Q3 2020 ServiceNow Inc Earnings Call

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I'd now like to hand, the conference over to your Speaker, It's Lisa banks Senior Vice President of Finance.

You. Please go ahead.

Thank you good afternoon, and thank you for joining us for service now third quarter 2020 earnings conference call joining.

Joining me are Bill Mcdermott, President and Chief Executive Officer, and Gms into you know, our Chief Financial Officer.

During today's call, we will review, our third quarter 2020 financial results and discuss our financial guidance for the fourth quarter of 2020 and full year 2020 before.

Before we get started we want to emphasize that some of the information discussed on this call, particularly our guidance is based on information as of October 28, 2020 and contains forward looking statements that involve risks uncertainties and assumptions, including those related to the continued impact of COVID-19 on our business and mobile.

Economic conditions.

The guidance, we will provide today is based on our assumptions as to the macroeconomic environment in which we won't be operating.

So the assumptions are based on the facts, we know today.

Many of these assumptions relate to matters that are beyond our control and changing rapidly, including but not limited to the timeframe sport and severity of social distancing and other mitigation requirements. The continued impact of COVID-19 on customers purchasing decision and the length of our sales cycle, particularly for customers in certain industry.

Yes.

Please refer to the press release and risk factors and DNA in our SEC filings, including our 2019 10-K, and our 10-Q that will be filed for Q3 2020 or information regarding such risks uncertainties and assumptions that may cause actual results to differ materially from those set forth in such forward looking thing.

Yes.

We'd also like to point out that the company reports non-GAAP results. In addition to and not as a substitute for financial measures calculated in accordance with GAAP.

All financial figures, we will discuss today are non-GAAP, except for revenue net income and remaining performance obligations.

To see the reconciliation between these non-GAAP and GAAP results. Please refer to our press release filed earlier today, our investor presentation and for prior quarters previously filed press releases all of which are posted at investors Dot service now dot com a replay of today's call will also be posted on the website with that I would now like to.

Turn the call over to Bill. Thank you Lisa and good afternoon, everyone. Welcome to our Q3 earnings call I Hope you and your loved ones are healthy and say.

We continue to be service now strong in support of our employees and communities in these challenging times. We also remain passionately focused on delivering for our customers partners and shareholders 2020 has brought on imaginable change to the world companies have to operate in new and faster ways pivoting.

Their business models, everyone is adapting to new employee and customer expectations. It's all about people getting teams to collaborate across the enterprise is now more important than ever the workplace. So the future will be distributed managing complex digital work flows will be critical.

Enterprises need innovation without disruption, it's clear that speed has become the key differentiator.

Service now is leading this once in a generation opportunity to make work work better for people and this is what we're saying old value chains are being split apart.

They are being reformed into modern digital workflows across the enterprise.

The three trillion dollars had been invested in digital transformation initiatives.

As I do see research shows that only 26%.

The investments have delivered meaningful ROI now.

Massive investments are simply not creating massive change this is fueling the work flow revolution, but.

The missing link is integration.

Those silos departments and processes must come together into holistic cool enterprise workflows and now platform unlocks this ROI by offering speed agility and resilience companies need it now it gives companies the ability.

To deliver at scale, the experiences employees and customers demand.

That's the power of the now platform a single architecture and data model that serves as the enterprise platform for all other platforms in other words, it's the platform for digital business as one CIO said to me my goal with the now platform is to enable Mike.

Colleagues to perform their top 50 tasks in a single environment that provide a consumer like experience.

Momentum of the work flow Revolution is unstoppable, despite the cold, but operating environment. Our team delivered outstanding Q3 results Gino will provide the details here are the headlines we beat expectations across the board, we surpassed 1000 customers with.

CV over $1 billion, we landed our largest deal ever with our largest customer who has now crossed over 40 million in HCV and we're raising full year guidance today, we're driving sustainable growth well on our way to 10 billion and beyond.

I'm incredibly proud of our team and the most challenging of times, we are focused disciplined committed to helping our customers succeed above all other priorities speed.

The speed at which we're innovating has never been faster our team is leading the future work. We are releasing new innovations every two weeks with our safe workplace suite to help our customers safely returned their employees back to the workplace.

Other new product introduction introductions include hardware asset management fine.

Financial services operations Telecom service management legal service delivery workplace service delivery and connected operations I could go on in addition, our platform innovations our differentiated for the direct to consumer industry, where subscribers demand flawless cost.

From a service one of the largest streaming services in the world seamlessly upgraded their service now environment. This past weekend with zero downtime. There was no impact any of their active subscribers have that for customer service such innovation demonstrates the.

Power of the now platform, we were honored in Q3 to be named a leader in the 2020 Gartner Magic quadrant for enterprise low code application platforms. We believe this is yet. Another example of the agility of a now platform to help customers quickly work flow any gel.

We think our Gartner recognition validates the breadth of our IC solutions, putting service now in a leader position in the 220 20 Magic quadrants I see your risk management and I to vendor risk management tools and of course, we remain.

The leader on both completeness of vision, and highest and ability to execute for our ideas and the core business amaze.

Amazing now, let's look at Q3 performance.

Highlights across our portfolio here we go.

Our top 20 deals included three or more products are poor remains ever strong I'd assume was included in 17 of the top 20 deals with customers choosing our GSM problem in 16 deals being.

The embedded AI and machine learning capabilities are helping I see organization scaling automate reduce complexity cost and risk, while enabling people to work from anywhere.

