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spk13: 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. In the interest of time, we do ask that you please limit yourself to one question. I would now like to turn the conference over to Darren Yip, Vice President of Investor Relations. Please go ahead, sir.
spk21: Good afternoon, and thank you for joining ServiceNow's third quarter 2023 earnings conference call. Joining me are Bill McDermott, our Chairman and Chief Executive Officer, Gina Mastantuno, our Chief Financial Officer, and T.J. Desai, our President and Chief Operating Officer. During today's call, we will review our third quarter 2023 results and discuss our guidance for the fourth quarter and full year 2023. Before we get started, we want to emphasize that the information discussed on this call, including our 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 investment. To see the reconciliation between these non-GAAP and GAAP measures, please refer to today's earnings press release and investor presentation, 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.
spk06: 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 Sevidia, 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 that now engulfs millions of people in Israel and in Gaza. Our hearts break for the innocent on all sides. Even with optimism and 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 a million. Employee workflows had a stellar quarter with seven deals over a million and one deal over 10 million. From an industry perspective, this was the best U.S. federal quarter in ServiceNow's history. NNACV was up over 75% year over year. U.S. federal agencies are standardizing on a single platform with a core set of end-to-end solutions. We had 19 federal deals over a 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 in 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 Gen AI between 2023 and 2027. Gen AI 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 products. At ServiceNow, our strategy isn't about exuberance. It's about execution. We've carefully laid the groundwork for success and talent in 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 to ServiceNow. We have over 300 customers in our pipeline from every industry, every buying center, and every stage of testing. Our Gen AI 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 U.S. government agency selected our premium SKU offerings to be an early adopter of Gen AI. 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, Keller Performance, 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 had 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 half a 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, trained 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 operating 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 Answer, 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 in telecommunications, financial services, retail, and the public sector. And beyond any one industry, we increasingly see both intra and enter 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, Rise Up with ServiceNow. As one example, Future Skills Prime A digital skilling initiative 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 their ServiceNow workforce. Bottom line, it's all points to growing the 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 Knowledge23, it's clear the approach is working. The 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 Mastantuno. Gina, over to you.
spk14: Thank you, Bill. Q3 marks another quarter of strong execution as we once again significantly surpass the high end of our top-line growth and profitability guidance metrics. ServiceNow continues to demonstrate its resilience as the intelligent platform for end-to-end digital transformation. Customers are seeking enhanced productivity solutions in the current macro environment, and ServiceNow is delivering. In Q3, subscription revenues are 2.216 billion, going 24.5% year-over-year in constant currency, exceeding the high end of our guidance range by over 100 basis points. Amazing organic growth at massive scale. RPO ended the quarter at approximately 14.4 billion, representing 23.5% year-over-year constant currency growth. Current RPO was approximately 7.43 billion, representing 24% year-over-year constant currency growth and a 250 basis point beat versus our guidance. As Bill highlighted, Federal had its best net new ACV quarter ever, growing over 75% year-over-year. I want to give a quick shout-out to the Federal team who has just been crushing it. Among the other industries, transportation and logistics was very strong, growing over 100% year-over-year, followed by education, which grew over 75%. Manufacturing and TMT also saw robust growth. We had some outstanding achievements from a workflow standpoint as well. I'm pleased to announce that creator workflows crossed $1 billion in ACV and Q3, a monumental milestone. And our employee proskew saw over 100% growth in net new ACV year over year. Retention remained exceptional, with a renewal rate of 98% in Q3, reaffirming the essential role the NOW platform plays in our customers' operations. Our customer cohorts displayed solid expansion as the quarter closed with 1,789 customers contributing over $1 million in ACV, with 58% year-over-year growth in those contributing over $20 million. In Q3, we successfully closed 83 deals greater than $1 million in net new ACB, with four deals greater than $10 million. Notably, 18 of our top 20 net new ACB deals included eight or more products. By launching at the end of the quarter, we have also already closed four Gen I-related enterprise deals, and we're seeing strong pipeline builds for our plus SKUs. Turning to profitability, Non-GAAP operating margin was 30%, over 250 basis points above our guidance, driven by discipline spend management and the top line outperformance. Our free cash flow margin was 9%, up 300 basis points year over year. We ended the quarter with a robust balance sheet, including $7 billion in cash and