Q4 2021 ServiceNow Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to service <unk> fourth quarter fiscal 2021 earnings call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question Press Star one again, thank you Darin, yet Vice President of Investor Relations you May begin your conference.
Good afternoon, and thank you for joining service out fourth quarter and full year 2021 earnings Conference call. Joining me are Bill Mcdermott, President and Chief Executive Officer, and Jean <unk>, Our Chief Financial Officer.
During today's call, we will review our fourth quarter 2021 results and discuss our guidance for the first quarter and full year of 2022.
Before we get started with <unk>.
Besides that some of our information discussed on this call such as guidance is based on information as of today may contain forward looking statements that involve risks uncertainties and assumptions, including those related to the impact of COVID-19 on our business and global economic condition.
We undertake no duty or obligation to update such statements as a result of new information or future events.
Please refer to today's earnings press release, and our SEC filings, including our most recent 10-Q and our 2021 10-K that will be filed or factors that may cause actual results to differ materially from those set forth in such forward looking statements.
We'd like to also pointed out that we have presented non-GAAP measures. In addition to and not as a substitute for financial measures calculated in accordance with GAAP.
Unless otherwise noted all financial measures and related growth rates, we discuss today are non-GAAP , except for revenues remaining performance obligations or RVO and current RVO.
To see the reconciliation between these non-GAAP and GAAP measures. Please refer to today's earnings press release, and Investor presentation, which are both posted on our website at investors got service now Dot com.
A replay of today's call will also be posted on our website.
With that ill now like to turn the call over to bill. Thank.
Thank you very much Darren and a warm welcome to everybody joining us on today's call service now has once again delivered results that significantly beat the high end of expectations. Here's the Q4 run down in constant currency subscription revenue growth was 30% C. R. P O growth was 32.
4% free cash flow growth was 32% adjusted subscription billings growth was an exceptional 33%.
Operating margin was 23% one point over our guidance.
We had a record 135 deals over $1 million, which was up 50% year over year.
There has long been a rule of 40 benchmark for highly successful software companies.
These results demonstrate that service now operates beyond the rule of 60.
The company is expanding in all geographies industries and buyer personas.
<unk> will share the details in a few moments, including our strong 2022 guidance <unk>.
Service now is uniquely position, we're growing like a fast moving start up with the profitability of a global market leader, we're on a clear growth trajectory to 15 billion plus by 2026.
While our strong cash position preserves optionality, we don't depend on M&A for growth.
While rising interest rates challenge others service now as business model is built to flourish in any economic environment, we're not opportunity constrained as our customers need for digital transformation is ever expanding.
Our organic growth machine is in full flight and our pipeline is stronger than ever.
Our 99% renewal rate is one of several lead indicators for sustained performance moving forward.
Like to thank all of our stakeholders, especially our customers for their steadfast confidence in service now.
I'll give you the breakdown of our portfolio results, but first let's discuss the market dynamics.
We're in a sustained demand environment here.
There are structural challenges facing every industry in every geographic region.
Yeah, great resignation supply chain disruption inflation to name a few.
These underscore a point we have made consistently the technology strategy has become the business strategy digital technologies are our growth stimulating deflationary force a power new business models accelerating productivity, while reducing costs.
85% of chief executives will sustain or inquiries technology budgets. This year and that's according to Idc's Global CEO survey.
D. C has increased their forecast for digital transformation now a 10.7 trillion opportunity through 2025.
Gartner forecast worldwide software spending will increased 12% in 2022.
The data shows this is clearly more that a pandemic induced transformation.
CEO I spoke to last week said it perfectly.
I have a long list of strategic priorities technology isn't one of them it runs through all of them and quote.
Service now Q4 results clearly validate the structural incline of this digital economy.
As enterprises build deploy monitor and service technology, our it workflow business is at the core I T.
Service management was at 16 of our top 20, Q4 deals with 19 deals over a million.
It operations management was in 18 of our top 20 with 21 deals over $1 million.
Bell, Canada, Canada's largest telco company uses it workflows and it operations management to enable its operations our platform will improve critical dimensions are both asset management and the employee experience.
Service now will also be supporting the United States Space Force to connect its space operators with warfighters across the globe.
The hyper focus on hybrid work continues to propel our employee workflows business.
Our service delivery was in 11 of our top 20 deals with an exciting 24 deals over 1 million jobs.
Johnson controls international a smart building solutions leader will use employee workflows to unlock productivity for its 105000 employees together with service now they are focused on creating a human centered approach to the employee experience and video is using employee workflows.
To support its employee experience transformation with service now and video will provide its global employees a unified service model to support its mission by providing a frictionless employee experience Cvs health will also leverage our technology and employee of workflows to help deliver.
A best in class colleague experience.
As business integration is key to customer service or customer workflows business is arriving customer service management was in 13 of our top 20 deals with 10 deals over a million Google cloud plans to use our customer workflows to enhance its customer support operations.
British Telecom chose service now to address the needs of its next generation of customers. The service now platform will help <unk> accelerate the delivery of new services from 36 weeks to three.
Our new industry vertical solutions also continued to gain traction with wins at major brands, including SaaS Institute, Deutsche Telekom and well start.
Technology teams alone can't build the 500 million new applications IDC forecast by 2023.
