Q3 2022 ServiceNow Inc Earnings Call
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Good afternoon, ladies and gentlemen, welcome to the service now Q3 2022 earnings Conference call. At this time all participants are in a listen only mode and please be advised that this call is being recorded after the speakers' prepared remarks, there will be a question and answer session. If he would like to ask a question. During this time simply press star one on your job.
I'll keep that he would like to withdraw your question simply press Star One again and we do ask that you. Please limit yourself to one question and now I'd like to turn the call over to Mr. Darren Yet Vice President Investor Relations. Please go ahead.
Thank you.
Good afternoon, and thank you for joining service now third quarter 2020 earnings Conference call. Joining me are Bill Mcdermott, Chairman, President and Chief Executive Officer, and genome essentially Hill, our Chief Financial Officer.
During today's call, we will review, our third quarter 2022 results and discuss our guidance for the fourth quarter and full year 2022.
Before we get started.
<unk> got some of the information discussed on this call such as our guidance is based on information as of today and contains forward looking statements that involve risks uncertainties and assumptions.
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 2021 10-K or factors that may cause actual results to differ materially from our forward looking statements.
We'd also like to point out that we present 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 RPM current RVO and cash and investments.
Please 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 service now Dot com.
A replay of today's call will also be posted on our website.
With that I'll turn the call over to Bill. Thank you very much Darrin and I'll add my welcome to everyone joining today's call.
Service now had an outstanding third quarter looking at the topline results in constant currency subscription revenue was 28, 5% growth.
<unk> growth was 25%.
On profitability operating margin was 26% all three metrics at or above our guidance, beating expectations once again.
Service now have 69, Q3 deals greater than $1 million.
Our U S federal business had its best quarter ever in Q3.
We saw strength across industries and business segments output.
Outperformance was consistent globally with Europe , executing especially well this quarter.
Our renewal rate remains best in class at 98% we are there.
The largest organically growing enterprise software company, we have an unmatched combination of organic growth and profitability at scale.
As these Q3 results demonstrate we fully intend to maintain its leadership position.
Regarding the operating environment in recent quarters, we said that secular tailwind with stronger than macro cross wins they are.
Nothing we saw in Q3 changes this core thesis.
Digital technology is a deflationary for us.
The enterprise digital transformation market is validated.
Investment thesis is stronger than ever.
Hybrid multi cloud deployment adoption of a modern data infrastructure stack cyber security and risk management, AI and data analytics remote remote work and collaboration Easter.
These trends are not only durable they're relevant is expanding.
750 million new applications built by 2025.
In the U S alone nearly 100 million work is we'll remain in hybrid environments.
7 billion connected devices will drive more data into the cloud over the next three years and service now as platform directly addresses all these challenges, which translates to numerous growth vectors for our business I hear one thing from Ceos consistently.
Anything we prioritize must generate results in weeks or months.
This is the essence of the great re prioritization.
In past decades waves of enterprise systems were introduced to meet market challenges of those times operating systems databases applications. What we see now is a generational shift from architecture is built in the last century took platforms engineered for this one.
If you look at the ERP market, we see customers at various stages of their move to the cloud some.
Some of the world's largest manufacturers for example are consolidating hundreds of all procurement processes into a modern workflow experience.
This declutter the legacy environment, driving more than a $1 billion and cost efficiencies. So just one of our many ERP wins this quarter.
We can do it because service now was born in the cloud we integrate with everyone. We meet our customers wherever they are any environment any organizational structure any operating model, where there is complexity. We simplified we are fast to deploy fast to generate ROI.
In this need for speed environment. This service now platform is becoming the strategic center of gravity for our customers in light of this today, we are announcing a new initiative right up with service now.
At scale 1 million service now certified professionals by 2020 for our customers partners and service now itself.
All growing at service now Workforces, we see opportunity everywhere with rides up with service now will give people and knowledge to seize it.
Overall, the demand environment is strong the market opportunity is growing the ecosystem is expanding.
Service now as a growth company on every level.
We see the growth across multiple buyer personas as customers consume more of our expanding solution portfolio in.
In Q3, well <unk> and icon or in 17 of our top 20 deals with six deals each over $1 million.
Security and risk we're in 15 of the top 20 with five deals over $1 million.
Customer and employee workflows, where each in 12 of the top 20. Once again, we saw creator workflows and all the top 20 deals with nine deals over $1 million.
Customers view service now as mission critical.
Defense Logistics agency works with service now to support the global defense supply chain with automated workflows based.
Faced with a crisis of hurricane and.
