Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Q1 2020 service now earnings Conference call.
At this time, all participants are in listen only mode.
After the speakers presentation, there will be a question and answer session.
Ask a question during the session you'll need to press star one on your telephone.
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I would now like to hand, the conference over to your Speaker today, Vice President of Investor Relations Isa banks.
Yes. Please go ahead.
Good afternoon, and thank you for joining us for service now first quarter 2020 earnings Conference call.
Assistant with while we are operating globally, our call today is work from home.
Joining me are Bill Mcdermott, our president and Chief Executive Officer, and genome up and you know our Chief Financial Officer.
During today's call will support for.
He 20, <unk> financial results and discuss our financial guidance for the second quarter of 2020 and full year 2020.
Before we get started you want to emphasize that somebody information discussed on this conference call, particularly our guidance is based on information as of April 29, 2000, and when he contains forward looking statements that involve risks uncertainties.
Including those related to the impact was Kobe Nike on our business global economic conditions.
The forward looking guidance, we will provide today is based on our assumptions as to the macroeconomic environment in which we will be off.
Those assumptions are based on the back as we know them today.
Many of these assumptions like the matters that are beyond our control and Gigi rapidly, including but not limited to the time frames for severity of social distancing another mitigation required.
The impact of Kogan Nike.
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And the length of arc l. cycles, particularly for customers in certain industry.
I think it changes in the future could cause us to modify or guidance higher or lower.
Please refer to the press release and risk factors and DNA in our filings.
During our most recent they pay and our 10-Q that will be filed for Q1 2020 for information regarding such risks uncertainties and assumption that may cause actual results to differ materially from those set forth in such forward looking statements.
We'd also like to point out that the company reported non-GAAP results. In addition to you and not as a substitute or superior to financial measures calculated in accordance with got.
All financial figures, we will discuss today are noncash except for revenue net income everybody performance obligation.
The sees a reconciliation between these non-GAAP and GAAP results. Please refer to our press release filed earlier today or investor presentation in the prior quarters previously filed press releases gold, which are posted that investors Dot service no doubt.
A replay of today's call will also be posted on the website.
Please note that due to the short term uncertainty of the ongoing Kobe banking crisis, we have decided to postpone or financial analyst day for future date, we expect that will occur in the second half of the here. So we can provide more visibility into 2021.
Oh for heating.
With that I would now like to turn all undergo.
Thank you Lisa and good afternoon, everyone welcome to our Q1 earnings call.
Let me begin by extending my hope that you and your loved ones are healthy and say.
We wish you a speedy recovery for anyone affected by cope with 19 and of course, our Hearts go out to those who tragically lost a loved ones.
For the millions of people economically impacted we're doing our part to support those in need and to get the world working again, we're truly in this together.
Here are the key to take a ways all reinforce in today's remarks.
First.
We're just now is a unique platform.
Very strong company, we are well positioned in this seminal moments.
Next digital transformation was a business imperative recall, but.
With 7.4 trillion projected spend over the next three years host Kogut digital transformation will accelerate.
In surface now isn't the work flow standard for digital transformation.
And most important the now platform the platform of platforms.
It's become the standard for work flow design experiences.
As we called it 19 pandemic spread around the world in Q1 service now focused on protecting the health and safety of our employees, serving our customers and supporting our community.
Leadership by example has never been more important we never stopped pushing we will not slowed down.
You've seen our earnings release, we delivered a strong Q1.
Beating guidance and consensus we have shown we can deliver.
In March as the pandemic was being felt everywhere around the world are more than 11000 employees seamlessly transition to work from home environment.
I'm, so incredibly proud of how service now employees adjusted.
Our team focused they executed they delivered.
Employees feel motivated inspired and proud.
After shifting to work from home, we held our biggest all hands company meeting ever.
<unk> Global digital event, where we laid out our plans to support each other and to serve our customers.
Feedback from our recent employee satisfaction survey is also very encouraging.
99% are excited about our future, 95% feel more inspired by our purpose they never 98% feel confident in our crisis response.
Surface now employees already the lead.
We're strengthening the amazing purpose culture and character of our company.
Our seamless transition to work from home is a powerful demonstration of the now platform.
Our cloud native now one now solutions enabled our employees to maintain and often improve productivity.
Our virtual agent technology are now mobile app.
Digitize work flows on the now platform allowed employees to easily sell manage their work requirements.
We didnt Miss a beat supporting our customers.
Our cloud uptime numbers remained world class cloud consumption stayed high as customers relied on the now platform as a work flow work horse.
Around the world, we see the customers who are farthest along in that digital transformation or better equipped to manage this crisis companies lagging behind are realizing that they now have a burning platform.
Accelerating digital transformation has become a business imperative.
Behind every great experience is a great work flow.
Today that matters more than ever.
The power of the now platform has become self evident to customers in this pandemic.
There are leveraging the now platform to quickly deploy work flow apps that enable better crisis management and business outcomes.
Our corporate 19 emergency response apps are a great example.
These four apps one developed in partnership with the Washington State Department of Health.
And Threed developed by our own team were released at no charge at the end of March more than 5000 installations have taken place.
Washington State, San Francisco, and Los Angeles, or just a few examples of how we are helping government agencies respond.
See I always are telling us that their teams are using the now platform to deliver work flow designed experiences that there are companies need now for example, the Loews Corporation was facing a surge of emergency paid leave request due to covert 19.
Within 96 hours they built a mobile leave request out on the now platform and deployed it Tim 330000 employees.
This is what Q1 was all about.