Our creator workflows business is leading the citizen developer Revolution.
Our platform solutions, where in 19 of our top 20 deals Lockheed Martin the worlds largest aerospace and defense company is using service now to support its enterprise digital transformation. They will use our creative workflows to help automate processes globally, Petrobras a Brazilian energy come.
He is using creative workflows as the foundation for its application development function they've already built over 26 applications, such as Onboarding for oil platforms and managing data privacy regulations.
Together these businesses.
Customer employee creator represent a next generation suite built on a pure play born in the cloud architecture.
Our intuitive consumer grade experience is expanding adoption of this platform everywhere already 70 million users strong.
This has created a unique mode in terms of service now strategic relevance in the enterprise.
From a geographic perspective, we've continued to see momentum worldwide.
This includes a P J with wins at Samsung Sds in South Korea, and then D C and Japan in EMEA with partnering with the French postal service, La Poste, and leading Italian energy Company N L.
As you can see the digital opportunity is expanding dramatically for service now already in 2022, we're taking significant steps on a long term roadmap.
We're introducing a state of the art New solution service now impact leaders need a command center to navigate a fully connected world service now impact includes an intuitive consumer grade mobile application that visualizes the value from transformation investments in real time on.
Their device as this experience speeds up user adoption, we anticipate a significant halo effect with broader consumption of outgrowing solutions portfolio.
As our market opportunities expand we are promoting strong leaders for scale.
As a result of the consistent speed and unmatched quality of our innovation teams. We are expanding C. J decides role to chief operating officer of the company.
He will continue to lead products and engineering, while also assuming industry and solution responsibilities for the company.
Our top sales leader, Kevin Haverty has executed at an art form level for more than 10 years of service now Kevin We'll also step into a strategic role for the company serving as a mentor for the next generation of surface now leaders. He will work directly with me on expanding our footprint in the.
Public sector worldwide.
Paul Smith will become chief commercial officer, assuming our global sales responsibility.
As service now as President of Europe , Middle East and Africa, Paul has established himself as a leader of consequence, who can broaden the geographic reach of surface now.
All regions in the company have outstanding leadership in place and I'm very very proud of the work they are doing indeed.
We're also recruiting outstanding new leaders to the company.
Aaron tablet has joined service now to become chief diversity equity and inclusion officer.
Karen joins from our great partner Accenture, where she led dysfunction. She will help us embed diverse strategies directly into our business strategy because inclusive companies outperform all the others.
Our leadership team continues to strengthen our inspired global workforce remains ever loyal.
Look at our retention rates service now is not only recruiting great talent, we keep it in the engineering function. As an example, we see much lower attrition rates than any of our peer group benchmarks, while no company is immune from the war on talent.
Our unique culture puts us in a highly differentiated position.
Our high rankings from glass door show that our people are invested in service now has a bright future.
We see growth everywhere, but service now are customers now view us as the standard platform for digital transformation. Our engineers continue to strengthen this highly innovative scalable platform architecture.
Our customer success teams have navigated the COVID-19 challenges without missing a beat.
Our partner ecosystem continues to build service now practices with even bigger commitments for long term growth. The market forces are moving even more intensely and our direction for the future of work businesses need to integrate disparate systems leaders are more invested in ESG.
Than ever there are two common threads here first service now platform is purpose built for each opportunity.
New integrated ESG in a box offering is a perfect example, second every company wants to become an exponential business. They cannot do that with linear processes of the 20, most valuable companies 30 years ago. The zero are in the top 20 today.
The question is then which companies will be on that list 10 years from now.
To be in that conversation leaders need outcomes really fast service now gives them the speed advantage, they're looking for we're empowering digital first leaders to accelerate their vision.
Our purpose is to make the world work better for everyone. Our ambition is to be the defining enterprise software company of the 21st century.
Service now 2021 results.
Strong 2022 guidance signal, our unshakable confidence in that goal.
Our performance should leave no doubt we are executing on all cylinders and we will continue to do so.
The World is looking for market leaders to build a new inclusive sustainable ways of economic value and service now is delivering this is why we embraced the brand the motto and the Maxim The World works with service now. Thank you for your time I look forward to.
Your questions now over to our great CFO , Jean <unk> Madsen tuna gena over to you.
Thank you Bill and happy new year to everyone listening in.
He is below with a fantastic quarter capping an already phenomenal slide 21.
Despite increased FX headwind service now outperformed across all of our topline guidance metrics in Q4.
Our performance over the past couple of years, not only exemplifies our unwavering focus on delivering customer success, but it is a testament to the innovation.
The ability the now platform provides to our customers.
Whatever the macro challenges where service now adapted to deliver value.
There is now the ability to quickly respond to the needs of enterprises, when and where they require a smell its why we become the trusted digital platforms to drive transformation.
It's why our renewal rates are best in class, creating a solid foundation from which we grow upon each year.
Why in 2021, we added more incremental subscription revenue than we reported in 2016.
I'm going to pause there for that to thinking in 2020 . One we added a whole other 2016 service now to the top line.
Incredible organic growth.
Scale, while generating over 30% free cash flow margin.
Now turning to our Q4 results.
<unk> revenues of 1.523 billion growing 30% year over year in constant currency.
