Q2 2021 ServiceNow Inc Earnings Call
[music].
Okay.
Good day, and thank you for standing by and welcome to the Q2.2021service now earnings conference.
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 the question. During the session you will need the press star 1 on your telephone keypad. Please be advised that today's conference is being recorded and if you require any further assistance.
Scott the spreads sorry zero.
I will now turn the call over to your first the speaker today, Lisa banks Senior Vice President of Finance and you May begin your conference.
Good afternoon, and thank you for joining us for services now second quarter and 2021 the earnings conference call.
Joining me are Bill Mcdermott, our president and Chief Executive Officer, and Gina Messenger and now our Chief Financial Officer. During today's call. We will review, our second quarter and 2021 financial results and discuss our financial guidance for the third quarter of 2021 and full year 2021.
Before we.
Get started and we want to emphasize that some of the information discussed on this call, particularly our guidance is based on information as of July 'twenty, 8.2020, 1 and contains forward looking statements and involve risks uncertainties and assumptions, including those related to the continued impact of COVID-19 on our business and global economic.
Economic conditions.
The guidance, we will provide today is based on our assumptions as to the macroeconomic environment in which we will be operating those 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 time range timeframe.
And for and severity and 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 and certain industries. Please.
Please refer to the press release, and the risk factors and M. DNA sections of our SEC filings, including our most re.
Recent 10-Q, and our 10-K vials of our fiscal year 2020 for information regarding such risks uncertainties and assumptions that may cause actual results to differ materially from those set forth and such forward looking 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.
National measures calculated in accordance with GAAP all.
All financial figures, we will discuss today are non-GAAP, except for revenues remaining performance obligations or our P. L and current RPI or C. R. P. M C.
And to see the reconciliation between these non-GAAP and GAAP results. Please refer to our press release filed earlier today and our.
Our investor presentation the.
These and all prior press releases and Investor presentations are posted at the investors got services 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 Q2 earnings call.
Our team delivered an outstanding quarter significantly exceeding the high end of our guidance across all metrics subscription revenues were up 31%.
Subscription billings were up 30% operating margin was 25% and.
The number of deals greater than $1 million was 51 of 28% year over year.
Free cash flow for the first half of the year was up 34% year over year and.
And incredible performance by our team and exceptional first half and we have unstoppable.
The momentum and.
And we've reflected this and our strong full year guidance range across the board.
<unk> will review the details with you and a few moments.
The global economy is recovering at the fastest pace and 80 years the.
The enterprise digital transformation market.
Expected to grow nearly 3 times faster than GDP and 2021.
Business leaders worldwide are facing do or die moments business models have changed forever. The pandemic has accelerated the digital imperatives.
We are in a leading position to capitalize on this unprecedented tailwind.
We are giving customers the innovative solutions they need to solve the greatest challenges of our time.
The world's biggest challenges our service now as biggest opportunities from vaccine management.
To ESG to the new world of hybrid work.
Whatever the challenge work flows with service now with.
We've created a new market, 1 that respects the billions and billions of dollars of investment that customers have put into their systems of record.
We make those investments work for today's digital business demands. The now platform the platform of platforms delivers workflow automation, where the consumer grade user experience and hence.
And spires are customers.
Enabling siloed systems.
Kurt across an enterprise to work together, creating more efficient more productive ways to get work done.
Service now is the control tower for digital transformation.
For every business in every industry serving every person.
<unk> the.
And the power of the now platform makes this possible with 1 data model.
1 architecture, and 1 platform to workflow of better world.
For example of premium German auto manufacturer faces huge logistical challenges.
And maintaining on target production.
Every 30 million parks are processed daily and the dispatch to more than 4000 and supplier locations to production centers and Europe and Mexico.
To manage the complexity.
Soma service now provides a single connected supply chain technology platform <unk>.
Service now analyze as 300000 data points per month.
Optimizing the performance of each aspect of the value chain.
Just 1 example of the power of the now platform I'd.
Like the share an overview of our success across service now portfolio.
So let's begin with our <unk> workflows, we are the standard for optimizing all of <unk> services and operations.
Our core IP work flows remained very strong.
S M was and 16 of our.
Our top 20 deals with 14 deals over $1 million I, Tom was and 15 of our top 20 deals with 6 deals over $1 million.
Our AI powered service operations is resonating big time with customers, we saw great wins with leading companies.
Including travelers and Walgreens Boots Alliance and more.
And they're working with service now to support their digital transformation of their enterprises, and we're honored that maritime and Port authority of Singapore.
Is working with service now to accelerate its digital transformation.
Asian efforts as it looks to make Singapore, a leading global Port and International Maritime Center and.
M P. A M will leverage the now platform to drive automation and to improve productivity and employee experience.
With employee workflows, we make work better by driving out.
Outstanding employee experience of better enhance productivity for employees anytime anywhere while also developing company loyalty, which is particularly important in this environment.
The now platform provides employees the system of action for key events, including.
Boarding parental leave moving and many more moments that matter for people employee workflows, where and 13 of our top 20 deals with 6 deals over 1 million.
Asahi for example is focused on expanding growth, while reinforcing ESG initiatives.
That support sustainable value creation. They chose the now platform to improve the employee experience by providing a single point of contact for employees to improve productivity.