Leading helping our customers deal with reality, helping them do what needs to be done.
Let's look at some of the results now.
We had 37 deals greater than $1 million this quarter.
That is up 48% year over year.
In fact, most deals closed in the final weeks of March consistent with normal linearity.
Our renewal rate remains best in class at 97%.
We saw strength in the Americas, our largest region.
We also.
So a strong growth in a P.J.
Despite the impact of coal 19 throughout the quarter.
Our now cloud went live in Seoul, South Korea in March where we signed two new customers representing major brands.
We also saw strong deals completed in EMEA.
Despite the challenging environment.
Q1 results reinforce the strength of our portfolio here that's.
18 of our top 20 deals.
With companies, such as Mark Humana, and Siemens included three or more products.
This included our second largest new customer transaction ever which were signed with a fortune 50, leading U.S. insurance company.
We saw great momentum with our GSM pro.
Which delivers increased automation and operational resiliency for our customers are.
Our business continuity and integrated risk management products continued their strong momentum.
16 of our top deals included multiple IC products.
Chevron for example is realizing the power the now platform by using multiple service now products across their business to drive productivity.
They are now using our suite of IP products and they deployed our age our products to their entire 44000 person workforce.
We saw continued traction on HR and customer service management.
Customers such as the U.S. Department of Health and human services are leveraging HR service delivery to respond to cope with 19.
Half of our top 20 deals included HR.
We now have more than 50, she gets them customers greater than a million dollars, including one of the fastest growing digital streaming services.
This company launched an innovative game changing digital presence they did it with service now.
Our customer service management technology is foundational helping them scale faster than anyone imagine possible.
In Q1.
We also landed our largest C S M deal ever in a PJ.
Japanese based murata manufacturing purchased CFM to enhance their customer support.
Reduce time to resolution and increase customer satisfaction.
We also launched Orlando in March our most innovative now platform release ever.
Our day, one adoption with service now highest ever.
Orlando features now intelligence, which gives customers on Max AI.
Analytics and mobile capabilities across the now platform to support any work flow designed experience.
Driving new levels of enterprise productivity is what Orlando is all about.
The office of information technology at Princeton University for example, successfully upgraded to Orlando and went live with CSM.
For instance, CIO, Jay Dominic said, they moved fast to implement CSM functionality to serve current and prospective graduate students staff faculty and all the stakeholders.
And I'm talking to many Ceos and C suite leaders worldwide, here's what they're telling me.
In crisis, they are focused on protecting revenue.
Ensuring business continuity and driving productivity.
They want and enterprise work flow platform that delivers ROI in 12 months or less.
The good news is.
Fast time to value is a surface now core strength.
The service now advantage is one architecture, one day to model one platform.
This gives us strategic 40.
To be the clear choice for all customers across I Ci.
Employee.
And custom workflows across all geographies.
Industries and her sonus.
Our partner ecosystem seed to seize this clearly.
And there are doubling down on surface now.
We value how our partners Accenture Deloitte the X C E why KPMG and many others have stepped up to support our shared customers.
Our Q2 fast start playbook is focused on the priorities that matter most to our customers, we're engaging our customers like never before.
Our Q2 fast start playbook includes five key messages.
Digitally scale operations quickly and efficiently.
Reduced technology debt, there's a lot out there.
In short resilience for critical business operations.
The liver employees the right digital experience from anywhere.
And create new workflows fast.
Each one of these priorities drives great employee and customer experiences.
Last week in fact, we engage current and potential customers with beats. These solutions in a global company wide prospecting day were built to drive pipeline.
The results was simply outstanding.
Our teams delivered three times greater pipeline than any previous prospecting day ever.
Our messages and solutions are resonating in every sector in every geography around the world.
We're also engaging customers and building pipeline throughout digital knowledge event.
This launches on May step.
I encourage everyone to join US we have six weeks of incredible content and digital experiences for our surface now community.
Knowledge already has more than twice the number of registered attendees.
We had anticipated in the physical event, we planned in Orlando.
We expect the audience to keep growing throughout the next six weeks it is going to be one heck of an experience.
And this is a great example of how we pivoted we remain focused on delivering our customers and partners. The connection inspiration and education that makes knowledge such a special event every year and most importantly, it keeps the service now community.
Strong.
Hey, I've covered a lot here, so let me recap.
We seamlessly transitioned to a work from home environment and drove very strong Q1 performance.
Our customers are innovating on the now platform to meet their crisis management.
Business continuity and productivity needs.
Service now is enabling customers to do what they must do to get the job done.
Our pipeline is really strong.
Our solutions are resonating our customers are asking for more.
These are the actions in insights that have informed our outlook.
Tina will provide more details on our guidance. She has led an exceptional analysis and thorough bottoms up effort on all possible scenarios.
Our guidance reflects a slightly broader range.
Centering the well known uncertainties, our customers face as a result of cold good 19 in the marketplace.
Even as I say that.
Please keep in mind that service now is strong in all industries across the Fortune 500.
And we are confident in our opportunities.
Our ongoing cost or customer demand and our solutions.
And in the strong pipeline, we see in our business.
We are aware of the hard work ahead, we are taking nothing for granted.
This is an innovation led company with an incredible team.
We have a proven track record.
And an unwavering commitment to customer success.
Ladies and gentlemen, if it can be done.
Service now we'll do it.
We are on the move.
I'd like to thank you very much for your time and attention and I'll now turn over the call to Gina.
Thank you Bill.
We had a strong Q1, continuing the momentum coming out of 29.