The state of Florida work with service now to deploy a mission critical application to manage requests from people searching for their loved ones and crisis situations.
Weeks to deploy isn't an option, which is why the state did it on service now in a few hours.
Telecom provided KPN works with service now.
To reduce their order management process from three days to under a minute.
Saving millions.
Thank you. These stories are everywhere in fact, one CEO chose service now for the first time said, yes to me personally.
It's always easier to make a strategic partner decision when you trust the people on the other side of it.
In late September we announced the service now Tokyo release, we delivered AI powered task intelligence, which is all about making the customer service agents more productive reducing manual effort speeding time to resolution and improving the customer experience.
On the revenue facing side, we delivered enhancements to order management, including support for bundling configurable products and pricing models.
We delivered major advances in field service operations, and dispatch with scheduled optimization and territory planning.
These capabilities help our customers better manage their costs, but also their ESG footprint.
At a moment when customer service is at the very top of sea level agenda.
Service now net new innovation is driving and transforming the front office.
Technology leaders, we released a new service operations, workspace, which will deliver faster incident resolutions to keep people highly productive and.
And given the ongoing migration to the cloud we released a new license cloud cost simulator. So leaders can model the cost benefits.
Moving from on premise to cloud deployments.
<unk> released contains many more new features across each of our major workflow businesses technology customer employee and creator.
It is the latest demonstration and service now product and engineering machine is the best in the World The best in class like no other and.
And speaking of best in class I've been lucky enough to learn from one of the greatest innovators of the 20 <unk> century tread.
Fred Luddy and I have been on a multiyear journey together, one built on love and mutual respect.
At this week's board meeting I was honored to take on the role of chairman with Fred remaining inactive member of our board for the long term threat.
<unk> remains the sole and inspiration of service now and I'm honored to call our founder and my personal friend in conclusion, we again delivered on our promise in Q3, we said the company would continue its SaaS growth in any operating environment, we did.
We said the <unk> growth would accelerate during age too as our Q4 guidance reflects it is we said that we preserve the benchmark near the rule of 60 for the full year in constant currency, we are on track.
Service now as the revenue growth predictability of growth and sustainable business model, while others are managing the past our engineers are innovating.
The future.
Fundamental question facing enterprises today is this Ken modernization weight.
With the robust demand environment, we see the answer is a compelling no it cannot.
The stated ambition of service now remains we will be the defining enterprise software company of the 20 <unk> century, we are firmly committed to that journey. We are focused on value creation for our customers our partners our colleagues and our shareholders.
Our confidence in Q4 extends.
Since 2023 and beyond sales.
Sales capacity and pipeline coverage are higher today than at any point this year.
Best in class sales and marketing efficiency, we have a highly differentiated platform. We have a business model that will be managed by design.
For net new innovation growth and profitability you can count on us.
With this growth in margin profile operating near the rule of 60 service now as a unique asset and a premier company. We are hiring with an absolute focus on people, who can innovate through code and who can sell solutions and who can help customers realize success.
The bottom line is this.
When our customers work the World works better for everyone. That's why the World works with service now.
If we didn't do what we do it wouldn't get done the hallmark for service now is net new innovation and with that in mind.
Thank you so much and I'll hand things over to Gina.
Thank you Bill.
Q3 was a fantastic quarter of execution. The team delivered strong results, beating all of our constant currency growth and operating margin guidance metrics and outstanding performance across the board.
Investments in digital transformation are a necessity in service now remains a strategic priority.
<unk> recognized that the now platform can deliver the workflow needs today digital first initiatives.
Driving quick time to value and hard dollar savings. These outcomes are imperative in the current macro environment and while we continue to see robust demand for our products.
In Q3 subscription revenues of $1 742 billion growing 28, 5% year over year and constant currency exceeding the high end of our guidance range by 100 basis points.
<unk> ended the quarter at approximately $11 4 billion, representing 24, 5% year over year constant currency growth.
Hi, <unk> with approximately 587 billion, representing 25% year over year constant currency growth of 150 basis point fee.
First is our FX adjusted guidance.
50 basis points of the beat was driven by early renewals from Q4 as the team look to get it to get ahead of our large renewal cohort.
Our renewal rate was the best in class, 98% continuing to demonstrate the stickiness of our business as the now platform remains a mission critical part of our customers' operations.
We finished the quarter with 1530 customers paying us over $1 million in ACB up 22% year over year.
The number of customers paying us over $10 million in ACD.
60% year over year as a cohort expansion remained healthy.
From an industry perspective, net new <unk> growth was led by retail and hospitality up nearly 50% followed by strength in education.