We exceeded the high end of our guidance range by $3 million when adjusting for the incremental $15 million FX headwind, we saw in the quarter, we beat by $18 million.
R. P O ended the quarter at approximately $11 5 billion.
Turning 32% year over year constant currency growth.
<unk> was approximately $5 7 billion.
We think 32% year over year constant currency growth and nearly four point b versus our FX adjusted guidance.
Q4 subscription billings were 2.420 billion, a $110 million beat versus the high end of our guidance.
This represents 32% year over year growth on a reported basis and 33% year over year growth on an adjusted basis as FX and duration were a headwind of 100 basis points.
From an industry perspective energy and utilities more than doubled its net new ACD contribution from the year ago period busy.
Business services, and healthcare and life Sciences also had a robust Q4 with very high double digit net new ACD growth.
Our renewal rate with our best in class, 99% continuing to demonstrate the stickiness of our business as the now platform remains a mission critical part of our customers' operations.
These enterprises not only remain loyal service now customers.
Customer cohorts have continued to show solid expansion over time.
As of the end of Q4, we had about 1300 50 customers paying us over $1 million in ACD.
Our strategy of targeting the right enterprise customers that drive the best ROI and can grow with US overtime is bearing fruit in Q4, we closed 135 deals greater than $1 million and net new ACD in the quarter up over 50% year over year.
In addition, our better together story is resonating as 18 of our top 20 deals included five or more products.
Turning to profitability operating margin was 23% one point above our guidance, primarily driven by the strong revenue D. R.
Our free cash flow margin in the quarter was 46%.
Full year 2021 operating margin was 25% and free cash flow margin was 32% representing one $9 billion of free cash flow.
We ended the year with a healthy balance sheet, including $4 $9 billion in cash and investments putting us in excellent shape to continue investing in strategic initiatives to drive organic growth.
Together these results show the power of our business model and our ability to drive the balance of growth and profitability.
What's more we are achieving all of this with a focus on ESG and winning the right way last quarter I announced our commitment to reaching our net zero emissions goal by 2032 decades earlier than our previous goal.
This quarter you heard Bill introduced carrier tablet, who will lead our efforts to strengthen our culture insurance equity and creating an even deeper sense of belonging.
Diversity equity inclusion a business imperative to service now in 2020 , one we outperformed all six of our representation and hiring goals across three categories.
Hispanic and Latin next and women in leadership.
At its core service culture is one of the logging it is core to who we are and it will be one of the keys to our company's growth for many years to come.
Moving on to guidance.
Since the end of Q3, we've seen an incremental strengthening of the U S dollar, resulting in a material FX headwind in 2022 to help provide investors better visibility into the underlying strength of the business.
I'll be providing constant currency guidance.
I would also note that in January we completed an assessment of the useful life of our data center equipment and determined that we could extend their estimated life from three to four years.
As a result, we expect a reduction in depreciation expense, which will contribute approximately 100 basis points to gross margin in 2022 trending down to just 50 basis points in 2024.
With that in mind, I'll turn to our 2022 outlook.
Last year was a strong year and I'm excited to announce that our momentum will carry into 2022 as we do not expect any change in constant currency growth year over year.
We expect subscription revenues between 7.12 billion and 7.04 billion, representing 26% year over year growth at 28% on a constant currency basis, the same growth as 2021 instead.
It's an amazing achievement when you think about the fact that the base, we're growing off of its $1 $3 billion higher when we started just last year.
We expect subscription gross margin of 86% up 100 basis points year over year.
We expect an operating margin of 25%.
With regard to operating expenses, we have reopened many offices and our planning in person conferences and user events. This year. Our sales force is also already begun to travel again.
We expect certain COVID-19 related savings, we've seen over the past two years to date in 2022.
We expect free cash flow margins of 31%.
And we expect diluted weighted average outstanding shares of $204 million.
For Q1, I'm pleased to announce that we expect subscription revenue growth to accelerate year over year on a constant currency basis.
We expect subscription revenues between 161 billion and $1 $6 5 billion, representing 25% year over year growth or 27, 5% constant currency growth.
We expect CRP, oh growth of 28% year over year or 29, 5% on constant currency basis.
We expect an operating margin of 25% and we expect 203 million diluted weighted outstanding shares for the quarter.
In summary, we had a very strong Q4 am so proud of what our team has accomplished over the past year and what they continue to achieve that.
The pace of digital investment is accelerating demand in 2022 continues to be strong.
Enterprises are turning to service now to create new business models to address the new ways employees and customers want to engage.
The now platform offers the speed flexibility and innovation companies need.
We're well on our way to $15 billion and beyond and becoming the defining enterprise software company of the 21st century.
Moving on to Q&A, Bill and I want to thank our employees around the world for a tremendous year you are the key to service now success and you walk continue to make US service now strong.
And with that I'll open it up for Q&A.
Yeah.
At this time I would like to remind everyone in order to ask a question. Please press star followed by the number one on your telephone keypad and we ask that you. Please limit yourself to one question.
Your first question comes from the line of Phil Winslow with Credit Suisse. Your line is open.
Hi team. Thank you for taking my question and congratulations on a strong into a really strong full year.