We exceeded the high end, our guide a subscription revenue and subscription billing.
And we delivered another solid quarter operating profit and asked them.
You want subscription revenues were $995 million, representing 36% year over year I see.
He wants subscription billing or 1.0 by $5 billion.
I think 32% year over year adjust.
Remaining performance obligation RPL ended the quarter at approximately $6.8 billion, representing 3% year over year.
Right.
Hi, RPL with approximately $3.3 billion, representing 33% year over year constant currency.
Our renewal rate remains best in class, 97%.
As John topline performance during the quarter driven by you.
The.
We also continued to be said, adding new huh.
We closed three new customers at a pace greater than $1 million.
Oh cohort of customers more than $1 million.
Continues to go significantly up 30% year every year.
Now have nine.
We consummate hang up more than $1 million in HCV.
We saw strong profitability coupon, but operating margin of 24%.
By a strong revenue performance.
Oh expenses due to the current work from home environment.
Our free cash flow more than 39.
Thanks have a seasonally high amount of less must stop Q4 billion.
Our first quarter results demonstrate our mission has been trusted innovator partner to help customers digitally transform.
Before I lived the guidance I want to briefly discuss the impact 19 on our business.
Many of our customers are now operating very challenging.
And with spine companies, especially those highly indices, such as transportation hospitality retail and in.
Hey, we evaluate how the spending the dollar.
The iOS surveys and our own conversations with customers.
No that software spending milk, we used to be merger all.
We're seeing company, placing greater emphasis on return on investment and time to value.
We remain well positioned to weather the short term.
And now platform Amazing mission critical however operation.
We have a strong customer base.
And every industry and over 80% of our business is serving large by this globally.
As a result mean that Dana I wouldn't worry.
It's a neighbor right in a highly effective industry, they do that contract and expand their usage of the now bought one in the quarter with a large portion of business right in March.
As Bill mentioned, we ended keep it was the fastest labor.
Thoroughly impressed.
Ill go to market motion and there's work from home environment.
It seems really thinks that the pipeline you just girl and we have been [laughter] like clothing business with both new and existing customers.
A few weeks of April.
With that said salad.
Anything, particularly you have been taken into account does.
Our customers values announced that one and we know they are prioritizing that in customers may delay newsy transformation initiatives until you have greater visibility into the future operations there but.
Given the current operating environment, we that some variability.
Uh huh.
This will be most acutely felt by our customer base a highly effective industry. He previously Scott.
Which represent approximately 20% of our bid.
The other 80% are you see that are less.
We are very committed to helping our customers nice.
Hi.
And that's why we've taken measures.
Greater flexibility Mad.
Yes.
As Bill said, we are engaging our customers like never before.
We have done a rigorous analysis to understand both the risks and opportunities ahead of us.
Because of the potential short term impact our business, we have made the falling adjust guy methodology.
First I understand that the most significant headwinds are doing very well.
We're also assuming these headwinds the lease and the economy open more probably by the end yeah.
Second increase the guidance range the description billing.
It's accounts to the increased uncertainty of new business.
I mean every meal, as Billy and particularly particularly with customers highly effective industry.
Well the guidance is based on a tie assumptions about the macro environment, we are confident.
Guys I believe that by making these adjustments we are appropriately factor into it.
Hey, Michael the night.
As a reminder, we have good visibility towards subscription billing.
On average 50% has just been my backlog was 25% by renewal and the remaining pushing concomitantly TV.
Subscription revenue it'd be the whole forget.
Approximately 80% of the revenue that will be recognized immediately funny already contract.
Yeah.
Now, let's turn to guide for the second quarter brilliantly money, which reflect the impact at Cobiz 19, and the FX headwinds as a result of decline the British pound, 5%, you're a 1%.
Billion dollar, 12% versus the U.S. dollar.
But you do we expect if your revenues between 995 million $1 billion.
Thanks, 29, 30% year over year constant currency growth.
We expect subscription billing between 959 between $80 million, representing 20% to 22% year over year adjusted.
We expect to 20% operating margin of 500 basis points year over year.
Production problem fed bid and then transition of knowledge to digital area.
For the full year 20 money, we expect some revenues to be between 4.1 to 5 billion and 4.14 or $5 billion.
Good day, 28, 29% year over year constant currency growth.
This guidance or less.
$52 million.
I see and point $3 million reduction driven by the way that you made easy compare to the midpoint.
Hi, guys screens.
We expect description billing between 4.60 billion and $4.6 billion, representing 23, 25% year over year adjusted.
Mr Black.
$52 million aren't insane and a $123 million.
And then by them.
Maybe compared to the midpoint previous guidance range.
We continue to expect when he likes its consistent gross margin, 80% and we are raising our guidance for full year explains Lenny.
Great.
That's true but savings from reduced travel.
Slower DNA hiring.
No knowledge 20 digital experience.
Looking into next year, we are investing in these areas to.
Freebies level.
Importantly, as we continue to feel confident that long term opportunity.
10 billion in revenue and beyond we will continue to in bad strategic areas such as R&D in Bell.
And we maintain a thoughtful based on hiring due out 20 play.
As always we will continue to be disciplined as we evaluate our investments in so are we generate the greatest our lifestyle.
We are maintaining full year 2020, recast marching died 29%.
Let's begin increasing operating margin offset by decreasing collection expected increase in Dsos.
Finally, we expect second quarter in full year 2020.
Weighted average outstanding share 190 million.
In summary, as we navigate this global pandemic thing has become clear.