Hi, Tom was included 18 of the top 20 deals we won deals with Mount Sinai and the Federal Defense Information systems Agency our.

Our customer workflows continue to be a growth driver 13 of the top 20 deals included CFM eight of those deals were greater than a million.

Our customer wins in Q3 demonstrate how service now is becoming the enterprise workflows standard for example, Q3 was our largest several quarter ever we now have nine federal customers over 10 million and ACB deals included the U.S. Air Force you are.

The army and the U.S. Department of veteran Affairs, and we had new customer wins with agencies, such as the U.S. Senate and Federal claims court in our largest deal ever the department of Veterans Affairs is modernizing its enterprise service management and I see capabilities. They are using the now platform to have re.

Real time visibility into the health availability and cost of their critical business services. This will deliver significant benefits to our her role where veterans with ideas Enpro V.A. will automate manual workflows with AI and machine learning capabilities to free up employees.

Service Excellence.

As the U.S. airports is publicly described they are deploying been now platform as part of their digital Air force of the future vision.

We are helping them deliver genius bar like self-help services, so the women and men serving our country around the globe.

In addition to federal.

State governments also or leveraging the now platform Tennessee's department of human services expanded its relationship with surface now they are using CSM to reopen state offices for public services, while keeping health and safety a priority. They quickly adopted our latest now platform Paris.

This release utilizing a new feature that enables the public to sell schedule appointments and digitally check in when arriving for appointments. The state of Alaska Governor issued a directive to protect workers and ensure that the state can continue operating in a pandemic environment.

Their existing systems manual processes and dispersed population created numerous issues to work effectively the HR department is transitioning to a centralized operating model and service now we'll solve their manual onboarding issues and enable employee workflows.

Sure be digitally transform out.

Outside of federal and state and customers across industries, then now classic Slim is been standard for driving enterprise digital transformation.

2020 has brought significant changes to deals work from home model, our HR product will support this new way of working by providing enterprise Onboarding and transitions and the now platform is helping Dell its mission to provide the best customer experience in the markets. They serve.

Leading managed services provider Tcfs became the first customer of our new telecom industry specific product service now is going to run TV access customer portal, enabling Onboarding project management customer servicing and I T support.

A major Indian financial institution chose service now to give them complete visibility to better control enterprise risks, replacing legacy solutions that were stitched together. It's just another example of the movement. We are seeing in the industry to replace legacy solutions and consolidate.

Hey on the now platform huge savings.

In Q3, we continued to see strong momentum with our safe workplace suite of apps.

This quarter, we added two new apps into the sea workplace suite employee travel safety and health and safety testing.

Our sales workplace apps demonstrate our ability to innovate quickly and deliver fast time to value.

Weeks not months and years, we've seen nearly 800 downloads of our safe workplace apps customers include standard <unk> Poors, Raymond James and Rutgers University and reactors are safe workplace apps are being used for health screening contact tracing and room reservations.

To ensure a safe environment for all students and faculty yes.

I guess my favorite customer win I'm, a huge basketball fan as many of you know my grandfather, Bobby Mcdermott was a hall of Famer so I couldn't be more proud of how service now held pro basketball haven't successful restart season, the N b, a and W.M.B.A. were able to implement service now employee workflows and under.

Week to manage the complex manual processes associated with restarting.

Service now help to lead facilitates screening for more than 2600 league step vendors and guests who entered the n. BMW and be a bubble in Florida and successfully processed more than 13000 essential documents using service now technology. The lead demonstrated that is.

Hey, Carol returns are professional sports was possible with the right tools and protocols in place, we're very proud to become the old fishel workload partner of the N.B. AE and W. NB Iot and we look forward to helping to lead continue to drive digital transformation to deliver greater.

Employee player and fan experiences.

As we drive great customer wins, our partner Eco system is growing even stronger we are grateful for the investments our partners are making to grow their service now businesses and to serve our customers. We recently announced a go to market partnership between I B M and surface now.

This new business opportunity combined service now are you give them and I, Tom capabilities with IB EMS Watson, a ops AI ops to help customers or to me.

He added scale, reducing cost and risk.

Last week, we announced an expanded partnership with Accenture then.

The new Accenture surface now business group will accelerate digital transformation programs for customers in telecom government financial services manufacturing healthcare and life Sciences.

Okay in summary.

Q3 was another great outperform quarter service now is accelerating.

We are confident in our ability to succeed in this environment.

We are bullish on our long term outlook and our path to 10 billion and beyond our leadership is expanding our reach and opportunities with marquee partnerships such as the N.D.A.W.N.B.I. I B M and Accenture. There are many more our brand is right.

Canadian we are becoming an essential C suite strategic partner, our eco system is growing fast our go to market capabilities are stronger than ever and product innovation is second to none.

We're deeply committed to attracting retaining and developing the best talent in this industry.

We are a big company dedicated to diversity inclusion and belonging.

Person he makes a stronger making service now the destination company, where the best talent, the longs and bribes and this is what's going to make us unstoppable.

Our new board member.

And new Chief Global Talent Officer were announced today and it demonstrates the caliber of people we're attracting.

Could not be more thrilled to have Larry Jackson, joining our board and Gabby Solidarność, joining our leadership team both are exceptional leaders.

Gary is leading the music industry Revolution for Apple music is experience using technology to create innovative market, leading consumer experiences will be invaluable as we drive innovative employee and customer experiences for the global marketplace. Likewise, Gaby brings deep 10.