Investors have been concerned this year about the potential for pull forward in demand really setting the stage for decelerating growth across software now looking at your results night and the guidance I really can't find any signs of decelerating demand for service now in fact sales and marketing head count in Q4 grew at its fastest rate since Q1 2020, we suggest youre continuing to lead in here. So two questions first.
Bill My question to you is what are you hearing from customers that gives you confidence and sustainability of growth and to accelerate this go to market hiring exiting the year in Juneau, what trends are you seeing in terms of ramping these new sales and marketing hires. Thanks.
Thank you very much bill for your kind remarks, and also for your question customers are absolutely focused on technology being the business strategy and digital transformation is in full flight and we will.
Capitalize on that greatly.
The reality on our numbers is we did not see any evidence of unusual demand pull forward into our business for 2021.
It happened.
In an extremely linear and coherent fashion, which was really a thing of beauty to watch from an execution perspective.
And as I look at the pipelines their ever increasing and they're doing that across the platform. The employee experience the customer experience the creator experience and all of this now is really making service now one of those real standard platforms for well run companies in.
The 20, <unk> century, and I think that includes a very short list of others, where one of them and fill up the business just couldn't be going better.
And then Phil on your question with respect to ramp Rep, you're absolutely right. We did not pause at all on our head count growth in Q4, we're entering 2022 with more ramped sales reps than we entered 2021 and we feel really good about pipeline and.
Demand that we see in front of us, but we are absolutely not stopping our investment in go to market resources. We are planning for a very strong 2022.
Awesome. Thanks team congratulations again thank.
Thank you thank you Phil.
Your next question comes from the line of Raimo <unk> with Barclays. Your line is open.
Hey, Congrats from me as well well done.
Can we talk a little bit about the.
Revenue, where you were achieving with one of your biggest clients you have like a breakout number now of people over 1 million an ACB, but the ACP number is also growing up like but can you talk a little bit about how you see this trending going forward with all the different products that you have but also the product expansion that you're seeing there.
Do you think this will evolve over time. Thank you.
Raimo excellent question this is really.
A beautiful point.
And the scale phase that service now is in and you might notice the substantial promotions to C. J in addition to taking on.
He is normal great on <unk>.
Results for development and engineering. He is now moving into the industry phase, where we're going to connect the code to the actual industry specific solutions.
These specialists professionals that guide our general line sales force and our customer relationships each and every day.
That's going to give us a real special bilateral communication with our customers to innovate at an even faster clip than we have in the past if thats possible and you see what happens in telecommunications in financial services, you see what happens in government healthcare life Sciences.
All the businesses that we've chosen to focus on from an industry perspective are really scaling and doing so very very quickly here's where the big deals have only just begun.
If you look at businesses today, and there's one retailer in particular that I referenced in the call like Cvs, which is a great company.
They have retail customers, but they are also transforming into a health and wellness company and they understand the experience that they have to give their customers is evolving into a multi workflow environment. So on one hand I have to keep my associate Super happy because they are complex enough jobs.
I have to keep my customers happy because in some cases, they want to come to the store in other cases, they want to sort of come to them on transforming my business model between all of these factors and now ongoing for health and wellness and someday I'll not only do that in store, but I can do that at the home. So you are seeing.
Multi complex workflows possible on the now platform coming together to form greater sized solutions that have major business impact for our customers and the value. We can create with digital transformation. So the challenge I've got out to the company.
Raimo is the large deals will accelerate dramatically on a year over year basis. We are now prepared for that and we have the best leaders and not in the positions in the company to deliver that and we have an extremely inspired workforce and an extremely inspired ecosystem. So all of that.
Comes together and as you know I've seen the movie before when it all comes together.
It equals big growth.
Oh, I'm sorry exciting thank you.
Thank you.
Your next question comes from the line of Alex Zukin with Wolfe Research. Your line is open.
Yes.
Hey, guys congrats on a great.
And to the year.
And maybe the first one for you. If you think about what you just said three most question about being in a great position to massively accelerate the amount of large deals.
Is it right to kind of think that industry clouds and.
And the low code platform vision, that's the big motion that you think will unlock the most value in some of these larger deals even.
Even more maybe even more so than HR, CSM, where or what's the right way to think about like the growth drivers of these expansion opportunities over the course of the next year and look at it doesn't escape all of US the valuation contraction, we've seen in the public markets does it change or in any way.
Fluids, your your strategy or thought process around organic versus inorganic growth.
Yes, Alex.
So really significant set of issues and I'll address them head on first of all every great company has a great core business because when you have a multi billion core business that core business has to perform so you get the leverage on all of the Adjacencies are core business is better than ever and it's grown.
Going early strong.
And in fact, I think it could be very close to the overall corporate growth rate as we look into the Crystal Ball then you add on employee experience.
Remember this employee experience and the future of work and where people are going to be working and how they're going to be working especially exacerbated by a talent war out there is really a big deal and Ceos need to retain the people. They have now they better be recruiting and onboarding in a flawless manner because the.
<unk> today expect consumer grade user experiences in the enterprise and if they don't get done they either don't come on in the first place because they know what's going on in these companies the internet tells them that or when they get there. They don't stay very long because they're not happy. So the employee experience is front and center and then on customer service management.
