ServiceNow, Inc. — 2024 Q1

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

Yes. And Kash, on your question around seasonality about the cRPO. So first and foremost, really proud of the fact that we beat our guide in Q1 by 100 basis points. That beat was twofold: one, strong net new ACV growth as well as higher early renewals. And so from a seasonality perspective you'll remember, we talked about the Fed duration. And so Q2 is slightly more impacted, right, before it pops up again in Q3. And so we feel really good about the trends that we're seeing. And again, feel really good. We continue to be prudent in our guide around early renewals, while we are seeing them stronger than we saw last year. Again, from a guidance perspective and a forecast perspective, we're continuing to be prudent there.

So I would say, Karl, I would start first is environment, and we shared this in January, Bill, Gina and I, it remains pretty much the same from our perspective as it -- and what we mean by that, it is not 2021, specifically. So it still takes many approvals and all the things that we discussed from a sales perspective in trying to get business validation done or a purchase being made. And pretty much, I would say, that's a standard across industries and geographies.

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

Yes. Matt, I'll take that one. So yes, we are absolutely seeing faster Pro Plus adoption versus Pro. It's 2 quarters out, right? So it's early days, but we feel really good about the adoption curve. And we've been talking about whether or not that adoption curve would be faster. And we posited that it would be, and that's certainly proving out to be the case, although again, early days.

Yes, it's a great point, and I did call that out. So RPO growth was 27% year-over-year in constant currency, which is 300 basis points improvement versus last year. And yes, that is our longer-term backlog. So as you think more longer term about the opportunity in ServiceNow, I couldn't be more excited about that. We are seeing the average duration growing. And in fact, duration this Q1 is the largest it's been in the Q1 since, I think, 2019. And so I feel really good about what that means for the mid- and long-term opportunity here for sure.

Sanjit Singh in for Keith Weiss. Bill, I wanted to ask a little bit about GenAI adoption within ServiceNow, you mentioned Now on Now, but in terms of just like the GenAI adoption, both broadly and with the engineering team, it looks like you're hiring for this quarter in R&D, you kept a pace. How is GenAI adoption changing or not changing your hiring plans more broadly and specifically in the engineering team?

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

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

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

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

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

So first, I'll use, Tyler, one quick example that I was in a conversation at a bank, very technical audience in their technology organization. They were still on ITSM Standard. Once they saw what we have done with Pro plus, they actually bought Pro and Pro Plus together. And that is just amazing that they bought both technologies together, not just saying, "hey, I'm going to go to Pro and then staircase to Pro Plus." That's a very specific example. But the way we look at this specific product line, whether it's ITSM or whether it's CSM, our customer service, is I look at both Pro and Enterprise in total.

Yes. It's a really important question, Gregg. I really believe the IT budgets in their own right will go up on a standard rate basis as we've seen now for many, many years. The business executives, however, are inserting their will into the generative AI revolution because the CEO is in a boardroom with her senior team sitting around a table with the Board of Directors, and they're like, "hey, what are you guys doing on GenAI?" And they know now that they got to go into that room with a story because this is a lot like when we had the internet, then we had the iPhone moment, everything went mobile. Everything is going GenAI. It's just a question of how quickly you get there.

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

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

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

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

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

Yes. So if you remember, Samad, last year, we've been -- over the last year, we've been more prudent in how we've been forecasting early renewals because it's hard to forecast. It's very customer specific and customer by customer. And so in Q1, our beat was really strong on our net new ACV growth, but we also saw early renewals than our prudent forecast. I haven't changed how we're thinking about forecasting. I'm still remaining prudent given the macro. And so as we think about seasonality. I talked about Q2 being lower, slightly lower, but then it bounced back up in Q3 when Fed is our strong quarter. And so again, it wasn't material enough to impact the Q2 guidance, but I'm not assuming better early renewals in Q2 like we saw in Q1.

By the way, Samad, when you show up, you'll notice that it will be a stunning knowledge, and you'll see thousands more people than you saw last year. We just keep getting bigger and bigger. So get ready for the best Vegas show you've ever seen.

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

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

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

Alex, great to hear from you. So I'll take this on. So there are a couple of things we are seeing. So when we launched Pro in 2018 September, and we launched Pro Plus in 2023 September. As Bill outlined in his comments, the Pro Plus uptake by our customers is at a higher pace than Pro uptake was across not only just ITSM, but also CSM and also HR, which are 3 big product lines for ServiceNow. So when you look at exactly 2 quarters and 2 days that we have been in the market, it has exceeded our internal projections on what Pro Plus will do and our ability to sell them. And as Gina outlined, that not only it was in the 7 out of 10 deals, which are the top deals for ServiceNow in Q1, we had $7 million-plus deals, including public sector deals in a regulated environment where our engineers have made the technology work for this regulated environment.

Yes. Thanks, Michael, for noticing. We're really proud of the 47% free cash flow margin. Year-over-year, though, you have to remember that Q1 of last year was lower than normal given the Silicon Valley Bank and regional bank crisis that happened that quarter. All of that being said, even if you normalize for that, we are significantly higher. And that's testament to the strong margin, operating margin and some nice work that we've been doing on working capital efficiencies. And so we feel really good. Seasonality for free cash flow will be similar to what you've seen historically. And so just really strong results. The team has done an outstanding job on working capital efficiencies, and we'll continue to see that as well.

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

And Derrick, I would just give you one thing to think about, too. You could take great companies like Novartis, who want to be a global leader in their industry. And that industry has been held back with 6.5-year clinical trials. And these kinds of CEOs are rethinking everything and they're using generative AI as the gateway to change. And they're looking at not only GenAI, but they're also looking at ServiceNow as a fresh new platform design to take on some of the tougher process challenges that has slowed companies down. And as CJ said, which I think is a major point, the time to implementation on these GenAI use cases has been faster than anything I've seen, not just against Pro, but against anything.