investments. In Q3, we repurchased half a million shares as part of our first ever share repurchase program with the primary objective of managing the impact of dilution. As of the end of the quarter, we have approximately $1.2 billion remaining of the original $1.5 billion authorization. Together, these results continue to demonstrate our ability to drive a strong balance of world-class growth, profitability, and shareholder value. Moving to our guidance, we're raising the full year outlook to reflect the strength of Q3. As we have done all year, we continue to prudently factor the macro crosswinds into our guidance. This includes incremental FX headwinds from a strengthening US dollar. For 2023, we're raising our subscription revenues outlook by $48 million at the midpoint to a range of $8.635 billion to $8.640 billion, representing 25% year-over-year growth, or 25% on a constant currency basis. We're also raising our full-year operating margin target from 26.5% to 27%. And we continue to expect subscription growth margin of 84%, free cash flow margin of 30%, and gap-diluted weighted average outstanding shares of $206 million. For Q4, we expect subscription revenues between $2.320 billion and $2.325 billion, representing 24.5% to 25% year-over-year growth, or 23% to 23.5% on a constant currency basis. we expect CRPO growth of 20.5% or 21% on a constant currency basis. Notably, the strength of our federal business has resulted in a higher mix of 12-month contracts that will create a one-point headwind to Q4 CRPO growth and remain a headwind into 2024. We expect that these contracts will renew in 2024 as ServiceNow's federal contract renewal rates are 99%. We expect an operating margin of 27.5%, and we expect 206 million gas-diluted weighted average outstanding shares for the quarter. In conclusion, our team delivered an exceptional performance across the board. With a culture focused on customer success, our people have worked relentlessly to provide solutions to meet enterprises' needs, and it's showing in our robust results. Businesses are looking to consolidate vendors standardized on a platform with a core set of products so they can build a predictable and reliable roadmap to drive digital transformation. ServiceNow is that strategic platform. With the addition of our Vancouver release and the capabilities presented by GenAI, the window of opportunity is even more expansive than ever before. The result is a more powerful and intelligent platform that enables customers to ignite end-to-end action across the enterprise in ways not seen before. It's an exciting opportunity to further improve productivity and employee satisfaction, optimize processes, reduce costs, and create organizational agility. The possibilities are endless. Bill and I extend our gratitude to all our employees worldwide for their unwavering dedication and commitment that puts us at the forefront of this opportunity and further driving ServiceNow towards its ambition of becoming the defining enterprise software company of the 21st century. With that, I'll open it up for Q&A.
spk13: Thank you. If you would like to ask a question on the phone lines today, please press star 1 on your telephone keypad. To remove yourself from the queue, hit star 1 again. Please limit yourself to one question. We'll take our first question from Raimo Linschel with Barclays. Please go ahead.
spk02: Thank you. If I look at the mix on the product side, it looks like ITSM item was very strong this quarter. Can you a little bit speak to that? I sense it's probably the big federal deals, but maybe more broadly, what do you see in the different product categories? Many thanks and congrats from me.
spk05: 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 core of our core. So as Bill outlined, that we have very strong new logo business and new logos that matter, where we almost always land with ITSM and ITOM. And in general, we are seeing that ITSM continues to have Expansion rates, whether it's via ProSKUs or just recently added ProPlus. 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 their digital real estate.
spk11: We'll take our next question from Kash Rangan with Goldman Sachs.
spk04: Hello, thank you very much. Congratulations, Bill, CJ, and Gina. Outstanding results. Bill, 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 forever for this recession to happen. It's not happening. And I'm sure that CEOs that you do business with 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 in your sails, 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 groups. What does the growth curve look like with all these tailwinds ahead of you? Thank you so much and congrats.
spk06: Well, Cash, thank you. I think that's the reason why we've raised guidance on top of an outstanding quarter like this, because we have great confidence in the core business. All CEOs right now are either in a move to increase productivity because of the crosswind that you referenced in the macro, or take costs out. And obviously, while doing so, they also have the added challenge of new business model innovations, such as the auto industry now dealing with the transition to EV. What's unique about ServiceNow is digital transformation can deflect so many of the cost-intensive, labor-intensive procedures that companies have to deal with to properly serve their market. On top of that, you have one-third of the productivity of knowledge workers getting torn apart by swivel sharing between on average 13 individual applications a day. Now you add the productivity tailwind of generative AI on this once in a generation ServiceNow platform and you have achieved a very important business transformation. And I think right now CEOs are focused on business transformation. And when you can give them one common UX that is consumer grade, that integrates with the half a century old legacy mess that they have to contend with, and we can get the actions that they need done, done, done to achieve cost out, productivity in, and growth on, they're all about service now, now.
