908 Devices Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 25, 2023

There are 10 speakers on the call.

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 speakers' 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.

Operator

I would now like to turn the conference over to Darren Yip, Vice President of Investor Relations. Please go ahead, sir.

Speaker 1

Good afternoon and thank you for joining ServiceNow's 3rd quarter 2023 earnings conference call. Joining me are Bill McDermott, our Chairman and Chief Executive Officer Gina Masentuno, our Chief Financial Officer and CJ Desai, Our President and Chief Operating Officer. During today's call, we will review our Q3 2023 results and discuss our guidance the Q4 and full year 2023. Before we get started, we want to emphasize that the information discussed on this call, Including our guidance, it's based on information as of today and contains forward looking statements that involve risks, uncertainties and assumptions. Please undertake no duty or obligation to update such statements as a result of new information or future events.

Speaker 1

Please refer to today's earnings press release and our SEC filings, including our most recent 10 Q and 2022 10 ks, are factors that may cause actual results to differ materially from our forward looking statements. I'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 discuss 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 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.

Speaker 1

With that, I'll turn the call over

Speaker 2

to Bill. 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 Savidio was at the Supernova Music Festival.

Speaker 2

He was murdered And 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 in short supply, we choose to honor the dream of a peaceful and prosperous future for the Middle East region.

Speaker 2

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.

Speaker 2

We had 83 deals greater than $1,000,000 in net new ACV, up from $69,000,000 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 3rd consecutive quarter. ServiceNow's traction As the intelligent platform for end to end digital transformation has intensified, all of our workflow businesses We're in 14 or more of the top 20 deals: ITSM, ITAM, Security and risk customer, employee and creator. Within our technology workflows, Security and risk had a very strong quarter with 10 deals over $1,000,000 Employee workflows had a stellar quarter with 7 deals over $1,000,000 and one deal over $10,000,000 From an industry perspective, this was the best U.

Speaker 2

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.

Speaker 2

We had 19 federal deals over $1,000,000 including 3 deals over $10,000,000 Our top deal in the quarter, the United States Air Force was the 3rd largest deal in the company's history. You'll hear from Gina that this performance has tightened 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.

Speaker 2

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 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 $3,000,000,000,000 Will be spent on AI and Gen AI between 2023 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.

Speaker 2

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.

Speaker 2

We released product. At ServiceNow, our strategy isn't about exuberance, it's about execution. We've carefully laid the groundwork for success In talent and resources and technology, this investment is accelerating our already robust pipeline With customers lining up to be 1st 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. Gen AI represents a tailwind of growth for ServiceNow.

Speaker 2

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 29. That left us one day In Q3, we signed deals and we signed 4 large deals. A U. S. Government agency selected our premium SKU offering 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.

Speaker 2

NVIDIA is accelerating its own ServiceNow journey with generative AI. Among other leading companies, Teleperformance Join ServiceNow's AI Lighthouse program. They will collaborate on new generative AI use cases That boosts 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 1000000 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.

Speaker 2

Phillips, Mars, Bank of California, Cleveland Clinic, the U. S. 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.

Speaker 2

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.

Speaker 2

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.

Speaker 2

Deloitte will become a pioneering partner integrating our generative AI capabilities And to 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 Anser, 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 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.

Speaker 2

As one example, Future Skills Prime, a digital skilling initiative of the Indian government We'll 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 all points to growth for ServiceNow. In closing, we are building a company for the ages. By concentrating on customer value, we are creating immense shareholder value.

Speaker 2

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. The 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.

Speaker 2

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. The profitable growth profile of this company speaks for itself. The market is there for us and now we are focused on Q4, Delivering a strong full year and a fast start in 2024 as well.

Speaker 2

Thank you for your time today. I look forward to your questions. Now I'll turn it over to our outstanding CFO, Gina Mastentuno. Gina, over to you.

Speaker 3

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 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 were $2,216,000,000 growing 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 $14,400,000,000 representing 23.5% year over year constant currency growth.

Speaker 3

Current RPO was approximately $7,430,000,000 representing 24% year over year constant currency growth at 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 TMC also saw robust growth.

Speaker 3

We had some outstanding achievements from a workflow standpoint as well. I'm pleased to announce that Creator Workflows crossed $1,000,000,000 in ACV in Q3, A monumental milestone and our employee pro SKUs saw over 100% growth in net new ACV year over year. Retention remained exceptional with the renewal rate of 98% in Q3, reaffirming the essential role the NOW platform plays in our customers' operation. Our customer cohorts displayed solid expansion as the quarter closed with 1789 customers contributing over $1,000,000 in ACV, With 58% year over year growth in those contributing over $20,000,000 In Q3, we successfully closed 83 deals greater than $1,000,000 in net new ACV with 4 deals greater than $10,000,000 Notably, 18 of our top 20 net new ACV deals Turning to profitability, non GAAP operating margin was 30%, over 2 50 basis points above our guidance, driven by disciplined spend management and the top line outperformance. Our free cash flow margin was 9%, up 300 basis points year over year.

