Q1 2021 ServiceNow Inc Earnings Call

Good day, and thank you for standing by and welcome to the Q1 2021 surface now earnings conference call.

At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone please be aware to limit your question to one and a follow up.

Please be advised that today's conference is being recorded.

Require any further assistance please press star zero.

And now like to hand, the conference over to your speaker for today, Ms. Lisa Banks Senior Vice President of Finance. Thank you Ma'am. Please go ahead.

Good afternoon, and thank you for joining us from service now first quarter 2021 earnings conference call. Joining me are Bill Mcdermott, our President and Chief Executive Officer, and Jan Madsen, Our Chief Financial Officer.

During today's call. We will review our first quarter of 2021 financial results and discuss our financial guidance for the second quarter of 2021 and full year 2021.

Before we get started we want to emphasize that some of the information discussed on this call, particularly our guidance guidance.

Is based on information as of April of 'twenty, eight 2021 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 global economic conditions.

The guidance, we will provide today is based on our assumptions as to the <unk>.

<unk> economic environment in which we will be operating.

Those assumptions are based on that banks, 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 of sport and severity of social distancing and other amortization requirements.

<unk> impact of COVID-19 on customer purchasing decisions and the length of our sales cycle, particularly from customers in certain industries. Please.

Please refer to the press release, and the risk factors and MD&A sections of our SEC filings, including our most recent 10-Q and our 10-K filed for the fiscal year 2020, our information regarding such risks uncertainties and assumptions that may cause actual results to differ materially from those set forth in such forward looking.

These statements.

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

All financial figures, we will discuss today are non-GAAP, except for revenues net income remaining performance obligations or Rps and current RPM of <unk>.

Please see the reconciliation between these non-GAAP non-GAAP measures. Please refer to our press release filed earlier today, and our investor presentation and for prior quarters previously filed press releases all of which are posted at investors Dot service now dot com AR.

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 to all of you welcome to our Q1 earnings call I Hope, everyone remains healthy and safe and you and your loved ones are benefiting from broader vaccine availability service now.

Mains grateful to be in such a strong position to help support of families communities and customers. We started 2021 with another outstanding quarter, delivering a perfect balance of growth and profitability our team is executing maintaining.

Of the Swift pace towards our path to 10 billion in revenue and beyond in Q1, we grew subscription revenue, 30% year over year exceeding the high end of our guidance, we delivered strong profitability with operating margin over <unk>.

27%.

And we increased free cash flow margin seven points year over year to 46%.

Our significant Q1 beat across the board represents the passion, our culture has for innovating and our relentless focus on the customer we.

We are ideally positioned to deliver what our customers need in.

In the past year the transformation of work has accelerated the adoption of digital products services and experiences as a result digital investments are at an all time high and will total more than seven eight trillion dollars.

By 2024, according to IDC.

Service now is the strategic authority for digital transformation across the enterprise, we have expanded the boundaries from <unk>, Inc.

So employee customer and now creator workflows for citizen developers the digital economy is firing on all cylinders and so are we.

Our culture, our culture was born from this moment.

Our team of 14000 colleagues are exponential bankers. This is how we continuously bringing innovation to everything we do.

The past 18 months, we have more than doubled the features and functionality of our platform for our customers. We're at the epicenter of the workflow Revolution.

Our purpose has never been more relevant we are making the world of work work better for people, we are helping our customers dream big and to build their digital bridge to the future. Xerox. For example is working with service now to transform the services industry.

Leveraging our field service management their technicians will use machine learning so proactively solve customer problems. They are using virtual and augmented reality tools to resolve their customers' issues via desktop mobile and smart glass devices in this bold new world.

It's as if their agents are there in person.

Digital transformation is about creating great employee and customer experiences in an increasingly distributed hybrid work force companies need to create frictionless experiences that make it easy for employees to get work done this requires seamless cross enterprise workflows.

Linking systems silos departments and processes.

Only the now platform can do this with native integrations the platform of platforms. The power of one one data model one architecture, one enterprise solution to work flow every business challenge. This is what service now delivers.

We are the only ones doing what we do the way we do it.

Strong demand for service now is evident in our results high growth organically driven at mass scale, while aggressively investing in future growth and delivering significant profitability.

And amazing business model and a true Testament to the power of the now platform.

Our teams keep innovating, we're proud that Quebec, our latest platform of lease delivered 1700, new customer capabilities.

Through innovations like predictive AI operations, AI search and virtual agents that enhance every experience to name a few.

Service now is helping customers move to the cloud and invent new business models. The past year has demonstrated that giving people. The right productivity tools is critical to success, especially in distributed work environments. It's why organizations like Adobe Deutsche Telekom Logitech.

City of Los Angeles, and discover are using on our platform.

Discover in fact is fully utilizing the now platform's ease of upgrade participating in the early adopter program for our flow back release now discover is able to focus on timely availability and adoption of new functionality. The now platform is the gold standard from time to value.

By the end of 2021, Forrester research predicts that 75% of development shops will use low code platforms with Quebec, we are delivering new low code tools that move App development beyond the borders of the engineering organization and into the hands of citizen.