spk11: And that's why you're seeing these results, and they are sustainable. Amazing. Thank you so much. Very inspiring. Thank you, Cash.
spk13: We'll take our next question from Tyler Radke with Citi.
spk07: Yes, thank you very much for taking the question. So the beat on constant currency current RPO was one of the largest we've seen in quite a while. Could you just unpack that? Was that mostly federal, or was it broad-based? And then secondly, Gina, on the current RPO outlook for Q4, could you just help us understand the dynamic with the one-point headwind a little bit better? Did Q3 also face that headwind, given you booked so many of these large federal contracts? Thank you.
spk14: 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 early renewals. If you remember, we've been really prudent in how we've been forecasting early renewals given the current macro environment. And so the beat this quarter was two prongs, right? So strong net new ACV growth as well as strong early renewals. So your question on the impact of Q4 CRPO and the one-point headwinds. 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 there for a full year. But at the end of Q4, when one quarter of those contracts roll off the RPO, it means that there is a headwind to Q4. And because Q4, sorry, because federal was so, and the mix of federal and 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 stronger renewal rate at 99%. So as you think about the underlying health of the business going into 24, it remains very strong.
spk11: Thank you.
spk13: Thanks, Alex. We'll take our next question from Keith Weiss with Morgan Stanley.
spk18: Yeah, this is Sanjay Singh for Keith. I wanted to congratulate the team on the 24% constant on the current RPO growth. That was really impressive. You know, Bill, when I looked at what you were talking about in terms of Gen AI trials and, you know, landing for customers right at the end of the quarter, In terms of the team's expectation about adoption of ITSM ProPlus versus Pro, do you see a scenario where that adoption could potentially happen faster than the cadence of adoption that you've seen over the last five years with ITSM Pro? Appreciate the thoughts.
spk06: Well, I can tell you that we, first of all, 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 ProPlus and the transformational nature of what customers are now able to do on the Now platform has led to the single best pipe 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. Absolutely. Thank you, Bill.
spk05: And thanks for the question. So we have one data point from the last week of September, which I do not want to translate it to trend. However, we are having many, many conversations with some of the iconic companies and public sector customers around ServiceNow's generative AI offering. So when we launched in 2018 Q3, the pros cues, you know, there was a curve that followed over multiple quarters now 20 quarters uh and we know what that looks like with pro plus what i am seeing is it is no longer about the potential of generative ai where they are questioning is generative ai good for us in context of service now platform but the conversations have shifted to hey cj how long would we What does it take for us to implement? Does our data strategy need to be aligned? And what about security, et cetera? So the positive side of this is that we are seeing good demand. And on the cautionary side is we will work with our customers. They are learning, like Bill said, the four customers who leaned in and bought our products on the last day of the quarter. But as we move forward, we'll work with these customers. And as we get a couple of quarters under the belt, we will be able to tell you how this is looking versus pro. So pro plus versus pro.
spk18: I appreciate the additional thoughts, CJ. Thank you very much.
spk06: And Keith, one thing to keep in mind is pro is a necessary stepping stone to pro plus. So from a shareholder value creation standpoint, it's plus plus.
spk11: Well noted. Thanks, Bill. Thank you very much, Keith.
spk13: We'll take our next question from John Davucci with Guggenheim.
spk15: Thanks for taking my question. And Gina, thanks for all the detail around CRPO. That's really helpful in understanding that metric. And I know we've talked about this in the past, but I mean that. It's helpful. My question is really around the federal business, which has been really strong for at least a year. More than offsetting any commercial weakness when it happens, like maybe a year ago or so, and just adding to what at least what I think is surprising commercial strength, as cash sort of hit on that, in periods like this quarter. I guess my question is how sustainable is that federal business in regards to new ACV, which it sounds like it just continues. It's like the Energizer bunny. It just sort of keeps on giving.
spk06: Yeah, you know, John, I'll start it 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 a million, including three over 10 million with the U.S. Air Force as the third biggest deal in the history of ServiceNow. And what we're seeing is is across all areas, you know, 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 Gen AI offerings, for example, are really reinforcing our ability to help accelerate their transformation journey. And they're seeing really tremendous, tremendous opportunity in Gen AI 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 you 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, We're 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.
spk14: The only thing I would add, and Phil, fantastic answer. The only thing I would add, Sean, is that this is durable demand. The federal agency's digitization agenda is only growing, and the success that we've had at federal, we absolutely have the ability to replicate that outside of the U.S. and public sector around the world.
