

CJ Desai:

Bill, you said it well. Mark, the only thing, great to hear from you. The only thing I would add is the engineering collaboration is absolutely necessary, but not sufficient when it comes to go-to-market partnership and relationship we have, working with Microsoft. So, whether it's our financial services customers or healthcare or government customers, when they are trying to leverage ServiceNow, hey, where are my assets? Are my assets healthy? Are they secure? Whether they are running on-prem, or in Azure, we have the best-in class partnership with Microsoft and that is definitely being noticed by some of our largest, as well as mid-sized customers, and brand-new customers.

Bill McDermott:

Thank you very much, Mark.

Karl Keirstead:

Okay, great. Maybe I'll direct this one to Gina. Gina, I know from the past when you've had strong Fed quarters that by virtue of those deals, they tend to have, I think, correct me if I'm wrong, a little bit more upfront RevRec. So I'm just curious, you laid out the impact on cRPO, but how does that strong Fed quarter that you saw in September impact the reported subscription revenue, and margins that you put up, and if you could, in any way, maybe size that lift given that, I think, there is more upfront RevRec? Much appreciate it.

Karl Keirstead:

Okay. Good to hear. Thanks.

Operator:

We'll take our next question from Gregg Moskowitz with Mizuho.

CJ Desai:

Hey, Gregg. Thanks for the question. I'll take this question. I would say, just to summarize because we, in the Vancouver release, launched Now Assist for our four flagship product lines which is ITSM, HR, customer service, and Creator. So let's start with that, and those are all resonating whether our customers want text-to-code or text-to-workflow capabilities, or they want their employees to be more productive, or they want their IT staff or customer service agents to be more productive. So, depending on the customer, and what they solving for, all of them are resonating really well. So this was driven mainly on Pro Plus, but these were Pro customers, who also bought Pro Plus. So one example, one of the customers who did buy this on September 29th, specifically, said to me, hey, CJ, you know, we had the most successful ITSM roll-out. Now, we want to buy Pro Plus, and they're on ITSM Pro already, and we just want our employee experience to be great, versus another customer that Bill mentioned, they said, not only we want to solve for our employees, but also our end customers. So these four specific transactions were across the board, resulting in very strategic and significant wins. As we move forward, I would tell you that what is still resonating with our customers is the speed to value. This is not something where now large language models need to be fine-tuned for one customer at a time, and the way our engineering team has implemented this solution, I can tell you, Generative AI is probably one of the best, if not the best complement I have seen to ServiceNow platform, where you can use generative AI to look up something to summarize something, and then you take action via ServiceNow platform.

Operator:

We'll take our next question from Kirk Materne with Evercore ISI.

CJ Desai:

Thanks. So, first of all, Kirk, thank you for the question. When we start, and you know, yesterday we had our Board of Directors meeting and similar question was asked, we're first prioritized on our core set of use case that cut across every single industry. We are very focused on that, we are ITSM customer service, HR, as well as our Creator offerings. As we look forward though, there are specific use cases within financial services or healthcare types of customers or even government. So, I'll give you an example. Some of our public sector customers, they asked us, hey, CJ and the team, can you provide us a solution, that can potentially run on-prem, given the nature of that agency, and our engineering team delivered that for our public sector customer. So, I would consider that as a vertical solution, that we had to create, for our public sector customers. But as we take it to the next level, post this core set of use cases across our four workflows, we will definitely be prioritizing financial services and TMT moving forward.

Operator:

We'll take our next question from Alex Zukin with Wolfe Research.

CJ Desai:

Yeah, Alex, thanks for the question. This is CJ. First of all, you know, yes, Federal had a phenomenal quarter, and it's been talked about by both Bill and Gina, but we also saw strength in certain industries, and certain geographies across the board. We won't be able to produce these kind of results, and this kind of beat on cRPO with our strengths in other industries and other geographies. So that's what I would say at the highest level that there were a lot of other strengths, and even from a use case or a workflow perspective, Bill already outlined, that our employee workflow, which is now customers are asking us this question that we want our employee productivity to be high, and what is ServiceNow's solution because employees waste too much time swivel chairing or looking for information, so we saw significant growth there, but the growth was across the board, given from a workflow perspective as all four workflows grew very, very nicely. And Alex, you know, how much I pay attention to that. The second thing I would say on Pro and Pro Plus, what we are seeing is that customers understand ServiceNow strategy is very specific to ServiceNow use cases. And one of the things that I realized after having this Pro Plus conversations with customers on a large sample size that, generative AI or our Pro Plus SKU is a productivity multiplier. It's not a productivity enhancer. When you have a productivity multiplier, and you can articulate what kind of productivity gains they will get, that is when they say, okay, we got it. And now, let's forget what are the pricing, and other things. So, competitive dynamics wise, from a generative AI standpoint for overall this Pro Plus SKU, it is still in the context of ServiceNow. How much value will they get, how fast will they get that value, and how much they're willing to pay.

Alex Zukin:

Super insightful, guys. Thank you very much.

Gina Mastantuono:

Thanks, Alex.

Brad Sills:

Oh, great, thank you so much. Looks like an uptick here in headcount this quarter, sales and marketing hires net adds, looks like more than 500 R&D, almost 400. Would love to get some color on some of those areas of prioritizing -- that you're prioritizing in the investment, both in sales and marketing and R&D. Thank you.

Brad Sills:

Thank you.

Michael Turrin:

Hey, great, thanks. I appreciate you taking the question and fantastic job with the Q3 results. Gina, you gave us some 2024 mile-markers at the Analyst Day earlier this year. It's now October, a lot's changed, but the growth profile is proven impressively durable throughout. Is there anything you're seeing that's meaningfully different here today versus where things were in May? It sounds more clear in terms of some initial value you're seeing from the GenAI capabilities, but there are there other swing factors we should keep in mind understanding Q4 is very important, but anything you can add is useful. Thanks.

Michael Turrin:

Well said. Thank you.

Operator:

We'll take our next question from Samad Samana with Jefferies.

Gina Mastantuono:

Sure. Yeah, Samad, great question. As you recall, at Analyst Day, we actually showed a lot of live demos of the work that we were doing around generative AI. We talked also about the fact that we're not jumping on this AI bandwagon, but we've been investing in AI for years and years and generative AI was part of that. So as you think about our roadmap and our plan, GenAI was part of that. Now, that being said, the interest, and the understanding, and the excitement about GenAI today versus back in May is extremely exciting to us. And so, if your question is, is there potential upside as a result of GenAI, absolutely, but one quarter does not a trend make. So we will absolutely continue to keep you posted on the adoption rate of our GenAI SKUs, but we are extremely excited about the pipeline build that we've seen already, and it's just been out for a very short amount of time. And yeah, so more to come on where GenAI goes for us, but rest assured, ServiceNow is going to be a winner in the GenAI space, and we're extremely excited about pipeline build, and where we are today.

Bill McDermott:

Yeah, Samad, the CEOs all have Boards of Directors, and they don't want to show up without a GenAI plan. So, this is a CEO-level decision, and I think that is why we meet with so many CEOs and the C-Suite is now completely embedded in the ServiceNow go-to-market plan, and it's working beautifully. What they are doing is as follows. According to IDC, the IT budget this year would have been about 3.5% spend, and next year, it's expected to go to, instead of incrementally increasing 3.5%, which is your typical year, it's expected, according to IDC, to incrementally go up 7%, and that's the IT budget itself. What I believe is going to happen, and based upon the CEO discussion that I'm having, and also based on my own way of thinking, I would very much like to take the position of looking at the world through the customers' eyes, and on them, 7% may or may not get it done. I might look to G&A functions to further fuel this generative AI revolution because this is really about business transformation, and truly transforming the way you run your company, and it's not a nice-to-have IT project. I do think that is one of the -- interesting question you have because, I think it's one of the reasons why I have said repeatedly the IT strategy has become the business strategy because digital transformation is an end-to-end imperative now generative AI across platforms that matter, and is only a few and we are one of them is really to me, going to get a very nice tailwind investment in 2024 regardless of the macro.

Bill McDermott:

My pleasure, Samad. Thank you.

Operator:

We'll take our next question from Derrick Wood with TD Cowen.

Bill McDermott:

Yes, Derrick, you know, I'll start off, and then CJ can build on it. I'd like to first acknowledge NVIDIA, in particular, has been such a great partner, really taking their fantastic GPU technology, and then working hand-in-glove with them on fine-tuning these large language models, especially beginning in IT, but even more recognized that one of the great brands, and great companies the world is using ServiceNow, to transform their company on our platform with generative AI is such a complement. And so, I just want to say thank you, Jensen. Thank you, NVIDIA, for being a great partner. And yes, with regards to Accenture, and Julie and so forth, we are really doing some great things with Accenture. They are a fantastic partner, and we're building now generative AI use cases across 300 different customers with our ecosystem, and that doesn't even touch on the broader pipeline. CJ can give you some detail on exactly what we're doing, but I really do want to say that, I am incredibly appreciative of our partners, and I want to thank our partners for recognizing that we're a good partner, and it takes a good partner to know one, and we have really built foundational trust with the ecosystem and I appreciate them all, and I think that is another tailwind effect that we're getting because I believe we're moving into a world of not just intra-enterprise, but inter-enterprise business network opportunities, and I believe our platform in generative AI will fuel a completely new frontier of solutions, and offerings, and the global economy, and I think that this is only just begun. I just want to really give you that as a thought because we'll have more to say about that in the future. CJ?

Derrick Wood:

Thank you for that color.

Matt Hedberg:

Oh, great. Thanks for squeezing me in, guys. CJ, a question for you. A lot's changed in the observability market with the Splunk proposed acquisition. I'm curious, could you give us a sense for your positioning in the cloud observability market? With Lightstep and other advancements there, how well-positioned do you feel to gain additional share there? Thank you.

Operator:

And that does conclude today's presentation. We thank you for your participation, and you may now disconnect. Goodbye.

Operator:

Good afternoon, ladies and gentlemen. Welcome to the ServiceNow Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode, and please be advised that this call is being recorded. After the speakers' prepared remarks, there will be a question-and-answer session. [Operator Instructions] And at this time, I would like to turn things over to Mr. Darren Yip, Vice President, Investor Relations. Please go ahead, sir.