Baxter had a good quarter as well led by a large eight digit deal in technology media and telecom continues to show durability.
That well had its best quarter ever, including an over $20 million net new ACB win.
We closed 69 deals greater than $1 million and net lease to be in the quarter, including Phi with new logos.
What's more each of those five deals were led by a different product.
That diversification showcases the breadth of our product portfolio and increasing customer awareness of service capabilities as a platform, which includes 11 organic businesses with over $200 million and ACB.
In fact 18 of our top 20 deals contained five or more products.
Turning to profitability operating margin was 26% one point above our guidance driven by our top line and operating efficiencies.
Free cash flow margin was 6%.
We ended the quarter with a healthy balance sheet, including $5 5 billion in cash and investments.
Together. These results continue to demonstrate our ability to drive a strong balance of world class growth and profitability.
Before I move to guidance I want to give a brief update on the macro.
Our ability to outperform in Q3 is a testament to the strong execution of the service not seen.
Account executives I think close to the customer constantly checking in and proactively assembly the necessary materials to get deals across the line.
We'll operate with the same rigor in Q4 and are confident that we're factoring in the macro churn into our guidance.
Consistent with the market on a year over year basis, the strengthening of the U S. Dollar also resulted in incremental FX headwind.
We now expect a $290 million headwind to 2020 is description revenues at.
At $330 million headwind to Q4 the Rps.
100 basis points headwind to operating margin and approximate $160 million or 100 basis point headwind to free cash flow margin for 2022.
With that in mind, let's turn to our 2022 outlook.
We're revising our subscription revenues range to between $6 85 billion and $6 87 billion, representing a raise to our year over year constant currency growth outlook to 28, 5%, excluding a 550 basis point FX headwind.
We continue to expect subscription gross margin of 86% up 100 basis points year over year.
We continue to expect an operating margin of 25% consistent with our original guidance at the beginning of the year as we are offsetting incremental FX headwinds with operational efficiencies and disciplined spend management.
We now expect to have some margin of 29%, reflecting the incremental FX headwinds I previously noted.
Despite the $160 million impact of that that we will generate over $2 1 billion and free cash flow demonstrating the incredible resilience of our business model.
Finally, we expect GAAP diluted weighted average outstanding shares of $203 million.
For Q4, we expect subscription revenues between 183 4 billion and one 839 billion, representing 26, 27% year over year growth on a constant currency basis, excluding a 600 basis like FX headwinds.
We expect CRP outgrowth of 26% on a constant currency basis.
Leading 600 basis points of FX headwinds.
We expect an operating margin of 26% and we expect 204 million GAAP diluted weighted average outstanding shares for the quarter.
In summary, we had a fantastic Q3.
I'm, so proud of our people for being focused disciplined and committed to helping our customers succeed.
Bill and I would like to thank all of our employees around the globe for their continued hard work and dedication.
Our business is resilient and our teams are delivering.
As confident as ever about the future.
The platform enterprises need to reinvent their business models and adapt to the new economy.
Can innovate to when it come out of this moment stronger than ever.
We continue to see a robust pipeline and are maintaining our investments in growth higher as the opportunity in front of us remains large.
We're well on our way to becoming the defining enterprise software company of the 20 <unk> century.
With that I'll open it up for Q&A.
Thank you very much Mr. Mattson, ladies and gentlemen at this time, if you gave any questions or comments simply press star one and if you can find that your question has already been addressed you can remove yourself from the queue by pressing star one again and just a quick reminder, we ask that you. Please limit yourself to one question.
I'll go first this afternoon, two some odd simona at Jefferies.
Hi, good afternoon, and thanks for taking my question, it's great great to see the strong results Bill maybe I'll start with you you've been telling yes. As you noted on the call that that service hasn't got durably, regardless of the environment and I'm just wondering if maybe either the shape of the nature of the conversation that you're having with executives has changed in this.
Type of environment, and and how that is ultimately still allowing you to close all of these large deals and maintained this momentum.
Yes, I think Gino said, it very well some model and she said where mission critical and the now platform has really become the standard for digital transformation and a modern enterprise today and with solving so many so many challenges.
Our customers need to drive automation and productivity as you know, they're either not hiring laying people off and they have to do more with less we're built for that.
They need the computers and the platforms to do the work so that people have a more pleasant experience on the employee side and they require and experience no matter, where they are working from that's world class, we take care of that.
Customer service management has evolved from just the engagement layer of highway market to use sell you cross sell you. It's really moved into the Middle office and the back office and back into the supply chain on how I can streamline with great efficiency, giving you the right product in the right form factor and price on <unk>.