And they wanted service catalogs and so they could the standardized HR processes and they wanted integrations to connect all.
All of the Siloed workflows.
With customer workflows, we're creating a new service paradigm by delivering connected experiences that redefine customer operations for greater speed and agility transparency and convenience all while working with existing systems.
Customer workflows, we're in 10 of our top 20 deals with 4 deals over $1 million. We now have over 2000 customers run and customer service management.
Deutsche Telekom is leveraging service now telecommunications solution to streamline order manager.
Management to become the leading beat of be telco provider.
And the now platform will be at the heart of the order management process, enabling a 360 degree view of orders and inventory and infrastructure, creating a seamless connected experience for <unk> employees.
And customers with.
With create of workflows, we're accelerating software development across the entire enterprise by giving everyone. The low code tools to quickly create applications and beautiful experiences.
<unk> predicts that more than 500 million apps.
<unk> developed by 2023.
This is equivalent to the total number of apps that were developed in the past 40 years.
For example, Airbus built and innovative tracking application and less than 3 months using service now as low code App engine.
Now Airbus employees can scan barcodes of any piece of factory equipment to see the relevant information they need in real time Manny.
Manufacturing transportation and incidents have dropped 20% and Q2 creator workflows, where and 18.
Of our top 20 deals Nokia of pick service now as creative workflows to develop cost of apps and significantly less time at a fraction of the cost of alternative platforms.
These examples show how the combined capabilities of the workflows on.
On the now platform, our better together, they deliver even more value than the sum of their parts.
Our introduction of the now buying program has helped customers realize those synergies more quickly by simplifying the buying process, providing greater usage flexibility of.
All while improving business impact.
Continuing to build a strong client and alliance ecosystem, we established an enterprise agreement through the now buying program with Deloitte, who will take advantage of our old product suite to facilitate great experiences for their employees.
And clients, while enhancing efficiencies and compliant management of the business.
Also and our partner ecosystem, we recently announced our integration with Microsoft Windows 365.
This will enable users to easily access cloud Pcs.
Directly through Microsoft teams, regardless of the employees location and the hybrid work environment.
In closing I am incredibly proud of our team's passion for solving the world's greatest challenges.
Our engineering team is second to none.
And our go to market organization is the best and the business.
And our purpose to make work better for people is resonating.
It's been an honor to help turn vaccines and to vaccinations for millions and millions of people.
It's a privilege to.
And the world reopen and safely return to the workplace.
We are engaging leaders on how we can solve society's biggest problems and improve the lives of people and help deliver better services to citizens everywhere.
We are better than we were of yesterday.
To help of not as good as will be tomorrow.
This is the special company with unbridled energy and unprecedented opportunity where.
We're well on our way to becoming the defining enterprise software company of the 20 <unk> century.
And I look forward to taking your questions, but first I'll turn it over to our chief.
The financial Officer Gina.
Gena over to you. Thank you Bill.
Q2 was a tremendous quarter with strong beat the across our top line and profitability guidance metric.
The team demonstrated exceptional execution and we saw strong demand across all regions and workflows.
Q2 subscription revenues of 1.33 billion 35 million above the high end of our guidance range and growing 31% year over year inclusive of the 450 basis point tailwind from FX.
The remaining performance obligation of our P. L ended the quarter at.
And the $9.5 billion.
Representing 35% year over year of growth.
<unk> was approximately $4.7 billion.
Representing 34% year over year growth and a 4 point beat versus our guidance.
Currency was of 300 basis point tailwind.
The profit year.
Q2 subscription billings of $1.328 billion, representing 30% year over year growth and of $73 million. The first the high end of our guidance.
FX and duration were 500 basis points tailwind year over year.
We saw growth.
Year of bus all our industry categories financial services, and manufacturing were particularly strong and across the globe driven by investments and business continuity.
Industries impacted by Covid, including retail and hospitality also showed signs of recovery with strong net new HCV growth in the quarter.
The now platform remains of mission critical part of our customers' operations.
Reflected by our strong 97% renewal rate.
The stickiness of our customer base has served as a solid foundation for us to build upon with our land and expand growth strategy.
This is evident with the continued.
Other than our average customer spend this quarter.
As of the end of Q2, we had 1201 customers paying us over $1 million and ACB of 25% year over year.
This included 62 customers paying us over $10 million and ACB.
Overall.
<unk> grew close 51 deals greater than 1 million net new HCV in the quarter.
We're also seeing robust net new ACD growth from new customers with the average deal size growing over 50% year over year.
Going to market with the solution sales approach to deliver the full capabilities of the portfolio.
Raul of instead of selling point products continues to drive more of multi product deals.
And Q2.18 of our top 20 deals included 3 of our products.
Turning to profitability operating margin was 25% 3 points above our guidance driven by the strong revenue beat.
<unk> see any cost savings and some marketing spend that was pushed into the second half of the year.
Our free cash flow margin was 19%.
Together these results show the power of our business model and our ability to drive of balance of growth and profitability.
To navigate the post COVID-19 economy and.
The new era of work.
Businesses are investing in digital transformation to unlock new levels of innovation agility and productivity.
As you heard from Bill the macro trends driving digital transformation are of significant opportunity for services now.