Bill McDermott:

Thank you, Darren, and thank you, everyone, for joining us today. Once again, ServiceNow's Q2 results beat expectations for all key performance metrics. Subscription revenue grew 25% in constant currency, 1% above the high-end of our guidance. CRPO grew 24% in constant currency, 1.5% above our guidance, and operating margin was 25%, 2 points above our guidance. We had 70 deals greater than $1 million in net new ACV, which was up from 54 a year ago or a 30% increase. As the market consolidates, customers are moving to ServiceNow as the intelligent platform for end-to-end digital transformation. We have now more than 1 trillion workflows running through ServiceNow each year, and that metric is already growing at 40% annually. ServiceNow's long-term trajectory is being supercharged by Generative AI. ServiceNow is the most differentiated asset in enterprise software, AI first mover, organic innovation-led, fast top line growth, best-in-class profitability, 99% renewal rate, early stages of cross-sell expansion around our IT mode. We have said consistently, ServiceNow will be the defining enterprise software company of the 21st Century. This Q2 beat and raise is another step forward on that journey. Looking at our solutions portfolio, large deals were evenly spread in Q2, which illustrates the broad appeal of this platform. ITSM was in 16 of the top 20 deals with seven deals over $1 million. ITOM was in 13 of the top 20, also with seven deals over $1 million. Together, security and risk combined for 17 of the top 20 with eight deals over $1 million. Customer workflows had a sensational quarter, its best net new ACV growth in three years. Customer was in 16 of the top 20 deals with eight deals over $1 million. Employee Workflows were in 14 of the top 20 with seven deals over $1 million, and Creator Workflows were in 18 of the top 20, with eight deals over $1 million. Great organizations are transforming with ServiceNow, including Barclays, BT, Honda, HP, Petrobras, CSB Bank in India and Yokohama City in Japan, to name a few. We see a sustained demand environment and pipeline for all of our product businesses, geographic regions and industry verticals. We're set up very well for a strong second-half. As you'll hear from Gina, we are raising our full-year guidance for subscription revenue and operating margin. This is an unprecedented market environment for enterprise software. Our good friend, NVIDIA Co-Founder and CEO, Jensen Huang, joined us at Knowledge ‘23 earlier this year. And Jensen stated the expanded NVIDIA-ServiceNow partnership is really important. Their partnership of choice for enterprise IT. He thinks it's an exciting growth opportunity for both companies. We agree. We're in the midst of a dramatic expansion of the software economy. In 2023 alone, IDC says Platform-as-a-Service spending will grow 30%, and Software-as-a-Service applications will grow 17%. When you correlate that to ServiceNow's platform and our workflow leadership, it's clear we live in a great neighborhood on a super nice street, and maybe we're in the best house. With regard to artificial intelligence, especially large language models, ServiceNow strategy has been laser-focused for years. We accelerated that focus with our Element AI acquisition in 2020. Today, by some estimates, Generative AI could boost global GDP by almost $7 trillion. We see unprecedented parallel adoption across consumer and the enterprise. Our platform experts, who have worked for the greatest brands and technology believe this moment is as transformative, if not even more so than the Internet or even the iPhone. But they're careful to remind me, it's all about delivering enterprise-grade, domain-specific large language models, which is the core of ServiceNow's AI strategy. These models will improve the accuracy results, leveraging a customer's enterprise data in alignment with their business rules, while maintaining the highest ethical standards for data privacy. As you saw at our Financial Analyst Day, ServiceNow is infusing Generative AI into all of our workflow offerings. We have since announced, Now Assist for virtual agent, which maximizes productivity by eliminating time spent searching for information. Another example is ServiceNow Generative AI controller. It allows organizations to connect ServiceNow instances to Bolt, Microsoft Azure OpenAI service, and OpenAI API large language models. We're going even further by expanding our Generative AI capabilities with case summarization and text-to-code, text-to-flow and text-to-new-application-development. Our customers are so excited for greater ROI and customer service, better employee self-service experiences and a substantial boost in developer productivity. They are ready to invest to drive these outcomes. And based on the immense value our customers will realize from our Generative AI innovation, we have a clear strategy for monetization. First, our existing Pro offerings had a record quarter in Q2 based on the hyperautomation technologies we already engineered into those products. For all new Generative AI capabilities beginning with our Vancouver release, we will introduce a new set of premium plus SKU offerings across ITSM, CSM and HR SV. We have also introduced a new ServiceNow AI Lighthouse customer program, alongside NVIDIA and Accenture, all in lockstep to accelerate value realization at the cutting edge of Generative AI. Specifically, this involves our engineers locking arms with NVIDIAs to codevelop new use cases for the enterprise. We already have the most significant pharmaceutical, financial services, manufacturing and health care companies engage with us. Additional customers will become design partners for new AI capabilities in their specific industries. We're currently evaluating a range of customers who are candidates for this program, and the interest is continuing to surge. These engagements share one sentiment perfectly in common

Operator:

Thank you, Ms. Mastantuono. [Operator Instructions] We'll go first this afternoon to Keith Weiss at Morgan Stanley.

Gina Mastantuono:

Well, thank you, Keith, for all of those comments. I appreciate that. Vancouver launch is the end of September. So if you think about from a timing perspective, we won't see it even in the market really until Q4. I'll let CJ talk a little bit more about our very exciting Lighthouse program. But as we think about longer-term guidance, right, our scale is such that it's going to take a little while for us to see real impact on the top line, but rest assured, we absolutely are very bullish on the opportunities in front of us as we think about the value that we're creating for our customers with Gen AI.

Keith Weiss:

Outstanding. Nice job, guys.

Gina Mastantuono:

Thanks, Keith.

Samad Samana:

Great. Thanks for taking my question. And congrats on a strong quarter. I want to maybe ask a follow-up question. Gina you mentioned Vancouver is coming out at the end of September. I guess one of the questions I wanted to ask is, is it changing how customers are thinking about renewal timing? And I want to tie that to maybe the CRPO guidance that you just gave for the third quarter. How should we think about what you're thinking about the release, the new products and maybe how that informs the short-term guidance that you've just given for the third quarter and what that maybe implies for the fourth quarter as well as we've been through the rest of this year in particular.

Samad Samana:

Great, thanks for that. Congrats again.

Operator:

Thank you. We'll go next now to Matt Hedberg at RBC Capital Markets.

CJ Desai:

Okay. So first of all, thanks, Matt, and I will start. As it was outlined that ITSM Pro, as well as CSM Pro, which are very similar, customer-facing agents and employee-facing agents, had amazing growth in second quarter. And even when I look at the percent of total, I feel very good about the Pro trajectory that we have been on in this market for the past few years based on automation and other features that we deliver via Pro. Now on your question on seat expansion, the way I think about it is T times Q times R, where R is the rate of increase. So if you look at ITSM Pro, what we have seen is besides the 25% uplift that Gina shared at the Financial Analyst Day, the seed expansion has been 10%. And so you may ask, okay, why is that? The reason is very simple, as the world is becoming more digitized, as the corporations are becoming more digitized, the incident volumes or a customer service requests are going up. So while they are leveraging the Pro features, the seed expansion is not a coincidence, because number of incidents, whether you look at security incidents, IT incidents, our digital products continue to go up. And that's why I look at T times Q times R where R being the rate of increase on the number of if you keep the quantity constant, that R is driven by higher level of digitization. So when I think about Generative AI specifically, we look at this base of Pro and we think about Pro Plus. And given the value that is already being delivered by Pro, Pro Plus will allow you to gain additional value or whether it's the employees, whether it's our customers' customers or whether it's our agents. And that's why we feel very comfortable with the monetization strategy with Pro Plus because our customers will get value because of higher productivity, and we'll get a small percent of it.

Matt Hedberg:

Thank you.

Operator:

We'll go next now to Mark Murphy at JPMorgan.

Bill McDermott:

Well, thank you very much for the question, Mark. First of all, when we get to the C-level, and we're talking to the corner office, it's all about innovation. And there is no lack of interest in digital transformation. There is no lack of interest in rethinking the employee or the customer experience or even how you empower people to do their best work, especially engineers and IT professionals because the digital strategy has become the business strategy. So the whole thing for us is not so much based on one month or one quarter versus another. It's having a chance to portray the broad vision and the completeness of vision we have with C-level decision-makers that understand what transformation really is all about. So that is the only limiting factor just making sure we get a chance to explain the breadth and depth of our story. In terms of the geographic scenario, we're growing in all of them very well. They each have their own individual scenarios. Obviously, you're well aware of energy and security and obviously, the Ukrainian situation, which is just a human tragedy. Americas is extremely strong. Europe is strong in spite of that because they need technology to dig their way out of a lot of the complexity. And Asia is going well for us, especially in Japan, where we have a new leader now, and we really feel like we planted a flag in Japan, and we have a new frontier that's going to grow really fast. So we're feeling good about all the geos. Some of the industries are doing incredible things. And yet at the same time, I want to make the point back to the platform. We had 19 of our top 20 deals with five or more products in the deal bomb. And in nine of the deals, we had 10 or more products. And that's a tribute to CJ and an amazing engineering team, but also in concert with Paul and our go-to-market machine, the collaboration on taking innovation from the factory and getting it in the hands of the customer quickly is really establishing itself as an art form here. And I'm super proud of the team, and I just want to give it up for the team.

Bill McDermott:

Thank you, Mark.

Operator:

We'll go next now to John DiFucci at Guggenheim.

Gina Mastantuono:

Yes. So John, what I said was that it had its best Q2 ever. And so Q3, as you know, is always a big quarter for Fed. But what I said was continuing the trend. So it had its best Q1 ever. It had its best Q2 ever. It had it best Q4 as well. And so it's not bigger than Q3, but it had a great quarter. It saw $10 million deals, including one over $8 million. And what you're really seeing is that our message around accelerating digital transformation journey is resonating. If you think about what they're looking to really partner with ServiceNow and platforms like ServiceNow, much more through an enterprise lens, more strategic, more multiyear, and they're really looking to digitally transform the citizen experience across the board. And so we're really excited about the continued trends that we're seeing. We have an incredible new leader in Dr. Raj Iyer doing incredible work with that whole team. And so you can only imagine that the opportunity remains really strong.

John DiFucci:

Thanks, Bill. Thanks, Gina. And nice job. Nice job, Kevin.

Gina Mastantuono:

Thanks, John.

Rob Owens:

Great, thank you for taking my question. And I know there's been a lot of discussion around pipeline and enthusiasm towards the second half, but I just want to drill down, I guess, more from an economic standpoint. There's been a lot of discussion, I guess, around the edges here. But as you look at the second-half, willingness to invest from customers, and obviously, ServiceNow is taking share and executing this environment. But do you think that there's an all clear signal here that you're giving us with the strength in this quarter? I just want you to paint the landscape for us. Thanks.

Bill McDermott:

And one set of facts, Rob, that might be interesting to you and others is the loyalty effect. You understand cloud economics, of course, but there's also the human effect of loyalty. Right now, we took a very strong position with our employees that we would remain a loyal to them, no matter the weather conditions in the marketplace, that we would do it together. And we now have the best retention rates in the history of the company. We have 99% retention rate with our customers. So if you take the loyalty effect into consideration, the net present value of what that means, and you combine it with the net new ACV that we think we can get out of this amazing platform and the innovators that are leading the charge for us, we have a tremendous sense of purpose and confidence within the company. And I think that really is fun to watch, and it's pretty thrilling to see what we can do with our customers. And I'm excited about this brave new world. And we're really fired up and ready to go over here.

Gina Mastantuono:

Thanks, Rob.

Kash Rangan:

Thank you very much. One for you, Bill and one for CJ. And Gina, we'll get to you on the follow-up calls. Bill, when you look at the last 12 months, challenging time for the economy, but ServiceNow out-executed gain share. So when the cycle turns towards being more constructive. What does ServiceNow pricing power look like? And how do you get value for your Generative AI investments and gain share of the precious IT budget? And one for you, CJ. You talked about $100 of value and how you keep 10. Why not more than 10? And could you tell us how the customer gets that $90 of value? I mean I'm sure that you've done some process mapping, some fancy map financials, et cetera. Just curious to get your thoughts. Thank you so much and congrats once again.