The reality is this is just starting because the world is really acknowledge that the customer is not going to come to you. The way they used to you're going to have to go to them and you're going to have to explain to the customer that youre brand gets it and you can give them an experience no matter, where they are experiencing a brand that has enormous consist.
Since the service value and yes, even helpful hands in terms of smart transactions through an AI platform like service now and then you take the creative workflow look 500 million applications between now and the end of 2023 is more applications that had been built in the last 40 years.
So there's no choice, it's gonna be low code no code and the service now platform is beautifully positioned now let me extend to your question on industry and low code.
That is absolutely a very astute observation because if you take the low code Revolution, and you combine it with industry. We're now solving business problems that had been out there for a long time.
We featured the Salone this partnership where they can do the X ray and the non service now installed environments. We can activate all the changes that are necessary to augment the business process on the now action layer and of course, he has a big Bang all those systems out there had been mass customized but with service now you can.
Carry forward all your customization with the creative workflow.
Neenah team, a consult incentives and a truck coming over there for years and years projects in billions and billions. This is Tal. This is speed to market. This is low cost of rollout of big ideas and business model innovations and better service for the employee and the customer. So it all comes together and the reason.
I'm so excited about what we're doing with the executive team here is we're all lined up now to take everything we know how to do and scale it across the world in every geo in every industry and every persona and I have to thank my partners out there I mean, they're knocking down the door to you.
A bigger piece of the service now franchise. So it's all of those things coming together Alex are on M&A.
I want to be really Super clear about this we have no targets on the board.
For M&A and the reason for that is on an organic growth basis, you see the numbers as much as I see the numbers the cloud economics are in full flight.
And we have engineers that loved this company.
And they love coming to work every day, whether they're working out of their home or office were all open.
And they come in and they create new things and they have an idea that they can take and they have a dream that they can build.
When I listen to other engineers and other software companies that want to come over here, telling me they spend 90% of their time integrating the past as opposed to innovating the future. It just reminds me of how thoughtful we have to be on M&A. So as gene said, we have $5 billion of cash that's going to continue to grow exponentially.
With that and were fueling our organic growth ambitions, we can be opportunistic but in this guide and this current state of affairs. There is no intent to do any large scale M&A and if that were to change I would be the first Italian.
Incredibly incredibly specific and we all love the candor and appreciate that that color I guess, maybe just.
Quick follow up.
First of all congratulations to C J.
Wonderful.
Expansion of of his abilities and opportunities I wanted to ask about the shift on the chief customer officer.
You know what plays workday as an examples and other company that's made a move to historically make the head of Europe . The head of overall sales I wanted to ask what in terms of the motion that youre seeing successful in outside of the U S that can be applied to the rest of the organization and particularly inside the U S. What players are.
Our successful that you think can be run or expanded that will work.
Well first of all I want to tip my cap to our regional presidents.
Because they know I love them and a level.
We have great leadership with mentioned a P J, great leadership with Mike and the Americas and now all rig coming on in EMEA I know the mall personally I admire them deeply and I really appreciate what they're doing the service now and they're all playing critical roles in our future Mike as an example has done.
Extraordinary job here for very very long period of time, and you know 65% of the number resides in this pack. So he knows what we think of him and I've always told our leaders that this is a significant company and each piece of this puzzle needs to be managed with incredible care.
And these are the leaders that will do that now Paul Smith.
It brings very unique style.
Style and Knowhow, especially around the expansion of the C level relationships, where he has proven himself in an exemplary fashion for the 18 months that he has been here and as you know we had a great track record before we got here and he understands all the concepts that I've put out on this call today, because he has been through.
And we're activating them together and we know exactly what we are doing and the other thing is with C. J and the closeness that CJ and Kevin have had all these years that continues CAD still Whitney and CJS right when they evolve right. When they so were all putting this together and we.
We're going to activate it in every region and every industry and across every persona and what I'm. So inspired by his these executives I respect them with my whole heart and they're doing a fabulous job and they want service neither be defining enterprise software company with 20, <unk> century, and they all wanted as badly as I do which is why.
No it's going to happen.
Thanks, so much guys and congratulations.
Thank you very much.
Your next question comes from the line of Kash Rangan with Goldman Sachs. Your line is open.
Hi, what are incredible finisher 'twenty, one do you have more than $5 billion in revenue and you have close.
Close to 11, plus an RP or that you are a hardy with inside of your long term goal.
So kudos on that.
Thats a wonderful milestone Bill My question for you is certainly your vision of the platform Revolution, taking over from the database relational database middleware that whole stack. All revolution is a very compelling one because you can bring value to customers pressing problems immediately right. So that's the that's been the.
Long term thesis of service now.
More tactically as you head into 'twenty, two we've got no need to.
Reiterate, but very briefly inflation pressures labor shortage supply chain shortage.
And our need to boost productivity. Despite all these constraints how do you see the now platform being equipped to handle these challenges vies. These tactical challenges in the near term for corporations with with your execution. Thank you so much.
Well I really appreciate the question. Thank you so much for your kind remarks.
I really do cash. Thanks, Alot service now has a unique ability to drive more efficiency and automate these processes and is absolutely a deflationary tool that helps alleviate the need for more hiring many companies think the only way to solve a problem so more bodies at it.