Our knowledge 2020.
And 1 of that and May included 2 of amazing weeks of keynotes panels and discussions that brought together experts and thought leaders of every industry across 141 countries to focus on these topics.
This year, we released new solutions, including our manufacturing and health care industry.
Industry products and.
And the power and endless possibilities achievable through service now workflows.
The response from customers has been fantastic the pipeline generated per attending accounts was up 45% year over year.
Together, the macro tailwind and interest.
Generated from knowledge has accelerated pipeline growth for the second half of 2021.
More of coverage ratio today.
<unk> to remain ahead of a year ago.
As a result, we are raising guidance for the full year.
We're raising our subscription revenue outlook by $73 million at the mid.
Midpoint to a range of 553 billion to $5.5 billion, representing 29% year over year growth, including 250 basis points of FX tailwind.
We are raising our subscription billings outlook by $123 million at the midpoint to a range of $6.3 1.
$5 billion to $6, 32, 5 billion, representing 27% year over year growth.
Excluding the early customer payments in 2020 are normalized subscription billings growth outlook for the year would be 31% at the midpoint.
Growth includes the net tailwind from FX.
And duration of 200 basis points.
We continue to expect 2021 subscription gross margin of 85%.
And we are raising our full year 2021 operating margin of 23, 5% to 24, 5%.
This reflects the increase in our top line growth.
And with more efficient marketing spend and savings of continued lower G&A expenses related to COVID-19.
We are raising our full year 2021 free cash flow margin by 1 point from 30% to 31%.
I'd note that from a seasonality perspective, we're expecting 40% of our.
Total free cash flow in Q4.
And lastly, we expect diluted weighted average outstanding shares of $202 million.
For Q3, we expect subscription revenues between $1.4 billion and $1.4 zero of 5 billion, representing 28% to 29%.
Percent year over year growth, including the 100 of 50 basis points of FX tailwind.
We expect CRP of growth of 30% year over year, including a 150 basis points FX tailwind.
We expect subscription billings between $1.32 billion and $1.325 billion.
Representing 22% to 23% year over year growth.
Growth includes the net tailwind from FX and duration of 50 basis points.
As a reminder, looking at billings from a 4 quarter rolling basis will help normalize the quarterly seasonality and changes in customer invoicing terms.
On that basis, our Q3 subscription billings guidance would represent 31% year over year growth.
We expect and operating margin of 23%.
And 202 million diluted weighted outstanding shares for the quarter.
In conclusion digital transformation.
And is accelerating across the globe and service now is at the epicenter of that opportunity.
Services now of the digital fabric that stitches together existing systems of record collapsing silos to connect fragmented processes.
We are the platform company for digital business, and we are well on our way to becoming of 15.
$15 billion revenue company.
I'm extremely proud of our team's performance this quarter and bill and I can't thank our employees enough.
For their hard work and incredible dedication.
And with that I'll open it up for Q&A.
And at this time, if you would like to ask any.
The questions. Please press star 1 on your telephone keypad to withdraw your question just press the pound key.
Phosphate just a moment the compile the kenny of roster.
Yeah.
And your first question comes from the line of Raimo <unk> from Barclays. Your line is open.
Hey, congrats on a very strong second quarter.
Bill can you talk a little bit to the growing pipeline that you've kind of mentioned here on the call.
Just talk a little bit about the sales cycles I would assume that's helping you this year, but probably also kind of sets. The foundation for the next year just any color there that would be nice. Thank you.
Sure. Thank you very much for and most of the question first I would like to recognize our outstanding.
The leadership as well as all of our and.
Incredible focus on analytics and the company because we really run the company on the service now platform.
And whatever all of the systems even existed.
And the company I Couldnt pick him out of of lineup because the only thing. We look at is now service now and I have real time data on every single account and every single deal that's moving and the global economy and I can tell you that the pipeline is incredibly robust and it.
It has a substantially.
Rome, and the likes of all Green.
Sales leader is extremely positive on the second half of the year as is our engineering leader and the unity and the company around performing right. Now is really strong. So you can take.
Take gene is.
Guide and.
The range that you just put in front of the capital markets.
Heart, because we looked at every detail and and everywhere, we could with our own information and it's very very strong in terms of the sales cycles I think the sales cycles of moving quicker than.
And the notoriety of the brand is resonating as the digital transformation control tower.
<unk> the SaaS.
She is the stronghold on so many things now because if you want to give the employees of great experience that you want to provide the customers and unmatched service or you want to unify it and business around creating these new workflows, which are necessary because there's not enough developers to develop.
Our other applications that are required everybody can agree on the now platform and that seems to be a unifying organizations between it and business and accelerating our sales cycles and enlarging our deal sizes.
Perfect. Thank you and then any early feedback from the customers around the light stuff because that's obviously.
All of the funding your Tom quite a bit.
And what has been the the early feedback from the customer base and thank you.
Yes, I'd really like to thank Ben and his team for their trust and service now and Pablo and CJ and a great engineering team for the work that they're doing together.
What we think is that service now has proven capabilities.
Like a client with light steps of observe the ability technology will really help organizations seamlessly connect because thats the big deal seamlessly connect the insights and that date of warm the necessary patterns and that data and then action into the workflow, which enables people process and technology.