CJ Desai:

Yes, thank you, Bill, and spot on. So Kash, we have always thought about pricing of services in the context of what value our customers get, whether when we launched ITSM Pro, which was exactly five years ago, and we have kept the same price for ITSM Pro over the past five years. Now in terms of Pro Plus, based on very specific use cases, right? So I'll start with specific use cases, which we call domain specific. Those large language models we do not need to run super large language models because we are saying that, hey, for ITSM, this model will give additional productivity on top of Pro. And that productivity based on the use case could be significant. So from a pricing perspective, on the list price, we would like to be at least minimum, 60% plus when we start on top of Pro. So you're a Pro customer, you're already getting the value. We have seen it over the past five years, and we have seen the seat expansion happen as well. So on Pro Plus, you start with 60% plus. Customers are trying out this large language models. The models have accuracy, they are trying to learn themselves. Hey, do I take the prediction that comes out of large language model? Do I just accept it? But we fundamentally believe, which is what I shared at the Financial Analyst Day, that Generative AI is a tailwind for our business, but most importantly, the value that customers get. So I want to start with explaining the value, because you can say somebody is more productive for a particular task that they are repeating over and over again, but what percent of their day they spend on the task. And how do we look at the particular work week or a customer service agent or an IT agent. And then if we can say, okay, for your industry, for these use cases on ServiceNow, we believe we can deliver very high value, and hence, there is a premium we have Pro Plus. And we'll start with the 10%, 90% map. And as we see more and more value getting delivered, of course, we are going to ask for higher prices.

Gina Mastantuono:

Thanks, Kash.

Operator:

We'll go next now to [Steve] (ph) Bachman at BMO.

CJ Desai:

Absolutely. So first of all, thank you, Keith. Lots of questions in there. And I would say when we launched ITSM Pro in September 2018, the exact same question was asked. And at that point, I said, okay, listen, if -- even if Q remains the same, with the 50% on the list price uplift, we should be able to deliver value for our customers. And how it has played out, though, is that not only we have been able to get 25% uplift on ITSM Pro, but in addition, the seat count went up by 10%, which is the rate of increase. Now when I look at Generative AI, to answer your first question, not only is Pro Plus, because it's also Enterprise Plus. Because Enterprise features are things like process mining, workforce optimization, skills mapping for the workforce in IT or customer service. So these are not related to AI feature set. So enterprise has a very different payload than Pro. So we are Pro Plus as well as Enterprise Plus. So that's number one. And number two, in your question around early customer conversations, customers are still dealing with labor shortage. They are still trying to figure out how they can make their labor force more productive. It is always about efficiency so they can get more work done. And in that environment, I have formed belief right now that Generative AI is a catalyst so that their employee base is still more productive. And so even if Q remains the same, I'm still optimistic on the rate of increase, as well as the price we will get because of the value we are going to deliver.

Bill McDermott:

Thanks.

Operator:

[Operator Instructions] We'll go next now to Alex Zukin at Wolfe Research.

CJ Desai:

Yes, absolutely, Alex. So I'm going to have Gina answer the CapEx and COGS question, and then I'll answer your pricing question.

CJ Desai:

Got it. So Alex, the two things that I do want to share based on Gina's comments is, number one, we do not require large language model with hundreds of billions of parameters because for our domain specific use case, we can run what we have seen with text-to-code, for example, is one-tenth per size of OpenAI model. So that allows us to run it efficiently. It allows us to run while respecting the privacy of our customers' data. So that's number one, and that goes into the COGS answer that Gina gave based on the initial demand and customers that we are working with. Now in terms of your question around P times Q. The uplift that we believe we can absolutely price it as would be on the price. So if the quantity remains the same, the uplift will be on top of Pro with the list price, 60% uplift. And then, of course, our sales team works with enterprise discounts, all that you know how that plays out. And that's why if you assume that, why is that 60% is the number? It is all based on the value that we believe our customers will derive with additional Gen AI features that we are going to release for ITSM or whether it's for customer service management, those things, definitely, there is a cost of R&D and as well as cost to run something like that, but it will always be based on the value they get. So I feel pretty comfortable on the uplift list price on that specific price at the seat level. And then the second thing I would say is that we have seen, because of digitization on ITSM Pro, which was the point I was trying to make earlier, the seats have expanded by 10% over the last five years, while the price uplift that we have realized, which was 50% on top of ITSM, and we got 25%.

Alex Zukin:

Sounds like a pretty good recipe for success, guys. Congrats.

Gina Mastantuono:

Thanks, Alex.

Karl Kierstead:

Thank you. Hey Gina, three months ago, you guys put up a solid quarter, but you did tell us that the FINS vertical, which is one of your largest, felt a little wobblier. Macro uncertainty picked up. Do you mind just giving us an update with the passage of three months, how that vertical tracked for ServiceNow in the quarter and how it might through year-end? Thanks so much.

CJ Desai:

Yes. And I'll just add one thing, Karl, on Gina's point, is that specifically in Q2, within Fin in the banking sector, we saw measurable progress across our portfolio, both in the United States and Canada, as well as in Europe. So the platform is resonating. The largest of the largest bank expanded. And I can tell you that one bank, which expanded with us, is now close to -- at a TCV level, $100 million when they renewed with us in Q2. So we are seeing that banks are back, and there is a very decent pipeline in the second-half as well.

Gina Mastantuono:

Thanks, Karl.

Peter Weed:

Thank you. I think one of the areas you've been emphasizing as kind of a future growth lever has been the ramping up of channel and its ability to really deliver alongside ServiceNow. And in the past, you've talked maybe 15%, 20% of revenue is kind of really channel directed and more was supported. How is that going? And how large do you see that getting to over the coming year? And is this something that you might start breaking out, something that you might speak about regularly in your earnings going forward?

Operator:

Thank you. We'll go next now to Brad Sills of Bank of America.

CJ Desai:

Yes. So thank you so much, Brad. So first of all, I would start with, through for CSM also had its best quarter besides Customer Workflow overall, including our field service management also had a great quarter. So when I think about this category, we were very good on tying front office to the mid office to the back office, and that has been our differentiator, not just the engagement layer, but actually getting work done when a customer raises a request. And now we have some of the largest brands in the world, which showed up at our Knowledge ‘23 event on how they are using our Customer Workflow solution, all the way from engagement layer, to mid-office and back-office workflows. So that's number one. The other comments that were shared earlier by Gina is that we are also seeing, in certain specific industries, Customer Workflows resonate really, really well. One is telco, as Gina shared on our industry-specific SKUs, but also when I look at public sector, when I look at government-to-citizen experience, all of that on our ability to get work done on ServiceNow platform and leveraging our back-office experience and tying that to the front office is resonating at the largest brands in United States and Europe. And I remain extremely optimistic on this particular product line as we have transformed how customer can be served better when you tie the front office to the mid office and back office. And on Creator, also very, very nice growth in Q2 driven by just -- there was an earlier comment on U.S. Federal, but we are seeing App Engine, which provides low-code capabilities for our customers, the ability to integrate with all the systems that are available as well as our platform encryption and just the security features of our platform, that is resonating really well from financial services to health care and many other organizations, including sub-verticals within public sector. So App Engine, when you think about low code and the text-to-code innovation that we will deliver in September, which we showcased at our Knowledge Conference, there is so much demand. And Bill touched on this early on when I speak to some of our largest customers, our midsized customers, the backlog on ServiceNow remains very high. And what I mean by backlog, they want to automate more things using ServiceNow. They don't have enough people who can automate more things using ServiceNow. So with Generative AI and text-to-code and text-to-workflow capabilities, that's what really excites them so that they can reduce the backlog, automate more using our platform, so they get higher value and become an efficient organization.

CJ Desai:

You bet.

Raimo Lenschow:

Hey, thanks for squeezing me in. Just maybe a quick high-level question on the end. If you think about AI and adoption, this year could be tough for corporates, because the IT budget was set for enterprises last year. There was a lot of inflation from the vendor side. And so you're kind of squeezing AI out of the kind of tightened budget. How do you think about next year? And Bill, maybe in some of your conversations with Board members -- with Boards, like how are they thinking about the generational shift and how that impacts how you budget and how you plan for the coming years? Thank you and congratulations.

Raimo Lenschow:

Yes, okay. Excellent, thank you. Congrats.

Operator:

Thank you. And ladies and gentleman, that will bring us to the conclusion of ServiceNow second quarter 2023 earnings call. I'd like to thank you all so much for joining us and wish you all a great evening. Good-bye.

Operator:

Ladies and gentlemen thank you for standing by and welcome to the ServiceNow, Inc. Q1 2023 Earnings Conference Call. I would now like to turn the call over to Darren Yip, Vice President of Investor Relations. Please go ahead.

Bill McDermott:

Thank you very much Darren. And thank you everyone for joining us today. ServiceNow had an outstanding first quarter. Subscription revenue grew 27% in constant currency, which was 150 basis points above the high end of our guidance. cRPO grew 25% in constant currency, a 100 basis points above our guidance. Operating margin was 26%, two full points above our guidance. We have 66 deals greater than a $1 million in net new ACV. We saw a strong, sustained demand to ServiceNow’s platform. In January, we committed the company to performing beyond expectations. We said it, we did it. Our Q2 guidance reflects our strong conviction in the fundamentals of this business. We remain laser-focused on net new innovation, new business growth and profitability. ServiceNow is a growth company that consistently executes in any environment, and we will continue to do exactly that, execute. Looking at the big picture, there is no question this remains a complicated macro environment, C-Level leaders are managing an endless array of headlines and mixed signals. When you filter all that noise, it comes down to one simple reality, there is an app for everything, but nobody wants every app. This consolidation is a tailwind for ServiceNow as the intelligent platform for end-to-end digital transformation. We are now seeing conversations up level to business transformation. This is bringing CEOs directly into the process as principal executive sponsors. Nearly 40% of CEOs think their company will no longer be economically viable in a decade if they continue on the current path. They aren’t interested in turf battles between departments, they want enterprise level investments to drive business impact. This isn’t merely an inspection of what historically has been a big call center, this is CEOs engaging on a strategic level, insisting on a clear roster of technology partners to drive very specific business outcomes. For example, when it comes to technology in the age of generative AI, it’s a build, buy, operate conversation. They are looking for a single platform that can orchestrate the entire technology value chain. ServiceNow does just that. Businesses are also working hard to transform their customer experience. The AI opportunity here is when you integrate the front, middle, and back offices to better serve that customer. This is a ServiceNow core competency. On the internal side, it’s about reducing the number of touchpoints for employees to get work done. People can’t maximize their potential by juggling multiple systems with different user experiences. Our customers use ServiceNow as the one-stop digital hub to create a consumer grade experience at work. Whether it’s efficiency, productivity, cost takeout, or business model innovation, ServiceNow has never been more relevant. This is a message I hear directly from CEOs who know they need to shake things up and they want our help to do it. Once again, these secular trends are fueling ServiceNow. About 70% of global tech equity value comes from firms that rely on network effects, and we see growing platform adoption across all of our businesses. ITSM was in 18 of our top 20 deals with three deals over $1 million. ITOM was in 14 of the top 20 with five deals over a $1 million. With increased focus on cost takeout, ITAM had a very strong quarter in 14 of our top 20 with three deals over $1 million. Security and Risk were in 12 of the top 20 with three deals over $1 million. Customer workflows was hot in Q1 in 18 of the top 20 with nine deals over $1 million. And this is worth emphasizing because ServiceNow is more relevant than ever as businesses invest in a differentiated experience for their end consumers. Very exciting indeed what we’re doing with customer service management. Employee workflows was in 10 of the top 20 with four deals over a $1 million. Creator workflows was in 18 of the top 20 with three deals over a $1 million. Major global brands continue to accelerate their own transformation by working with ServiceNow, Marriott, Grupo Bimbo, Navy Federal Credit Union, Travelers, the U.S. Air Force and Schneider Electric, just to name a few. Look at banking as one example. PNC works with ServiceNow to modernize the way it manages disputes, which will reduce losses and improve case closures. We also saw major co-innovation milestones in the quarter. For example, ServiceNow and AT&T have created a global telecom product to help communication service providers manage 5G and fiber network inventory. Q1 was also the latest step forward for our organic innovation machine. The ServiceNow Utah release was engineered to drive faster business outcomes for our customers. The release includes AI-powered process mining, with robotic process automation capabilities, additional search enhancements, expanded workforce optimization and health and safety incident management. These are all designed to help increase automation, simplify experiences and offer greater organizational agility. It bears repeating that while customers are aware of market excitement for individual technologies like generative AI, they expect a platform strategy to integrate the various tools. ServiceNow has AI, process mining, RPA, low-code and many other technologies built natively into a single workflow automation platform. Of course, we will have much more to say about all of this at our Knowledge event in Las Vegas on May 16. I hope you can join us. I’d also like to extend a warm welcome to Deborah Black, Vice President, Engineering at Netflix, who is the newest member of ServiceNow’s Board of Directors. We’re so proud to have Debbie’s leadership on our journey to be the defining enterprise software company of the 21st century. In closing, I’ll simply reiterate things we’ve said consistently. First, businesses need ServiceNow. Enterprise software is mission-critical, the demand environment is robust. Second, ServiceNow is a unique company performing at a very high level. We are delivering strong growth, aggressively managing costs and creating immense shareholder value. The company has momentum everywhere. We’re performing very well across the best places to work scorecards including Glassdoor. Our brand recognition is increasing as we rise on lists like Fortune’s Most Admired Companies, our market opportunity is expanding, and this is the early days of a truly generational growth story. Finally, we know the trust is the ultimate human currency. What we have here is a platform, a culture and a company that is built entirely on trust. The results tell that story. We just eclipsed the $2 billion threshold in a single quarter, and we were the fastest ever to do that on an organic basis. This is about a fast growth, durable, predictable cloud business model. This will be the red thread at our Financial Analyst Day in a few weeks. We look forward to seeing you all there. Businesses work with ServiceNow, people work with ServiceNow, the world works with ServiceNow, and we’re only getting started. I’d like to thank you very much for your time today. I’m looking forward to your questions. And for now, I’ll hand things over to Gina.

Operator:

The floor is now open for your questions. [Operator Instructions] Our first question comes from the line of Mark Murphy from JPMorgan. Please proceed.

CJ Desai:

Mark, first of all, thanks for the question. Here is what I would say. When we started the ITSM Pro journey in 2018 Q4, the exact question was asked because we embedded machine learning and AI into ITSM Pro. And that was a game changer, both for our customers and our shareholders. When I look at specifically generative AI, we absolutely believe that besides our core machine learning and AI features that are in platform today, it is a clear ‘and’. And this particular and versus an or provides more productivity not only for the employees of our customers, but for the customer service agent or IT agents as you asked. And wherever we can capture that additional value, we will monetize that further via additional SKUs that we offer on top of our current offerings. So overall, I feel very good about generative AI and what it does for our business. And we have learned a lot through our ITSM Pro traction over last – four years now, four-plus years, and I feel very optimistic for next three to five years related to it is an accretive to our top line.

Operator:

Our next question comes from the line of Brad Sills from Bank of America. Please proceed.

Bill McDermott:

Yes. Thank you very much for the question, Brad. And I think it underscores the importance of ServiceNow becoming the intelligent platform for end-to-end digital transformation. As I said, the C-level decision-makers now, CEO, the CFO, obviously the Head of Technology, along with the Head of HR and the various other departments in the company are aligning their business strategy on technology platforms that truly matter and can impact business results, and they’re moving away from the app of the day and platforms that don’t matter. They’re also taking antiquated platforms and building our innovation on top of them. So if you want to think about our unfair advantage, we actually started in IT and have extended that beautifully into HR, into the customer service management and into creator. Think about the importance of creator. 75% of the app development that will take place in the next two years will be done by the customers themselves on a low-code platform like ServiceNow. We feel we have a pole position. Customer service management, everybody is trying to align the front, mid and back office to give a seamless, self-service, direct-to-consumer experience on the mobile. It’s our core competency. And when you think about the employee experience, there’s wonderful systems of record out there that do what they’re supposed to do, but our expertise is really taking a technology view of recruiting, hiring, onboarding, providing all the services and with generative AI actually giving the employee next best action and fundamentally changing the game on the productivity curve. All of this is aligning the executive team around platform strategy, and our teammates here at ServiceNow are proud and confident in that platform. They can tell the story by industry, by persona, and they can bring countless examples to the first meeting now, and they’re aligning the executives. One of the biggest requests we get is, hey, can we have an off-site with our entire management team with your team so we can figure out the best next step for the relationship? That’s a very different outcome than we were doing four years ago, where it was a more land-and-expand kind of approach.

Bill McDermott:

Thank you very much, Brad.

Keith Weiss:

Excellent. Thank you guys for the question. Congratulations on a really nice start of the year. I want to dig in a little bit on the thread that Mark Murphy started pulling out in terms of the impacts of generative AI. And the question that I get a lot from investors is, does it necessitate that ServiceNow has to change their pricing model? And is there an ability to do that? So maybe if you could kind of walk us through, like as this functionality creates more automation and it’s more just the workflows in the platform, the data in the platform that’s driving the value, is there a necessity or a potential of changing the pricing model to be more consumption or volume-oriented versus like a seat-based model?

Keith Weiss:

Got it. I will stay tuned for Analyst Day for more details. Appreciate the color.

Operator:

Our next question comes from the line of Samad Samana from Jefferies. Please proceed.

Bill McDermott:

Yes. Samad, thank you very much for the question. And first of all, everybody is entitled to their strategy, and there’s lots of great companies out there that have taken a different approach to managing headcount and the people packed. We have been highly intentional throughout the last four-year journey that I can personally speak to on hiring in the first place. And we have been very biased towards great engineering, especially fingers on keyboards, and go-to-market folks that actually carry a quota and keeping the company extremely lean on G&A, where most of our investments have been in F. So we started into this macro scenario that the world is in right now in a thoughtful position to begin with. And therefore, we’re still managing our headcount tightly. It’s not like we’re boldly hiring, and especially now we’ve doubled down on exactly that, quota bearing and fingers on keyboards. And the good news, and I really believe, we have a new dimension here where our culture is actually attracting people in the marketplace, and we’re hiring truly best-in-class talent. We call it 9s and 10s here. If you’re an 8.5, you don’t get in the door now. So, I would like you to take away from this answer, they’re being very thoughtful about hiring. The numbers are commensurate with the new business they’re bringing in the door, not the existing business, and they’ll continue to do that in a way that manages the margin profile in importance with what shareholder value expectations are in the marketplace. And I honestly believe we’ll look back at this moment and how we’re managing the people part of the business and putting people first as something that created a very special, highly-differentiated company as it relates to people’s desire to work here. It’s pretty interesting.

Bill McDermott:

Yes. I mean we – internally, we call it a checkout approach.

Bill McDermott:

Thanks a lot, Samad.

Matt Hedberg:

Great, thanks for taking my question, and I’ll offer my congrats as well. Gina, you talked about a strong pipeline exiting 4Q and obviously delivered a strong quarter here. How do you feel about the pipeline as we enter the quarter? And obviously, there’s been some additional volatility in financial services, and it sounds like that was fairly stable for you guys this quarter. But maybe talk about the visibility you have entering the quarter.

Bill McDermott:

And one thing you may find interesting, Matt – one thing you may find interesting is financial services, as Gina said, continued to perform. And in EMEA, two of our top five deals were in financial services, including one with one of Europe’s largest banks.

Gina Mastantuono:

Thanks, Matt.

Operator:

Our next question comes from the line of Kirk Materne from Evercore ISI. Please proceed.

Bill McDermott:

Yes. Thank you very much for the question, Kirk. We stand by. No one has to lose for us to win, and I really do believe the systems of record that team up with ServiceNow would see dramatic increases in their win rates. That’s obviously up to them, but there’s no question that, that would happen because the power of the ServiceNow platform versus point solution is pretty clear. C-level decision-makers want an enterprise-wide workflow capability to drive their performance, and it’s just that simple. And when you have a lot of point solutions that optimize the department but don’t tie into the greater workflow across the domains or the functions, it doesn’t really help at the corporate level. And I think that’s the coherence that we bring to the enterprise productivity story. And frankly, the one thing I would say is that customers aren’t interested in forced marches with upgrades to technology that’s not delivering business impact. It’s kind of like thinking about why would I do a heart transplant when I can do a simple bypass and gain massive, new productivity with a platform that drives a great user experience, empowers my employees, satisfies my customers and enables my creators? In fact, on the banking case, in particular, what you were seeing is some serious focus on risk management across the whole bank and using us to consolidate all the point solutions so there would be one dashboard or one version of the truth to protect that house. So you’re seeing more and more of a platform approach to decision-making in the market.

Bill McDermott:

Thank you very much, Kirk. See you there.

Kash Rangan:

Hi thank you very much. Great start to the year, Bill and team. But curious, the strategy to expanding the base of customers, you’ve done a great job, you’ve got 7,700 customers, a lot of million dollar wins. But if you look at enterprise software beyond $10 billion to $15 billion, $20 billion in revenue, those companies have always had a base of the pyramid that has a big chunk of commercial customers, SMB customers. I’m curious how you think about ServiceNow’s strategy to expand the base of the pyramid going forward. Thank you so much and congrats.

CJ Desai:

I’ll just add one thing, Kash, that from a product strategy perspective, as Gina shared, we are very focused on top of the house of the pyramid, as you call it, in terms of expansion strategy, whether it’s just additional products that we continue to deliver release after release or creating vertical-specific solutions for those industries where we can get higher ASP uplift vis-à-vis selling horizontal solution. And as Bill mentioned, whether you call that commercial segment, mid-market segment, we are absolutely focused on that as well from a new logo perspective. We have commercial go-to-market selling motion that allows us to move up, and those customers sometimes become massive customers, and that is an area of focus for new logos or new business in addition to the existing one.

Kash Rangan:

Thanks Gina.

Bill McDermott:

Thanks Kash.

Gregg Moskowitz:

Okay. Thank you very much and congratulations on the strong start to the year. The last time that ServiceNow had grown cRPO sequentially in a Q1, we’d have to go back to 2019, but you just did it and you did it in a really challenging environment. So aside from what, it sounded like good sales execution clearly, would you attribute the cRPO outperformance on the fact that you had fewer early renewals in the Q4? Or is there another reason that you would highlight? Thank you.