While we have no quarrel with increase in jobs, if theres a limited pool of digital assets. That's a problem and that's why you need service now so driving the productivity and efficiency.
Resources enterprises already have helping them reduce the need for additional spend is our lead play in the playbook for the scenarios you laid out there.
One simple example, take virtual agents deflecting and automating tickets so that the it help desk personnel can spend their time tackling more strategic issues given them more satisfaction with their job and creating a happier work environment.
And this also reduces the need to hire more people in the first place. But then you know really smart Ceos are literally struggling every day now how do I keep my people and the only way to keep them is to give them a great experience and they are going to feel you right out of the gates. If you recruited him.
And you can onboard them properly.
Didnt feel you have you can train them.
And activate a customized training curriculum, that's targeted specifically to their unique skills and attributes and theyre going to feel you real quick if they can't go one portal to activate all of their services on their mobile device. So no matter, where they are they are comfort.
Their company's brand their company's culture is talking to them.
And then when you do need to manage these cases with people.
Goodness legal could be involved finance could be involved HR could be involved cfos and Ceos can be evolved and most companies have literally thousands of cases that are in flight at any one time.
Only service now only service now can manage the multi disciplinary workflows that go across an organization in many different circular forms to closeout of case properly.
That's what we do cash so I lean in to the inflation conversation the labor conversation, where more and more activated now and straightening out supply chain dilemmas, we have one manufacturer in the auto industry that has us as the control tower for their entire supply.
Now a few years ago, nobody would even know that.
We're solving ERP cases left right and center with service now as the action platform. So I think the idea of this productivity and I mentioned in my discussion earlier really manifest itself in our new impacts product, we took a service product ties it.
In software.
Where we can look at the entire value chain on the now platform.
The entire value chain from the pre sale to the sale and the post sale all the activities that are taking place in the deployment in relation to the value that's being delivered in real time with hard dollars and cents and an absolute measurement that the customer can look at on their iPhone.
That the partner participate in the conversation and so definitely we're not using any other technology within our platform and that service now can use. So now just think about the gorgeousness of that conversation, where as we deploy we can show the business outcome and the partner and service now and the customer are all on the same sheet of music.
On the now platform with service now impact cash its amazing we had 17 customers in the pilot join up on the impact platform before we even launched it when now G E on it and we're launching it with all of our employees globally Tomorrow. Every geography. This is going to create a renaissance of value delivery.
In the enterprise the likes of which has never been seen before.
Preferably exciting thank you so much bill.
Thank you Kash.
Your next question comes from the line of Keith Weiss with Morgan Stanley . Your line is open.
Excellent. Thank you guys for taking the question and let me echo the congratulations on a great quarter and great year.
I wanted to.
Follow through on cash is a interesting question and kind of turn it inward.
To service now.
Bill from your perspective.
Do you see any constraints in terms of your partners finding the people or your customers finding the people to be able to deploy service now we're hearing about that from some of our checks and some of the systems integrators, just such a tight labor market are the people there to sort of deploy the solution architect could that become something of a friction to just getting.
It is now up and running and to Gina.
Are you seeing any <unk>.
Incremental increased wage inflation in terms of sort of you guys are hiring very aggressively head count from 29% year on year. So you are definitely finding the people is there any.
Increase in wage inflation or anything extraordinary on that side of the equation given that kit tight labor market that.
Might impact margins on a go forward basis.
Thank you very much for the question Keith you know as I mentioned earlier, we are one of these significant partners to the global S size. So if you look at the top five technology partners for the top 10 S is where one of them.
So while they may have some difficulty hiring to meet demand we are getting preferential resource allocation not only as a top five technology partner, but also because our swelling pipeline and our growth is so amazing that they all want more of that real estate and where they have less.
Ah interesting growth scenarios with other partners. They are actually peeling off head count in favor of the service now practice. This is happening all over the place. In addition, one of the things. We have done is we took matters into our own hands and built out academies.
And we're doing more for university programs to meet to meet the demand. The service now train talent and I'd note that we've also been working with our partners to sponsor and engage with local diversity profit nonprofits to target diverse populations for nexgen skill development, which will help alleviate.
Such labor shortages in the future we have to initiate people into the digital world that perhaps arent initiated but it's certainly more than capable and I always go back to the root cause of why service now is so special when Fred Luddy created this company. He created a platform that was a sensation.
And it was designed to give people productivity a tool to enable them to do things with their lives and their jobs that they could have never done without it.
And I think that level of simplicity and agility and the general construct of the platform makes it so much easier for people to learn and develop and grow on it and now they see where we're going I know, it's a gross sensation and you know how it is rising tide lifts all boats and everybody wants to get on this one.
And then Keith on your question with respect to labor inflation rates, you know enterprise software talent has been in high demand for some time now the competitive compensation had been on the rise and it's not new for US we continue to monitor it and we definitely anticipate some continued price pressure in the coming quarter.
But we remain very committed to our margin guidance that we've given you for 2022 and beyond.
Outstanding. Thank you so much for the detail.
Thanks, Keith Thank you Keith.
Your next question comes from the line of Michael <unk> with Keybanc. Your line is open hey, thanks, very much Kevin Congrats on the quarter, one for Bill and one Virginia. So bill I wanted to ask about a couple of Submarkets that you have.