The combined truly deliver great experiences for the customers and the employees and I think what.
Shapes us uniquely as this is 1 pane of glass, it's 1 user experience and it is not just the developer operations Youll also see business executives align on this as well and to us that.
So kind of really health organization seamlessly connect their digital experiences across the enterprise again, the platform I can't stress enough of the digital platform and the now platform is the glue that's tying it all together.
Thank you well done.
My pleasure thank.
Yes.
And your next question comes from Matt Hedberg from RBC capital markets. Your line is open.
Hey, guys great. Thanks for taking my questions questions and congrats from me as well Bill.
You talked about the power of the platform really of consumer grade interface, but also I think the simplifying Brian process.
Process, New wheel Elas is really powerful and you called out the Lloyd I guess I wanted to double click on that a bit and really.
And the importance of the simplifying the buying process and how you see that benefiting really new account acquisition as well as expansion.
Yeah, absolutely Matt the main thing is speed right, we're in a market.
Thank you that is very robust digital transformation is really hot and we are of that signature brands. So the more quickly we can evolve the upgrade process and the net new deals to get customers live that's really what it's all about and I want you to the rest assure that.
The finance to legal to the way, we execute the sales motions and the field and also enable our ecosystem that hold the value chain is right now pedal to the metal. So when you think about the now buying program, we're looking at larger rapidly expanding customers and making it easier for them to grow.
With us.
So that includes simplifying the buying process as you rightfully point out.
Using flexibility so they can easily upgrade to higher tiers of product innovation are innovators of just so amazing here every time, you turn around and the next releases of new breakthrough.
I, just can't think of them enough.
<unk> Pro and enterprise are doing terrific and this is enabling customers to try things as well and it change or adopt products at their will and it's giving them a forward look and where we're going with our roadmaps and when they see the innovation powered services now that actually buys.
Buys them and very quickly and finally I would just like to say we've done a really good job on the industry domain expertise and the company, but also on the line aligning all of the value.
That we have to the platform and making sure of the customer understands the value of their realized so as they step in to.
Bigger relationships with us, we can predict those expansions and those pricing tiers and the integrated customer success support and value and they can carry that into the board room with great confidence and say this is what service now is doing to deliver for you I was really excited when I saw the the.
The <unk>.
<unk> that went out today, where they were talking about retiring 75 legacy systems as they standardize on the now platform. So it's just it's just really good for the customer and it's good for our folks to get the customer to value fast.
Makes sense and then maybe it's the quick and Regina.
Last quarter, you talked about the net.
Net new ACB acceleration and I guess, maybe I can assume based on your increased guidance. What the answer is but curious if you have and any thoughts on net new ACB.
Yeah, So I talked about net new actives, the accelerating in 2021 versus 'twenty 'twenty and we have definitely seen that.
The Arctic happening across the board and with our strong beat in Q2, and our raise in the back half the.
The acceleration that we're seeing is actually greater than initially anticipated.
Great to hear and thanks, a lot guys.
Thank you Matt.
And your next question comes from the line of cash.
Cash and Reagan from Goldman Sachs. Your line is open.
Hello, and thank you very much and a hearty congratulations on another spectacular quarter.
Couldn't help but notice that the making the ACB contribution from your core IP business workflow business.
Sharply curious to get your thoughts on what's happening in that segment of the market.
And Bill and I also noticed that the the head count and sales and marketing also went up pretty significantly.
Can you just talk about what the implications are for number 1 the.
The increase and net new business coming from your core business, coupled with what seems to be a pretty gigantic increase and sales and marketing, which I guess.
Positive, but I just want you to give me the implications of these 2 observations. Thank you so much and congrats.
Well, thank you very much cash and and thank you for all of the things that you saw and the now platform and our leadership and the market I really appreciate it and.
In terms of the core business.
The core is.
And more and more relevant as these enterprises try to separate away from the old World of islands of automation and point solution buying and dealing with fragmented systems processes and silos. So the core of the core of course.
Of course is our itx portfolio and that is really resonating with our customers because they can do all the things they want to do on 1 platform and to the extent they want to leverage other technologies that they've already invested in of course, where solar accommodating to that because our great.
Engineers have built all out of the box and our integrations to the biggest systems and the world. So it's kind of started with the core and now it's moving across the enterprise with the with great speed and.
And all of the businesses have done great and in fact, all of the Geos are ahead of their operating plans and Theyre all doing.
Really really well and every geography and every industry <unk> remains.
So I would.
And just like too.
And I'll give you a feel for this some cash by just saying like we have seen the immediate impact of our innovation and the core as we expand the.
Doing 1 of our to employee and customer service management and now creator of.
Great sales of leadership sees the opportunity and they see the hockey stick building and the pipeline and we're trying to get it out in front of that with the coverage model.
And what I think you made a great.
Page comment on is that the high.
<unk> situation because most companies are complaining about the war on talent and they are actually suffering because they don't have enough talented people to do the job of.
We're only hiring 1% of the applicants that of highly qualified to come into service now and the hardest part of our recruiting.
Hi, Kyle is doing right now is just keeping up with the inflow of all of the resumes. So I think it's great that we're actually hiring ahead, we see of great hockey stick and the pipeline and I have tremendous confidence and our sales leadership all over the world.