Digital transformation is accelerating as companies react unexpected disruptions up there as.
We will help companies transform the way work gets done.
We have a world class management team and a right product portfolio, whether the short term challenges.
To help our customers of all immersion this crisis, and even stronger and better position company.
Well, they know very strong bank, which in exiting Q1 $6.8 billion in RPL and a strong net.
She's point $2 billion.
We will continue to embed the long term growth.
We have never been proud of them. Please and the continued focus on serving our customers partners and community.
Well you know culture is stronger than ever we can't thank our employees and not for their hard work and dedication.
With that operator, we'd like to now instead of often less.
Thank you.
That's very minor to ask a question you will need to press star one on your telephone to withdraw your question press the pound or hash key please standby, while we compile the Q and a roster.
Your first question comes from a line of Alex second with RBC capital markets. Your line is open.
Hey, guys. Thank you for taking my question and congrats on a good quarter.
Bill I guess, you gave us a you give us some great insight on the kinds of customer conversations you're having right now.
If you have given where you sit and kind of how you're driving these conversations forward can can you give us a real time look at you know the piece of business closing right now and April you talked about the fast start playbook.
How can you just help us understand what you know you're facing right now and how your pivoting the message given the breadth and flexibility of the portfolio that I've got a quick follow up.
Yeah, Alex it's a great question as you know the in process measures of what companies do in times of crisis cannot be overstated in their importance.
And you're in a race against the clock in terms of how you execute.
Having been through a few cycles in my career like this it was clear to me that we had to immediately jump in on the Cobot response actions, we took with the four apps.
The work from home initiative.
We all hands communication to get people rallied around our customer.
And then also along with our leadership team galvanized the company around a Q2 playbook that really sold into what the customer needed in the face of a market crisis.
Gina did a great job, telling you about the market dynamics that we handle mainly high end customers in the fortune, 580% of them are in industries that of course feel some effects of cold, but it's the 20% that feel the greatest shocks to cope with so the stage is set for service now to perform.
Well.
What I'm seeing and the trenches as it relates to air April is a continuation to watching it and I told you about March.
From the linearity basis March close.
As we would expect March to close.
In April has actually started faster than April did last year.
So on a year over year basis, our pipeline is bigger than it was last April.
And what we actually have in the door is on a percentage basis higher than we had last April.
And the forecast is not shaky. It is very solid when you talk to our sales leader the executives that report into him and you participate in the daily conversations in the trenches like I do with people that run companies and run government entities. So right now.
Things are going very well at service now.
Perfect and then maybe just one follow up Regina.
You mentioned, a payment terms or dsos and investors right now I think are closely scrutinizing customer churn dollar churn contract flexibility payment terms. So maybe what are you seeing right now from customers, particularly in the 20% of industries that are impacted and how does that inform.
You know some of your visibility and confidence. This you know around the guidance for subscription billings current IPO.
And.
And any other factors.
Sure well I'll say that we've not had customers at this point that are unable to make payments and so our customer base remains very healthy that being said we have provided some flexibility extended payment terms. So portion of our company Uh Huh learn and those are the ones that we're talking about in a highly effective.
Industry.
And so far or not.
Of course customer base, we don't anticipate that payment took our older adjusted came in well have a meaningful impact on revenue our billing.
It is why we have our.
Margin guidance flat, even though we're increasing our operating margin by 100 basis points, we do feel like they'll be a little bit that that will push into early 2001, but from the most probably felt very comfortable in our guidance. So.
Perfect. Thank you guys they say.
Thank you Alex you too.
Your next question comes from the line of Brad Zelnick with Credit Suisse. Your line is open.
Great. Thank you so much 10, congrats on the continued leadership has demonstrated by these results a bill if I can can you elaborate on how your adapting your go to market strategy. During these crazy times clearly your value properly becomes more appealing as the entire.
World Pivots to digital but how have the field priorities changed if at all as it relates to new logo versus expansion business.
Well one of the new logos, Brad that I had mentioned was Merck.
And there there's quite a few on new logos in Q1, but here's a big thing.
It might be a little counterintuitive actually.
But one of my goals as I told you in the last earnings call was to be the trusted innovator for the C suite and actually to elevate the level of contact that service now utilized in the marketplace.
Right now C level executives and Ceos in particular are easier to get to than they ever happen because they're in their home office and they're looking for a good phone call are good zone.
And service now they're finding one so what we're doing is we're aligning the pre sale.
Especially on the value drivers that are important to a customer in their specific industry.
In their specific persona.
And on an outside in basis, we're studying very carefully, especially in the cobot environment, what we can do to help them.
We schedule our team.
Essentially due in a physical world, we had what we called executive briefing.
Center meetings now when a virtual world, we simply have the same executive briefing Center meeting only we can have many more of them because we don't have the wear and tear where the difficulty of getting calendars are line because people have time on the hands for things that a mission critical and things that can give them immediate time today.
Al you and the priorities that they care about and as I said, Brad they care a lot about protecting the revenue. They already have obviously, everyone wants to grow but job. One is protect what happens and then this business continuity thing you can't overstate. It for example, this very was a one very long.
Much of consulting company out there with hundreds of thousands of people.
And think about something like asset management, and how you get you know the tool set whether it's a phone or a computer or anything the workforce might need to work from home physically to them trace and track it and make sure that its executed well across the value chain.
So think about all those enterprise asset management needs now being managed on a work flow basis between a virtual and physical world. So this platform a platforms is really resonating. So I believe that it's logical for people to be concerned to say why you are.