spk10: Thank you very much.
spk14: Thanks, John. Thank you, John.
spk13: We'll take our next question from Mark Murphy with J.P. Morgan.
spk19: Thank you very much. Phil, 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 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?
spk06: Yeah, I'll start it off and then please CJ feel free to add your opinion on this as well. But our partnership with Microsoft is really geared to open additional addressable market for ServiceNow. And we're doing that by creating an expanding co-sell motion with Microsoft's enterprise sales team. So that would talk to your one-two punch. And ServiceNow is really helping streamline their migrations to Azure, while Azure exposes us to a much wider spectrum of customers. So we saw the partnership influence deals across Geo's and Q3, including government wins in Americas and APAC, as real driving forces between both Microsoft and ServiceNow. And we really are confident that the partnership and the synergy with Microsoft does enable us to bring value to more customers and do so at an unprecedented speed. And I do want to say that we've been friends with Satya, myself, on a personal level for a long time. And we've done a lot of business together. And the friendship that exists with CJ and the engineering team at Microsoft is very rock solid. And we trust each other. And we see that our mutual interests get better by working together. But also, we're doing it in the name of the customer. And I think that's the big thing. And I just want to compliment CJ and our engineering team, not just for the 5,000 new innovations they brought to the platform this year. That would have been enough. But also for the hands-on relationship with great partners like Microsoft, because you've got to remember, everything we have has been integrated into Microsoft, from Office 365 to Dynamics to Teams to Azure to AIOps. It's pretty amazing when you think about the engineering work and talent that went into putting this together. So this isn't just like, let's go to market and two is better than one. This is deep technical integration to serve customers at an unprecedented level. Bill, you said it well. Mark, the only thing, great to hear from you.
spk05: 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're 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.
spk19: Thank you for that extra texture, and congrats.
spk11: Thank you very much, Warren.
spk13: We'll take our next question from Carl Kierstad with UBS.
spk20: 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 rev rec. So I'm just curious, you laid out the impact on CRPO, but how does that strong Fed quarter that you saw in September change? 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's more upfront reference. Much appreciated.
spk14: Yeah, it's a great question, Carl. Actually, quarter over quarter, year over year, on-prem has remained consistent. So there hasn't been an impact. And so the strength in our revenue in the quarter was the result of extremely fantastic execution for the team.
spk11: Okay. Good to hear. Thanks. Thank you.
spk13: We'll take our next question from Greg Moskowitz with Mazuho.
spk16: Okay. Thank you very much. So it's really interesting that you signed four large deals on September 30th, literally right after the availability of Vancouver and now it's this. And it sounds like your Gen AI tech was a clear catalyst, if not the catalyst, for these transactions. So I guess for Bill or CJ, I assume these were all existing customers, but did they all purchase ProPlus? Did any of them purchase EnterprisePlus? Are any of them deploying your new text-to-code functionality? Just curious to hear any additional color that you might be able to share. Thank you.
spk05: Hey, Greg. Thanks for the question. I'll take this question. I would say just to summarize, because we, in the Vancouver release, launched NavAssist, for our four flagship product lines, which is ITSM, HR, customer service, and creator. So we'll 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're solving for, all of them are resonating really well. So this was driven mainly on ProPlus. So these were Pro customers who also bought ProPlus. 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 rollout. Now we want to buy ProPlus 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, you know, very strategic and significant wins. As we move forward, I will 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've 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.
spk11: That's fantastic. Thanks, CJ.
spk13: We'll take our next question from Kirk Matern with Evercore ISI.
spk09: Hiya. Thanks very much and congrats on the quarter. Bill and CJ, I was wondering if you could just talk about the concept of starting to deliver AI solutions that are more vertically oriented. You know, how far away are you from that? How much of the verticalization do you want to take on and how much do you want to leave to your partners to sort of you know, take some of these use cases with GenAI into verticals with specific vertical technology. Thanks.
spk05: All right. 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 a similar question was asked. We are first prioritized on our core set of use case that cut across every single industry. We are very focused on that via ITSM customer service, HR, as well as our creators. As we look forward, though, there are specific use cases within a financial services or a healthcare types of customers or even governments. I'll give you an example. For 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 customers. 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 core workflows, we will definitely be prioritizing financial services and TMT moving forward.
spk11: Thank you.
spk13: We'll take our next question from Alex Zukin with Wolf Research.