Developers employees without software expertise, who need to quickly create workflow applications, we're seeing strong response.

The National Cancer Institute at the U S Department of Health and Human services is a great example.

NCI has established a digital service center around service now low code App engine platform.

10 days NCI leverage service now to build a new application for an online portal to collect and track specimens from COVID-19 patients service now as low code App is helping NCI staff support the global research community in understanding how genetic.

Factors contributing to the severity of COVID-19 cases.

We also introduced process and workforce optimization capabilities and our new enterprise Skus. This brings even more intelligence to our customers, allowing them to be more agile, we're putting new AI capabilities in the hands of our customers. So they can enhance productivity while spending.

More time on human creativity with our recent acquisition of of Intel of Bot service now will have an unmatched intelligent workflow automation solution with RBA AI machine learning and process mining native to the now platform you'll hear more about this from our chief.

<unk> and Engineering Officer, CJ Desai at our upcoming Investor Day. Please be there now let's look more closely at Q1 performance highlights across our portfolio.

Our better together solutions continue to drive more multi product deals are core workflows remains strong.

Sam was in 12 of our top 20 deals our AI and ml capabilities embedded without pro SKU continue to resonate with customers item had a strong quarter and was in 13 of the top 20 deals.

EMEA was especially strong we're hitting a new gear was CEO engagement, we're seeing more demand across industries, including financial services as EU banking regulations require companies to have full visibility into their assets while also managing.

Risks HSBC for example chose service now and of multi year partnership as their workflow partner of choice to help them digitize at scale supporting Hsbc's employees service now will deliver the technologies needed to simplify their architectural landscape.

This creates efficiencies better controls and compliance.

Australia, and New Zealand banking group also shows the service now platform to consolidate simplify its I D systems and streamline operations to improve the employee experience and now platform gives them the advantage of being fully integrated view of technology and risk.

We continue to see strength in our customer workflows, our investment in the telco vertical are gaining traction daily and it's materializing in wins across the globe luminous technologies, a leading telecommunications company is transforming its customer care and <unk>.

<unk> function with service now customer workflows, they will use the now platform to deliver best in class customer experiences across their networking cloud and security solutions Telia, a leading multinational telecommunications company selected service now to transform <unk>.

Of this operations connecting network operations employees and customers around the world.

Creator of workflows, our platform business was in 19 of our top 20 deals.

Three of our top 10, App engine wins came from a T. J, where we are seeing increased awareness of service now and it's continuing to drive demand.

A large global manufacturing company in Japan is planning to use our app engine to automate manual processes take out costs and risks associated with migrating on premise applications to the cloud this will be of movement in Japan.

In the U S. The now platform is at the heart of the city of Los Angeles as digital transformation, helping to provide reliable access to essential services for its 4 million citizens. The city is expanding its use of digital technology to provide immediate access services, which enables citi.

Essence to get the assistance they deserve.

Employee workflows were included in eight of our top 20 deals. The Lando is the leading online platform for fashion and lifestyle connecting customers brands and partners as part of their HR transformation. They will implement a central employee services portal using service now.

As employee workflows, so low.

<unk> this is of critical component and supporting their growth and improving their employee experiences.

Employee and workplace safety are top of mind for our customers. We are the only company with a complete suite of applications to meet these critical needs since the start of the pandemic service now has been at the forefront of solving unprecedented challenges we saw the need early enacted.

Quickly first with our emergency response apps than our safe workplace apps and now with vaccine administration management.

We leverage the speed and agility of the now platform and the incredible talent of our product team to innovate fast deliver market, leading solutions to support our customers and help keep them safe.

You see organizations of trap and the last mile of vaccine management as they lack the processes and infrastructure needed to vaccinate people quickly. This is the work flow challenge of our time.

To address these challenges.

Organizations are using the now platform as their vaccine management Command center, our workflows are connecting organizations existing technology infrastructure to help orchestrate the critical elements of the vaccine management process, including distributing administering.

And monitoring vaccines.

Of the Minnesota Childrens Hospital implemented our vaccine administration management in five days. So they can stay focused on their number one priority caring for children. The hospital is using service now virtual assistant to answer questions and scheduled patient vaccinations there of leveraging inventory.

Tori tracking and schedule, Inc to ensure appointments staffing levels and vaccines are all in sync.

Germany's largest state North Rhine Westphalia is using service now to support vaccinations for millions of people.

Within two hours of the portal going live 120000 people have registered and received an appointment service now ended Q1, working with over 100 organizations and governments globally to help vaccinate people at scale, we are supporting the delivery and management of millions of.

Vaccines globally, we will continue to do more of the workflow Revolution is all about helping people we are humbled to be helping so many people around the world manage this workflow challenge in summary, we had a great start to the year with strong momentum.

I'm so proud of what our team has accomplished over the past year and what they continue to achieve from the beginning of this pandemic. We are focused on taking care of our people and taking care of our customers.

That's why we're so grateful to be named to the Fortune 100, Best places to work list for the first time and we're proud to have increased our position on the fortune best workplaces in technology list by more than 10 points.