Industry and talent leadership experience building World class organization at scale, but some of the best known companies in the World.

We were humbled to recently be recognized as the company with the best leadership team in an anonymous survey of more than 10000 employees across the industry.

He is a great addition, who will only make us stronger.

In so many ways. We are just getting started this year's unprecedented headwinds have only strengthened our digital transformation tailwinds we.

We have the platform businesses need the work flow standard for enterprise transformation.

The missing link for integration of existing technology investments and the creation of modern enterprise workflows.

Remember behind every great experience is a great work flow whatever challenge of business is facing we weren't flow. It we will make work flow a burp.

Service now is incredibly well positioned to become the defining enterprise software company in the 21st century, we will not slow down in pursuit of this goal.

We couldn't be more fired up to finish this year very strong.

And now I'll turn the call over to our outstanding CFO and my friend Gina.

Thank you Bill.

Q3 was a fantastic quarter for service now as the team continues to execute very well despite the challenges created by COVID-19.

We exceeded the high end of our subscription revenue and subscription billings guidance and that top line be carried through into a robust operating margin and strong free cash flow generation.

You see subscription revenues were 1.091 billion, representing 29% year over year constant currency growth.

Q3 subscription billings were 1.081 billion, representing 24% year over year adjusted growth driven by the great execution from our sales team.

Remaining performance obligations RPL ended the quarter at approximately $7.3 billion.

Thank 28% year over year constant currency growth in.

Incurrent RPL with approximately 3.8 billion, representing 30% year over year constant currency growth.

But topline stress demonstrates the power of our product portfolio and our ability to meet the evolving needs of our customers.

The now platform is uniquely positioned to deliver exceptional kind of value and provide workflows that create great experiences for customers employees and partners.

We are solving customers' challenges and playing a key role in accelerating that digital transformation.

The now platform enables the missing integration that linked together system silos department and processing into unified work flows.

Our best in class renewal rate improved quarter over quarter to 98% demonstrating the resilience of our business as the now platform remains a mission critical part of our customers' operations.

As Bill highlighted our sales team continued to win bigger deals in Q3, including the largest ever at $13 million HCT deal.

We closed 41 deals greater than 1 million, an ACB in the quarter and what's more nine of those well with net new customers.

Our ability to land new logos. Despite the macro uncertainty that could have been just it is a testament to our amazing products and our brand that continues to resonate with the C suite.

We now have over 1000 customers paying us more than 1 million and a CD.

Turning to profitability Q3, operating margin was 26% a 400 basis point beat versus our guidance driven by our strong top line outperformance.

Lower <unk> expenses as a result of coated and about a 150 basis points of marketing spend that shifted from Q3 into Q4.

Year over year Q3, operating margin was consistent with last year.

Lowest teeny expenses were offset by planned incremental investments in R&D and marketing spend a pipeline generation.

I'll speak how so margin was 19% a 500 basis points year over year, driven by lower teeny spend in capex in the quarter as well as strong collection.

Together these results demonstrate the strength of our business model and our ability to strike a balance of growth and profitability.

Before I move to guidance I want to give a brief update on the trends we are seeing in our business.

Overall, we see strong momentum heading into the last quarter of the year. The highly affected industries, we outlined earlier in the year, which represented about 20% of our business and include areas such as transportation hospitality retail in energy continue to see macro headwinds that remain steady cost.

Most of service now.

We closed six new deals over $1 million in visa affected industries.

While we do expect some headwinds, it's a really impact that it just seems like airline.

Renewals of existing customers have remained very strong.

Furthermore, we've also seen very healthy payment terms and dsos collections have been strong helping drive free cash flow upside in Q3, and we expect that trend to continue into Q4.

Enterprises are realizing that they need to quickly adapt to the workplace of the feature and service now is providing a smarter and faster way to work flow.

Our pipeline generation has remained robust and our pipeline coverage ratio for the remainder of the year gives us confidence in our ability to deliver a strong finish to 2020.

As a result, we are raising guidance for the full year.

We are raising our subscription revenues range to between 4.257 billion and 4.262 billion, representing 31% year over year constant currency growth.

We are raising our subscription billings range to between 4.78 billion and 4.8 billion, representing 26% to 27% year over year adjusted growth.

We continue to expect 2020 subscription gross margin of 86% and we are raising our full year 2020 operating margin from 24% to 24.5%. This reflects additional savings from glowing see any expenses related to cover it.

Let me note that while we expect many of these expenses to return at some point in the future. We're taking our learnings from the current environment and leaning into the future of work.

These learnings will have lasting effects on our overall efficiency, giving us the ability to redeploy savings elsewhere.

We plan to take advantage of the incremental leverage and make disciplined investments for growth.

We're reinvesting in R&D in quota bearing resources to drive innovation and pipelines to fuel our tremendous organic growth engine, ensuring that we maintain our market leadership and are well positioned to take advantage of the digital acceleration heading into 2021 and beyond.

Turning to free cash so we're raising our full year 2023 cast some margin 200 basis point from 29.5% to 31.5%, reflecting the increase in operating margin and our expectations for better than originally forecasted collections for the year.

Turning to Q4.

We expect subscription revenues between 1.155 billion and 1.16 billion, representing 27% year over year constant currency growth.

We expect subscription billings between 1.625 billion and 1.645 billion, representing 24% to 26% year over year adjusted growth.