Primarily an enterprise direct sales.
Go to market, but actually it works even better in digital occurs the activity set increases and it's just easier to do business with C level executives now than it ever has been before the other thing I would mention to you and I said it in my opening remarks is it's all about value right. The one thing about value that's changed though is.
As diffuse has to be really short not dissimilar to 2000 a neat.
It has to be very very short you know I told you story about lows, where we had them up and running on something were 330000 employees. A 96 hours, we have people installing TSM pro and a couple of weeks and just compare that to the old system of record world and how long it takes to get to value. So we're so realm.
Event, and I want everybody to you know just think about the old value chains and how they are splitting apart and be are being reassemble into these end to end mobile first workflows on the now platform and how quickly you can get to value and just how willing people are to engage digitally and even the order agreements.
You know, it's all digital you don't have to go out there and get things signed anymore. So that's pretty much the none of it.
Thanks, very much it's all very very helpful. Bill maybe just quickly for Gina I think you'd mentioned slowing down on hiring how has the hiring plan evolved since the beginning of year and have you noticed that its then it has gotten easier over the last several weeks or where a month or so to find talent.
Yeah, I would say that what I talked about lowering hiring.
Okay.
Hey.
Now.
We will continue to aggressively higher [noise].
Well.
Yes.
They have been.
Hi, I'm.
Sorry.
Some of those areas so.
We have really.
Not seeing a slow it down to date and our ability to hire and attract released oncology, which is great I think what we're trying to do it really thoughtful.
Right.
Okay.
And you to higher for the critical from the credits.
I want to make sure that we are well positioned to weather the short term so yeah.
Awesome. Thanks, so much.
Hey, Brad just wanted to give you and everyone else on the call little color right to build on with Gina, saying, we're hiring nines intense and I'm just too to net it out.
This is a brand destination that super successful and talented people now know about one example is our chief AI Officer VJ Mariana keep in mind. This guy has a 15 patents.
You know he ran data science solutions that Microsoft in engineering at Pentrust, you know, we have the ability to attract the very very best people in the market and he was getting offers from everybody and he chose service now. So we are as we bring in engineers as we bring and talented go to market people were also.
So making sure that their nines intends, we're not interested in eights and below we'll leave that to the open market to rationalize.
Your next question comes from the line of Sarah and Dillon Bohlen with Macquarie. Your line is open.
Thank you so much but when Gino you know, especially for providing US an outlook I think we all understand it's very challenging given what we're seeing right now and sharing your process what else was extremely helpful.
Thank you for doing that and I'd ask you a few questions. My first one for you Bill.
We're hearing a lot about some of our company is now no granted they have far more SMB exposure than you do but really working ahead of time on the renewal side and I was wondering if service now.
If it's pulling together or renewals team or some kind of prioritized focused on making sure that some of those distressed customers come true even under potential contract extensions and then I have a follow up with Gina.
Absolutely. So first of all thank you very much for the question.
We really want everybody to know that this company is all about driving long term customer loyalty.
Sustenance of these customer relationships is everything in the cloud economics sense, but even more it's everything in the sense of the service now culture.
We have.
Presale sale wholesale customer support.
Our consulting and partner ecosystem aligned in a value chain.
We do this by industry. We also segment that by persona and the 20% of our customer installed base most affected by cope with 19, we have a cross functional team that also includes legal finance.
Presales sale and post sale involved in the process. So we do all weekend to make our customers successful we haven't had a single down so.
We have been flexible on cash where we needed to be which genus stated, but we're also looking at things that a win win in the orientation. So even if coated or even worse than it is today, we expect it'll get better but even if it was worse, we find that customers are realizing.
At the now platform is a keep the lights on technology and these companies. It is a half to have and therefore, nobody has disputed whether or not they need to renew.
It's just simply a consequence of can we help them get through this very difficult time, so keep that in mind. The loyalty effect is getting even stronger because customers really are relying on the platform, even more and and as I look at the root causes of why companies when and lose customers have to love.
Our product in good times and in bad and be willing to stick with that product because they really believed that is essential to their future and that has been the case in every engagement, even the ones where customers need our help them most.
Awesome Bill. Thank you that was extremely helpful. Appreciate it very thorough and Tina I just wanted to follow up with a fairly simple question, but in an interesting one.
You know, especially given the depth of work you've done on the guidance.
You know its fiscal year outlook the way you've cut numbers was better than I was I was hearing and indefinitely relief to me and you walk through how you were building the model I'm wondering if there's some maybe primary one particular driver I know being the customer success platform is right.
Events, but are you potentially also seen or expecting to see a continued boost from enabling I T operations in a in a very distributed perimeter and work from home environment and down is that the primary driver of the revenue builder is it is as much as mathematical as you've outlined.
Yes, thanks, sorry for the question I think that.
I see because the business now I see us is going to be super important, but that's not the only place where we continue to see strength and so we did.
Very bottom deep dive analysis and completed.
Extensive scenario planning our pipeline coverage on conversion on renewal rate et cetera, and so it's really about whether or not.
Our original Guy, we just thinking that some of our customers' needs highly impacted industry. We believe our renewal rates will stay strong, but I do we think about net new and digital tried priorities.
Then may be delayed so that's really where with where we're focused on when we brought down the guy.
We absolutely believe that we'll be able to maintain our salmonella right.
We believe that digital transformation will remain a priority as bill has talked about.
And so we feel very confident right now with our current guy.
Yeah.
Thank you Bill.