Our culture of demonstrates time and again, how we powered through all weather conditions, our engineering pride is unmatched.

Innovation with legless and our customer focus tireless we have a very very robust pipeline.

Substantially greater than anything we've seen before.

We have all the learnings of digital customer relationship management.

Our strong go to market organization is operating in high gear.

Our customer services and partner ecosystem is accelerating time to value.

Our business is ever resilient, our opportunities never greater we continue to work with some of the world's greatest brands, including BMW, Bristol Myers Squibb F. I S subway standard and Poor's, we're honored to be their digital transformation partner.

We're also excited to highlight even more customers at our upcoming knowledge 21 experienced in may which will be our biggest customer event ever and we look forward to seeing all of you at our upcoming Investor day.

This service now machine is firing on all cylinders, we're not slowing down we are well on our way to 10 billion and beyond and we are striving with all we have to be the defining enterprise software company of the 21st century Gina.

Over to you.

Thank you Bill Q1 was a great start to the year on the heels of a tremendous Q4, the team continued to execute well and delivered another strong quarter of outperformance we exceeded the high end of our subscription revenue subscription billing and CRP of guidance and those top line beat.

Carey.

Robust operating margin and starts to be cash flow.

Q1 subscription revenues of $1 293 billion, representing 30% year over year growth inclusive of a four point tailwind from FX.

Remaining performance obligations or P. L ended the quarter at approximately $8 8 billion, representing 34% year over year growth, putting us well on our way towards that $10 billion revenue target.

K R. P. O was approximately $4 4 billion, representing 33% year over year growth and of 100 basis points beat versus our guidance.

Notably, we delivered that beat with 100 basis points less of an FX tailwind.

Due to the week of Euro currency contributed four points instead of our original outlook for a five point tailwind.

Q1 subscription billings of 1.35 billion, representing 29% year over year growth and of $50 million beat versus the high end of our guidance.

FX and duration of four point tailwind year over year.

As Bill mentioned, we saw particular strength in EMEA as investments made in 'twenty 'twenty are gaining traction in.

In Q1, the region close one of its largest deals ever helping to drive very strong year over year net neelie CV growth.

We're also seeing improving trends in a P. J when we landed two of the top III platform built from the quarter.

We continue to see the secular tailwind driven by the intersection of digital transformation cloud computing and business model innovation every C suite leader wants to create great experiences for their employees and their customers and service now is delivering.

The now platform offers the speed flexibility and innovation companies need.

The sustained strength of our top line growth is the result of consistent execution from across the organization as we address these opportunities.

From our engineered to continue to drive leading edge innovation to the sales and customer success teams to partner with our customers to ensure we're delivering value and everyone else in between that helped to deliver great experiences.

It's been a tremendous team effort.

Our renewal rate remains strong at 97% as of the now platform remains of mission critical part of our customers' operations.

We closed 37 deals greater than 1 million ACD in the quarter, including seven net new customers.

Our focus on selling comprehensive solutions instead of point products continues to drive more multi part of steel as 17 of our top 20 deals included three of our products.

We now have 1100, 46 customers paying us over $1 million in ACD up 23% year over year.

And the number of customers paying us 5 million or more of an ACD grew over 50% year over year.

Turning to profitability operating margin was 27% of 300 basis points year over year, driven by a strong top line outperformance and the timing of some spend that will shift into Q2.

Our free cash flow margin was 46% up 700 basis points year over year, driven by strong collections and lower <unk>.

Together these results show the power of our business model and our ability to drive of balance of growth and profitability.

Before I list of guidance I wanted to give a brief update on the macro trend we're seeing in our business.

Industry is highly affected by COVID-19 that we outlined early last year, which represent about 20% of our business remained resilient in Q1.

We closed several seven figure deals in these verticals and renewal rates were ahead of the company average.

However, we did continue to see some headwinds and severely impacted industries such as airlines.

Regardless of the industry and an increasingly distributed hybrid work force companies need to create consistent and frictionless experiences that make it easy for employees to get work done.

Investments are at an all time high and are expected to continue growing as companies must reinvent themselves to the new economy.

Service now is the strategic authority in digital transformation, and we're committed to helping our customers succeed in that journey.

These strong secular tailwind paired with the strength of the agility of the now platform positions us well for 2021 and beyond Pi.

Pipeline generation has remain robust globally, even ahead of our knowledge 'twenty 'twenty 2021 event, which is a big driver, particularly in the Americas.

Helping to drive the net new ACD acceleration in our business. This year enterprises around the world of recognizing the strength of our one architecture model and its ability to deliver great scalable experiences with speed and efficiency.

Now, let's turn to guidance.

For Q2, we expect subscription revenues between 129 billion and one point to 95 billion, representing 27% to 28% year over year growth.

Including a 300 basis points of FX tailwind.

We expect CRP or growth of 30% year over year, including a 250 basis point FX tailwind.

We expect subscription billings between 125 billion and $1 255 billion, representing 23% year over year growth.

Growth includes a net tailwind from FX and duration of 300 basis points.

We expect an operating margin of 21, 5%, which includes $15 million of sales and marketing spend that shifted out of Q1 and into Q2.