Gregg Moskowitz:

Terrific. Thanks very much and see you in a few weeks.

Gina Mastantuono:

Thanks Gregg.

Arjun Bhatia:

Hi guys. Thanks for taking the question. Gina, maybe just a follow up on the expansion fulfillment. One of the things that we’ve been hearing out in the sector is that there are seat headwinds as headcount growth is moderating at end customers. What are you seeing in your growth algorithm from a seat expansion versus upsell/cross-sell dynamic? And how has that changed at all?

Arjun Bhatia:

Okay. Perfect. Thank you.

Alex Zukin:

Hey guys. Thanks for taking the question. Congrats on a solid quarter. Maybe, Bill, can you talk a little bit about the macro from two different respects? One being are you starting to kind of settle into this new longer sales cycle, customers making you pitch ROI every time, everywhere? And you’re getting ready to kind of anniversary this in June, meaning it’s a sense of like a stabilization or a new normal? And then maybe just comment on the demand environment vis-à-vis U.S. versus international because it does feel a little bit different depending on which geo you’re in.

Gina Mastantuono:

And I would just add from a geo perspective, demand pretty strong across the board. Americas had a strong quarter in Q1 with particular strength in health care and life sciences and state, local and education. We’ve focused verticalization strategy. That’s really driven some strong momentum there. So we feel really good about results in Americas as well as demand. The number of million-dollar deals increased over 30% year-over-year, so that’s great news. EMEA had a really strong Q1 as well. U.K.I, strong demand, great momentum. Central Europe continued to outperform. Renewal rates continue to be strong at 99% in EMEA despite the macro. So again, strong durable demand across the board. And then from an Asia Pac perspective, selling into the C-suite has been working well and really helping to drive larger transformational deals. We landed seven $1 million-plus deals in APAC in Q1. So really strong demand across the board from a geography perspective as well, Alex.

Bill McDermott:

Thank you very much Alex.

Operator:

Our next question comes from the line of Michael Turrin from Wells Fargo. Please proceed.

Gina Mastantuono:

Yes. Great question. So from an overarching perspective, as I said before the durable demand that we’re seeing has really kept our business resilient. So strong Q1 cRPO. The Q2 guide, if you remember, beginning in Q2 of last year is when the macro headwinds really started to hit us. And so we’ve seen muted growth in the past couple of quarters as a result, which is driving a little bit of a decel in Q2. The other thing, as you rightly recall, I’m absolutely continuing to remain prudent in our guided assumptions given the uncertainty in the macro environment. And so again, feel really good about the guide. It’s a strong guide given the current uncertainty. But those are kind of a couple of the things that are going into the number. With respect to early renewals, what I’ll say is that early renewals actually exceeded our forecast slightly this quarter. And so as I talked about at the end of Q4, we really factored in some prudent assumptions with respect to early renewals given the current macro, and basically they are lining up as expected.

Gina Mastantuono:

Thank you, Michael.

Derrick Wood:

Great. I’ll add my congrats and thanks for taking my question. Bill, I wanted to ask about the Microsoft partnership and the co-sell agreement. I think you guys announced that a year ago. I imagine you’ve been laying some groundwork. Can you just give an update as to how that partnership is trending? What kind of dividends you see in 2023 and what you may be looking to do around generative AI with them?

CJ Desai:

Absolutely. So here’s what I would say, Derrick, is at the highest level when we think about our partnership with Microsoft certain products such as our ITOM product, which is your visibility into Azure and overall our product set that allows you to consume public cloud services is going in the right direction. Our footprint of ITOM with Azure Cloud continues to expand. So that’s number one. From a go-to-market standpoint, whether it’s in U.S. Federal Cloud with our IL-5 certification just going live on Microsoft Azure cloud or the Australian government certification, we have had some recent wins in Australia and a few other geographies, where our go-to-market teams are working really well together. We will share more on generative AI with Microsoft, but we absolutely plan to leverage open AI as well as Microsoft Azure capabilities when it comes to how ServiceNow use cases will work in conjunction with open AI and Microsoft Azure.

Bill McDermott:

Thank you, Derrick.

Sterling Auty:

Yes. Thanks. Hi, guys. You touched a little bit on my question in the last answer, but I just want to dive deeper and better understand the traction. What’s driving the traction you’re seeing in your observability solutions? How much of it is maturation in the light step functionality and what you’ve built on top of it? How much of it might just be price and what you’re able to bundle together as a platform?

Bill McDermott:

And Sterling, the one build I would give on this, just for you to know, Microsoft and ServiceNow understand each other and have like-minded ways of going to market and including not just geographically but in industry. So as CJ said, this Australian government agency we’re referring to is one example. But then you can go to South Africa, and you would see us doing something very interesting for an insurance provider, where we also displaced an aging legacy system. So we’re on the front end of innovation by industry and geo, and we really have common goals and shared values around making these customers successful, and we both know how to do it.

Bill McDermott:

Thank you very much.

Tyler Radke:

Yes. Thank you for taking the question. Gina, just as we look at the updated guidance for the full year, I’m wondering if you could just walk us through some of the assumptions both on the subscription revenue side and margin side. It looked like you did beat by more than – you’re raising the full year guide if you account for currency. So just wondering if there’s any extra conservatism or moving pieces. And then the same thing on margins, there was strong outperformance this quarter. Thank you.

Tyler Radke:

Yes. Makes sense. Thank you.

Operator:

Our next question comes from the line of Brad Zelnick from Deutsche Bank. Please proceed.

Gina Mastantuono:

Yes, Brad. Great question. So yes, net new ACV growth in 2022 given the current macro and backdrop is very healthy given that environment. We’ve talked about the fact that the current macro as well as the FX movement would likely weigh on that guide for 2024 and 2026. What I can tell you and what I’m excited about is to make sure you come to Financial Analyst Day in May, where we’ll be really focused on the longer-term strategy as well as updating those relative numbers for you. And so we don’t guide for net new ACV, as you know, but we will give a lot of clarity as to what we’re thinking for the mid- and longer term at FAD in just next month. So look forward to seeing you there.

Gina Mastantuono:

Thanks, Brad.

Operator:

Our next question comes from the line of Karl Keirstead from UBS. Please proceed.

Gina Mastantuono:

Yes. I mean, listen, Karl, I think that given the current macro, deceleration is very normal and expected, but you’ll continue to see us really driving strong demand across the board. And so we absolutely think that demand remains robust and strong, and we will continue to perform. But yes, given the current macro vis-à-vis last year, we’ll definitely see a little bit of deceleration throughout the year.

Operator:

Our next question comes from the line of Raimo Lenschow from Barclays. Please proceed.

CJ Desai:

Listen, we are, first of all Raimo, super pleased with our creator workflow performance that has many aspects to it. But the key aspect it is, of course, our low-code engine and our automation technologies. This platform, as you described it, you’re 100% right that there are many companies even with point solutions that market themselves as a platform company. We are truly a platform company. And when we sell creator workflows, that is sometimes used to extend our out-of-box applications. And sometimes, as Bill mentioned, customers use to create many, many new applications to digitize their processes. That business in itself is a very nice business that has been growing significantly over the last three to four years, and I feel very optimistic on that. And the reason I feel optimistic versus point solutions that you described or a system of record because you cannot have all these applications being developed randomly without governance. Our key buyer tends to be IT organization. We serve IT organization. We have governance features on how you develop these apps, where does the data reside. And when we say that to our customers, they say, we would rather use your platform to create new applications than a point solution or from a system of record that only has a system of record data. And the second thing that’s really working for our platform is we organically build our integration or automation engine that not only integrates with all the 600-, 700-plus applications out there in the world, but allows you to automate any processes via RPA, machine learning and many new AI technologies that we are going to deliver. I am extremely optimistic and bullish on this aspect of our platform, a creator workforce.

Operator:

Okay. So it does appear we do have time for one more question. Our final question comes from Michael Turits from KeyBanc. Please proceed.

CJ Desai:

Yes. So Michael, first of all, I’ll just address on customer workflow. Customer workflow, as Bill called it, was hot and shows a great quarter. What we saw, Michael, what we shared last year at the Financial Analyst Day with you and the team is we have now created industry-specific solutions, whether that’s for insurance, for state, local and central government, whether it’s for health care and life sciences. All of those investments that we have made in the past few years are working really well in the context of customer service, and we are getting higher ASP. In addition, our field service management product is also resonating, and there are some of our competitors who have announced end of life or replatforming their field service management offering. We are absolutely capturing that opportunity being a single platform company to have field service management solution alongside of customer service management solution that is industry-specific. I’m really proud of the product and engineering teams as well as our sales team on how they executed our horizontal and vertical capabilities for largest insurance companies, health care companies or state, local and federal government.

CJ Desai:

Thank you very much. Thank you, Michael.

Operator:

Good afternoon, ladies and gentlemen, and welcome to the ServiceNow Q4 2022 Earnings Conference Call. [Operator Instructions]. At the time, I'll turn things over to Darren Yip, Vice President, Investor Relations. Darren, please go ahead.

William McDermott:

Thank you, Darren, and thank you, ladies and gentlemen, for joining us today. ServiceNow continues to perform as-the-beyond expectations company. For Q4, we beat guidance with subscription revenue growth of 27.5% in constant currency. Operating margin was 28%, 2 points above our guidance. Our free cash flow margin was 30%, 1 point above our guidance. We had 126 deals greater than $1 million in Q4, including our largest deals ever worldwide in EMEA and in Latin America. Our 98% renewal rate remains the industry benchmark. With 25.5% constant currency cRPO growth, we actually had better-than-expected new business in Q4 with less reliance on early renewals. Based on this new business surge, we are giving a very strong guidance for 2023. Our guidance reflects a disciplined forecast that appropriately balances our well-founded optimism for ServiceNow's business. We'll work hard to go beyond it, and we'll begin that march in Q1. Here is the main takeaway. Even in a complex operating environment, ServiceNow is executing at the rule of 58.5%. We are driving net new innovation, fast growth and operating leverage. ServiceNow is the proverbial safe harbor in all weather conditions. Let me unpack the current environment for you. The secular tailwinds of digital transformation aren't going anywhere. IDC's research makes a clear that technology budgets are growing. They forecast IT spend will grow 5% in 2023, software spend at 8% and Software-as-a-Service spend at 15%. So as businesses increase spend, the only question then is where will all that investment go? And this answer has everything to do with the great reprioritization. The theme in Davos this year was cooperation in a fragmented world. It all begins with a fragmented enterprise. C-level buyers don't want long-term road maps to clean up a siloed mess of point solutions. They want integration, speed, automation, great experiences and business impact. A CEO told me, "We can't afford 1,000 points of dim light. We need a cohesive plan with a trusted platform." So this is now without any doubt, a platform economy. And only a few platforms will be relevant in this shift, and none are as well positioned at ServiceNow. This begins with our business model. ServiceNow was born in the cloud, established itself in IT and expanded from that core. It accelerates with the realities of the multi-cloud world. Many enterprises are struggling to use public cloud capacity that they have already procured into ServiceNow, which directly enables cloud workload migration. We are the control tower for any architecture, public, hybrid or multi-cloud. And with open telemetry, we help business build and monitor cloud-native applications. This all extends to driving automation. ServiceNow has natively embedded the complete tool set from AI to RPA to process mining in our platform. Now professional developers and the rest of us, real people like you and me, can build mission-critical applications to automate the world of work. Everything culminates with real business outcomes. ServiceNow integrates the enterprise to deliver better customer service, employee experiences, security, risk management and next-generation business processes like Procure to Pay, technology foundation, hyper automation, process orchestration. With this completeness of vision, ServiceNow is the end-to-end platform for digital transformation. If all we did was help existing customers consume everything this platform can do, we would stay a fast-growth company. But of course, our strategy goes well beyond this as does our proven ability to execute. Right now, many technology companies are working to shift resources from bad businesses to good ones. ServiceNow only has good businesses. Our products and engineering team is building organic net new innovation with an unmatched level of speed and quality. When we started to sense noise in the macro early in 2022, we shifted immediately to a conservative cost management posture in running the company. This allowed us to focus on execution with our team rather than look to workforce actions to leverage. It also allowed us to continue hiring, especially in engineering and quota-carrying roles. The results tell the story. ITSM was in 14 of our top 20 deals, with 15 deals over $1 million. ITOM was in 16 of the top 20, with 14 deals over $1 million. Security and Risk Solutions were at 13 of the top 20, with 9 deals over $1 million. Customer workflows were in 13 of the top 20, with 13 deals over $1 million. Employee workflows were 13 of the top 20, with 11 deals over $1 million. And create workloads were in 19 of the top 20, with 11 deals over $1 million. We saw new business growth, new logos and major expansions with some of our existing customers. The United States Army expanded its ServiceNow road map well beyond IT. ServiceNow will improve the Army's ability to consolidate service management for its over 1 million active military contractor and civilian population. The Schwarz Group, one of the world's top retailers will digitize its 11,000 stores from retail locations to logistics on ServiceNow as its digital business platform. This transition is a transformation and it will position the Schwarz Group at the forefront of the next-generation retail industry. From Banco do Brasil, to AT&T, to Sumitomo, we have countless stories that span ServiceNow's workflows, Lightstep, geographic regions and industries across the board, we're winning. And as you'll hear from Gina, we grew new business 100% year-over-year across retail, hospitality, transportation and logistics. That's only one example. And with the expansion of ServiceNow's impact, we are setting the standard for speed of deployment and business value for our customers. More than three years ago, I stated our ambition to be the defining enterprise software company in the 21st century. And this is an ambition I will see through to its full completion. Following my elevation of Chairman and CEO, I'm delighted to announce that CJ Desai has been promoted to President and Chief Operating Officer. CJ is the leader of consequence, well known in the industry. His track record in ServiceNow speaks for itself from strengthening our platform to driving our customer experience. This is exactly how we are orchestrating our company to perform on an end-to-end basis from innovation to execution with our customers. And I'd like to personally congratulate CJ for his latest well-deserved endorsement of his leadership. Congratulations, CJ. In other news, we proudly welcome Masatoshi Suzuki as the new President of ServiceNow Japan. He brings a long history of successful leadership with some of the industries most respected brands. We will elevate ServiceNow Japan to a fourth geographic region reporting directly to our proven Chief Commercial Officer, Paul Smith. And to add fuel to the growth buyer, we rolled out a new partner program to help our ecosystem drive full platform adoption of ServiceNow. We're also getting an enthusiastic reception for the company's premier global initiative RiseUp with ServiceNow. And under the thoughtful leadership of Lara Caimi, we will continue to rise up. We offer the training and certification to help people build a lifelong career working on this platform. We have never seen so much interest in the ServiceNow franchise around the world as we are seeing right now. And from an ongoing operating perspective, we entered 2023 with much stronger sales coverage on a year-over-year basis. We have the feet on the street. We also see stronger pipeline coverage and the maturity of that pipeline, much more so than we did a year ago. The latest Glassdoor ratings feature ServiceNow as the 9th best place to work in the United States, 2nd best in the United Kingdom. The company is fully invested in all of our stated ESG objectives with our global impact report coming later this year. All this is a reflection of our proud culture built on Fred Luddy's founding vision for our company. I was just in Las Vegas last week for our sales kick-off of them. And I can tell you, our team is fired up and ready to go for the year ahead. Really fired up. I can only reiterate that we have said consistently, there is only one way forward, and that is innovation. IDC says that by 2027, the number of digital businesses on the S&P 500 would double. Every industry is being reframed by a new paradigm or several. The participants that lean in will lead, the others will fall behind and quickly. For ServiceNow, we are committed to make the world work better for everyone. Our fundamentals are operating at peak performance, net new innovation for our customers, business impact, driving long-term stickiness of our platform and network effects, giving us a competitive moat with multiple avenues for market expansion and profitable growth with a pristine balance sheet. All in all, when people talk about cloud economics, ServiceNow is the blue chip standard. Whatever the world lacks in stability, we will more than offset with relentless execution. Our customers need to automate for cost reduction and to innovate for growth. Yes, ServiceNow helps them do both. The world works with ServiceNow as the end-to-end platform for digital transformation. I'd like to personally thank our customers, partners and shareholders for their steadfast trust in ServiceNow. You can count on us. We're in your service, hungry and humble as ever. I'd like to now hand the call over to our CFO, Gina Mastantuono. Gina, over to you.

Operator:

[Operator Instructions]. We'll take our first question this afternoon from Brad Zelnick of Deutsche Bank.

William McDermott:

Yes. Thank you very much, Brad. And before I answer the first question, ladies and gentlemen, I just wanted to officially welcome CJ Desai as our newly President and COO, who is joining me here today. and I will have him continue to join me on these calls. And I'd also like to acknowledge Gina for powering through while she's a bit under the weather, so please her voice might be a little scratchy, but her passion is on fire. So she's in good shape, but losing her voice a little bit. We've been all over the world from Davos to Vegas to here. So that's what happens when you travel a little bit. Brad, the partners and the largest partners are really doubling down on their investment with ServiceNow. And I look at it as a multifaceted situation. First, on this RiseUp with ServiceNow, we're going to train 1 million people in the ecosystem to be fully certified on the platform to ensure that we globally scale. Second, partners are teaming up with us on an industry domain basis also based on persona and mapping that back to our solution road map and naturally, everybody is all in on the platform. So the big ones are really doubling down on the platform. What's interesting, and you bring up a good point, this is for the front, the mid and the back office. And there's a next-generation ERP evolving here with things like procure-to-pay, optimizing supply chains and other things that definitely impact the middle office. But I would also say we have a great opportunity. And if you saw our new business surge in Q4, you're seeing it play out, where we're going to net new logos and drawing net new business. And I think that will be a big part of it. CJ, you may want to build on it from what you're seeing in the middle office.

William McDermott:

Excellent. And I know, Brad, do you have the second question, I think, for Gina.

Gina Mastantuono:

Yes, of course, Brad. Thanks for the question and apologies for my throat. So I think what you're seeing is early renewals were always correlated and still always correlated to net new ACV. And when people early renew, it's really about co-terming multiple contracts. And certainly, in the current environment, when -- I don't know if you want to say it's less budget flush or just more tightening of budgets, the need or the desire to co-term the contract is a little bit less than what we've seen historically. Not altogether surprising given the current macro. It's why I wanted to be really clear about the fact that early renewals have no impact on future revenue, right? And in the quarter, our target forecast for net new ACV as well as renewal ACV within the quarter actually overachieved, which is why we were able to come out with a strong 2023 revenue guide and why we feel good about not only the Q4 results, but also the position that we stand in the market as well entering 2023.

Raimo Lenschow:

Congrats from me as well, and Gina, I hope you feel better soon. A quick question. If you think about the different pockets of growth, you saw this quarter that the HR and CRM part was a little bit stronger for Q4. Can you talk a little bit about the drivers? Because like ITSM, ITOM, you're kind of the #1 player. And the other ones you're expanding. So it's nice to see the expansion in them. And then I had one follow-up for Gina.

CJ Desai:

Absolutely. So employee experience and employee productivity are two sides of the same coin. And with our HR service delivery product that is resonating really well, whether it's in commercial markets, including we had a very strong public sector performance as Gina outlined, where that product is resonating. And during this macroeconomic times, when you think about customer service, you want to hold on to your customers and you want to serve them profitability. That's what is driving business for our customer service management product. So we are seeing that despite the technology foundation where IT is the business, digital services other business which is what driving our ITSM and ITOM product lines and what we call service operations, picking the best of service management and operations management, but HR and our customer service management are also driving growth in very specific industries from telco to public sector and health care.

Gina Mastantuono:

Yes. It's a great question, Raimo. So I gave a good strong guide for operating margin as well as free cash flow margin for 2023. I think what you saw in Q4 from an operating margin perspective was continued discipline on the cost side, as you have seen us do and as you will consistently see us do. On the free cash flow side, obviously, that disciplined cost management flows through. But also, we did see some CapEx spend come through towards the tail end of Q4, which means that the payments are not due until Q1 of '23. So that does drive a little bit of headwind on the free cash flow margin in '23, which is why you see the guide that I gave. Hopefully, that's helpful.

Sterling Auty:

Just want to circle back on the cRPO. Given the constant currency was 25.5%, is more of the issue that you described more happening internationally than in the U.S.? And how should we think about kind of the appetite to do renewals? And is there any concern about expansions from some of those international customers here in the first part of '23?

Operator:

We'll go next now to Karl at UBS.

Gina Mastantuono:

Yes. Great question, Karl. What I would say is, overall, the underlying growth that we're seeing remains healthy. FX headwinds have eased slightly, but certainly are still material. And with the uncertain macro backdrop, we're going to continue to monitor the market and provide an update on our long-term targets at our Analyst Day in May. So I'd say, again, underlying demand, really strong; operating margin, well on the trajectory to hit 27%; with respect to top line and free cash flow, with the impact of FX, and that keeps moving along, we'll update those targets for you in May. But let's go back to what Bill talked about earlier. We remain very well positioned given the current macro environment. We are the platform of choice for digital transformation. And that opportunity is -- has not changed. If anything, it continues to grow.

Mark Murphy:

Bill, just given your comments on the pipeline coverage and also the maturity, would you say that the macro headwinds have actually dissipated somewhat if you compare it back to the summer? Or -- are those winds still blowing fairly steadily, but you're just able to kind of navigate through them through will power and execution rigor?

Mark Murphy:

Very clear. And Gina, sorry again giving your voice. But just again, on the topic of the lower mix of early renewals from 2023, should we interpret it at all as customers may be a little hesitant to renew early just because of the cost of capital is higher. They want to hang on to cash a little longer? Or on the flip side, is there some element of maybe you actually enjoyed the luxury of not having to encourage as many early renewals because you did see so much strength on the new logo side?

William McDermott:

And Mark, one thing I would just build on what Gina is saying, and for every investor out there, when you don't need to rely on early renewals, that means you have a competitive advantage with your technology. It also means that you're able to preserve your pricing power as you go into the renewal cycles on the normal terms. So this is actually a super healthy thing, and that's why the guide for 2023 was above all the consensus estimates that you guys have.