spk10: Hey, guys. Congrats on another great quarter. Maybe just two quick ones for me. Clearly, you know, the story of this quarter was the unbelievable federal growth that you guys posted. Maybe ex-federal, to the extent of, you know, the incremental challenges or lack of thereof from the macro and pipelines, like what's the story of the quarter ex-fed? And then some of the deals that you guys referenced either on the ProPlus side or just the very large deal side, like maybe talk a little bit about the competitive environment. Are you taking them away from some of your front office peers or kind of how does that shape up as you look at the pipeline?
spk05: Hey, Alex. Thanks for the question, CJ. First of all, You know, yes, federal had a phenomenal quarter and it has been talked about by both Bill and Gina, but we also saw strengths 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 without 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 you know now customers are asking us this question that we want our employee productivity to be high and you know what is ServiceNow solution because employees waste too much time swivel sharing or looking for information So we saw significant growth there, but the growth was across the board, even from a workflow perspective, and 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's strategy is very specific to ServiceNow use cases and One of the things that I realized after having this ProPlus conversations with customers on a large sample size, that generative AI, or our ProPlus Q, is a productivity multiplier. It's not a productivity enhancer. So 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 figure out what are the pricing and other things. So competitive dynamics-wise, From a generative AI standpoint, or overall this pro plus Q, it is still in the context of service now. How much value will they get? How fast will they get that value? And how much they are willing to pay?
spk06: And Alex, if I may build on what CJ said, I can give you some additional color if you like. You know, one thing that might be of interest to you is in America is the number of 5 million plus deals. actually more than quadrupled year over year. And the number of 10 million plus deals doubled year over year. And I think as CJ laid out beautifully, technology and employee workflows were enormously successful. And in EMEA, our 1 million plus deals grew 70% year over year, which means that the platform and multiple components of the solutions that our great engineering team builds is resonating. And we're seeing particular uplift now in government and manufacturing. And one interesting fact, we have these world forums coming up in London, Paris, Frankfurt, and Rotterdam. And we have a billion-plus pipeline that's registered for those events. So we feel good about that. And APJ, when you think about it, their one million-plus deals increased 40% year over year. And Japan is continuing to impress us with the unprecedented opportunity of the world's third largest economy, as Germany is as well. So we're seeing lots of real growth opportunities on the global stage, and I think Gina pointed that out earlier as well.
spk10: Super insightful, guys. Thank you very much.
spk11: Thank you. Thanks, Alex.
spk13: We'll take our next question from Brad Sills with Bank of America.
spk12: Oh, great. Thank you so much. It looked like an uptick here in headcount this quarter. Sales and marketing hires, net ads looks like more than 500, R&D almost 400. We'd 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.
spk14: Yeah, Brad, listen, this is a tale of continued execution. We've been very focused on adding heads and investing in our R&D resources and our quota-bearing sales. And so you will continue to see us invest in those critical areas for us. And that's been something that we've been doing for quarters now. And so we'll continue to add the quota-bearing sales, the direct sales folks as we enter into 24. You could expect to see similar levels of growth as we enter the following year. So feel really good about where we've been investing in those same areas that we've been talking about, quarter bearing, direct sales heads, as well as critical key engineering as we think about the great innovation that comes from our R&D and engineering teams across the world.
spk11: Thank you.
spk17: take our next question from michael turn with wells fargo securities hey great uh thanks 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 has 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 of the initial value you're seeing from the Gen AI capabilities, but are there other swing factors we should keep in mind? Understanding Q4 is very important, but anything you can add is useful. Thanks.
spk14: Yeah. You know, Michael, thanks for the question. We don't provide formal fiscal year guidance, right, until next quarter. Given our increase in revenue this year, we remain ever confident in the goals that we put forth back in May at Analyst Day for 2024 as well as 2026. The strength of our underlying business does provide solid momentum and the potential for upside heading into 2024. But as you said, Q4 is a big quarter for us. We expect great things. but it has a significant impact on next year. So we'll wait for the formal guide, but feel very, very confident in the numbers that we laid out for you back in May, and stay tuned as we head into 24.
spk11: Well said. Thank you. Thanks, Michael.
spk13: We'll take our next question from Samad Samana with Jefferies.
spk01: Hey, Gina, I actually wanted to follow up on that. I had a different version of that question, which is just more precisely on Gen AI. When you gave the outlook at the time of the analyst day, there was obviously already a lot of discussion about AI, but the products had been rolled out. So when you gave the 24 targets, did that embed any potential impact from Gen AI specifically, or was that something that was just on the horizon or on the come that wasn't included? Just for clarification, I've gotten the question a lot.