202 million diluted weighted outstanding shares for the quarter.

For the full year 2021 we're raising our top line growth guidance on a constant currency basis.

We are increasing the midpoint of our previous subscription revenue expectations by $32 million based on the strong trends we saw in Q1.

However, a weaker euro resulted in a 59 million dollar headwinds northwest take.

Taken together, we expect subscription revenues between $5 four of five 5 billion and $5 four 7 billion, representing 27% to 28% year over year growth. This includes a 200 basis points FX tailwind.

Similarly, we're increasing the midpoint of our previous subscription billings expectations by $50 million on a constant currency basis.

However, the week of Euro resulted in a $68 million headwind to our growth.

Taken together, we expect subscription billings between $6, one 9 billion and $6 two zero of 5 billion, representing 24% to 25% year over year of growth.

This includes a net tailwind from FX and duration of 150 basis points.

In terms of quarterly seasonality, we're continuing to see a shift of Q2 and Q3 subscription billings into Q4, we now expect about 21% of our total subscription billings to be in Q3 and 37% to be in Q4.

We continue to expect subscription gross margins of 85% and an operating margin of 23, 5%.

Finally, we expect to recapture margin of 30% and 202 million diluted weighted outstanding shares for the year.

You'll hear more about our strategy and long term opportunity at our upcoming Investor day on May 10th which will be webcast on our investor Relations website.

In addition to making work work better for people. We're also committed to making the world work better as well. This week, we unveiled our first ever global impact report at our Investor Day, I'm excited to be able to share service now global impact strategy with you.

In conclusion service now is leading this once in a generation opportunity to make work work better for people, we are focused disciplined and committed to helping our customers succeed.

We have the platform businesses need and where the workflow standard of any.

Price transformation.

Customers are using the now platform to create new workflows for new value chain to improve experiences of cross siloed systems and functions to reduce friction in People's daily lives.

And it's showing in our financial results.

Very excited about the future in front of us.

Finally, before moving on to Q&A I, just want to thank all of our employees around the world of helping to make service now one of the Fortune 100 best places to work.

<unk> greatest strength is its people and you all continue to make US service now stall Bill and I couldnt be prouder of this team.

And with that I'll open it up to Q&A.

Ladies and gentlemen, just as a reminder, if you'd like to ask a question. Please press star and then the number one on your telephone keypad.

And your first question comes from the line of Keith Weiss with Morgan Stanley.

Hey, guys for taking the question and nice to see the really strong start to the year I think of it.

A question for Bill.

One of the most notable kind of Kpis that we saw is that pickup in the platform business go into 20% of the new ACB up from 15% just last quarter that seems to be a pretty big pick up can you talk to us it give us a little bit of color in terms of what's enabling those bigger more strategic platform sales was there any profit.

As you've put into place with the sales force or is it the new partnerships or give us some kind of idea of kind of how has that picked up so.

It's just so much in the results of this quarter.

Yeah, absolutely I'd be happy to Keith Thank you for the question.

I think the answer is we've done all of those things with Quebec, we're delivering new low code tools that move App development beyond the borders of just the engineering organization and really into the hands of the citizen developers. So as you know with digital transformation as a whole move to modernize apps.

And this is really tying engineering and business together and we're seeing a greater market awareness for service now.

Digital transformation enablement to automate manual processes within organizations.

And we have a focus in this company on being the platform of oil platforms, which means we don't need anyone wants to lose for us to win so lots of folks integrate into the now platform.

And our low code no code App development to create new workflows that deliver great experiences is really taking off and you know I gave a couple of examples.

In our prepared remarks, one such example is national Cancer Institute.

If you think about what they're doing at NCI. They established of digital service center of excellence and they've done that around service now as low code App engine platform and when you think about time from time to value is just 10 days they were up and running with an online portal to collect and track specimens for COVID-19.

19 patients.

So we think that this is going to be a runaway success story for the company and when you look at the year on year growth here and you look at the pipeline we are extremely bullish on this business.

Excellent that's super helpful.

Thank you Keith.

Our next question comes from the line of Karl Keirstead with UBS.

If I could just ask you about the seasonality in subscription billings.

This year, maybe sort of a two parter in terms of <unk> it looks like your.

Constant currency Billings guide of 20% that's about a five point step down from what you did in Q1, yet of the <unk> compare I think is reasonably easy given that was a tough quarter for everybody in software in the year ago period, and then in terms of the full year of Billings guide it looks like the constant currency.

C Guide is about 23% at the midpoint just to clarify was it about 22%.

Before so you've you've in fact upped it by a percentage point or so just to clarify thank you so much.

Sure. So I'll take the first question on the Q2 billings and the deceleration from Q1. So first off you can see in our Iowa.

You know of IR deck that in Q1, we had $11 million in multi year billings that we don't expect to occur in Q2. So that's part of the beat of the deceleration.

As well, we talked about timing and we've talked about this in the past of why billings is not the best metric right because of customers are co terming that out of contract period, they often renew early which changes the timing of renewals and really impact bill.