Thank you <unk>. Thank you so much thank you cash.
The team is and your next question comes from the line of Alex Zukin. Your line is open.
Hey, guys. Thanks for taking the question so I'll ask the.
Similar question of that around the Elas.
Michael and the deals that you've talked about can you comment on how common that is for your pipeline right now versus maybe and preview.
Tears and give us a sense for the kind of magnitude of upsell that is possible when customers move at an accelerated pace of these enterprise buying activities.
Well. Thank you very much Alex I mean, the good news is it's early.
It's a very very small part of our results and a very very small part of our pipeline.
So the upside for this initiative and this way of thinking.
And is quite dramatic.
Because if you think about enterprise solution selling.
And you do that and all of the Geos and all of the industries and you really establish a relationship plan and with the customers at the C level that's.
Quite convincing.
Convincing.
And do a lot and what we could also do.
Get customers resonating with this and really lock them into the idea of of future roadmap.
And they become of design partner and that's really what we want and we don't want sales we want partnerships. So.
If we have design partnerships that go 3 of 5 years, we are buying into the roadmap and we're doing that given the customer all of the benefits of scale and innovation that they deserve from surface now and at the same time, we're investing less calories and selling things and more calories on building relationships that last a lifetime.
And I would just add Alex that on the while still small.
The current expansion that we're having with our customers who are going through the <unk> line.
And it's pretty significant so we're really happy with that.
Perfect.
And then just maybe 1 follow up for Eugene and if you look at the guidance on a constant.
Instant currency basis can you give us a sense just I mean, clearly Q3 is a big federal quarter and everything we've heard suggests your federal pipeline is quite robust can you give us some puts and takes around the.
The the guardrails of the conservatism and the guidance that takes that strong federal pipeline into account.
Yes, great question we.
We absolutely are expecting another strong federal quarter SCE are.
But if you remember on a quarterly basis Theres a lot of seasonality built into billings and so as the said in the past there is a couple of drivers impacting the growth rate, which is really a function of renewal and invoice timing and not.
Cash and of business performance. The 1 particular item this quarter for Q3 is and some of our customers of becoming larger and they've requested a change from annual to semi built the semiannual billings and this is much more pronounced and Q3 of this year as we had 2 large customers that were previously invoiced.
Annually and Q3.2020 that are now being invoiced stemming and annual so that's actually resulting in a 2 point headwind to the year over year growth. It's 1 of the reasons why I talked about the fourth quarter Rolling number and if you look at 4 quarter Rolling for Q3 with this guide it implies 31%.
The year over year growth. So we absolutely expect the strong federal quarter, we absolutely expect continued acceleration and net new and we are feeling really good about both the Q3 as well as the full year increase and billings guidance and.
Alex if I could build on genus.
Outstanding commentary I would just say, there's many big opportunities and the back end of the year and federal and in particular and.
And the attending to be large programs as opposed to small of point solutions and again this is more or less of the theme now as we've become and enterprise solutions company and.
And Youre.
Seeing business and the area of resiliency.
A lot of focus on business continuity and now you know outages of course and dealing with the Covid scenario.
Cyber securities on the top of many lists and programs that we're involved and and vaccine management.
<unk> management is 1 of the greatest workflow challenges of the government.
And faces and.
And as you can tell and bill likely need to be re administer and things regularly and managing their process.
And the front and center and that and of course.
I'm really proud actually of the way the government is looking at digital transformation. They really are looking at this as a way to help government run line business.
And a lot of really smart operators on the technology side that I've met and many of the large programs and our team is very humbled to have an opportunity to help not only of the United States, but many of the governments around the world is really exciting.
Makes total sense and Janet this is why we are all very thankful that you are now guiding to occur and RPM.
And is are these the.
These issues probably.
Or less.
And are less impactful.
Exactly exactly thank you.
And your next question comes from Gregg Moskowitz from Mizuho. Your line is open.
Okay. Thanks very much.
We're not the question.
Bill should we construe the strong Q2 results and your bullish pipeline commentary to mean that you've clearly begun to benefit more from the economy of reopening and then also how do you see that playing out over the back half of the year.
Thank you very much Greg certainly I think it's beginning to show and the results.
<unk> and I have to say part of my belief is that as the economy opens up even more.
And that can only benefit services now even more.
We have done a great job and I really do take my hat off to our team and all functions of the company to stay focused on the customer and of digital only world does not an easy.
Much of a taken due and service now employees of stood up to the challenge, but now as the economies open up and people are back and the office and there is the hybrid world that we're all accommodating I do believe getting our sales professionals and executives and front of other executives.
It's only going to help the story resonate even more.
So.
The thing the thing I believe is that we all learned something from Covid and we recognize what is essential in terms of travel and accommodating personal meetings versus what is more adequately handle using tools that of digital and can be scaled even faster.
The important and it's the combination of those 2 forces that I think will really lift service now actually to new Heights Brett.
That's great. Thanks, Bill and then just 1 for Gina I think your subscription gross margins were a bit lower than they've been and awhile is there anything that you would call out here.
Yes, the margins we talked about.
Faster when.
And we're keeping them flat to our guys of the Aha.
And are impacted.