Just as you expected and that end to end is all about the service now platform and finally, you're seeing a breakthrough here on building net new innovation customers are going to have to do that.
For themselves and with partners and we are also going into a co creation mode with our partners in every industry and geo around the world, that's pretty stunning and theres lots of use cases and examples.
The Big thing <unk> is the C level executives are looking to service now they are calling us they want to work with us they see that with the defining one and that took some time to build and I think we are there now.
Although growth is incredibly impressive and Gina maybe just a quick follow up for you on the comment around battling macro and can you maybe just help us understand last quarter, you called out slightly longer deal cycles. Any change can you just dimensionalize, what you factored in from a macro perspective.
Relates to maybe deal.
Nichols or close rates. Thank you so much.
Yes, it's a great question and certainly.
Not immune to the macro environment.
We're certainly not blind to what's happening around us our ability to execute despite the macro is quite astounding and I give amazing kudos to our incredible sales organization around the world.
We are staying closer to our customer than ever before checking in with them, making sure. We understand the levels of approval that they need to go through making sure that we understand what they need to get that deal across the line. We will maintain that level of rigor that you've seen us do in Q3, and so while certainly there is more.
More.
Theres more outlook on deals that are getting closed and there is more people are looking.
At deals cool closer, but we are closing them close rates are stronger.
We feel really good about how we.
Put that all into our guidance as though macro is is is evolving but our sales force is saying so close to our customers and really driving superb execution.
Great Congrats.
Thank you.
Thank you and just a reminder, ladies and gentlemen, please limit yourself to one question. We'll go next now to Phil Winslow at Credit Suisse.
Hey, guys. Thanks for taking my question and congrats on just awesome quarter, you build one of the things that you mentioned during your comments with sales capacity has never been higher and never has and the coverage ratio for the year has not been higher.
Even though in the context of growing sales and marketing head count 30%. My question to you is this is one of the.
Biggest net add quarters in terms of employees in sales and marketing this year and over the past couple of years, you usually don't see a lot of salespeople, you're moving to a new company to Q3, but theyre doing that.
Service now when you talk to these new employees in Europe , and your management team what are they saying about why theyre coming to service now and then Gina you talked about continuing to invest in go to market. There you, obviously you hit 30% growth.
In Q3, how should we think about the exit rate for this year. Thanks.
Well Phil. Thank you very much for your kind remarks also good question. If you think about the first quarter of the year.
The economies of the world really Werent chicken, everything thats going very well and especially a tech company like service now people were very desirous of having our people too.
But we still whether debt and we continue to hire.
Obviously, the people that you hired in the second and the third quarter. The beauty of that is done now becoming truly productive.
And certified to execute at a level that we would consider statistics.
Statistically.
Relevant for moving the needle and Thats, where I come with my Max capacity is not just based on the number of people, but its based upon their readiness to enter into the customer relationship with a level of proficiency. So they can execute at a high level, that's what I'm talking about and where they are now and where there are stronger than we are.
All year long, Phil So it's an absolute numbers, but it's also on readiness and it's in the pipeline and the coverage and the pipeline is better all those dials look great in terms of why people come here they come here for the culture.
No. This is all about net new innovation, it's all about customer centricity and brilliant execution.
And it's a politically fat free environment, we just want to win and people want to be a part of a winning organization.
And then on your question on asphalt sales and marketing higher Bill, Yes service now is hiring and we'll continue to hire.
And are investing for growth. So we are absolutely committed to continuing to build up our world class go to market organization is all about driving long term growth and ensuring that we also are continuing to drive ramp rep productivity.
Really it's really about ensuring that the opportunity that we see in front of us that our sales and go to market teams are ready to drive that growth that we continue so youll see us continue to grow our sales quota bearing especially will also be hiring our critical engineering heads.
Very much open for hiring on these critical growth higher.
And one thing Phil I, just don't want to fall between the cracks is the million dollars.
And the rise up with service now campaign, where we're going to hire them.
Some of them will end up getting hired of course, but we're going to train them for our customers.
For our partners and to serve as now so it is a bold move for a million <unk>.
Service now trained professionals to put them into the growth engine in service now and that'll be done on a global basis, we see bold moves that need to be taken in India, Japan Korea and continued expansion in Europe .
Just have a a tireless appetite for growth.
Excellent congrats again and thanks for taking my questions.
Thank you Phil.
Thank you. We'll go next now to Sterling Auty at Moffett Nathanson.