Billings and so one of the reasons why billings is not the greatest.

Of metrics and why we are pointing to an of giving guidance now of course CRP of 30% in Q2.

What I would say is that we.

We are in fact seeing a re acceleration of net new ACD in Q2, given the Q2 comp from last year. It's just that there is a lot of noise in billings and so I just continue to really.

Stress that we used to be looking more at CRP IL and then for the full year. It's.

It's about 28% normalized because remember last year, we had the pull forward of $80 million of buildings out of Q1 of 2021 and into Q4 and so the full year guide we have increased debt by almost a full Q1 beat that 15 got it okay very helpful. Thank you Gina.

You're very welcome.

Your next question comes from the line of Alex Zukin with Wolfe Research.

Hey, guys. Thanks for taking the question. So maybe first on just the pipeline of visibility to bill.

I'd love to just get a sense for how youre thinking about kind of a large strategic deals I think there's a fear of that last year you know it was the <unk>.

Time to really go and sell into the base and that Theres not a lot of incremental monetization opportunity available in some of the large cloud customers, but it does seem.

Or at least picking up in our checks that couldn't be further from the truth and that Theres a lot more strategic opportunity available. So maybe just first I'd love to hear kind of your your take on that Bill and then I've got a quick follow up for Gina.

Sure absolutely Alex So first of all when you look at the pipeline in my prepared remarks, I was very careful to point out that it has never been better than it is right now.

And in fact it.

It's outstanding and there's a couple of driving forces here. One if you look at EMEA as a theater the EMEA of businesses smoking Hot.

And you saw 80% year on year growth in the first quarter out of EMEA. So let that be the first indicator of that the brand is now alive and well.

We're operating extremely well through the rolodex of EMEA and the Ceos across various industries and various mission critical geographies are adopting of says the workflow standard continue to believe in EMEA as a great wellspring of growth of service now and that was a big one for us to get.

Really rolling the other pieces as P J.

We're seeing now outstanding growth out of a P. J and I would say the same is true for the brand now were well known.

Were on fire in Japan, as you know, Japan is an on premise market that needs to move to the cloud.

The workflow Revolution is one great way to get them going in the cloud.

An example of that in my prepared remarks, we're also expecting better things out of Australia with of leadership adjustments that we've made.

South Korea doing extremely well so I want you to believe in a P. J as yet another well spring of growth that can go higher and higher the surface now we've always been strong in the Americas the of.

Americans had an extraordinary Q4, as you know and they'll kick back into their normal growth rates and higher and be on course, with where we wanted them to be at the end of Q2. So you add all that up and the geographic theaters and the business is in great shape. The other thing we've done is really focused on.

On some breakthrough industries financial services, and telecommunications quickly come to mind, where once we get rolling the bowling Alley effect takes it takes effect very very quickly here and keep in mind, we're now in a global economy.

That is shifting quickly to lights back on last year GDP was down substantially in the global economy get digital transformation spending was up this year as the economy comes back they're not slowing down digital transformation has been actually it's also going up but the economy's waking up so what's gorgeous about this for us is.

We now have the CRM techniques of digital selling combine it with the direct selling of always worked well and some of the techniques that we've enabled also on insider selling and how we've taken the whole marketing value chain from the brand of communications.

Field marketing industry specialization product marketing and then all of the resources in the field to basically take that industry specific value driven story choose of customer and we've aligned that with our services organization and.

And an expansive ecosystem with all of the Big partners betting long on service now setting up global practices with service now so Alex I've been in this business of 20 years I've never seen an opportunity like this in my career and I actually think we're just getting started.

That's awesome. Thank you bill for that and then maybe just a follow up Virginia. So as we think about moving our forward looking indicators to current RP O N R. P O.

Is it can you maybe remind us of are there any kind of corks or seasonality or things, we should keep in mind, because I think some.

Some people are going to do.

No change in <unk>, and <unk>, which is a little bit harder when when theres less decimal places quite frankly to do it from but.

The thing we should keep in mind, you're guiding to that 30%, there's a little bit of FX tailwind there.

Anything we should think about there.

Yeah, I mean C. R. P. O is definitely a better guide and there's less noise in it than billings, but there is noise there.

There's no perfect forward indicator for you and so if you think about <unk>.

Contracted Upsells for example, and the timing of renewals that could impact the R. P. O. Additionally, self hosted deals could potentially impact of CRP of visa B, where revenue growth. So there's no one perfect indicator, but C. R. P. O is definitely a stronger indicator with less noise. So we will continue to go.

<unk> was what one quarter out and will continue to to stress that it has less of.

Noise in less Ah <unk>.

And in it then the billings metric.

Got it thanks guys congrats.

Thank you very much.

Your next question comes from the line of Smart Simona.

Hi, good evening, thanks for taking my questions.

Good to see the start and the strong start of the year as well maybe on the federal side, just with the change in administration.

Im curious if theres been any change in either of the demand environment. There is no change in maybe the linearity of how we should think about federal and for that matter of state and local government deals. This year as well and then I have one follow up.

Yeah, I think some odd it's actually very obvious that with the change in administration.