And as the prior year of the and we talked about this earlier in the year, we're making increased investments and our data centers and customer support to serve customers impacted by the new data residency regulations as.
Well as serving our customers who require additional security measures such as IL 5 for off net customers. So those of the big ticket items that are impacting on margin that was included in our original guide for the year and we are.
Achieving exactly what we set out.
And 2 on both of those events.
Perfect. Thanks, David.
Sort of thing.
And your next question comes from Arjun Bhatia Your line is open.
Perfect. Thank you very much for taking my question and congrats on the quarter.
And I wanted to start off and maybe with the new customers is the clearly seems.
Seems like other theyre strong traction there and your platform is broader than it used to be many years ago I'm wondering how many of your new customers are coming and off the bat outside of your core workflows and HR Inc.
The customer service management are you seeing traction there from new customers or was that mostly.
A point of the expansion from existing customers.
That's a really good question our June what were seeing is <unk>.
Services now.
<unk> hired some of the best people and the World and Korea to workflows and customer service management and employee experience and we.
The big businesses within our company and these categories. So it's not at all unusual to see of customer begin with us on the employee experience side.
There are many customers out there today that have systems of record the frankly can't accommodate a 1 stop shop for all of the.
The build work needs of of workforce, that's going to be everywhere and.
And we uniquely serve that need with that consumer grade UX on the mobile and now you see us with amazing partnerships with Microsoft and others and I think that really is creating a lot of interest in the marketplace and yes.
Hybrid deals beginning with employee experience the same thing on customer service management.
New zone banking not limited to that that have come to us and started with us there and I really want to stress this create of workflow situation.
If you think about the 500 million apps that are going to have to be developed and the shortage of developers to do it what youre going to see.
<unk> is a groundswell of new business opportunities with service now starting there because what's happening and as they have to start with the low code, but they also want the resiliency and the security of tying in to a unified platform like service Now's and service now is friendly to everybody and the market.
And that's what customers want they want somebody that breaks the amount of the islands of automation and so we've seen new deals and creator and customer and employee not just starting with IP and yes that is kind of a new frontier and it's 1 of the reasons why we're very bullish on the company and.
And I would just add on that really pleased with our new customer.
The growth, we talked about it and the script of about 5 new customers just this quarter over $1 million and thats across several different industries and all of those 5 customers actually purchased 5 of them more products. So cross platform, it's quite amazing and so as bill talks about it certainly continues to be.
The high percentage of our new logos, but we're seeing more and more of a high percentage of lands. The CSM App engine and HR, So really really pleased with the with the progress there.
Absolutely.
Perfect that's great to hear and 1 more of if I can follow up on Greg's question about reopening I'm curious if the delta of areas.
<unk> or any impact from that is coming up and your conversations with customers and whether this is something that you are factoring do you know if you're factoring that into guidance at all at this point or if it's still too early to the.
To bake and any impact from impact of verticals on that front.
Yeah, It's a great question.
And certainly first.
First and foremost the greatest concern is always to the health of the.
Being of our people and our Hearts go out to all of those affected.
And we're definitely having conversations with customers, but with that said our business model is extremely resilient and predictable we are of very robust backlog of RPI.
Exiting Q2 at $9.5.
$5 billion, and we talked about pipeline our pipeline continues to look really strong and our coverage ratio is better than the same time line last year. So that's definitely offsetting any potential conversion rates that might come under pressure so I feel extremely.
Confident in our guide right now and we're certainly seeing the the acceleration of digital transformation and this hybrid environment.
Continuing to accelerate and so feel very strong about the guidance.
Great and congrats again.
Thank you.
Your next question comes from Keith Weiss from Morgan Stanley. Your line is open.
Excellent. Thank you guys for taking the question and congratulations on a really nice quarter as well.
I wanted to ask the.
Kind of a higher level question what are the I think the investor debates going on right now is relative to <unk>.
And the market of back office type of applications versus front office with most investors thinking and that most of the focal point is on the front office you guys see both sides of the equation. So bill can you give us some indication on.
Sort of whether there's a relative more strength in the front office and back office or how youre seeing that market environment right.
Now that's a really important question 1 of the things that is really really interesting Keith.
It's neither of back nor of front office World anymore. It actually is both and that's the big change and the enterprise and that's why the now platform.
As a uniquely competitive.
Advantage for us and for our customers on our ecosystem.
Because it actually ties the front and the back together and.
And and that's the big Aha.
So many enterprise participants and you know I've been in the enterprise for a while.
<unk> made their success out of.
Good and functional domains with shrink wrapped software and then.
Pushing and our globally and getting standards built on it and then ecosystem evolves on top of that of what happened, especially and this hybrid work from anywhere world and with the digital transformation era ease of do-or-die moments.
And now.
And the executives and these companies need to have that resilient.
Core debt.
That's absolutely Fort Knox and terms of its security its resilience and its performance.
And it has to serve the business and then the business is pulling and IC the service, but even.
And as the business wants to get innovative and do it as 1 thing and this world. The silos are an impediment to progress. So I think having a great front office employee experience and having a great front office customer service management and of great creative workflow tied to that resilient core.
Core is really resonating so big time and the other thing is.