Moving on to profitability for Q4, we expect a 21% operating margin, which includes about 150 basis points of marketing spend that shifted from Q3 into Q4, and some incremental investment into pipeline generating activities to set us up for a strong and successful playing 21.

Finally, we expect fourth quarter and full year 2020 diluted weighted average outstanding shares of 201 million and $199 million respectively.

In summary, Servicenow is the strategic work flow authority.

As enterprises are adapting to the workplace of the future cxos or using the now platform to create new workloads and new value chain transforming experiences across silos systems and functions across the enterprise.

The now platform is the missing integration layer that multiplies the power as enterprises existing technology investment and delivers exceptional time to value.

I'm extremely proud of our team's performance as we focused on addressing these needs for our customers.

Our ecosystem partners are efficiently expanding our capabilities and our reach.

And more and more enterprises are recognizing the strength of our one architecture model and its ability to deliver great scalable experiences with speed and efficiency.

We are the platform company for digital business.

I'm very excited about the traction we are seeing in our journey towards becoming a 10 billion revenue company and defining enterprise software company of the 21st century.

Finally, before moving on to Q1 day I just want to thank all of our employees around the world for your dedication during these trying times we.

We know everyone has a lot going on in their lives juggling work and caring for your families at home and we just want to express how appreciative, we are a be a contribution.

Service now wouldn't be in a position of strength. It is without each and every one of you you make us service now sell with.

With that operator, we'd like to now turn over the call for questions.

As a reminder to ask a question you won't need to press star one on your telephone to whats driving a question press the pound key well pause for just a moment to compile the <unk> roster.

And your first question is from Raimo Lenschow of Barclays.

Hey, congratulations from my side, Bill and it's like a bigger picture question out or we are living in this normal environment, though kind of working from home demand generation in a different way than we have before what lessons have you learned so far in terms of like how does the new world is going to functionality in terms of your planning for.

Coming years in terms of sales hiring.

Lead generation et cetera. Thank you.

Oh, Thank you very much I appreciate <unk> first of all we're learning that digital transformation is actually accelerating and the cobot environment. It.

It is however, a platform game, so you need to have lapped.

That kids, who would make the difference and we see workflow as the new productivity on block when you looked at ITC talking about reached really invested and system of record kind of change you see system of action, taking on a whole new meaning now and the information.

Knowledge industry, which puts us in a very nice position in any environment. So I think what's happened here is cobot accelerated digital transformation now the people into it they've got to keep growing as fast as they possibly can our direct sales force is every bit as relevant as ever before.

And we are continuing to make sure the coverage model it stands geographically by industry and also presume you.

You can also complement is very nicely with an inside selling motion to both support existing accounts and pursuing net new logos, you're going to be in an environment, where you can do events. These events do not have to be done big stadiums with thousands of people you can do them digitally enhanced techniques, where you are.

Bring life experiences into the event that also gives a growth company like service now the ability to take some of that you need and put it into revenue strategies for future growth. So we're super excited Super confident about our ability to execute in this environment because as you know.

And while the future work is now totally different than it was a month ago and thank goodness, we leaned into that when we did it in March and started a revolution.

Yeah, well done congratulations.

Thank you very much.

Your next question is from somewhat Simona.

Hi, good evening and thanks for taking my questions. Congrats on a great quarter Bill I wanted to maybe touch on the on the federal strength and even the state and local governments. It seems like you're seeing an acceleration in transformation, there as well and I'm curious how much of the strength there was driven by March.

Rising existing processes are all processes versus kind of near term pandemic driven spend on dealing with like monitoring p. any or contact tracing et cetera.

Yeah, I I believe you know as I said, you know what happened with digital transformation might have been accelerated by colgan, but the fact is I think it brought everything to light when people have to work in a distributed way work from home on all of the technology needs that they have been.

Communications needs that they have to self service needs that they have all these things became extremely clear in a cold environment and now that that environment is clear if you read the research clearly we're never going to go back to the way things work, even after the post the pandemic is resolved.

So the future work is changing the millennial generation is changing the way people work will change and as it relates to the federal government, it's a big opportunity because the information that is required to get across the country to citizens is very slow. So the government is rethinking strategies in turn.

The communication and providing digital services. So these workflows services are going to be here for a long time, because there's a lot of things to fix so we are in a in an environment now where I think the Virginia is out of the bottle its never going back in and digital transformation is going to continue.

To accelerate and yes, we do have returned to work, but that hasn't been the major source of the revenue drive in federal state and local it's really been more automating and rethinking work processes and automating everything in a much more human friendly way.

Great. Thanks for taking my question and congrats again gets you guys doing well.

Thank you very much.

Your next question is from Kirk matter of Evercore ISI.

Yes, thanks very much for taking the question and congrats on the quarter. You know Bill I was just wondering if you could give us some idea of when you're going into these big deals you. Obviously the economic backdrop is still choppy. So you know your customers are having to make decisions about maybe bringing budgets from other areas and its or giving it to you are allowing you to earn it.

Yes, what's going on in those conversations or are you taking budget from other area from other vendors or is this are these dollars that used to be spent on more antiquated business processes that you're now able to sort of pulled together there I'm just trying to get a sense because if you take a larger view of what's going on and obviously this is still difficult.

Economic backdrop, but you all are are clearly taking wallet share and just would love some more color on that thanks.