Everybody has to get their officers didnt get settled in place and budgets have to be allocated and so on so we see the lights turning on on the business model at the federal level very strongly in Q2.

And we expect that that all of them. So makes up about 10% of our business now so it's a big part of our business and the pipeline is absolutely swelling and it's swelling because of the change of administration, but the administration. As you know is very focused on digital transformation, because it's really the only way to run.

Much more refined low cost high delivery.

Process for the constituents to put you in office. So everybody is highly aware of that.

And we do fantastic as you know in federal and in fact homeland security many of the departments of chosen us of vaccine management, just as one thing to give you and state and local were doing really good and.

Again, a groundswell of opportunity there and I do believe as we go through Q2 and into Q3 and Q4. The deals will just get larger and the business will come in stronger as we go we're doing great in federal state and local.

Very helpful. And then maybe gene I guess as a follow up for you on the comment around the.

Net new HCV accelerating could you maybe help us understand.

Bifurcate that from new HCV from new customers to service now versus new a C V from existing customers and how.

Either or both of those are accelerating or just maybe how the trend line there looks.

Yeah, I would say that we were really pleased with our with new logo growth in Q1, we saw strong growth in all of those are new logos of seven new customers greater than 1 million across several verticals by pharmaceutical insurance E. Commerce just to name a few and most of these deals actually had four.

Plus products and so we are continuing to see good traction.

And the new logos, and obviously existing as well and so we saw they're not going to give you numbers, but I wanted to make sure again with billings noise that people understood that we saw strong net new ACD acceleration in Q1, and expect that as well in Q2 and throughout the year.

Great. Thanks, again for taking my questions have been net.

Thanks, Michael Knott.

Thank you.

Your next question comes from the line of cash Condon with Goldman Sachs.

Pretty much congratulations on a superb quarter sell.

But I had a question for you it's been of yours now since since moving working and running the business virtually and so.

One of them you could argue that the deals that are getting close to day work leads that got into the system about of your back or so.

The main virtual how do you think about lead generation and running the business for calendar 'twenty, one and beyond and also given that you've had tremendous success selling virtually.

Virtually.

This opening up of economy really have any benefits of course serviced out of incrementally speaking. Thank you so much from for Eugene I'll save the follow up sure.

Sure well cash thank you very much for the question.

Very important one.

Somehow some way I actually think some people have this illusion that service now was advantaged because of COVID-19 and the truth is that is not the case.

The truth is that we leaned into vaccine management on an emergency response returned to work in vaccine management level. It was great for our brand. It was the right thing for our purpose and it was wonderful in terms of expanding the inspiration of service now in the global economy on a financial level.

We like everyone else had to figure out a new way of connecting with customers and in that environment. You will always do better with your existing customers that already really likes you and of loyal to you in terms of expanding your portfolio across your base.

You're going to see now is net new logos net new HCV really kick up into high gear at surface now, which makes this such an exciting story because our sales force is of largely go to market direct sales force.

And now they will be able to utilize all of those skills that have been built into our culture and our wired for perfection really wired for perfection geographically by industry and by persona and that will now be of new tailwind for the investors to enjoy as we progress in 2002.

One of them the lead generation I tried to cover that early of two cash because I want to really make this clear we have really refined the company in the context of generating leads and what I mean by that is we took the brand. We ran a campaign today. If you cannot see it you can look at the Wall Street Journal and Youll see.

The Wanko campaign.

Because we're letting the world know that the workflow revolution is on and even the Willy Wonka Chocolate factory can run better on the backbone of the surface now platform and we're educating a whole new generation around what workflow is really all about and we've taken the brand of communications to feel.

The products.

Marketing and align that to the industry. The geo of the persona the inside sales of direct sales and we're managing that funnel with a meticulous level of detail around machine learning and AI that manifests itself ultimately in a CEO of dashboard, but we manage the whole company on of CRM level that is Matt.

Really really world class in fact, I've never seen it anywhere at the depth of analytics, we're running the business on now so the leagues are not all of equal you have to understand how to manage the pipeline you have to manage the noise in the pipeline and as the economy opens up those processes have been built now for <unk>.

Just real mass scale, so I want to let you know watch net new HCV watch net new logos and watch this machine kicked into high gear on the back of our knowledge 21, and an already robust and swelling pipeline, we're really in great shape.

It sounds like now we'd go gene a question for you Bill.

Bill.

Our take on how the economy opening up of perhaps.

Implications of applications, how much of that of your dog of the guidance or are you keeping guidance relatively conservative not take into account all of the upside that bill.

As he talked about opening up of economy.

If it does materialize.

Yeah, I I think I think that we feel really good about our guidance top line to bottom line I think the growth is strong pipeline is good from an operating margin perspective is it its strong free cash flow at 30% I mean, where are you seeing.

Growth that you're seeing top line and free cash flow margins of 30%, but the scale of that that we're at so we feel really good about the guidance, we feel really good about the growth and.

Well just continue to keep executing according to plan.

Thank you so much.

Cash you know one thing that's really interesting is.

When gene it talks about those numbers, which I totally agree with let's keep in mind, it's organic.