Yeah. Thanks, Hi, guys. My question is when you look at the large deal activity in the quarter and the pipeline how much of that is actually replacing legacy architectures to save money in this tough budget environment, we're heading into and how much of it is about the automation to drive increased productivity.
Thank you Sterling.
It's interesting question, it's always important to reinforce that the 20th century architecture is we're heavily invested in by our customers and our desire is not to replace our desire is to make them more relevant so they deliver modern value in a highly agile.
Experience oriented way.
Our employees customers and partners. So those underlying systems some of them that are point solutions and they never should have been there in the first place they do disappear.
Core large well known brand systems they remain.
But with the agility of the service now platform above them and our ability to automate the workflows and completely change the experience that we're now reinventing the way supply chains run for the biggest auto manufacturers in the World. We are now taking procurement management.
To an entirely new level of procurement and finance organizations for the biggest retailers manufacturers.
Freight companies around the world.
Double digit.
Wins doing this with some of the largest companies in the world. So theyre taking out huge costs.
Or getting rid of point solutions. They are keeping the main ones and then automating for speed and agility and value on the service now platform. The business cases are unbelievable. It makes me want to ask.
Why are we so generous with our pricing if they can get a 1 billion can we get a little more gas the situation we're in here.
Thank you.
Thank you.
We'll go next now to Keith Weiss of Morgan Stanley .
Excellent. Thank you for taking the question Bill.
Bill Congratulations on the new chairman position and congratulations on a great quarter.
In a difficult environment.
My question is actually for Gina.
Tremendous job and driving operating margins at the same time youre hiring.
Two client.
Are you still aggressively hiring can you talk to us a little bit about where youre seeing the efficiencies and sort of.
Were you able to kind of drive that.
Incremental productivity.
Out of the entire service now and Q.
I Wonder if you could touch on free cash flow a little bit.
It has been getting more seasonal over the years. This is the lowest free cash flow margin, we've seen in quite some time, where the FX impacts was there increased seasonality. If you could just give us any kind of visibility in terms of what happened on that side of the equation.
Yes, absolutely great question, so really proud of the fact that despite about 100 basis points of FX impact on our operating margins were able to hold them flat with our original guidance at the beginning of the year, while at the same time still hiring for quota bearing go to market.
Fingers on keyboard engineers right.
<unk> fees that we're seeing are across the board. So if you think about leverage in.
Mid and back office G&A leverage on the marketing side of things.
If you think about really what our incredible cloud infrastructure <unk> is able to drive with respect to efficiencies even in this macro environment, it's pretty remarkable.
So the other thing is that our platform drives efficiencies for ourselves. We are the customers here are all of our new product innovation. So our platform enable those efficiencies across the board. So thats. The other big lever that we always have to play so feel really great about the fact that we've been able.
To drive those efficiencies even through this current macro environment with respect to free cash. So absolutely. So Q3 in general is a lower free cash flow period, we had our midyear bonus payout we have an interest payout.
We also have seen a pretty big FX impact in the quarter and for the remainder of the year. So we talked about 100 basis points impact on free cash flow margin that we're not able to absorb this year because truly the impact on collections happens all at once whether the FX impact.
On your P&L because of the ratable way that we recognize revenue and Opex happens.
Over a period of time, and so underlying health of free cash flow remains great.
We're obviously as we talked about staying close to our customers and giving them some.
Some leeway on payment terms, if they need it but what I can tell you is that its days as opposed to weeks and so we are really staying close to the customers the trajectory of free cash flow accretion overtime remains the same.
Got it so it sounds like much more.
Linearity and FX headwinds than any significant change in invoicing terms or repayment terms.
Exactly exactly.
Awesome, that's very clear thank you very much.
Thanks Keith.
Thank you Keith.
Thank you well go next to Matt Hedberg of RBC capital markets.
Great. Thanks for taking my questions guys Bill gene a great quarter.
Bill I had a question for you you've made some previous advances in and serve ability quite step and this quarter you acquired era.
Software, which looks like a great addition to the platform can you talk about sort of what the integration plans are there and sort of maybe refresh what this means for your broader absorbability efforts.
Yes, absolutely. Thank you very much for the question Matt.
Basically if you look at what we're trying to do here, we are bringing a scalable cloud native log management solution and database that complements lifestyles existing solutions to the world and this is.
Really exemplifying and accelerating our vision, which is essentially to unify telemetry logs metrics and traces and now deliver that truly unified observe ability workflow on one platform.
And this is going to take huge cost out of the equation and it's going to bring a much greater experience to all users involved because they'll avoid the confusing context switches. They have to do now so all the integration work that is necessary is being done.