Acquisitions, and specifically in RPI and observed ability and how youre thinking about those markets and your strategy with this will be.
Really directed at existing larger service now implementations for how directly youre going to go into those types of deals and then select Virginia.
Yeah of course, well Michael Thank you very much first of all we are very excited about been his leadership and the whole lifestyle team.
As you know they have been doing a great job, winning amazing forward thinking brands and they have been doing a phenomenal job culturally are integrating back into service now. So we are going to begin going to market with lifestyle and that's going to be at mass scale.
That will be announced at the employee kickoff tomorrow, So that's exciting and the work with lifestyle to not only serve the needs of both.
But to observe things in a way that can be consumed across the value chain of decision makers in an enterprise is pretty big and then RP a this whole process mining RPI.
The platform for hyper automation is the service now platform as a huge point and see Jay and his great team unbelievable team.
They are making a major release in <unk> as you know in our San Diego release.
So more and more customers will benefit from the power of the service now platform, including RPM built into the San Diego release.
It's an exciting release.
What Amy Loki and the team have done also on the user experience we saw a demonstration of it with our board. It's unbelievable you know when you're dealing with service now because you can have one gorgeous user experience and it doesn't matter what area of the platform you're looking to enable its all one gorgeous.
User experience and I mean, I've never seen anything better and it is the scale story, all the way and when we hit Tokyo and September I hope to be in Tokyo with that announcement, because I want to reach out to migrate.
Great friends in Japan, as the Japanese expression called anti suit and that underscores the spirit of service now to be better than the best and that's the standard that we hold ourselves to and the marketplace in Japan is really getting the memo on the power of service now.
And what we can do to liberate them into the cloud and that's going to be an exciting part of our growth story.
Great. Thanks, Bill and then Gina just some clarifications on the extension of the useful life. So.
You got it essentially flattish.
Op margins, but down a bit by 70 bps on a free cash flow. So just make sure that I understand that and then obviously you get that benefit to EBIT margins, but the flow through and we see it on free cash flow. So this is just a noncash and <unk>, including expense and so to make sure. Those mechanics are right and then also.
Do you get in year two of list to get does that tailwind to EBIT and accrual does that flip around a headwind on margin on EBIT margins and gross margin great.
Great question Michael.
Absolutely right the benefit that you're seeing this year hits, you bet and an operating margin, but not to be cashed out right. Because it's just a change in depreciation which is a noncash <unk>.
Well.
The reason why youre seeing the benefit in operating income, but not in free cash flow. What you are seeing if we can sell is the increased cost that I've been talking about as the COVID-19 savings start to fade in 'twenty two as we come back in Pakistan for digital events and in person events and travel with respect to the law.
Longer tail of this change in depreciation it definitely tapers off and get smaller right. So it's 108 basis points benefit. This year by 2024 eight goes down to just 50 points.
And that's only on the EBIT margins not on Picasso.
Okay, Thanks, very much John and Bill.
Of course, thank you very much I appreciate it Mike Thank you.
Okay.
Your next question comes from the line of Brad Zelnick with Deutsche Bank. Your line is open.
Great. Thank you Bill Gena my congrats as well to you and the entire team and especially the C. J and the others that are so deservedly deservedly being elevated within the organization.
Bill you personally have been serving enterprise technology customers for many years and many of US had been students of the industry for a long time as well and I hesitate to say this but it feels like this time is different this digital transformation freight train just keep steam rolling down the tracks and rather than ask you to tell us about the environment, which is obviously.
Very strong foodservice now delivers I'll instead ask you if you agree with my characterization.
Why do you think this time might be different.
Alright. Thank you for the question it is entirely different.
It is entirely different because.
The technology that is available to customers today.
Can be so transformative.
And I believe strongly that the now platform from service now is literally the control tower.
<unk> platform for digital transformation with digital business and the reason I feel so strongly about that is.
Is the enterprise has been so behind.
In consumer rising experiences for people.
And now with service now.
As leaders of companies can finally say Oh, all I hear is good news.
My HR leader tells me.
That all the convenience of the past goes away with service now and my people are happy and they're getting what they need.
My head of revenue is telling me Wow, we can finally now do all the remote heavy thinking in diagnostics in a fully digital way and we can bring our story to the customer and have that frictionless digital experience that is easily repeatable drives.
Tremendous customer sat in NPS and creates the loyalty effect, while we're finally, there and then we can finally breakthrough.
Where companies are trying to refresh old applications. They can say Wow now I can empower my people. They can build the new innovations. They can refresh the all but build the new innovations and tech is the idea of liberating.
Not replacing people and creating more economic value and value add plus every young person today doesn't want to work for just a paycheck they want a purpose.
And I think our purpose to make work better for everyone is absolutely the right way to go and I think that the leaders of companies want that for their company.
And therefore, I think the confluence of all of this on one platform with one consumer grade user experience for all people, whether they're inside or outside the company a platform that can take cost out and build revenue in is what this generation is waiting for and once people are aware.
A service now we win every time.
So one of the moves that we've made and I'm sure you've seen the pivot with the World works with service now is bringing the world the brand that it deserves from service now and I think that's going to really turn on a lot of people to say.