Absolutely.

Thanks, Kathy Thank you cash.

Your next question comes from the line of Michael <unk> with Keybanc.

Hey, good afternoon, everybody. Thank you so much I have one for bill and one for Jennifer So built very big picture question, but a lot, but you've done two two of war and automation with the telephone acquisition. There's a lot of activity of that sector I'd like to know where do you think.

Service now fits in sort of broader automation scheme with so many different types of players out there of over the medium to long term in China I have one for you.

Yes excellent question, Michael you know many of our customers of trying to drive automation.

And they're trying to drive it across a mix of legacy and of course modern applications and when you think about <unk>, it's not a particularly differentiating technology, but it's particularly important for integrating with legacy applications that don't support API based integrations, so what Intel about.

It has a very strong experience in developing our <unk> solutions and has existing product capabilities and technical talent that will help us accelerate and enhance our automation efforts. So think about it this way.

Our focus is on delivering world class automation and of platform, we call. The now platform and what we want to do is accelerate digital transformation and RPI is a piece of that strategy. So our P. A will extend our core service now workflows and it'll automate certain repetitive tasks.

And it will integrate with these legacy systems for basically intelligent end to end automation and this is strengthened with our existing technologies, such as AI and ml and as it relates to our participation in the open market.

I can tell you that customers tell me that they feel like RPI has left them with islands of automation.

And it's getting harder for them to manage as they scale their kind of hitting a wall. So what they're looking for is what we are providing which is a single platform where workflow as the core engine that drives the process and then they have a choice of the right automation technology for the use case based on <unk>.

<unk> R. P. A decision management or artificial intelligence. So what will give them is we'll give them something that's natively integrated into the now platform. But for example, if you I'd pass or any other well known RPE technology assets, such as automation anywhere or automate.

Anywhere if they're looking to work with them, that's simply integrates into the now platform and.

And they support us and we support them because we're all on the side of the customer and that's what really matters and you know I really think this is a breakthrough a moment in this Q&A because we have taken that position with all participants in the market, but we don't need any want to lose for us to win what we do.

Do as we work flow end to end business processes, and we're automating work to make it work better for people and if a customer has a certain vendor that they're working with it integrates seamlessly with the now platform. It's okay, but theres a lot more of them that are saying give it to me on one platform make my life simple I don't want iron.

Ends of automation I want a platform that really manages my business in a smart way either way the customer wants to work with US we're happy to work with them.

Thank you very much Bill and Gina My question for you from some of them, maybe an extension of what cash reserves.

But you know.

As you pointed out you raised the guidance for subscription billings for the year, but just under the <unk> range and Theres still some even of extra 11 million theres. Some slight diesel into next quarter. So is there anything that is in fact holding you back from.

Guidance that would have been higher at this point.

No. The only the only reason why the full guide wasn't put through to the full year. It was we had some pull through of billings from Q from Q2 into Q1 of about $7 million.

We feel really good about the guide and you know.

I mean, I think it's a strong it's a strong guide throughout and we kind of really see the seasonality rights of keeps you in Q3 I tried to talk about that.

Whereas we're seeing more and more billing being pushed into Q4, that's really what you're seeing here, we're seeing very strong acceleration of net new in Q2 as well as into Q3 and Q4.

Yeah, Okay. Thanks, David.

Oh, yes, yes.

I think it is worth noting that like you know, it's the way the customer wants to do business right. So when they have a multi product contracts and they want to consume and combine and do all of these things. We're just seeing the trend line go more towards the Q4 from a seasonality standpoint, but the good news is and Thats why I think Jim has done a great job.

With changing kind of the nomenclature around this to <unk> because that's what the customer wants we give the customer what they want and the timing that they want but what I think our investors want out there if they want to know you guys getting new logos. These guys getting net new ACB.

Is your pipeline doing great do we have room to believe that this is of stories that can keep delivering.

Delivering and the answer to all of those questions is yes, yes, yes, yes, yes.

Thank you Bill Thank you Jim.

My pleasure. Thank you.

Our next question comes from the line of Brad Sills with Bofa Securities.

Oh, Great Hey, guys. Thanks for taking my question.

One of the Dev ops of released its exciting because it really could further that evolution of service now as of custom apps platform. There has always been that potential for service now too to play in that market.

But primarily the assessors has been in packaged applications of <unk> semi employee.

Customer workflows. So my question is that the case does this dev ops.

Solution to accelerate the company's kind of move towards a custom apps platform and given that's such a vast market are there certain areas or use cases that you might see success early thank you so much.

I think that's a really insightful question for sure. When you think about what's going on like I talked about discover in the prepared remarks right. They were an early adopter of the Quebec release.

And what they're doing is trying to give value back to the business. So this is a shared that it's a better time to be of developer on the service now platform than ever before.

Cause they used a new user interface builder and this capability has allowed them to basically create modern and data rich applications at an incredible pace and then at the same time, what you see happening is innovation at the edge of the enterprise like I'm. The executive sponsor from one of the biggest banking customers in the world.