spk14: Sure, yeah, Samad, great question. If 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 plans, gen AI was part of that. That being said, the interest and the understanding and the excitement about Gen AI today versus back in May is extremely exciting to us. And so if your question is, is there a potential upside as a result of Gen AI? Absolutely. But one quarter does not a trend make. So we will absolutely continue to keep you posted on the adoption rate of our Gen AI 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 Gen-I goes for us. But rest assured, ServiceNow is going to be a winner in the Gen-AI space. And we're extremely excited about pipeline build and where we are today.
spk01: Great. And Bill, if I could squeeze one in for you. You've talked about how much interest and buzz that's been generated and how it's increased the velocity of conversations. When you think about your board-level conversations, are you seeing that the budget that's being carved out for spend on Gen AI, is that being taken away from other parts of the overall IT budget? Or is that, hey, this is a strategic imperative and we need to find the money, whether we're growing our IT budget or not? Just how are they thinking about those dollars?
spk06: Yeah, Samad, the CEO's all have boards of directors and they don't want to show up without a Gen AI 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 discussions 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 customer's eyes. And if I'm them, 7% may or may not get it done. I might look to GNA 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. And I do think that is one of the interesting questions 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 strategy. Now, generative AI across platforms that matter, and there's only a few, and we're one of them, is really, to me, going to get a very nice tailwind investment in 2024, regardless of the macro.
spk11: Great. I really appreciate you guys taking my question. Thank you. My pleasure, Saman. Thank you. Thanks, Saman.
spk13: We'll take our next question from Derek Wood with TD Cowan.
spk03: Oh, great. Thanks for taking my questions. I guess either for Bill or CJ, but I was hoping you could expand on your new AI Lighthouse program with NVIDIA and Accenture. You guys announced this initiative a couple months ago. It'd be great just to get a bit more color on the undertakings around this program and how these particular partners are helping to drive more kind of generative AI investments on the ServiceNow platform.
spk06: Yeah, I'll start off and then CJ can build on it. I'd like to first acknowledge NVIDIA in particular for being 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, recognizing that one of the great brands and great companies of the world is using ServiceNow to transform their company on our platform with generative AI is such a compliment. And so I just want to say thank you, Jensen. Thank you, NVIDIA, for being a great partner. And yes, with regard to Accenture and Julie and so forth, we are really doing some great things with Accenture. They're a fantastic partner. And we're building now generative AI applications 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'm 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 and generative AI will fuel a completely new frontier of solutions and offerings in the global economy. And I think that this has 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. DJ? Absolutely, Bill.
spk05: Right on. And Derek, you know, one of the things with this Lighthouse program that we were solving for is have a great technology partner. And Jensen and the team are a great technology partner. Most of them, most of us know NVIDIA as a great, what most do not know is that NVIDIA's software team is working very closely with ServiceNow's engineering team to really innovate on generative AI. And that is a very important point as part of this Lighthouse program is the engineering collaboration between NVIDIA and ServiceNow and a software layer which obviously then pushes the hardware in the right direction. And then, you know, when these customers, you know, we talked about the four customers, there'll be many who start using this product as they need to get adopted. Besides Accenture, there will be other partners that we are also training, enabling, so that they can implement really, really fast the solutions that come out of ServiceNow. So overall, this is a holistic strategy, engineering collaboration, and as Bill said, ecosystem collaboration. so that we can deliver the value for our customers. Customers' demands are high on the value that we'll deliver, and we need a great set of friends between technology and system integrators to deliver that value.
spk11: Thank you for that, Keller. Thank you.
spk13: And we have time for one last question. We'll take that question from Matt Hedberg with RBC Capital Markets.
spk08: 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.
spk05: Absolutely. So, you know, I would say observability is still fundamentally a big market. It's a big market that continues to grow. We started with LightStep and as you are aware that they provided a great solution for tracing and with OTL as an open telemetry they have done some phenomenal work. Then we added the metrics capability and just end of September we finally added logging capabilities. So now we feel that we have a full-blown cloud observability solution that we can take to the enterprise market and we will compete head-on for the types of use cases that we need to with whoever we need to. And that's how I look at it. So I'm optimistic. We have a lot of work to do. Finally, the product is there, full-blown cloud observability product between metrics, traces, and logging, and we are ready to go.
spk11: Thank you, Matt.
spk13: And that does conclude today's presentation. We thank you for your participation, and you may now disconnect.
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