You're welcome so one thing and I think everybody will be interested to know that it's kinda. Your question, but it's probably on everyone's mind why is it that we have such confidence.
It's really because the customers telling us they have confidence in us so take the department of Homeland says and Australia, what they're doing is basically integrating the outdated underperforming old solutions into an integrated platform and that is helping them simplify their end.
Parliament dropdown cost and improve productivity the state of California. As an example is a perfect one because they went for a cloud first initiative.
And that's all about getting this stakeholders vendors and partner agencies to cooperate and that's why they chose service now customer service management. So what you're seeing here is a recognition that the integrated on nature of the platform what the platform can do and how it so simple.
Now to plug the processes into something that's modern cloud and on the move versus the things that their bogged down by in the old Twentyth century Tech. So we're feeling good.
Thank you for your time.
Thank you Sir.
Your next question comes from the line of some odd Symboda with Jefferies. Your line is open.
Hi, Thanks for taking less my questions and congrats on a great quarter.
Maybe if but the first question and I know you guys touched on it a little bit but yeah. As you think about customers do what everybody working remotely I know you've talked about the sales motion, but how about in terms of implementations are those cycles moving at the same speed as before are they moving more quickly and maybe what are the puts and takes around the ability to do a fee.
Full implementation from a remote perspective.
Yeah that that's actually a good question. Some odd I know initially probably people had concerns as to how viable that was but the reality is on it is very viable and thats in fact, what's happening on not only can service now virtually implement the system.
But so to kinda service now Echo system and initially there may have been some training that was required with certain partners on how to do that but our substantial partners absolutely know how to do that and that is the manner in which service now is being implemented its done virtually.
By service now as well as our ecosystem partners not an issue whatsoever.
That's helpful. And then maybe one more on just the go to market you know what would the t. any being down what they advance moving virtual coming out of this and it's tough to answer but it seems like maybe that the customer acquisition cost may just structurally come down overtime. How do you think about that as those of us that are thinking beyond this crisis eventually.
Trading do you think that it'll just allow customers to be acquired more efficiently just going forward. Thanks again for taking my questions and wish everybody well.
Well its amount I wish you well too and I tell you asking some great questions here, because who would have thought that I TSM pro could have been implemented by our partners in 21 days or less remotely pretty cool.
And then who would have thought we would have cancelled or knowledge event in Orlando, which has been the physical event of the year. The epicenter of the service now story, where we expected to have 25000 people physically in Orlando.
We already have 50000 registered and signed up for our event or knowledge event in a virtual environment and yesterday, our head of marketing and communications Who's leading this event and doing a great job I might add told me that his anticipated head count now for the event.
He has over 100000.
You are on a good point here, we might very well learn that companies that are digitally transformed and attracting others, who wants to be digitally transformed might actually get some brand recognition power from this and actually a lower cost of sale because of the bandwagon effect at.
And.
The second part is our motion on a virtual basis of coordinating all of the pre and post sale layers I discussed its becoming far more refined than it was in the prior highly physical high touch world. So we might still be able to deliver.
Hi value, but do so at a higher volume in which case you can lower cost of sale get more deals and more flow through to the bottom line I wouldn't rule it out I'll put it to that way.
That's great to hear thanks, again and take care.
Thank you very much.
Your next question comes from the line of Kirk Maddening with Evercore ISI Your line so.
Yes, thanks, very much I'll add my congrats on the quarter and glad everyone's doing well.
I still just to start with you. Obviously you all are standing out and then what is very difficult economic period, I mean, the interesting somewhat self are somewhat obvious, but when you're talking to see oppose I think when we go out and care about things like Capex spend obviously budgets are under a lot more pressure people are really focused on there.
Bottom line, maybe more so than ever and nervous about their own outcome. So you are you just getting the sense, that's you're consolidating wallet share, which in the I.T. organization or the organization in general are you tapping into new line of business spend that perhaps you weren't before this happened because I think what stands out is.
You are not only do you ever get quarter, but obviously your business seems to be doing really well through a girl market I think that will be pretty unique when we hear from everyone else. So can you just talked about sort of how you all or maybe just consolidating span amongst your customers at this point time, thanks, Yes, sure well well Kirk I want to thank you very much. The question, it's a really really small.
Good question, because I start every meeting off.
With the C level executives or heads of government that we're speaking with regularly daily in fact on this concept of behind every great experience is a great work flow.
And then now platform is the platform a platforms you heard me say that when I first came into the company, but digital workflows are becoming a substantially important asset within every company and what we see happening here is we see that we greatly.
Chances that every CEO wants for their employees and customers includes mobile web been conversational tools.
We see clearly that the I.T. workflow is also essential to enable employee workflow customer workflow and then anything they want to uniquely customized they can use the app engine on our platform to do it.
And having this one platform with one data model in one architecture with with by the way no debt because of how well service now engineering has been handled for the last 15 years.
You are able to really streamline eliminate a lot of waste in these companies and what I see happening is companies are telling me why what I want to double down on a system of record when I can take the data from the system of record.
And put it into a new workflow where by the way with the Orlando now platform. They can apply machine learning in AI and get the real analytics that they need to drive employee experiences and customer experiences. So it's actually.
Such a great return on investment I haven't seen one scenario, yet where I can't go to a C level executive and say you wanted us from me today, I gave you fivex or better the AC that value this year.
And then it's kind of like why wouldn't you do it.
One customer for example.
In this offer asset management scenario. We also do hardware asset management as you know said I know that I have always outdated solutions, I'm, Underutilizing show, where and so forth and ISO well, we'll analyze it for you. It's something we do we haven't found a business case, yet where we can't take 20% cost out.