I might have been a C level decision maker net new my it people were happy with service now I just never knew why once I started to learn about it or ask about it now I know that they can activate transformation in all dimensions of my company not the least of which is b the action layer for the whole enterprise and I keep talent.
People when I meet with the Ceos like we have good systems of record are all very fine, but I don't use them. We only use service now to run service now and Thats why are people so happy because everything works.
Awesome. Thank you for the perspective Bill.
Well. Thank you Brad Thank you very much.
Your next question comes from the line of Pat Walraven with JMP Securities. Your line is open.
Oh, great. Thanks very much.
Bill Congrats on the terrific results and outlook.
I Love Love hearing the enthusiasm.
Could you drill down deeper for us on the relationship with <unk>.
And how service now slowness worked together to solve customers' problems.
Yes, I, absolutely will and thank you very much for your kind remarks, I really appreciate it.
I want to go back a little bit in time on this one.
There once was a time, where these gentlemen graduated from the technical University of Munich, we call it to him over in Germany.
And I got to know Alex.
Well on several years ago.
And also.
His co founders and we built a very strong friendship and he used to laugh because he sent me a note and December telling me about his business and within a few minutes I will get back to him and he never forgot that and.
And I still get back to them within a few minutes and we still have a great friendship and we know that we have to liberate.
The past and move it into the cloud we know we need to put it on.
And automation.
Platform that can really change business and therefore in the non service now environments.
Especially where it's an ERP environment slowness does a very good job in the process mining to actually understand where the brakes are and the opportunities are in the business process.
To drive business productivity and performance.
It is on that basis that we said look we should tmall.
Because our customers more and more are asking us to get involved automating the back office business operations and business processes with the now platform.
So we are essentially taking.
This relationship and applying automation that truly moves the needle for organizations to understand how workflows across the people processes and systems of their companies.
And we're helping map those elements in real time and building digital workflows to more efficiently automate work because the X ray by itself doesn't really help we have to then put it on the actual platform to actually automate it to drive a result, so our engines.
Eric teams have created a seamless product experience, that's going to make it easy and simple for customers to get the insight into the process across multiple I might add enterprise systems, and they'll use soloist EMS platform.
And convert that insight into action automation of remediation with the service now workflow platforms and when you bring together process mining automation machine learning RP.
<unk> P E and low code App development and this touches on a question that came up earlier low code App development.
And to a seamless product experience customers will enable quick continuous improvement with.
With the flow of work.
And I stress quick.
Because and this touches on an early a very smart question.
These opportunities haven't been there for customers in the past and they are only going to start learning about them now which is why I see an even bigger hockey stick as we look into the future because we can revolutionize old installed based problems and to new market opportunities in the cloud that are just sensational.
In terms of the business value they drive for corporations.
All over the world.
Okay. That's super helpful. Thank you Bill my.
My pleasure. Thank you for the question Pat.
We have time for one more question. Your last question comes from the line of drew Glazer with J P. Morgan Your line is open.
Hi, This is Joe on for Sterling.
Just wondering how the government vertical performed in the quarter and whether you could provide some more detail.
Yeah, I'd be happy to you know our government business is truly a growth story at service now that is a very very special.
So we look at the <unk> in the U S federal market.
It came through very strongly it's a big opportunity for us whats happening through as many of these agencies.
They need or they have a mandate actually to digitally transform.
One of the mandates as the President's management agenda PMA. Their vision is the administration's guide to invest in the government's capacity to deliver better results and its aligning with service now as core offerings. So for example, if you look at the pillars, it's all about strengthening and empowering federal workflow.
And the workforce.
It's sharing data sharing business processes looking at things across boundaries.
Have deliver excellent equitable and secure federal services and customer experiences this is driving acceleration.
For better customer service.
If you look at their pillar three it's managing the business of government and they want to make sure. The systems work well. So this is all about built business resiliency.
Our cloud is extremely resilient and Theyre focused also on cyber security.
And I think you're familiar with that.
And the role that we can play and having a control tower are all the things going on from a security perspective, we can help other people solutions also tie into that control tower effect too.
Manage the nation cyber security and obviously.
Avoid recent ransomware attacks and other banks. They are also focused on vaccine management and we set a long time ago I.
I believe this was in March of 2021, we've said this that the old vaccine management process would be the greatest workflow challenge the government faces maybe in our lifetime.
And as you know we have the world's leading solution for that with entire countries of course part of the United States, Germany, Scotland, many countries, including in Asia are running on the now platform for vaccine management and returning to work safely and so forth.
So all of this.
To net it out basically says that at the federal state and the local the University and all public entities combined are focused on transforming digitally they have to take these paper based slow dangerous processes and put them in.
Border and the only way to do that is work loan digitize them and then execute the mission of government serving the people and that's why the public sector now represents double digits of the now although now business is about 10% of our business and look with the problems that government has and digitize.
And banks this should be one of the more sensational industry stories for us for a long long time, which is one of the reasons why the great Kevin Haverty and I will be working very very closely on the public sector initiatives globally in his new capacity.
Got it that's very helpful. Thank you.
Thanks, Tim.
Thank you very much I appreciate it.
This concludes today's conference call. Thank you for your participation and you may now disconnect.
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