Speaker 3

We ended the quarter with a robust balance sheet, including $7,000,000,000 in cash and investments. In Q3, we repurchased 500,000 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 $1,200,000,000 remaining of the original $1,500,000,000 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.

Speaker 3

We are 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 U. S. Dollar.

Speaker 3

For 2023, we are raising our subscription revenues outlook by $48,000,000 at the midpoint to a range of $8,635,000,000 to $8,640,000,000 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%

Speaker 4

to

Speaker 2

27%.

Speaker 3

And we continue to expect subscription gross margin of 84%, free cash flow margin of 30% And GAAP diluted weighted average outstanding shares of 206,000,000. For Q4, we expect subscription revenues between 2,320,000,000 at $2,325,000,000 representing 24.5% to 25% year over year growth for 23% to 23.5 percent on a constant currency basis. We expect CRPO growth of 20.5% for 21% on a constant currency basis. Notably, the strength of our federal business has resulted in a higher mix of 12 month contracts and will create a one point headwind to Q4's 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%.

Speaker 3

We expect an operating margin of 27.5 percent and we expect 206,000,000 GAAP 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 and standardize on a platform with a core set of products so they can build a 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.

Speaker 3

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 and A.

Operator

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

Speaker 5

Thank you. If I look at the mix On the product side, it looks like ITSM item was very strong this quarter. Can Can you a little bit speak to that? I sense it's probably the big federal deals, but maybe more broadly what you see in the different product categories. Many thanks and congrats from me.

Speaker 5

Hi, hi, Mohit. 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.

Speaker 5

So as Bill outlined That we had 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 Pro SKUs or just recently added Pro Plus. And with Itom and our AI ops strategy, we We continue to execute on not only the product roadmap, but how our customers are leveraging those innovations

Operator

We'll take our next question from Kash Rangan with Goldman Sachs.

Speaker 4

Hello. Thank you very much. Congratulations, Bill, CJ and Gina. Outstanding results. Bill, we've all been waiting for this recession.

Speaker 4

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 am sure that CEOs that you do business with are having somewhat cautious the last 3 to 4 quarters. But it looks like things are stable.

Speaker 4

And With the tailwind of potentially a soft landing, if I could use that expression, a software landing and AI has winded in your sales, What does the company's growth prospects look like in 'twenty four 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.

Speaker 2

Well, Kash, thank you. I think that's the reason why we've raised our 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 increased productivity Because of the crosswinds that you referenced in the macro, Fort McBride take cost out. And 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 1 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.

Speaker 2

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 ServiceNow now. And that's why you're seeing these results and they are sustainable.

Speaker 1

Amazing. Thank you so much. Very inspiring.

Speaker 2

Thank you, Kash.

Operator

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

Speaker 1

Yes. Thank you very much for taking the question. So the beat on constant currency current RPO was one of the largest we've In quite a while, could you just unpack, 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.

Speaker 3

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 2 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.

Speaker 3

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 2 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 1 year out, right?

Speaker 3

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 1 quarter of those contracts roll off the RPO, it means that there is a headwind to Q4. And because federal was so strong and the mix of federal in Q3 It was stronger than we've ever seen before. There is that headwind into Q4.

Speaker 3

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 'twenty four, it remains very strong.

Speaker 2

Thank you.

Speaker 3

Thanks, Alex.

Operator

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

Speaker 6

Yes. This is Sanjit Singh for Keith. I wanted to congratulate the team on the 24% constant on the current RPO growth. That was really impressive. Bill, when I looked at what you were talking about in terms of GenAI trials and landing for customers right at the end of the quarter, In terms of your the team's expectation about adoption of ITSM Pro Plus versus Pro, Is there do you see a scenario where that adoption could potentially happen faster than the cadence of adoption that you've seen over the last 5 years with IPSN Pro.

Speaker 6

Appreciate the thoughts.

Speaker 2

Well, I can tell you that we first of all appreciate your question, 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 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 C. J. Give you some color on individual customers and some of the actual stories that I think you'll find illuminating.