And the Guy goes really well why don't we habit I said look if anyone's going the problem with that I'll just split the profits would you want to know how ordered from you. So that's the kind of environment. We're in if you want to talk cost we can take it out if you want to talk experience, where the work flow behind it if you want to talk Executional excellence.
In a virtual world. This is the platform that cuts across all the systems of record and enables all of the mobile web and conversational experiences to help the employees do their job or inspire the customers to be happy and loyal so I really think its relevancy, it's quick return on investment and.
It's making things better for everybody and I really truly believe our purpose of helping.
You know people and really making work work better for people is truly resonating at this critical time and the world's history.
Okay. That's really helping this wasn't really quick win for Gina just teenager cash flow guidance for the full year. He made any sort of assumptions around served invoicing duration changing at all it sounded like outside that 20% of their customer base you haven't seen any real need to think that way. That's just trying to get a sense on sort of how you were modeling on that.
Front thanks.
Yeah, I as I said earlier, the real issue that we've seen it hasn't been men given that only 20% of our business is the customers in the heavily impacted indices.
We are not seeing anybody on this.
Two.
Invoicing duration oil or.
Great. Thanks, so much quicker.
Thank you Kurt.
Thank you.
Your next question comes from the line of Jennifer Lowe with CBS. Your line is open.
Great. Thank you maybe quickly follow up on the last question from the earlier one Gina you need you've mentioned a couple of times that 20% is.
Industries, most directly impacted by the current creases, 80% less impacted but as we think about sort of the assumption feeding into the guidance is the assumption that that impact remains relatively contained in that 20% with relatively little through downstream effects on the other 80% of of large.
Operations or are you assuming that there are some you know further disruption I'm, just trying to sort of quantify or to the extent as possible just think about what happens if things expand beyond just the industries that are currently impacted directly.
Sure. Thanks for the question, so basically not only only slightly above business in the heavily impacted indices, 80% of businesses Fortune 500, and so we are we are not as it's supposed to smaller.
Hi.
And so our guy does reflect some lower expectations from what we normally would see on our growth on our net may be the bulk of that we believe will come from companies in the more heavily impacted by some right.
We still may delay some of their spending and they look forward.
We definitely incorporated some of that as well.
Great and.
Yeah really there was dimension that I you know the guidance assumes things continue to stay difficult for a couple more quarters, but also you know April.
Hi, there was some positive momentum on the pipeline front and things like that and we're seeing press about industry starting to reopen maybe a little earlier they've been thier too. If we think about the sensitivity you know potentially on the more positive side, what are sort of the to keep the I think you're looking at in your own business to get that forward look on.
How things are trending and you know if we do you start to see things open up a bit sooner you know does that get us back to sort of what the guys might have been previously or is there going to be.
Business that you don't think comes back how do we frame out what the upside could look like.
No I think that there's definitely potential upside if the economy open more broadly sooner right.
We talked about we are very well positioned once the economy opens up digital transformation is more ericsson than ever and our customers are really engaging with us like never before and so there certainly wouldn't be upside at night.
Hi.
The market opened up sooner.
As we know we are barely Barry Q4 weighted and we're also within each quarter very last month, we waited so as we look at the asphalt conversion of the tight now we talk about pipeline being stronger than ever our alright conversion rate higher than normal. So we are very well positioned to be.
On the opens up a lot more broadly to potentially be in addition to have more opportunity.
Versus the current Guy.
Okay.
That's great. Thank you so much.
Your next question comes on the line of Raimo Lenschow with Barclays. Your line is open.
Hey, Thanks for squeezing me in and hoping you guys those coal to healthy.
Quick question Bill on digital transformation, so that can mean, a lot of things for a lot of people, but also for service now can you talk a little bit EBITDA, how you kind of tilting. Your he was sales approach here in terms of different sub groups, a especially in the and you know when times are little bit tougher people look for it.
Quick Oh, I like how if you change to sales approach over the last few weeks to kind of still do digital transformation, but take advantage of Lady Foster projects and faster time to money and then quickly on gross margins. This quarter. They were at record levels for subscription with anything special in there or what drove that thank you.
Well Raimo I'll start us off as you'll remember from 2008 of the World was feeling very good in September of 2008 about things until the crisis hit.
On the financial level that was pretty substantial and that was when cloud solutions that offered opex versus capex and fast time to value really became the ultimate.
Uhhuh.
For the enterprise because the power moved across the management team to see a Eo basically said do which you have to do to get the job done do it on your budget and Capex load and cloud took over as the pervasive computing theme of the 20 onest century at that moment.
In our case, we're already are pure play born in the cloud market leader. So what are you do we essentially wrote a playbook with five main plays that do what you said take our platform and our market leading solutions and shape them in a way that gives customers what they need fast so did.
Totally scaling your operations quickly and efficiently as an example combines our CSM.
Yeah, CSM are I TSM pro.
And on mobile capabilities and I, Tom capabilities in one out of the box pre packaged solution that's ready to run.
If you want to reduce your technology debt, we have our Sam.
So for asset management cloud insight and application management tool out of the box ready to run if you want to ensure resilience for your critical business operations, we have governance risk compliance I T operations and security operations out of the box ready to run and we do this for the employees. We also.
So do this when you're building any workflow so for the employees do you want the right digital experience from anywhere listen any C. O. One the business Council calls and that's what they want give me the right into experience for my people anywhere. So we have the human resource service delivery pro ready to go out at the box, it's all mobile and it's ready to run.