Oh, it's my pleasure so you know.

Bottom line I'm Kirk if you think about it you know the future of work in terms of the employee experience. It's clear now that one portal that can provide all the services that employees need from on boarding.

On an employee to self serving all of their cases to training them and creating a segment of one learning journey for them to managing issues that might resolve that might come off and need to be resolved across multiple functions. All of these things are workflow related.

So I think the future of work has truly accelerated the consumer strength our application because its so easy to use it so beautiful to use people love it and we hired all the complexity of what's been created over the last half century.

In terms of the customer experience you know the customers today, especially in a digital world expect companies to give them great service and you know the kind of be SFC of the past you know how do I Upselling and cross sell you they're not in a good mood for that what they really want is they want you to give them a great service.

In terms of whatever they signed up for and then make all the self help tools available to them and use a height automate the experience and then if you do need human intervention work flow process itself should initiate a call order to a bar or to a human to resolve some things to the core.

Customer gets what they want and they get a digitally and you know Netflix taught us business on Disney plus taught US. This this is the new way that customers want to work and they're not in the mood for an up sell or cross sell when they're calling in to have a problem resolved or they're trying to get a service initiated and similarly big.

Companies have a direct to consumer headset right now, it's kind of like Hey, the middle people I used to work through wholesalers retailers et cetera are open. So I've got to go direct to my consumer with my brand of my product and create a great experience. All of this is work flow.

So the changes in the future work, we're going to be there, but then you could take a large bank you know I had a a CIO or extraordinary and with our board and she talked about retiring 283 legacy applications and converging them all on the now platform and there's a list of another 100.

And she basically told a great story about literally thousands of people working from everywhere and getting them all their tools and procedures and allowing them to navigate in this world on their own in a way that's highly pleasing to them because they want to drive productivity wouldn't their workforce. They also.

Want to mitigate risk and have controls in place. So the place is running well and everything now is just wanting so much better they took out all these 283.

83 systems and they go live in like hundreds and hundreds of thousands of dollars by application that they retired and when you add it all up it's in the triple digit millions so the savings huge money.

Thank you.

You're welcome.

Your next question is from call Kierstead, yes.

Thank you maybe I'll direct this one to Ticino Tina on the the margin improvement trajectory. It seems like you.

You know there was a a band we should be thinking about maybe at the low end the pre covert rate at which service now was improving margins at about 100 basis points, a year and perhaps at the high end the roughly 300 basis points that you're going to put up in 2020, which is probably somewhat unsustainable I wanted to ask whether.

Your comments about help Upticking investments was intended to perhaps push us to one end of that spectrum I I'm not asking for from guidance I know that'll probably come later, but just directionally, maybe how this experience with cove it and the cost structure has changed if at all your view of service Now's a margin improve.

I've been story.

Yeah. So thanks for the question call. It. It's a great question and I was trying to give some some I was trying to elaborate yeah right. So that the 300 basis point of margin improvement that you're seeing that this year as I said, it's not right.

Right.

All of these costs will return and what were what we wanted to say is that not all of them will at the same level right and so we absolutely will be leaning into the future work and what that means from a cost perspective, but don't plan rests on the floor and as bill asked about it.

Acceleration of digital transformation really being at the forefront and really making sure that we are well positioned to take advantage of that and really remain market leader, we will absolutely do need to invest to ensure that we are well positioned in the in the view of that acceleration happening.

And so more will come on the absolute margin die, but I wanted to make clear that the 300 basis points is not sustainable and that certainly some of the learnings and efficiencies that we're seeing a post pandemic well will be redeployed in areas such as R&D and <unk>.

And quota bearing we resources to really kick start Chris. Okay. That's that's helpful. Thanks, and if I could ask a follow up to Bill Bill. It's now been a pretty well a year since you were announced as the new CEO service now congrats by the way on on that anniversary and I'm, just wondering now that you're getting comfortable.

Well in the seat the execution has been strong.

Perhaps it's time that M&A becomes a bigger lever to move service now and the direction you'd like I'd Love I'd Love your thoughts on that thank you very much.

Well. Thank you very much you know it's been a year, it's been amazing I love It here and the workforce these are partners and customers.

The satisfaction loyalty you cite on net promoter score everything is just so positive and the culture here. So committed and I think that is really jelled very well with my DNA song just honored to be here and having the time of my life.

As it relates to M&A you know we have.

Have a situation here, where the core business and the core business has so much potential in another itself.

And the platform has so much potential in of itself and when you extend that to the employee experience and some of the items I mentioned today and then you also you know think about the workforce and the workforce of the future and all the experience layered would go along with that and what service now we'll do for peace.

And we're going to make people and their lives so much better in the enterprise then you think about customer service maintenance.

And the enormous success, we're having with customer service management and the huge Tam customer service management. We just have so much opportunity organically that you know you have to think about geography as you ever think about industries. You have to think about the persona is we're going to serve and when you put it all together you know.

Depending on what research you look at you know Morgan Stanley want to Endear had just taken paper based processes and enterprises and automating them into workflows is 228 billion in the U.S. So if you extrapolate that to the world we could easily get to 400 billion system that you think about it.

We experienced the CSM the core business now with no more of the operational efficiencies. So much organically. So I think the tuck in strategy has worked well for us.

We've been able to re platform all of that code to the now platform. We have no tech debt I mean companies. So it's been through acquisition now have a mess on their hands the spanning engineering on re integrating all the time instead of building that wouldn't be so we're very thoughtful about what we're doing here.

