ServiceNow, Inc.

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 speaker's prepared remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star 1 on your telephone keypad. And if you would like to withdraw your question, simply press star 1 again. And please note that we do ask that you please limit yourself to one question. And at this time, I would like to turn things over to Mr. Dharam Yip, Vice President, Investor Relations. Please go ahead, sir. Thank you.

Good afternoon, and thank you for joining ServiceNow's second quarter 2023 earnings conference call. Joining me are Bill McDermott, our Chairman and Chief Executive Officer, Gina Matantouno, our Chief Financial Officer, and CJ Desai, our President and Chief Operating Officer. During today's call, we will review our second quarter 2023 results and discuss our guidance for the third quarter and full year 2023. Before we get started, we want to emphasize that the information discussed on this call, including guidance, is based on information as of today and contains forward-looking statements that involve risks, uncertainties, and assumptions. We undertake no duty or obligation to update such statements as a result of new information or future events. Please refer to today's earnings press release and our SEC filings, including our most recent 10Q and 2022 10K, for factors that may cause actual results to differ materially from our forward-looking statements. We'd also like to point out that we present non-GAAP measures in addition to and not as a substitute for financial measures calculated in accordance with GAAP. Unless otherwise noted, all financial measures and related growth rates we discussed today are non-GAAP, except for revenues, remaining performance obligations, or RPO, current RPO, and cash and investments. To see the reconciliation between these non-GAAP and GAAP measures, please refer to today's earnings press release and investor presentations, which are both posted on our website at investors.servicenow.com. A replay of today's call will also be posted on our website. With that, I'll turn the call over to Bill.

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%, two points above our guidance. We had 70 deals greater than a million in net new ACV, which was up from 54 a year ago for 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 moat. 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 a million. ITOM was in 13 of the top 20, also with seven deals over a million. Together, security and risk combined for 17 of the top 20 with eight deals over a million. Customer workflows had a sensational quarter. It's best net new ACV growth in three years. Customer was in 16 of the top 20 deals with eight deals over a million. Employee workflows were in 14 of the top 20 with seven deals over a million. And creator workflows We're in 18 of the top 20 with eight deals over a 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 and video co-founder and CEO, Jensen Wang, joined us at Knowledge23 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's 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 in 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 of 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 Agents, 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 both 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 in 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 hyper automation 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 HRSD. 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 NVIDIA's to co-develop new use cases for the enterprise. We already have the most significant pharmaceutical, financial services, manufacturing, and healthcare companies engaged 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. The propensity to buy is there. Even as our underlying growth is already strong, as our Q2 results indicate, AI represents a market-making tailwind to ServiceNow. Intelligence is only relevant when it is delivered where work actually gets done. It's why our single architecture Single data model workflow platform has never been more relevant than it is right now. As AI goes to work, humans will be the real machines because in most cases, AI augments people. It doesn't replace them. At a moment when employers face a 17-year high in unfilled job openings, generative AI will lift human productivity so we can chase even bigger dreams for the global economy and for the world. With our integrated suite of automation technologies, including AI, RPA, and process mining, ServiceNow is uniquely positioned to lead the intelligence revolution, and we will. Looking broadly at the state of our business, we have the momentum. With our upcoming Vancouver release in September, our products and engineering team will deliver even more AI innovation. Our partner ecosystem has never been more invested than they are right now. We announced an expanded strategic partnership with Cognizant to accelerate adoption of AI-driven automation. We expanded our partnership with KPMG to co-develop joint offerings through our finance and supply chain workflows. We launched a new collaboration with Guidewire to improve insurance experiences. We're also seeing extensive third-party recognition of our products. ServiceNow has been recognized for AIOps, App Engine, and cloud observability by prominent industry analysts. From customer service to risk to employee experience and ERP simplification, we can go on and on. This has fueled our rise into the Fortune 500 for the first time. And this is another tribute to Fred Luddy's founding vision for a hungry and humble market-leading company. And we're only getting started. In closing, this is a dynamic period for the IT industry. Think about it this way. Every leader in every department, in every business, in every industry is writing a new playbook for the AI world. CEOs are sponsoring them. The C-suite across all functions is funding them. And for the few true platforms, the opportunity is bigger than ever. ServiceNow injects speed into the business architecture. Our platform has become the de facto standard for intelligent automation. We are a growth company. We are profitable and durable. And thanks to the relentless execution, our results speak for themselves. We believe in our people, our culture, our platform, and our partners. The world is changing. Imagination is the only limit. ServiceNow is on the move. The CEO I spoke to this summer summed things up perfectly. She said, and I quote, everywhere I go, people are talking about ServiceNow. Whatever you all are doing, it's working, end quote. That's one of the many reasons we proudly say now as ever, the world works with ServiceNow. Thank you all very much. I look forward to your questions, but first, Let me turn it over to our great CFO, Gina.