It is all integrated back onto the now platform and as a roadmap to do that but right now we're extremely happy with the way Ben is leading aerosol where it just makes us stronger.
We're super excited about the future of this business and when it can be.
It's going to be interesting to watch this thing play out.
Thank you very much.
Thank you Matt.
Thank you. We'll go next now to Alex Zukin of Wolfe Research.
Hey, guys. Thanks for taking the question.
Bill I don't think we've heard you say the words procurement and supply chain more often than you have on this earnings call.
I guess I wanted to dive into that because after seeing sap's results. After what Oracle was talking about it does feel like there.
There is a.
There's like a deferred amount of activity thats getting done in the back office and I just wanted to see your take on kind of participating in that activity.
As you are talking about that driving it seems like some pretty material wins in the quarter and then I guess.
Maybe a follow up for Gina is around linearity in the quarter and also if there's a way to quantify the federal business seems like it again is the best quarter ever just how much of that was upfront we're kind of self hosted.
Revenue recognition.
Alex first of all let me. Thank you for your question you're right. There is quite a bit that has to be done in the back office to automate business processes.
For a new world order of things in the macro so you're 100% right. It's still early days, but I see a massive opportunity given how much enterprises and spend on ERP today, and if you look at procurement and supplier lifecycle management solutions that make it possible for customers.
As to unify these transactional systems and enable them.
Through workflow capabilities that truly drive efficiency and the user experience.
And the consumer grade aspect of service now is really coming front and center.
Because these transactional systems they all work fine.
You're a power user or a super user, but when you start to get more people collaboratively involved in a process. There is a demand now for consumer grade UX and Theres nothing that works better than workflow automation to solve some of these problems. So we are providing a collaborative platform for all the stakeholders.
And in enterprise and a consistent user experience as our superpower.
And I do want to underscore we are not interested or trying to replace the transactional systems of the brands that you mentioned those are wonderful companies and they do something thats very important.
We're responding to is the agility of our supply chain and how you can reoriented and a record speed because thats what this world order is asking for.
How you can rethink suppliers to manage different labor issues, whether it's an arbitrage or just buying from the people you should be based on your ESG efforts.
Or your MW B E spend and many other things that many customers care a lot about ESG is a big thing theyre doing that all on the workflow automation context of service now and they love. The fact that we integrate with everybody and we're not at war with antibody because we're on the side of the customer.
And that's what we should all be doing.
And on your question Alex on linearity in the quarter, we actually had great linearity in Q3, our best ever.
Really really pleased with how the sales organization is again, staying really close to the customer.
The federal business.
At its best quarter ever this year in Q3, and outperformed we had 16 deals over $1 million, one of which closed with over $20 million of net new HCV.
That will also saw great linearity in the quarter really because the platform is demonstrating such strong ROI that is really enabling them to get through the approval process faster.
We're really seeing an increase in the volume of federal agencies that are really looking at the our partnership with service now through an enterprise lens. So those deals are getting bigger and more strategic multi year.
We're seeing cabinet level agencies really trying to consolidate contract at an enterprise level with us and standardize their spend on the now platform. So federal team just doing incredible work with their customers.
With respect to hosted we had about 3% this year, sorry, this quarter, which is flat quarter on quarter, but down 1% from last year Q3, and so really great linearity across the board posted flat quarter over quarter, but down a point year over year, which is <unk>.
Actually a headwind to that revenue growth, which means our revenue growth is even stronger so really really great results across the board.
Thank you guys very comprehensive congratulations.
Alright, Thanks, guys. Thanks, Alex.
Thank you we take our next question now from Kash Rangan at Goldman Sachs.
Alright. Thank you very much congratulations what a change from the Microsoft earnings Conference call yesterday, Bill or to get cheaper. So you talked about the great re prioritization, Microsoft talked about how some of some new cloud workloads are being passed by the customers and they're optimizing existing workloads. So I just wanted to see what is it.
That is different about the prioritization of service now in the face of other headwinds that we're starting to hear about in the public cloud and how does this position the company for 23 looking into a more uncertain time, we all thought we're going to have a recession or any sort of escape. It maybe it happens in 'twenty three maybe.
It doesn't.
Great.
Prioritization that you talked about how our customers viewing the value proposition and return on investment on service now relative to the cost of capital and.
If you could care.
How would you be approaching come to 'twenty three guidance, so youre going to be more conservative than usual given the risks in the environment that we all appreciate it. Thank you so much.
Yes Kash.
Our markets are very rational customers are extremely focused right now on productivity.