It's really nice to speak well of all of the market participants because we just want to make them all better and we want to make all of the customers successful. So that now platform is really thinking in as of the platform.
Form for digital business, and that's really what we dreamed of and it's happening.
Got it and if I can sneak 1 last 1 and I think.
It kind of dovetails with what you're talking about in terms of working well with the other market participants and it kind of more of a question on the other side I've always thought of you.
Your idea of SM solution and there is kind of the backbone within the ITT.
And which everybody integrates into it and and 1 of those major integrations has been the observer ability of vendors and the state I've always heard them talk about sort of as not being 1 of the most requested integrations are on their platform, but now youre going to start competing with these guys. So how do you balance being that good partner as the backbone with the Nike.
But also starting to emerge as more of a competitor and and in Absorbability.
Well I think it's very important to acknowledge that it's not about competing with the other participants and the market. It's about innovating on the now platform and.
And giving the customer as much innovation as we possibly.
Of the can so they can conduct their business processes and workflows on the now platform to the extent there are of functionalities or investments that have been made and other participants and the market, we're very happy to integrate with them and accentuate that functionality into our now workflow.
So the customer gets the best of all worlds I will tell you that there are many customers that absolutely tell us that we won service now should be that digital transformation platform that backbone for all of our functions and we expect you to build that RPM.
So that process mining and observe ability that AI ops that M L into that platform, but at the same time, if there's others in the and their installed base that they want to amplify we're happy to do that and I think that good hardness and really.
And on the customers side, and making them successful has differentiated us and the market and and candidly I think all companies should coalesce on the now platform and just make it easier for customers.
Sounds like a plan.
Thank you very much.
Andrew.
Next question comes from Keith Bachman from Bank of Montreal, and your line is open.
Hi, Thank you very much bill of 1 of the direct this 1 to you if I could the start out with the competitive landscape and in particular and the ideas.
Workflow World could you talk a little bit about how competition may be changing.
And amongst the comments certainly not all inclusive, but amongst the comments I'd like to hear your feedback on is Atlassian and <unk> product are you starting to see them more.
In your bidding or and the competitive landscape and then I have a follow up if I could.
And sure Keith well.
Typically speaking of Atlassian and we are aware of their presence in the small and medium sized and and midsize market of course.
And we understand that and certainly on the enterprise side, we have cooperated with them and where it's helpful to our customers and that's absolutely fine I think.
Specific to our customers have really differentiated again on service now is on the completeness of the vision and when they're not interested and kind of like startup islands of automation and you know I've got this feature of this function and I can do certain pieces of the puzzle Theyre really looking.
Think we're at whole puzzle and that's why I'm. So proud that if you go to forest or you go to Gartner all you need to do is go to Gartner and Youll see that the I T. S. M. A magic quadrant has us as the the absolute the fact those standard and has had for many many years. So there are participants.
Instruments out there that do things they are very good businesses and that's fine, but we have not seen any sign and our core that the customers arent doubling downward services now whatsoever.
Yeah makes perfect sense Bill.
I wanted to on my follow up I wanted to ask you a similar question that I posed earlier and the year and that is.
Hi.
And for that Youre thinking about M&A and.
And I wanted to Orient. The question around you are now and observe ability as Keith was asking earlier and you're now and the RPE.
As those are 2 emerging areas.
Feel like your portfolio is complete or do you feel like there is and maybe incremental.
How does the entities to add to your portfolio and those 2 particular function of alleys areas through inorganic means and that's it for me. Thank you.
Thank you. Thank you very much for the question Hey look the re.
<unk>.
And we're the only borne and the cloud software company to have eclipsed 5 billion.
And the revenue without large M&A and we're highly aware of that.
But we also aware that this is a very unique culture and the self grown determination and innovation of our engineers is really in a league of its own and we continue to run the playbook of organic innovation and that is what I represented in January.
<unk> represented at our capital markets day, when we said we'd be of $15 billion plus revenue company, having said that RP.
<unk> and some of the other items that you mentioned.
You shouldn't expect us to make acquisitions and that space, but you should expect us to build our functionality and our capabilities.
<unk>, but also being open and willing partner for the customers because it's really about solving their problems and the biggest thing I hear from them.
They've got lots of good point solutions, all over the place and that in effect is the root cause of a lot of the mess that's been created and these enterprises and.
And more and more when I talk to leaders of the companies and spent quite a bit of time doing that this year. They tell me that they're looking for that control tower.
And that clear pane of glass that can move their workloads enable their workflows tighten up their systems their siloed operations.
<unk> and enable their people to serve their customers and really that's what we're doing so I'll always keep bringing it back to we can get where we said we'd go organically.
Were always on our tippy toes looking at what's best for our customers and our shareholders and we always look at that but.
But right.
Now the plan is ever steady and there are no plans to acquire and the spaces that you mentioned.
Alright, and many thanks Bill.
You very much for the question too. Thank you.
And your next question comes from Tyler Radke from Citi. Your line is now open.
Yeah. Thanks for the question.
Bill last quarter, you talked about the.
The EMEA business.
And it was on fire and clearly nice to see the uptick in the EMEA as a percentage of revenue I'm curious how that's evolved this quarter, obviously, there's kind of some mixed trends over there as it relates to reopening.