And why we're doing it in service to the customer so long and short of it is it's an organic growth story, there's plenty of room to grow the Tam is big and if we did something on a more sizable scale. We would have a very clear guardrails on doing that for the customers interest and the large expansion opportunity.

But we would never take away the experience.

Getting from the now platform.

Got it. Thank you very much both of you.

Thank you very much.

Your next question is from Keith Weiss from Morgan Stanley.

Excellent. Thank you guys for taking the question and very nice quarter, a bill a question for you and then one for Gina definitely feel your excitement about the kind of work flow space, but.

It does seem like there's a lot of other vendors that are trying to converge on this opportunity as well and trying to automate People's People's work flows and perhaps a different competitive in the center environment that is or is not seen historically Keith can you give us your perspective on sort of core the main competitors for the big vision of servers, not where the guys are you.

Really are going out there and and duking it out with to get those big.

Deals done.

Keep that that's the amazing thing you know, we don't need any wanting to lose for us to win so.

So if you think about the large system of record providers out there we have no quarrel with them most of the Ceos and technology leaders out there have invested heavily in those platforms and the last thing. They are interested in doing right now is switching out those platforms, especially in the Covidien bond with speed access.

Coloration resiliency in serving customer new employees at the top of the to do list. So that's not a problem for US and then if you think about the point solution providers of course, there's always going to be point solution providers running around but we became the platform standard for workflow automation.

And now we have extended the perimeter into the employee and the customer service management areas would you view Sands also as Gartner indicated you know, we're really gaining men distraction on the platform itself, where people are building innovation onto the platform. So what I see happening is large companies in the fortune.

2000, or basically taking legacy and they're putting it on so now they're basically saying mountain has bottomed my legacy because I could go to service now get a consumer grade experience I can automate my workflows across domains systems silos and give my employees and their customers great experience.

And that's so important to them they don't even know about price as much as they ask about how quickly can you get it done and then when we tell them how quickly we can get it done there's literally anymore, because we talk in weeks.

Don't talk in years, and that's a very different languages. The most large scale companies. So I would really tell you. There's no competitor that we go into these large deals are worried about we just focused on the customer getting their business to run and do it well and then obviously.

Have all the tools processes and people in place to show them the value and we not only show them, what's possible, but we manage the value through the lifecycle of the relationship at an art form level and these the plays that have been put into the service now playbook in the last year that it's scaling very very nicely and the car.

Customers can see what they're getting out of the platform and they like it.

Got it got it and then for Gina.

The confidence you guys have in the business you guys are definitely especially on the conference call, but also in hiring if I got like my math right. The Big head count is up something in the order by 27% on a year on year basis, So definitely investing behind this opportunity two questions for you one is that level of growth sustainable for sure is now on a going forward basis or should we expect.

Moderate and two just given the dynamics of the subscription model, where revenues kind of follow the trend of subscription billings and billings overall are there some margin implication for that type of growth that we should be keeping in mind as we think about 2021.

Great question, Keith I appreciate it yes, you're right in your numbers, maybe it's up significantly we made the capex that we were not going to lay off this year and the cobot environment and not only that are actually going to continue to grow our head.

Pretty aggressively year over year, especially in R&D and sales.

And so we have done just that and we will continue to do that with respect to trend. We are really focused on hiring nine and this organization and you know the announcements that we've made on new leadership has been fantastic and really getting high quality I will break out.

People want to come work for service now and we are just so thrilled about that and so yes, I absolutely believe that the trend will continue that we will grow headcount from a margin perspective, I said earlier, it's a bit early to comment 21.

Certainly the 300 basis points that we're seeing this year is not sustainable and we absolutely will be very focused and disciplined in all our investments including.

To ensure that we're driving the right level of ROI, but at the same time really investing behind growth and innovation.

Yeah, you know one of the things to build on when she is saying you know we pretty much.

Have so many people trying to work with service now and we're very honored by that but you got it really you know thread the needle to get done here. So what we're putting into the company is sustainable and we rather have a job open well extended period of time, rather than settle on town. So we're going to build great Great company here.

The other thing I want to mention to you is you know the margin profile is also a substantiated by revenue per employee.

And if you look at our revenue per employee and how its climb and how its lined up against any comparison you come up with in the enterprise is pretty impressive and June nine study that very carefully and we want to make sure that our shareholders have total visibility and all the things that we're doing and we also run the whole company on an l. platform.

So we're getting tremendous efficiencies out of that that being reinvested into people and I think that's a big bend and we're really focused on the engineering pride of the company, we make great great products and we provide great service with those products and the brand obviously is resonating but in addition to that you know where we put the money.

He is on things that will return for the shareholders. So in the form of revenue and sustained revenue. In addition to the margins. So we're really really focused on the whole PNM, but.

Yes, there is no unit economics are really best in class and we definitely take notice a beat.

The efficiency with which you guys make those investments and the great returns. So a great job guys. Thank you very much if any great. Thank you.

Your next question is from feel Winslow of Wells Fargo.

Hi, Thanks for taking my questions and congrats on another great quarter. A question for you are building a follow up Regina Bill obviously, given your background scaling go to markets a large application platform companies now that you've been at service now for three plus quarters. How do you think about the opportunity was there was no has not specific to your sell deeper into the organization, but as you mentioned you acquired acquired part.

