ServiceNow, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the ServiceNow Q3 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Lisa Banks, Vice President of Investor Relations. Thank you. Please go ahead, Madam.

Thank you. Good afternoon, and thank you for joining us for ServiceNow's third quarter 2019 earnings conference call. On the call with me today are John Donahoe, our President and Chief Executive Officer, and Bill McDermott, our incoming President and Chief Executive Officer. During today's call, we will review our third quarter financial results and discuss our financial guidance for the full year 2019. We'd like to point out that the company reports non-GAAP results in addition to and not as a substitute for or superior to financial measures calculated in accordance with GAAP. All financial figures we will discuss today are non-GAAP except for revenues and remaining performance obligations. To see the reconciliation between these non-GAAP and GAAP results, please refer to our press release filed earlier today, our investor presentation, and for prior quarters, previously filed press releases, all of which, including a replay of today's call, are posted at investors.servicenow.com. We may make forward-looking statements on this conference call, which are subject to risks, uncertainties, and assumptions. Please refer to the press release and risk factors in our SEC filings, including our most recent annual report on Form 10-K, and quarterly report on Form 10-Q for information on risks and uncertainties that may cause actual results to differ materially from those set forth in such forward-looking statements. I would now like to turn the call over to John.

Thanks, Lisa. Good afternoon, everyone, and thank you for joining us on today's call. Given our announcement yesterday, here's how we're approaching our call today. First, I'll give a brief overview of Q3 results and our 2019 annual guidance. Second, I'll provide a little more insight of my decision to leave ServiceNow and accept an opportunity to lead a company that I have been associated with and admired for a very long time. And finally, before taking questions, you'll hear from Bill, who will provide a little more context on why he chose ServiceNow and the opportunities he sees ahead. So let's start first with our third quarter results. We delivered another strong quarter, continuing our focus on driving customer success. Subscription revenues were $835 million, representing 35% year-over-year adjusted growth. This exceeded the midpoint of our previous guidance by $9 million, including the impact of FX. Subscription billings were $864 million, representing 29% year-over-year adjusted growth. This exceeded the midpoint of our previous guidance by $10 million, excluding the impacts of FX and duration. Our remaining performance obligations ended the third quarter at approximately $5.6 billion, representing 36% year-over-year adjusted growth. Current RPO was approximately $2.8 billion, once again representing 36% year-over-year adjusted growth. Our operating margin in Q3 was 26%, driven by hiring linearity and a shift in expenses that will be realized in Q4, And our free cash flow margin was 14%. Now for a peek under the hood. We closed 46 deals in the third quarter with ACB greater than $1 million, representing 84% year-over-year growth. And we now have more than 800 customers doing more than $1 million in business with us annually, which represents 32% growth year-over-year. And our renewal rate for the quarter remains strong at 99%. Our IT portfolio continues to have strong momentum. This quarter, we again saw 18 of our top 20 deals include three or more products. As you recall, we launched ITSM Pro late last fall, and we're seeing strong traction. Customers are upgrading from ITSM to ITSM Pro, and we're landing new customers to see the value in starting with ITSM Pro. Simply what's happening is customers who are pursuing digital transformation are investing in ServiceNow's full suite of IT products. They see the value of better together and of leveraging our entire product suite and unique platform. This is a clear trend. A leading company in financial services is one example. They enabled world-class IT, security, and risk, via automated workflows natively on our single strategic platform, the Now platform. Our HR business also had a strong quarter, and we closed one of our largest employee experience deals ever with a global distribution company. ServiceNow's employee service delivery solutions hide the complexity of cross-functional work, making it easy for employees to get the services they need. This is making work work better for people. In Q3, our New York release became generally available. New York extends new desktop and native mobile capabilities across the workplace at scale. This enables companies to make their employees' lives at work as simple, easy, and mobile-friendly as their lives at home. The New York release of the Now platform includes more than 650 innovations