And just wanted to see if you're seeing that momentum carry into Q2 and your thoughts there for the back half of the year.
And the is doing fabulous and 1 of the big changes that we've made and EMEA was obviously the.
And the proper leadership.
Not.
Not just at the immediate head level, which is obviously working extremely well and very proud of that but also in significant countries.
Within EMEA because as you know every country in Europe has its own unique culture its own unique business motions and you have to be strong with leadership and all of the geographies and.
And we're able to attract and retain the very best people and the enterprise software industry and I think thats 1 of the root causes of our success. The second would be our C level relationships, we have upped our game and instead of dealing with only the CIO, which is an incredibly important executive to us we have.
<unk> also created relationship plans across the C suite and really enable the platform strategy for our customers and I think thats the big evolution of service now and EMEA, we'd become a platform company there as well.
And so.
It's kind of exciting when you consider.
How tough Europe has had with Covid and.
And the travel restrictions to do as well as we are.
And can you imagine when things do loosen up and open up a little bit just how big this is going to get in Europe for us. So we're very excited the business is going great and and EMEA. Just so you know is ahead.
And of the first half operating plan and the internal operating plan and that's a really good sign.
And I would just add there that and totally did EMEA did well we had really strong performance across all regions, the Americas and APAC as well. So we're really feeling good some of the geography.
With respect of that we're hitting on all cylinders.
Great and just the sneaking a quick follow up so.
And I think you talked about creator workflows.
And 18 of the top 20 deals.
Which which was more of than both Ips M and item, but it did.
<unk> from from 'twenty.
Percentage of net new HCV to 14%. This quarter was curious if there's anything to call out there whether it was just smaller creators deal sizes or it was just the <unk> piece was was so strong this quarter.
Thanks, Yes.
The I'll take that the platform had a very strong quarter and youre right and 17 of our top.
Plenty of deals, including 1 deal over 1 million Q1.
We closed some 7 figure and multiple 7 figure of cleaner workflow deals, which are of unusually large and more than we typically see and 1 particular quarter.
And so that's why you're seeing a little bit of a shift Q over Q and Q2, we really basically.
And back to a more normalized run rate of the 14%, which is consistent with what we've been seeing.
I'd note that back and financial Analyst day in May we talked about the fact that we expect creative workflows become 20% of net new HCV by 2020.4.
And and we're well on our way and.
And are doing extremely well in that trajectory. So we feel really good about the performance and then bill I don't know if you want to add anything on the actual store.
The strategy behind no I think I think you did a great gena and I are.
You also acknowledged the all of our regional leaders and I'd like to acknowledge all of our regional leaders along with you because of the sprite thing and also.
So our our leadership executive team here and all of the folks and engineering that have worked tirelessly to build the most innovative platform and the world is truly an honor to be associated with these folks and I am so bullish on Korea to workflow and I truly believe that the new motion and the enterprise is not going to be.
Separate and.
Endeavors of innovation, it's going to be the unification of innovation and.
And the big organizations are going to insist on enterprise coherence and security and business process alignment and the Ceos of very involved and digital transformation. The Ceos that are out.
Some of the greatest leaders I've ever seen and they are very focused on digital first and theyre not going to let these enterprises do whatever they want to do so the companies that have true platforms that are acknowledged and the strategy room of the board of directors of given companies are going to do very well now.
And the ones that are trying to get there you better have a really great story on how youre going to take care of all the needs of the enterprise and not just a few needs of a specific silo.
And we will be taking 1.
1 more question from the line of the Sterling Auty from Jpmorgan. Your line is open.
Yeah. Thanks, Hi, guys. Just 1 question from my side, you mentioned the improvement and the hardest hit industries from the pandemic I'm curious what are these industries prioritizing in terms of their spend with service now.
<unk> durable do you expect that spending to be moving forward.
Yeah.
Yeah, Great question, we're really pleased.
And with the trajectory there and that they're returning to more normalized spending habits.
And the areas that I can call out most of really around business resilience and how to.
And how do they make sure that they are extremely well positioned.
As we come out of this pandemic to too.
To help their employees be more productive and a hybrid world to really help ensure that their operations are as resilient as possible so that throughout our IC whether it's.
Hi, Tom and I tie them, together or ICBM as well as risk and security so really across the board feeling really good about the fact that that that's opening up again and I would build on genus comment Sterling by also saying that the speed of digital business right now is faster than I.
Some of us could of even imagined and Theyre, all Tau consume was customer experience and.
And when you have to have a seamless customer experience to win.
You have to align the value chain across the entire enterprise to earn that customer loyalty and what you're seeing a lot of these companies is.
Is the mid office operations and just how manual these processes are.
And just how of fractured the data is so we are really good and getting the data organized and focused and put into a workflow. So you can align.
I think any of the business process and you can be more resilient, but at the same time you can enable this direct to consumer relationship.
And was the last time anyone on this call went into a bank everything is done on the mobile everything is direct to consumer everything has to happen with the gorgeous simplified UI and I think that.
It is really driving so much of the conversations we're in right now.
Understood. Thank you.
Thank you.
And due to the time constraints that there'll be other last question and this concludes today's conference call. Thank you for participating you may now disconnect your lines.
Goodbye.
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As of June.
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