Speaker 2

Absolutely. Thank you, Bill, and thanks

Speaker 5

for the question. So we have one data point from the last 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 Pro SKUs, that was a curve that followed over Multiple quarters now, 20 quarters, and we know what that looks like. With Pro Plus, what I'm 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 ServiceNow platform, but the conversations have shifted to, hey, CJ, how long would we What it takes for us to implement?

Speaker 5

Does our data strategy need to be aligned? And what about security, etcetera? 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 4 customers who leaned in and bought our products on the last day of the quarter.

Speaker 5

But as we move forward, we'll work with these customers. And as we get couple of quarters under the belt, we will be able to tell you how this is looking Versus Pro. So Pro Plus versus Pro.

Speaker 6

I appreciate the additional thoughts, C. J. Thank you very much.

Speaker 2

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 a plus plus.

Speaker 6

Well noted. Thanks, Bill.

Speaker 2

Thank you very much, Keith.

Operator

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

Speaker 7

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.

Speaker 7

My question is really around the federal business, which is really it's 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.

Speaker 5

Yes. John, I'll start it off and then let Gina give you some of

Speaker 2

her color as well. But our federal business, As I said, we 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 1,000,000 Including $3,000,000 over $10,000,000 with the U. S. Air Force as the 3rd biggest deal in the history of ServiceNow.

Speaker 2

And what we're seeing 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 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 GenAI on our platform. And we're already I've seen 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.

Speaker 2

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

Speaker 5

run business.

Speaker 3

The only thing I would add and Phil's fantastic answer, the only thing I would add, John, is that this is durable Demand. The federal agencies, the 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. In public sector around the world.

Speaker 7

Thank you very much.

Speaker 3

Thanks, John.

Speaker 2

Thank you, John.

Operator

We'll take our next question from Mark Murphy with JPMorgan.

Speaker 8

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 1 two punch with The Azure CoPilot and NowAssist.

Speaker 2

Yes. I'll start 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 Enterprise sales team. So, that would talk to you one two punch. And ServiceNow is really helping streamline There are migrations to Azure, while Azure exposes us to a much wider spectrum of customers.

Speaker 2

So we saw the partnership influence Deals across geos in Q3, including government wins in Americas and APAC, has 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 interest 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 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.

Speaker 2

So this isn't just like Let's go to market and 2 is better than 1. This is deep technical integration to serve customers at an unprecedented level. Well, you said

Speaker 5

it well. Mark, the only thing good to hear from you. The only thing I would add is the engineering collaboration It's 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?

Speaker 5

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

Operator

We'll take our next question from Karl Keirstead with UBS.

Speaker 8

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 Rex, 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's more upfront rev rec. Much appreciated.

Speaker 3

Yes. 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.

Speaker 8

Okay. Good to hear. Thanks.

Speaker 3

Thank you.

Operator

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

Speaker 9

Okay. Thank you very much. So it's really interesting when you signed 4 large deals on September 30, it's literally right After the availability of Vancouver and now assist, and it sounds like your Gen A iTek was a clear catalyst, if not the catalyst For these transactions, so I guess for Bill or C. J, I assume these were all existing customers, but did they all purchase Pro Plus? Did any of them purchase Enterprise Plus?

Speaker 5

Hey, Greg. 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 4 flagship product lines, which is ITSM, HR, Customer service and creator. So, we'll start with that.

Speaker 5

And those are all resonating whether our customers want Text to core 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 serving for, all of them are resonating really well. So this was driven mainly on Pro Plus. So these were Pro customers who also bought Pro Plus. So one example, One of the customers who did buy this on September 29 specifically said to me, hey CJ, We had the most successful ITSM rollout.

Speaker 5

Now we want to buy Pro Plus and they are 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 talk about our employees, But also our end customers. So these 4 specific transactions were across the board, resulting in You know 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 model need to be fine tuned for one customer at a time.

Speaker 5

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 compliment, 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.

Speaker 9

That's fantastic. Thanks, C. J.

Operator

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

Speaker 1

Hi, thanks very much and congrats on the quarter. Bill and C. J, I was wondering if you could just talk about the concept of starting to deliver AI Solutions that are more vertically oriented. How far away are you from that? How much of the verticalization do you want to take on?

Speaker 1

And how much do you want to leave to your partners Just sort of take some of these use cases with JNai into verticals with specific vertical technology. Thanks.

Speaker 5

Correct. So, first of all, Kurt, thank you for the question. When we started and yesterday, we had our Board of Directors meeting and 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 creator offerings.

Speaker 5

As we look forward though, There are specific use cases within a financial services or the 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.

Speaker 1

Thank you.