Take care a lot about their customers and their employees and obviously their bottom lines and no platform in the enterprise software industry gets what they want faster from creating great experiences for their employees you can't give a customer a three star Michelin experience until your <unk>.
Synergize your employees.
That's one aspect of it they know they have to have more productive happy people.
Cost of turnover and problems in the workforce, it's a huge huge bottom line hit that a lot of people don't factor into the equation and a lot of it's caused by bad Onboarding bed systems, and not really a great user experience for the people who work for their company from anywhere they want to be and as it relates to the <unk>.
Customer I touched on that I think.
We're adding on customer service management right now with the completeness of our vision is stunning in terms of value creation and a big surprise to customers, who didn't used to think of service now in that space and now they do.
And as it relates to our core it.
We're obviously.
The leader there sorry, not to go into great details on that but they are blown away.
By the San Diego released in March and the Tokyo released in October They know, there's an immediate cycle from what they need and how quickly we can engineer it and get it into the release levels. So the existing customers love that.
That they have this incredible seamless experience with service now they know the innovation is coming on time and at the highest level of quality and finally, I think at a platform level.
The need for speed cash is everything getting these business cases rational getting these customers up and running swiftly and demonstrating immediate business value is the essential ingredients.
I didn't give you. One example in the ERP World, where we did not get these customers live and more than 100 days. So we're talking we're talking need for speed and we're talking ability to deliver and the customers having great experiences you can't find a customer in the <unk>.
Mobile economy, it doesn't love the platform I keep trying I still can't find them.
And cast on your question with respect to 2023, obviously will provide more detail on slide.
Three in January .
Overall as you are hearing from our time the demand that we're seeing for the now platform has remained resilient and strong.
As you know has become a significant headwind, particularly over the last three months.
Since the beginning of this year, we now see about a $400 million headwind related to FX in 2023.
We certainly don't think the macro environment is all of a sudden is going to change as we enter into 2023.
So when we think about guidance, we'll be taking all of these factors into account.
As you would expect us to.
Thank you so much congrats again.
Thank you Kash.
And we'll go next now to you Brad Sills of Bank of America.
Oh, great. Thanks, guys.
Wanted to ask about an update quickly on the Si channel I think bill in the past you've said seven or eight of the top 10 global S size with $1 billion plus pipeline Thats just an astounding number when you think just a few years ago that channel was almost nonexistent. So just curious how much of their productivity is contributing to your results here.
Today, how do they give you that reach into these other departments that.
Historically service now Hasnt been it obviously youre talking about ERP and back office creator employee customer, we're seeing a ton of momentum there just.
Just wanted to get your thoughts on how important that channel is in bringing you into those types of opportunities and the traction youre seeing there.
Brad It's a great question and look it was <unk>.
Very interesting in the early days, just opening People's minds to the power of the now platform and our global partner ecosystem is obviously a meaningful enabler.
And they are critical.
For us to drive successful implementations for our customers and also to tailor our products to different industries. So this idea of co creation.
Whether it's foreign industry, it's for a sub industry vertical and even at a micro vertical level, we've only scratched the surface of what's possible with the ecosystem, where we are.
Young in terms of the runway for growth as it relates to the top ones. We now have eight of the top 10 global advisory and systems integrators that are committed to a plan greater than $1 billion with service now.
And again I'm very open to the ecosystem and Thats why you see us making a bold move today on rise up with service now to skill a million I know I on the call that but it is what it is I am sure it will be $2 million, because there's such demand for the platform.
And I really want our partners to.
To Love and Trust service now as we love and trust them because it really is about mutual goal setting.
It's about making sure we're very clear about who is doing what and we don't duplicate efforts and we never disappoint. Our partners. It's all about trust and they like us because with straight shooters here and we want to win and they want to win and the other thing Thats happening is they like to cash is pointed on the great re prioritization.
There's going to be so much spend that will go around.
But what they all realize now as business impact is what it's all about especially in this macro and they're more and more reaching deep into the service now relationship because the customers won't listen to long drawn out expensive time consuming multiyear projects if that project isn't it.
The same calendar year, the likelihood of getting an approved this real world and if you remember in 2008 that was the era, where everyone moved away from Capex to Opex and that was where the cloud got the big tailwind well now you got half of them in the cloud so theyre looking at Opex and that Opex question.
<unk>, which platform can get made to the winning equation the fastest.
And which platform is going to be around 10 years from now to be a dominant force in my infrastructure and Thats, where service now seems to be answering the bell.
Great to hear thanks, so much bill.
Thank you very much Brad.