They've got a modernized 5000 applications. So they basically saying to me is how can I put my business people modernize and application really quick or build of net new application. So what you're seeing is this convergence now between the developers and the business people demanding innovation.

And changed swiftly coming together on the now platform.

Business I would not be surprised if it ends up being the biggest business we have.

I see the money going to the cloud, whether it's multi cloud platforms. It SaaS platforms or its app innovation at the edge of the enterprise and we are right there and the fact that we can connected across all of the experience zones. All the way back to IP security Dev ops et cetera gives us.

The unique competitive differentiation and competitive advantage.

That's great Bill Thanks, so much Michael.

Pleasure. Thank you.

Your next question comes from the line of Sterling Auty with I do apologize Sterling Auty.

[laughter] with J P. Morgan. Thanks, guys. Just one question from my side. So on those hardest hit industries, you called out Airlines. So I'm just kind of curious what percentage of those that rough.

Roughly 20% of revenue in the hard hit industries are in the airline is where there is still a headwind versus the rest of that maybe are starting to bounce back and maybe look at incremental investment for digital transformation.

Yeah. Thanks Sterling it it's much much smaller it's a it's less than 5%.

And so we are really seeing a bounce back in the bulk of those industries that we had called out last year as being part of the 20% and we talked about some really large deals and some of those verticals, including retail entertainment transportation and manufacturing in this quarter.

As well as other renewal rates in those industries are actually higher so what's really happening as you can imagine as these these customers who have been harder hit they are more focused than ever on reducing risk taking out cost driving productivity and so they are leaning in even more.

As of late with service now than before and so.

I just wanted to make sure that people understood that not every customer is in that lucky position right now and there are still some that are hard hit and we continue to work with them and help them through it but yes. The bulk of this industries are really thought that bouncing back there fairly well and really helping lean.

Into this digital transformation that we're seeing.

Got it thank you.

You're welcome Thank you Sterling.

Can we do have time for one more question from Derrick Wood.

Squeezing me in a question back on the low code side of the market there certainly seems to be.

Just a lot more market dialog around low code tools to accelerate transformation bill out of love to hear who's Who's championing championing the these initiatives.

And would you be looking to add new kinds of sales motions to target the citizen developer outside of I T. And then maybe if you could just touch on.

Quebec had had a focus on advancing from low code anything to highlight there. Thanks.

Yes sure.

First of all I would just remind you that like service now positioning.

Enabling line of business users.

To develop workflow automation is really perfect.

And we are at the kind of epicenter of I would say of secular tailwind wins, which are forming around the convergence of ITM business, which I said earlier.

So app modernization operational transformation.

I see in the business. They are all moving as quickly as possible to drive greater efficiency and more agility. This is a product already today, where we have a very capable leader and engineering, Josh Kahn, who has been with US now for some time and when I first came many of the first thing he said to me, it's a I'm raising.

This could be big and I said, we're gonna get all behind you.

So we already have a specialist sales force that complements the general line to make sure that we capitalized on this opportunity and I think the reason that this opportunity is so smoking hot right. Now is there just aren't enough developers to build the applications that the enterprises need to transform their.

Business. So this huge unmet need and application delivery is really falling right onto the now platform and these create of workflows are really driving the foundation of the partnership with our customers tying together engineering and the business executives. So I would just say.

To you that we have we don't need to like higher new sales force to do this how we already got the specialists, we already got the great engineering and our team really understands app engine, they really understand of the platform even the general line AE in the field sees this as a golden opportunity.

And we've aligned all of the impoundment levels and the compensation schemes in all of the focus to be there because we know that's where the money is.

Fantastic. Thank you John.

Also of that one thing that Derek to say that the I T organizations are becoming more and more important here because of the businesses. While yes. They bought these applications. The IC organization is responsible for ensuring their fate of cure right and so the partnership between the business nicely as the coming strongly.

All of their service now is the platform that strategic to I T trusted scalable and secure and it's the platform that it is going to continue to use to build these mission critical.

Applications for the lines of business and so really.

We are very well positioned given our strategic relevancy in the in the suite with the CIO and Derek you know keep in mind gene is absolutely right you know the company starting of 90. So this is.

Actually a core strength of ours, and then we move to the employee and the customer and now it's all about.

The App engine and sort of this low code world that we see converging between business and it all.

Our company grew up there.

It's now prime time, because business is pulling at engineering and it to say I want my new modern application and I want it now so we're kind of right. There. The other thing we probably could of covered in greater detail, but I think you already all notice is this one architecture, one data model and.

One platform is really coming through of strong now because most companies out there are either best of breed, where they do one thing, particularly well, but not many things or they had many different platforms that aren't so well integrated in our case.

Even as we put new innovation on the now platform, it's all integrated and it all works. So you know folks are really excited about that within these enterprises, because they've got a lot riding on whatever they invest in working pleasing people delivering a positive ROI and really making the decision makers.

Invest in the platform look good because theres no tech debt with service now.

Yeah.

Great.

Can't wait to see the walk of campaign too, but thanks.

Thank you very much.

Ladies and gentlemen, this does conclude today's conference call. We thank you for your participation you may now disconnect.

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John.

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Yes.

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