Kasthuri Rangan:

I would think that in a time of inflationary environments that people would want to get rid of cash and preserve the purchasing power. But anyways, a little counterintuitive. That was not my question anyway. So congratulations, first of all, Bill, CJ and Gina. I will spare you. I'll give you some time off and not ask you a question, so you can rest your voice. Bill, one thing that occurs to me is that you've scaled a very successful technology company before. So what are the patterns that you see at this point of the evolution of ServiceNow there could be so many things that you could be doing from differently, from a go-to-market perspective, verticalizing the product, expanded distribution partnerships with resellers potentially. There's so much innovation. I look at the number of products that you have, it's mind blowing. Almost complex. How do you ensure that this all does not get in the way of your mission to build the defining enterprise software company of the 21st century? How do you make these catalysts and tailwinds and make ensure that nothing gets in the way since you've especially seen this pattern play out and you've successfully done this before?

Operator:

We go next now to Peter Weed at Bernstein.

Gina Mastantuono:

Peter, I'll take the first question. So clearly, we're thrilled with the net new ACV growth that we're seeing, and not only are our expansion rates strong within the quarter and for the full year in 2022, we were really, really pleased to see that new customer, net new ACV grew over 30% year-over-year despite the headwinds. And we've talked about this in the past. We've really evolved our focus away from the number and the volume of new customers to landing the right new customers that can land with us and expand with us over time. And so the fact that these new lands are growing is testament to the platform, a testament to the breadth of products on the platform. And so as we think about 2023 and beyond, we absolutely expect to continue to see very strong expansion rates as well as good new logo growth. But again, it's about not the volume of those new logos, but the quality. And really, you can see that in our results. With respect to your comment on NRR declining by 300 basis points, that's not what we're seeing. I'm not sure what math you're doing, but I'm sure that off-line, Darren can talk you through it. But our net retention rate and expansion rate remains very strong in Q4 and for the whole year in 2022.

Keith Weiss:

And very nice end to the year with that new business growth there. Gina, I wanted to dig in on gross margins a little bit. I'm still trying to wrap my head around a 200 basis point decline. We haven't seen 84% subscription gross margins in ServiceNow since 2016, if I'm looking on my model correctly, I believe. You told us last year at this time that there's still an incremental 50 basis points of tailwind that you can get from the accounting change on useful life. So there's somewhere a 250 basis point offset that's driving down gross margins. Can you help us understand what that is, a little bit better? What's that added expense that had such a weight on gross margin heading into FY '23?

Operator:

We'll take our next question now from Alex Zukin at Wolfe Research.

Gina Mastantuono:

I won't quantify the exact renewal headwind. But what I would say is that if not for the early renewals, we would have beat our cRPO guide. And with respect to the NRR, while we don't comment on exact numbers, it was absolutely consistent and relatively close to the 125 that you quote.

CJ Desai:

Absolutely. So great to hear from you, Alex. I would say one of the products that we verticalized pretty early on was in the telco media and tech. -- back in -- started building that in 2019, seeing very strong traction, everything from order management to mid office to back office in telcos. And that product line which was created for that industry is now at top 10 telcos and continue to win market share and displace multiple systems, whether it's a telco company or a media company. Similarly, the public sector, we created a product for public sector as well as health care that is seeing strong traction as well. And overall, between the new products, horizontal products like we have done in the world of ERP on procure to pay or supplier life cycle management, combined that with some of these new industry products, we are winning 7-figure deals, sometimes much larger and having massive traction in that specific where customers are actually going live in 3 to 4 months.

Operator:

We can go next now to Brad Reback at Stifel.

William McDermott:

Yes. Thank you very much, Brad. As Gina said, we're going to be very intentional about how we manage the headcount in the corporation. We are protecting this house as a primary objective. And we have invested very heavily now for the last 3.5 years, for sure, on headcount. And we have what we need. Where we are investing, and we'll continue to invest, primarily will be coders, people that actually write the code and also people that are actually responsible for the customer relationship and carry a quota. So we're going to be very, very intentional. And I'm really super because we're in great shape on our workforce. We have really happy workforce. Our retention rates are better than ever. The Glassdoor ranking speaks to some of that. So what we are finding is because of our intentionality, we're getting 9s and 10s in here, and the people we are choosing to hire come from a pool of thousands and thousands and only the best get to go to ServiceNow. And I think that's going to build an even stronger ServiceNow going forward. So no problem with the workforce. Everything is about driving innovation or net new ACV, net new innovation, net new ACV. That's the ball game.

Operator:

We'll take our next question now from Keith Bachman of BMO.

Gina Mastantuono:

Yes, Keith, I'll tell you that 30% net new ACV -- net new customer ACV growth, we're really proud of in the quarter. We haven't given those metrics in prior quarters. Suffice it to say that we continue to see those net new customer ACVs growing as we are landing larger deals with new customers. And those new customers are able to expand with us more. So really strong growth in the quarter, but we've not consistently given that, but to say that we are continuing to see that grow. With respect to ITSM Pro, we've talked about penetration being at about 35%, and that continues to do well.

Gina Mastantuono:

It has continued to grow. We don't give that percentage every single quarter. We'll give it every time it hits the next five if that makes sense. But we absolutely are seeing Pro penetration continuing. CJ, I don't know if you want to add any

Operator:

We will go to Tyler Radke at Citi.

CJ Desai:

Absolutely. So let's first start with the cloud optimization question. Listen, our product line since day 1, whether you look at ITSM, ITOM or asset management, our ability to discover assets whether they are an on-prem cloud, private cloud, public cloud or multi-cloud has continued to be best-in-class. So we help our customer, they’re trying to optimize their power spend. That's great. If they're trying to move to public cloud and they want to accelerate that journey, that's great too. So our portfolio is best suited for meeting our customers where they are on that cloud journey and where they want to go. So I feel actually pretty good in terms of just our portfolio's relevance in this multi-cloud and how our different product lines can help them with their acceleration and optimization. And on observability, what was really encouraging for me in Q4 is that we had 3 of Fortune 100 companies decided to buy ServiceNow Observability solution and Lightstep at a meaningful scale. And these are real workloads that are really being monitored by our Lightstep solution. And as I think about 2023 milestones, as you know, that Tyler we bought company called Era, which provides log management solution. We will fully integrate that in our Observability platform. So we have not only primary observability solution, but also unified observability solutions that work across multi-states. So very optimistic going into '23.

Sarah Bowler:

Congrats to CJ, wonderful to see. Really, I think just given that you're operating in this, what feels like rarefied air, let me sort of flip things over a little bit and ask if there were any verticals that you haven't called out or regions in particular where you saw any softness or perhaps extra layers of scrutiny on overall spending?

Operator:

And again, ladies and gentlemen, we would like to thank you all for joining today's ServiceNow Q4 2022 earnings conference call. Again, that will bring us to end today's call. Thank you for joining us. Have a great afternoon. Goodbye.

Operator:

Good afternoon, ladies and gentlemen. Welcome to the ServiceNow Q3 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode and please be advised that this call is being recorded. [Operator Instructions] And now I'd like to turn the call over to Mr. Darren Yip, Vice President, Investor Relations. Please go ahead.

Bill McDermott :

Thank you very much, Darren, and I'll add my welcome to everyone joining today's call. ServiceNow had an outstanding third quarter. Looking at the top line results in constant currency, subscription revenue was 28.5% growth. cRPO growth was 25%. On profitability, operating margin was 26%. All three metrics are above our guidance, beating expectations once again. ServiceNow had 69 Q3 deals greater than $1 million. Our U.S. federal business had its best quarter ever in Q3. We saw strength across industries and business segments. Our performance was consistent globally with Europe executing especially well this quarter. Our renewal rate remains best-in-class at 98%. We are the largest organically grown enterprise software company. We have an unmatched combination of organic growth and profitability at scale. As these Q3 results demonstrate, we fully intend to maintain this leadership position. Regarding the operating environment, in recent quarters, we said that secular tailwinds were stronger than macro crosswinds. They are. Nothing we saw in Q3 changes this core thesis. Digital technology is a deflationary force. The enterprise digital transformation market is validated. The investment thesis is stronger than ever. Hybrid multi-cloud deployments, adoption of a modern data infrastructure stack, cybersecurity and risk management, AI and data analytics, remote work and collaboration, these trends are not only durable, their relevance is expanding. There'll be 750 million new applications built by 2025. In the U.S. alone, nearly 100 million workers will remain in hybrid environments. 27 billion connected devices will drive more data in cloud over the next three years. And ServiceNow's platform directly addresses all these challenges, which translates to numerous growth vectors for our business. I hear one thing from CEOs consistently. Anything we prioritize must generate results in weeks or months. This is the essence of the great reprioritization. In past decades, waves of enterprise systems were introduced to meet market challenges of those times, operating systems, databases, applications. What we see now is a generational shift from architectures built in the last century to platforms engineered for this one. If you look at the ERP market, we see customers at various stages of their move to the cloud. Some of the world's largest manufacturers, for example, are consolidating hundreds of old procurement processes into a modern workflow experience. This declutters the legacy environment, driving more than $1 billion in cost efficiencies for just one of our many ERP wins this quarter. We could do it because ServiceNow was born in the cloud. We integrate with everyone. We meet our customers wherever they are, any environment, any organizational structure, any operating model. Where there is complexity, we simplify. We are fast to deploy, fast to generate ROI. In this need for speed environment, the ServiceNow Platform is becoming the strategic center of gravity for our customers. In light of this, today, we're announcing a new initiative

Operator:

[Operator Instructions] We go first this afternoon to Samad Samana at Jefferies.

Bill McDermott :

Yes. I think Gina said it very well, Samad, when she said we're mission-critical and the Now Platform has really become the standard for digital transformation in a modern enterprise today. And we're solving so many challenges. Our customers need to drive automation and productivity. As you know, they're either not hiring, they're laying people off and they have to do more with less. We're built for that. They need the computers and the platforms to do the work so that people have a more pleasant experience on the employee side, and they require an experience no matter where they're working from, that's world-class. We take care of that. The customer service management has evolved from just the engagement layer of how I market to you, sell you, cross-sell you. It's really moved into the mid-office and the back office and back into the supply chain on how I can streamline with great efficiency, giving you the right product and the right form factor and price on time just as you expected it. And that end-to-end is all about the ServiceNow platform. And finally, you're seeing a breakthrough here on building net new innovation. Customers are going to have to do that for themselves and with partners. And we are also going into a co-creation mode with our partners in every industry and geo around the world. That's pretty stunning, and there's lots of use cases and examples. The big thing, Samad, is that C-level executives are looking to ServiceNow. They are calling us. They want to work with us. They see that we're the defining one. And that took some time to build and I think we're there now.

Gina Mastantuono :

Yes, it's a great question. And certainly, we are not immune to the macro environment, and we're certainly not blind to what's happening around us. Our ability to execute despite the macro is quite astounding. And I give amazing kudos to our incredible sales organization around the world. We are staying closer to our customers than ever before, checking in with them, making sure we understand the levels of approval that they need to go through, making sure that we understand what they need to get that deal across the line. We will maintain that level of rigor that you've seen us do in Q3. And so while certainly, there's more outlook on deals that are getting closed and there's more -- people are looking at deals closer, but we are closing them. Close rates are stronger and we feel really good about how we put that all into our guidance. And so macro is evolving but our sales force is staying so close to our customers and really driving superb execution.