across IT employee and customer workflows. As you know, I am personally very excited about the native out-of-the-box mobile capabilities. For the first time, we have created consumer-grade mobile experiences for the enterprise, removing friction in everyday work. Employees can now easily find answers and seamlessly get stuff done across IT, HR, facilities, legal, and other departments. and they can do so from a modern mobile app powered by the Now platform. As a reminder, you can download a demo of this great mobile app from the App Store. Mobile technology was at the epicenter of the digital transformation in our lives at home, and we believe mobile technology will be at the very center of great experiences at work. Now, let me turn to full year 2019 guidance. As a reminder, For several years, we've used a very consistent methodology to manage FX. We simply take FX rates on the last day of the quarter and use those rates for the subsequent quarter. So, for example, the guidance we provided on our Q2 earnings call were based on FX rates as of June 30th, 2019. Now, during this quarter, those rates changed, impacting our Q3 results and annual guidance, So the guidance on today's call is based on FX rates as of September 30th, 2019. We provide complete transparency on the impact of FX in our Q3 results and 2019 annual guidance in the investor relations presentation. So for the full year 2019, we're carrying forward the $9 million in subscription revenue and the $10 million in subscription billings that exceed our previous midpoint guidance for the third quarter. So for the full year 2019, we expect subscription revenues between $3.240 and $3.245 billion representing 36% to 37% year-over-year adjusted growth. We expect subscription billings between $3.740 and $3.745 billion representing 32% to 33% year-over-year adjusted growth. We're maintaining our full year 2019 margin guidance as follows. Subscription gross margins of 86%, operating margin of 21%, and free cash flow margin of 28%. Now, before closing out our review of the quarter, let me just take a moment to update you on our CFO search. As you know, over the past several months, we've done a global search for a world-class CFO. And I'm delighted to say we've narrowed that search to a small group of exceptional finalist candidates. Now, obviously, because of our CEO succession, I slowed the final interviewing process to enable Bill to be able to pick his preferred candidate. And the good news is what Bill is doing now is meeting those candidates, and he expects to name our next CFO shortly. Now, I'd like to just take a couple of minutes to explain my decision. Let me just say up front that I believe deeply in ServiceNow, and I believe deeply in ServiceNow's opportunity. As I've said before, there is a clear cloud tailwind. This is a beautiful, as Bill calls it, clean strategic technology platform. Customers are leaning in and want to partner with our platform, and we have the ability to extend and expand across the enterprise. And I believe As much today as any time I've been here, we're very well positioned to get to $10 billion and move on our way to becoming a great enduring company. And to be honest, I have fully intended to be part of that journey. However, a unique situation with what is a unique company for me has emerged. Some of you may know that I have a 20-year history with Nike. I met Phil Knight and Mark Parker 20 years ago. And over the last five years, I've had the privilege of serving on their board. I deeply resonate with Nike's purpose. And as everyone at ServiceNow knows, I regularly use them as the gold standard of what a great company looks like. And I love sports. So when the Nike board reached out to me to ask me to become their next CEO, it was a calling I felt I had to pursue. But I will say it again, it is not in any way change my belief in ServiceNow and the opportunity ahead. And so the board and I have spent the last couple of months trying to identify the best successor in the world for ServiceNow. And let me just review the criteria we used and think about it. These are criteria that will enable us to get to $10 billion and beyond. We need to continue to elevate our relationships into the C-suites. We need to expand from IT across the enterprise. As a company, we need to continue to expand globally and build more industry relevance as we expand the number of industries we serve. We need to expand our go-to-market function and scale our entire organization. And most importantly, ServiceNow needs an authentic leader who is purpose-based, values-driven, and experienced. And I think You would share my enthusiasm and excitement that the board and I have that Bill McDermott has agreed to join as our next CEO. I will tell you, I have gotten to know Bill personally over the last three years. I consider him an excellent CEO that I have learned from and a good friend. So with no further ado, Bill, let me turn it over to you to talk a little bit about your decision to join ServiceNow.