New customers, how do you think about sort of balancing that opportunity and then just sort of a small but in terms of just go to market capacity. Obviously, you've added a lot of real market has this year. What are you seeing in terms of just ramp up this new has especially doing so no one in a virtual environment.

Yes, so bill Im really excited of course, the year here, we cross that threshold right in terms of building. The go to market machine here you know, it's it's an outstanding business because the business was built on net promoter score customer satisfaction and loyalty.

And when you have a baseline of.

Very very happy customers that love the product and are having a great experience. It's a lot easier to scale that organization. So I start with that and total respect.

The great Engineering and outstanding go to market focus that we have in the company the deeply care about customer satisfaction and loyalty and that baseline has enabled us to focus I'd say, we're focusing very carefully Phil on the global 2000.

We are now geographically expanding in Asia. We also have several places within EMEA that we can expand and we're on top of that and we're also segmenting things much more by industry now because as you know when you have an industry solution, it's easily replicated.

In other parts of the world and in other accounts. So were very good with large customers getting success and then fast replication of that success and the value that that delivers is something that's still a tailwind and there's plenty of room to grow or the more.

I do agree that you know that works, especially well in the cobot environment on a same account revenue growth basis, and then there is a whole new motion that we have for the net new logo expenses of the company and that will nicely complement the direct sales force. So there are several indirect techniques that were.

Putting into place.

And I'm just like all shareholders know, what we're thinking about this stuff.

Our sleep to we want to make sure that things that we used to do.

That perhaps because of Cold war, we came up with a better idea even after the cold winter is going to be invested in things that give us growth and do so with high efficiency. So we'll cover and aboard geographically by and by persona. It's a direct game. The focus is on the 2000, but we can also go down market with a lot of.

Self service techniques and insights that means that we have yet to fully formed and they are in their place. We think they'll hit hit the ground running 21.

And then I am backing west and with respect to sales of efficiency and ramp that I've been extremely impressed fill with the sales teams ability to close large deal dollar mode. As we mentioned, we closed 41 deals greater than $1 million in HCV this quarter on a sequential basis.

We actually saw an improvement in sales productivity with the most notable uptick coming from North America.

Attrition rates remain.

Low almost like the lowest rates we've seen in quite a long time. So we're entering into 21 would ramp significantly higher than last.

Last year, so we feel really good about sales productivity about the ramp and.

And of course, the ramping employees in a virtual environment. We use the now platform. So our onboarding platform and product has been phenomenal and sell the 27% growth that you've seen this year and so had we been onboarding the bulk of those folks remotely in a covert environment and.

It's been flawless I'd actually had higher is that were so impressed with how easy it was to onboard and so really really proud of the entire team.

Great. Thanks again.

Thank you Bill.

Your next question is from Derrick Wood of Cowen and company.

Oh, great. Thanks, and I'll Echo my Congrats I guess her bill or Gina I know you guys don't disclose net revenue attach rates, but I'm. Just curious if you look outside of the distressed verticals you talk about how would you characterize how expansion rates have trended this year versus versus what you saw a pretty cool bed and then.

As a follow up I mean, as you enter your strongest renewal quarter and Q4 can you talk about the focus in the <unk> and the demand for IP ascent pro and maybe give us a sense as to what what inning. You think we're in in terms of penetrating the installed base. Thanks, Yeah.

I'll take that on this and I think that.

Our fans.

Fans in rate and then really holding up well similar to what Weve seen pre Kobe itself, you know really strong happy happy with what we're seeing even with respect to the distress verticals I talked about those deals greater than a million in the knee.

Oh Im sorry in the quarter holding up really well.

And so we feel really good about expansion right Oh, we feel really good about Ethan Allens significant then needs to shut verticals right. We are seeing more upsells bend down south and so again feel really good about that.

If you talk about the demand I can get them so well.

Paying it seems to be going well and really strong we continue to have a job order in Q3, you know we had great strength, we saw increases in automation and operational resiliency within that product you know as we've talked about before that.

25% I like I see is that right.

And 15% about customers are are using it today. So there is significant runway still ahead of us with respect to the pro scaling. So again in summary, really doing well customers are resonating at the AI and ml capability that are incremental in the pro ski or really resonate.

Moving right now more than ever as you think about the future of work and hope called that environment. So still Ernie probably ending with a lot of runway to go and Derek one thing to build on his commentary on the pipeline.

If you look at our pipeline in a snapshot this time last year our pipeline is.

Well this year versus last year, and even one if you want to play the what 15 business growth and do it in a in industries got harder hit do you have enough coverage on the conversion side, we have more than them.

So we've already gone through all that and you know the retention been outstanding including in the distressed industry and the pipeline Walt is substantially strong and the loyalty actually went up this quarter versus less so the business is in really good shape.

Great to hear thanks.

Thank you.

Your next question is from Brad Zelnick.

Excellent. Thanks, so much for fitting me in I want to follow up on Keith's question around head count because I noticed you know the exception was in professional services and Bill.

I don't think anyone has the kind of experience and relationships with the global less size as you do so can you give us an update on these relationships the joint investments, you're making in the kind of partner leverage leverage that we should expect to see out of the business going forward.

Yeah. This is good because it's such a good question you know if you think about.

On the partner like he was as an example, if you talk to car mine you know service now.

Sinclair a year ago, and Servicenow platform, where do you see and you know we were one of the parts you know we were one of the companies.