Philip Winslow :

Congrats on just an awesome quarter. Bill, one of the things that you mentioned during your comments was sales capacity has never been higher and never has, and the coverage ratio for the year has not been higher. This is even on the context of growing sales and marketing headcount 30%. My question to you is, this is one of the biggest net add quarters in terms of employees in sales and marketing this year and over the past couple of years. You usually don't see a lot of salespeople moving to a new company in Q3 but they're doing that to ServiceNow. When you talk to these new employees and your management team, what are they saying about why they're coming to ServiceNow? And then Gina, you talked about continuing to invest in go-to-market there. You obviously hit 30% growth in Q3. How should we think about the exit rate for this year?

Gina Mastantuono :

And then on your question on actual sales and marketing hire, Phil, yes. ServiceNow is hiring and will continue to hire and are investing for growth. So we are absolutely committed to continuing to build up our world-class go-to-market organization and it's all about driving long-term growth and ensuring that we also are continuing to drive ramp rep productivity. It's really about ensuring that the opportunity that we see in front of us, that our sales and go-to-market teams are ready to drive that growth that we continue to see. So you'll see us continue to grow our sales, quota-bearing especially. We'll also be hiring our critical engineering heads. We're very much open for hiring these critical growth hires.

Operator:

We go next now to Sterling Auty at MoffettNathanson.

Bill McDermott :

Thank you, Sterling. It's an interesting question. It's always important to reinforce that the 20th century architectures were heavily invested in by our customers. And our desire is not to replace them. Our desire is to make them more relevant so they deliver modern value and a highly agile and experience-oriented way for employees, customers and partners. So those underlying systems, some of them that are point solutions, and they never should have been there in the first place, they do disappear. The core large, well-known brand systems, they remain, but with the agility of the ServiceNow Platform above them and our ability to automate the workflows and completely change the experience set, we're now reinventing the way supply chains run for the biggest auto manufacturers in the world. We're now taking procurement management to an entirely new level of procurement and finance organizations for the biggest retailers, manufacturers, freight companies around the world. They were double-digit wins, doing this for some of the largest companies in the world. So they're taking out huge costs. They are getting rid of point solutions. They're keeping the main ones and then they're automating for speed and agility and value on the ServiceNow Platform. The business cases are unbelievable. It makes one ask, why are we so generous with our pricing? If they can get $1 billion, can't we get a little more? That's the situation we're in here.

Keith Weiss :

Bill, congratulations on the new Chairman position, and congratulations on a great quarter in a difficult environment. My question is actually for Gina. You guys did a tremendous job in driving operating margins. At the same time, you're hiring to plan, right? And you're still aggressively hiring. Can you, one, talk to us a little bit about where you're seeing the efficiencies and sort of where you're able to kind of drive that incremental productivity out of the entire ServiceNow? And two, I was wondering if you could touch on free cash flow a little bit. It has been getting more seasonal over the years. This is the lowest free cash flow margin we've seen in quite some time. Were there FX impacts? Was there increased seasonality? If you could just give us any kind of visibility in terms of what happened on that side of the equation.

Keith Weiss :

Got it. So it sounds like much more linearity and FX headwinds than any significant change in invoicing terms or payment terms?

Operator:

Thank you. We go next now to Matt Hedberg of RBC Capital Markets.

Bill McDermott :

Yes, absolutely. Thank you very much for the question, Matt. Basically, if you look at what we're trying to do here, we are bringing a scalable, cloud-native log management solution and database that complements Lightstep's existing solutions to the world. And this is really exemplifying and accelerating our vision, which is essentially to unify telemetry, logs, metrics and traces and now deliver that truly unified observability workflow on one platform. And this is going to take huge costs out of the equation, and it's going to bring a much greater experience to all users involved because they'll avoid the confusing context switches they have to do now. So all the integration work that is necessary is being done. It is all integrated back onto the Now Platform and there's a road map to do that. But right now, we're extremely happy with the way Ben is leading. Era Software just makes us stronger, and we're super excited about the future of this business and what it can be. It's going to be interesting to watch this thing play out.

Alex Zukin:

Bill, I don't think we've heard you say the words procurement and supply chain more often than you have on this earnings call. And I guess I want to dive into that because after seeing SAP's results, after what Oracle was talking about, it does feel like there's a -- there's like a deferred amount of activity that's getting done in the back office. And I just want to see your take on kind of participating in that activity as you're talking about that driving, it seems like, some pretty material wins in the quarter. And then I guess maybe a follow-up for Gina is around linearity in the quarter. And also if there's a way to quantify the federal business seems like it, again, had the best quarter ever. Just how much of that was upfront or kind of self-hosted revenue recognition?

Gina Mastantuono :

And on your question, Alex, on linearity in the quarter, we actually had great linearity in Q3, our best ever. Really, really pleased with how the sales organization is, again, staying really close to the customers. Federal business had its best quarter ever this year in Q3 and outperformed. We had 16 deals over $1 million, one of which closed with over $20 million of net new ACV. Federal also saw great linearity in the quarter really because the platform is demonstrating such strong ROI that is really enabling them to get through the approval process faster. We're really seeing an increase in the volume of federal agencies that are really looking at their partnership with ServiceNow through an enterprise lens, right? So those deals are getting bigger, more strategic, more multiyear. And we're seeing cabinet-level agencies really trying to consolidate contracts at an enterprise level with us and standardize their spend on the Now Platform. So federal team just doing incredible work with their customers. With respect to hosted, we had about 3% this year -- sorry, this quarter, which is flat quarter-on-quarter but down 1% from last year Q3. And so really great linearity across the board. Hosted, flat quarter-over-quarter but down 1 point year-over-year, which is actually a headwind to that revenue growth, which means our revenue growth is even stronger. So really, really great results across the board.

Kash Rangan :

Congratulations, and what a change from the Microsoft earnings conference call yesterday. Bill, I wanted to get your perspective. You talked about the great reprioritization. Microsoft talked about how some new cloud workloads are being paused by the customers and they're optimizing existing workloads. So I just wanted to see, what is it that is different about the prioritization of ServiceNow in the face of other headwinds that we're starting to hear about in the public cloud? And how does this position the company for '23 looking into a more uncertain time? We all thought we're going to have a recession in '22. We sort of escaped it. Maybe it happens in '23 or maybe it doesn't. The great reprioritization that you talked about, Bill, how are customers viewing the value proposition, return on investment on ServiceNow relative to the cost of capital? And Gina, if you could care, how would you be approaching calendar '23 guidance? Are you going to be more conservative than usual, given the rising environment that we all appreciate?

Gina Mastantuono :

And Kash, on your question with respect to 2023, obviously, we'll provide more details on 2023 in January. Overall, as you're hearing from our tone, the demand that we're seeing for the Now Platform has remained resilient and strong. FX, as you know, has become a significant headwind, particularly over the last three months. Since the beginning of this year, we now see about a $400 million headwind related to FX in 2023. And we certainly don't think the macro environment is, all of a sudden, going to change as we enter into 2023. So when we think about guidance, we'll be taking all of these factors into account, as you would expect us to.

Brad Sills :

I wanted to ask about an update quickly on the SI channel. I think, Bill, in the past, you've said seven or eight of the top 10 global SIs with $1 billion-plus pipeline. That's just an astounding number when you think just a few years ago, that channel was almost non-existent. So just curious, how much of their productivity is contributing to your results here today? How do they give you that reach into these other departments that historically ServiceNow hasn't been and obviously, you're talking about ERP and back office, creator employee customer. You're seeing a ton of momentum there. Just wanted to get your thoughts on how important that channel is in bringing you into those types of opportunities and the traction you're seeing there.

Operator:

We go next now to Mark Murphy of JPMorgan.

Bill McDermott :

Yes, it's -- first of all, thank you for the question, Mark. It's really broad. If you look at Employee Workflows, they're 12 of our top 20 deals and we had seven deals greater than $1 million. And what we're helping customers do really is navigate this uncertainty that they're dealing with. And they've got to give these employees that they have, no matter where they work, a great experience. And it's not only limited to, I would say, recruiting, hiring, onboarding, training, certifying, providing all the services that the employee needs on one mobile app. And that includes off-boarding employees in a first-class way, which most companies forget to do, which really hurts their brand image. We care about all of that. But in addition to all of that, we're now in a world where customers are really pulling at us because they're like, "Hey, I'm not going to have as many people. And I really got to think about reorienting my business processes or rethinking how I automate things that I just haven't gotten to yet but I need to do it quick." So our ambitions are always in the billions. And this is another business where we're in billions. And I think we're just getting started on the employee experience journey. And I'll tell you why. If you look at even ourselves, there isn't a single employee in this company that could tell you a single system of record that might be in the infrastructure somewhere in our cloud. They have no idea. But what they do know, like Gina said earlier, everything that they do is on a mobile application on their phone, and it says ServiceNow because we completely workflow automated the entire corporation. So they don't know anything else. And what we're constantly hearing is people want to join because their onboarding experience is so great. And we don't lose employees. We have gotten lots of employees joining here that literally bounced out of another company in a week because they couldn't stand the onboarding experience and said, "This isn't for me." So everything having to do with the employee experience and the management experience. We launched in the Tokyo release a complete manager solution so we can manage their careers, their hierarchy of their training and development and they can also do that with their employees on the Now Platform. And all of this is happening in real time. So the system of record, again, we're not interested in being 1 of those, and we have no quarrel with any of them. We are interested in the experience and that's where the money is.

John DiFucci :

Bill, we've done a lot of work on the U.S. government opportunity. And you and Gina both mentioned the record results there in this quarter. As you know, this is the fiscal fourth quarter for the government and likely the strongest spending quarter of the year for that customer or vertical, I guess, it's a vertical. But can you talk about the opportunity for any spillover into next quarter or even next year? Or is this really sort of a use or lose it mentality, something -- is that something you can avoid in this vertical so it's always going to be material just like a third quarter thing?

Operator:

We go next now to Karl Keirstead of UBS.

Gina Mastantuono :

So I talked about the fact that one of the reasons why our cRPO beat in Q3 was related to 50 basis points of pull-forwards of Q4 renewals into Q3. And if you remember, on prior calls, I talked about the fact that this Q4 was a large renewal cohort because the fact that we were able to get some of them done early absolutely helped drive the RPO but also ramped our revenue beat as well. Expectation is that our Q4 renewal will be on par. We had 98% renewal rate in Q3. We expect similar levels in Q4, and so feel very good about the pace of renewals for the remainder of the year.

Michael Turits :

Congrats on a good job. So maybe to continue on that vein. My understanding is the expectation for the cRPO increase was primarily predicated on renewals and at par as opposed to expansion. So maybe can you comment on how the expansions have been going both on the early renewals and the prospects for those that you expect to renew in 4Q?

Operator:

Thank you. And ladies and gentlemen, that will conclude the ServiceNow Q3 2022 Earnings Conference Call. I'd like to thank you all so much for joining us, and wish you all a great evening. Goodbye.

Operator:

Good day, everyone, and welcome to the Second Quarter 2022 ServiceNow Earnings Conference Call. I would now like to turn today's call over to Darren Yip, Vice President, Head of Investor Relations. Please, go ahead, sir.