Operator

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

Speaker 8

Hey, guys. Congrats on another great quarter. Maybe just two quick ones for me. Clearly, the story of this quarter was the unbelievable federal growth that you guys Posted. Maybe ex federal, to the extent of the incremental challenges or lack thereof from the macro and Pipeline, like what's the story of the quarter ex Fed?

Speaker 8

And then some of the deals that you guys referenced either On the Pro Plus side or just a 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?

Speaker 5

Yes, Alex. Thanks for the question. This is C. J. First of all, yes, Federal had a phenomenal quarter and it has been talked about by both Bill and Gina.

Speaker 5

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 without strength 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 solution because employees waste too much time We will sharing or looking for information. So we saw significant growth there, but that 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.

Speaker 5

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 Pro Plus conversations with customers on a large sample size that generative AI or our Pro Plus 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.

Speaker 5

So competitive dynamics wise, from a generative AI standpoint or overall this Pro Plus Q, 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 are willing to

Speaker 2

And Alex, if I may build on what CJ said, I can give you some additional color If you like, one thing that might be of interest to you is in America is the number of 5,000,000 plus deals, Actually, more than quadrupled year over year and the number of 10,000,000 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 1,000,000 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 $1,000,000,000 plus pipeline that's registered for those events. So we feel good about that.

Speaker 2

And APJ, when you think about it, 1,000,000 plus deals increased 40% year over year, and Japan is continuing to Impress us with the unprecedented opportunity of the world's 3rd 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.

Operator

We'll take our next question from Brad Sills with Bank of America.

Speaker 8

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 and 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 and D. Thank you.

Speaker 3

Yes. Brad, listen, this is a tale of continued execution. We've been very focused on Adding heads and investing in our R and 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 'twenty four, you could expect to see similar levels of growth as we enter the following year.

Speaker 3

So, feel really good about where we've been investing in those same areas that we've been talking about, order bearing, direct sales head, as well as Critical key engineering as we think about, the great innovation that comes from our R and D and engineering teams across the world.

Speaker 1

Thank you.

Operator

We'll take our next question from Michael Turrin with Wells Fargo Securities.

Speaker 8

Hey, great. 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 not October, a lot has 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.

Speaker 8

Thanks.

Speaker 3

Yes. Michael, thanks for the question. We don't provide formal fiscal year guidance, right, until next quarter. That said, 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.

Speaker 3

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

Speaker 2

Well said. Thank you.

Speaker 3

Thanks, Michael.

Operator

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

Speaker 1

Hey, Gina. I actually wanted to follow-up on that. I had a different version of that question, which is Just more precisely on GenAI, when you gave the outlook at the time of the Analyst Day, there was obviously already a lot of discussion about AI with the products that have been rolled out. So When you gave the 24 targets, did that embed any potential impact from JetAI 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.

Speaker 3

Sure. Yes. 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 years and generative AI was part of that.

Speaker 3

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 JetAI? Absolutely. But 1 quarter does not a trend make.

Speaker 3

So, we will We 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 yes, so More to come on where Geni 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.

Speaker 1

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 Jet 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 that those dollars or the incremental?

Speaker 2

Yes. So, Matt, the CEOs 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.

Speaker 2

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 customers' eyes that if I'm them, 7% may or may not get it done. I might look to G and 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.

Speaker 2

And I do think that is one of the 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 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.

Speaker 1

Great. I really appreciate you guys taking my questions. Thank you.

Speaker 5

My pleasure, Samad. Thank you. Thanks, Samad.

Operator

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

Speaker 2

Great. Thanks for taking my questions.

Speaker 1

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

Speaker 2

of months ago. It It'd

Speaker 1

be great just to get a bit more color on the undertakings around this program and how these particular partners are helping to

Speaker 5

I'll start off and And

Speaker 2

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 wanted 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.

Speaker 2

They're 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 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.

Speaker 2

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

Speaker 5

the future. TJ? Absolutely, Bill. Right on. And Derek, 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.

Speaker 5

Most of us know NVIDIA as a great CPU provider among other engineered systems. But in this specific program, 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, when these customers, we talked about the 4 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

Speaker 2

Thank you for that, Cali. Thank you, Matt.

Operator

And we have time for one last question. We'll take that question from Matt Hedberg with RBC Capital Markets.

Speaker 1

C. J, a question for you. A lot has 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

Speaker 5

Absolutely. So, 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 in OpenTelemetry, they have done some phenomenal work. Then we added the metrics capability in Just end of September, we finally added logging capabilities.

Speaker 5

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, Thank you, Matt.

Operator

And that does conclude today's presentation. We thank you for your participation.

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908 Devices Q3 2023
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