And now it's AWS and Microsoft as its two most strategic global partners.

If you think about Accenture I talked about consensus today extensions now opened up a global practice dedicated leach pad.

Passion and investment.

If you look at I began I B M had a very large on premise their version of ideas them on premise legacy and they've entered into a big partnership with us to actually move that to the service now cloud we came up with them on their Watson Hey ops.

Everybody wins, but best of all now I view is committed to a large scale.

Servicenow practice and this is also true with all the other signature partners that you're well aware of so what.

What has changed there.

There isn't a single partner out there that doesn't have at least a 1 billion if not many more feel you vision for what they will do it service now in the very near future. They are all increasing their investment they're all looking at service now as a standard for digital transformation and they all see.

Okay.

He the service now as the cost platform integration.

Two straight now the way companies run and also complement their other practices or they're looking at it as a pure net new work flow Revolution practice on some of the diamonds with gene and I discuss today.

In all cases, it is we only getting tremendous tailwind. That's one of the network effects that I think is coming from building great products, having tremendous engineering bride in Walsall winding up a company only replacing the satisfaction I mean, that's really what we care about and all the partners.

Resonating with that because we work with surface now you don't have situation. We know product message you have situations where service now complements their practice it works everybody's happy with it how do we scale that's the conversation.

Awesome Bill if I could just squeeze one in for Gina I wanted to ask about the cobot assumptions that you have baked into the Q4 guide because if I look at what you were saying a quarter ago, you would assume that the most significant headwinds would occur in Q2, and Q3 and that as it relates to Covance and that you know into Q4, the economy would be opening up.

More broadly now if I look at the safe Harbor in the deck that you have out there today, even said says that the assumptions are based on information available to US today can you just maybe talk a little bit about you know is this in your mind that headwind relative to what your assumptions were a few months ago, because we're seeing I know this is changing and evolving very.

Rapidly, but you know even today with France shutting down how are you thinking about this.

Yeah, It's a great question and as you know right. So that the uptick in cases of France couple of closing down is certainly a key a key Uh huh.

He on all of our minds right not just from a business perspective, but what I will say is that I.

You still have the guy who actually raising our guide for Q4, and so we definitely took a cautious approach in all of our assumptions I'm back at the end of March and we continue to refine an athlete, though what gives me confidence right now in our current Q4 guide is our pipeline.

And stats right. The coverage is better than last year, our close rates are strong and so we continue to be able to evolve and close deals in this remote environment and so you know if you think about where we were back in March April may the whole world basically locked down.

We feel confident that we'll be able to really continue to hit our numbers and have a strong close to 2020 and keep the war on the team is doing a phenomenal job execution, it's just tough rate and at the end of the day back to the comments that Bill has made earlier.

More and more companies are leaning in and not leaning out because they absolutely have to and the longer coal they exist and let's be clear no. One thinks this is going away tomorrow. The more companies have to invest and exactly what service now is providing and so again pipeline looks.

We feel really good about our Q4 guide.

Thank you so much Ghana and congrats on all the success.

Thank you.

And we have time for one last question.

Last question is from same clean up Bernstein research.

Hi, Thanks for fitting me in a little bit of a conceptual question regarding your Tam I know you've alluded to this in the past, but I get a lot of questions from investors regarding how much does your Tam when you add up the spend on HR versus customer service or IP management et cetera, and it seems like that's maybe not.

The best way to think about it that increasingly it seems like the Tam is a function of how much the employee time or the value of employee time tracking work about work is is being wasted in aggregate around the world compounded with the the lost value in suboptimal business result, when when you guys.

Look at that looked at your opportunity in terms of Ah you know those those two variables that assuming that's.

Correct would look at it what what do you see as being the size the opportunity and then which technologies or competitors do you view as being most.

Most concerning for as you know once you would want to watch on the horizon as a potential threat. Thank you.

Yeah, I mean, it's a it's a it's an interesting question and if you. If you ask 10 different people what the Tam as you will absolutely get 10 different answers. If you look at what Gartner said, when we IPO Ed about what the Tam was I see them. It was you know significantly lower than what it what it is.

As I think most people would say the Tam is about 165 billion, but that's not including exactly what you talked about right the real opportunity to automate manual processes to out every single organization. It's a knowing that it's huge and if we think about that I think that.

You know I'm not going to quantify it here, but you all can do your math, it's large and so we absolutely believe that the acceleration of digital transformation is happening today and that we're going to continue to evolve and innovate to ensure that we remain the market leader and so.

A competition perspective, we talk about this off and we're a platform company and a platform a platform company first and so really with respect to competition as no. One out there that can do what we do the way we do it can automate complex workflows across the enterprise across.

Silos across departments.

You know the benefit is really that you know we can provide the engine and functionality across I see employee customer to out the organization you know where the only cross functional platform that can sit on top of any of the systems of record to enable workflows across those systems are reconciled so as bill said earlier no.

It has some leases for us to continue to grow and thrive and so I did a differentiation is that we were really the only software company at our side with one platform one data model one architecture and so we're poised to take advantage of that incremental opportunity as it comes but you're absolutely right the tail.

<unk> is getting larger and larger as we really think about how companies really need to automate the back and middle office Ashar.

Very helpful and for what it's worth I think third now is the only company the ever Ah I ever submitted a larger Tam than what management claims. So you guys have definitely executed well and congrats on the success. Thank you very much.

Thank you very much the same.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

Good bye.

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