And and of course I talked earlier in my remarks about asset management, you have to get the assets to the people where they are physically located and you have to track and trace this stuff as well again added the box ready to go and finally.
On creating new workflows fast when you need the most the App engine is now a soaring component of the service now platform and I think we really kicked off a new awareness for that with our cobot 19 apps people like well I can do my own how and I can do it at mass scale.
That kind of speed or are you kidding, we built them in three days I.
I had one CEO, who was fascinating says my goodness I was trying to do an employee rewards program because I want to do I want to get a great score on glass door and on surface now I had a business that we lived through it and three days. So everything we do is superfast added the box ready to go and we align the whole value chain within our comes.
The need to provide that to customers in a virtual world.
Thank you huh.
And on you know on your question with gross margin, we did see higher gross margins in the quarter over that 87% really driven by a greater.
So did revenue during the quarter, we expect in our guidance for fiscal year that at least one normalize the eight.
Okay. Thank you tell them. Thank you congratulations.
Thank you Randall.
Your next question comes from the line of Phil Winslow with Wells Fargo. Your line is open.
Hi, Thanks, guys for taking my question congrats on a great quarter and above all glad to hear that all of you are healthy and over the same for your family Entertainment.
Build your question for you first obviously as you mentioned, you're seeing lots of downturns like this and pass every course of your career and and frankly, you actually sold a lot of different pure software products.
Each our financials CRM, obviously, no idea I'd be often I guess I'm, what do you when you talk to executive how do you think.
The focus sort of within these segments has changed and priorities versus maybe past downturns and I just have one Paul for you and you know.
Phil I think first of all thank you for your question and safety and wellness see your family. Please give everybody my best Phil on executives today are very keen on digital transformation.
You can't go to any meeting where a CEO among Ceos isn't in some way trying to digitize their company and trying to make sure that digital transformation is at the top of the to do list because they know if they're not digitally transform and their competitors are they going to get white.
So this is where the action is we're in the sweet spot and we don't have to sort of explain that now service now is hitting the main stage with the biggest companies in tech.
And we have a very price position because.
The problem with systems of record and the technologies that have passed is they do one thing well in a specific domain, it's not that thats unimportant, but those investments have been made so the Ceos that I talked to want us to help make those investments work better.
And that's where the platform of platforms comes in because we're so well positioned to take all the investments they've already made and enable them to do what they want done which is to create workflows that inspire their people and provide outstanding service to their customers and fill one of the.
Big learnings in CRM as an example, the engagement layer has been well penetrated you know we all understand.
CFA, we all understand marketing, we own stand up sell cross sell engagement, but what hasn't been done so well. It's mid office operations, how does the healthcare provider take care of 50 million claims and make sure things have done well for each and every constituent or it could be making sure.
Sure on field service level for example, deep analytics and machine learning is applied to understand how things can be corrected remotely, but when you do have to managing incident, it's done with the right person the right tool set the right training with the right preparation so when they do activate a resolution process.
Productivity curve goes way up the customer satisfaction loyalty effect hits now you're also seeing virtual agent on the platform, where we can handle 50 million plus.
Consumers at any one given time on the Internet. So it's really evolved and service now is leading in digital transformation and work flow is hitting mainstream awareness, which is a new curve with Ceos and they like it.
Great. Thanks.
Very helpful. Then what do you think about the sales and marketing line, obviously with a pretty significant jump in head count this quarter, one of things that you've talked about.
Even more distribution for broadening product products that.
So I guess, a jump ball for bill and engineering or how you're thinking about just head count there and that that line going forward as you've gone through the long term growth potential, but also maybe near term productivity.
Yeah, maybe what I could do just started off and then I'll I'll, let gene to pick it up so here's the deal you know we have the platform of platforms. You know we are doing fantastic in Ikea to them and there's no question about all the.
Solutions in that portfolio employee is taking off like a rocket and continues to grow incidentally were very supportive of the systems of record out there and that's also helpful to the customer because we had all the complexity and make the user experience great on C. et cetera.
As I mentioned to you we can handle being engagement layer, the mid office or the field service layer like no one in the market, but if there's someone already entrenched in a certain account we have no quarrel with that we just make everything that they do work better.
And then there's of course, the App engine, what I see as our priority is to make sure we align the value chain by industry and persona in every geography, and we go to market with tremendous consistency and meticulous attention to detail on the presale sale.
Wholesale customer support services and Echo system and that motion is completely aligned and now I think the virtual environment is the best way to do it at mass scale quite frankly, I think we will learn that in this crisis now in the past, we would invent new product or a new line and then have to have.
The specialists salesforce to support it I think more and more we're going to be able to do that with our core sales professionals, because we're finding a new level of expertise.
Increased shaping these things in training on these things and aligning the value chain. So overtime I think we'll get more done with less as opposed to every time, we want more we'd have to add more and that's the mentality. We're putting into this that's why we're only hiring pens, maybe nine was that.
Actual Gina.
Thanks, So yeah, I would just say that you're right. We had strong growth in our sales and marketing head count in Q1. It was the strongest sale hiring quarter ever and we continue to invest aggressively in on long term growth in both sales and marketing as well and R&D.
I would also say that we've also seen strong productivity, which Thomas we're getting good yield on the hiring invest in May and of course is the ability to maintain these aggressive target.
So we feel good we will continue to impact here and continue to drive the long term growth trajectory of the business.
Great. Thank very much if they say thank you Phil.
Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating.
Disconnect.
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