We'll go next to Mark Murphy of JP Morgan.
Yes. Thank you very much I'll add my congrats on a fantastic quarter. So bill how broad are your ambitions in the employee workflows market I believe you had crossed $500 million.
Some of your partners seem to have 20% or 30% of their pipeline in <unk>.
And now you have.
You have this hitch works asset for talent intelligence and skills. So just curious how broad is that multiyear road map at this point.
Yes.
First of all thank you for the question Mark it's really broad if.
If you look at employee workflows 12 of our top 20 deals and we had seven deals greater than $1 million and we're helping customers do really navigate this uncertainty that we're dealing with and they have got to give these employees that they have no matter, where they work a great experience and it's not only limited to I would say.
<unk> recruiting.
Hiring on boarding training certifying providing all the services that the employee needs on one mobile app and that includes Onboarding employees and a first class way, which most companies to get to do which really hurts the brand image, we care about all of that.
In addition in addition to all of that we're now in a world where customers are really pulling at us because they are like hey, I'm not going to have as many people and I really got to think about re reorienting my business processes or rethinking, how I automate things that I just have.
<unk> gotten to yet, but I need to do a quick so our ambitions are always in the billions and this is another business, where we are in billions and I think we're just getting started on the employee experience journey and I'll tell you what if you look at even ourselves.
There isn't a single employee in this company that can tell you a single system of record that might be in the infrastructure somewhere in our cloud they have no idea.
What they do know like Gina said earlier everything that they do is on a mobile application on their phone and it says service now because we completely workflow automated the entire corporation. So they don't know anything else and what we're constantly hearing is people want to join because of the Onboarding experience is so great.
We don't lose employees, we have gotten lots of employees joining here that literally bounced out of another company and a week because they couldnt stand the onboarding experience and so this isn't for me so everything having to do with the employee experience and the management experience, we launched in the Tokyo release.
A complete manager solution. So we can manage their careers there a hierarchy of their training and development and they can also do that with their employees on the now platform and all of this is happening in real time. So the system of record again, we're not interested in being one of those.
And we have no quarrel with any of them. We are interested in the experience and thats, where the money is.
Thank you very much.
Thank you very much for the question.
Thank you the next now to Jamba Pucci, our Guggenheim.
Thank you.
So we've done a lot of work on the U S government opportunity in Eugene of both mentioned the record results. There in this quarter. As you know this is the fiscal fourth quarter for the government and likely the strongest spending quarter of the year for that customer or vertical I guess this vertical.
Can you talk about the opportunity for any spillover into next quarter or even next year or is this.
Is this really sort of a user lose lose it mentality something is that something you can't avoid in this vertical so it's always going to be material just like a third quarter thing.
Yes, John Thank you for the question, we have always been really strong in federal.
And a lot of that is driven by productivity efficiency and government organizations and I think we can all agree that that's a big opportunity.
So that area of focus for US has always been a priority. The budget. There is large and there is a lot of demand or updating the technology environment for governments, what they love about service now is we integrate to things that they've already done.
And we're not in a debate about whether the past was done properly or not the customer can decide how they retire point solutions by the bundles, but we don't insist upon that we are driving the experience and I can tell you with great confidence John .
We have a very strong pipeline going into the fourth quarter with more multimillion dollar deals and I couldnt be prouder or more confident in our team.
That's great. Thanks, a lot bill.
You very much John .
Thank you we'll go next now to Karl Keirstead of UBS.
Great I'll ask a quick one for Gina Gina did that pull forward phenomenon that you cited in <unk> continue into the fourth quarter, such that it's shaping up to perhaps be a little bit more front end loaded in terms of renewal timing than you would've expected. Thank you.
So I talked about the fact that one of the reasons why our CTO CRP LP in Q3 was related to 50 basis points of pull forward of Q4 renewals into Q3, and if you remember on prior calls I talked about the fact that Q4 was a loss.
Renewal cohorts. So the fact that we were able to get some of them done early absolutely helped drive <unk>, but also our <unk>.
Revenue beat as well expectation is that our Q4 renewal will be on par we had 98% renewal rate in Q3, we expect similar levels in Q4 and still feel very good about the pace of when they will spend the remainder of the year.
Got it thank you Gina.
Thanks Todd.
And ladies and gentlemen, we have time for one more question. This afternoon and that will come from Michael <unk> of Keybanc.
Hey, Thanks, very much congrats on a good job so maybe to continue in that vein my understanding of that.
Spectation tour, the <unk> increase was primarily predicated on renewals and attach.
As far as opposed to expansion. So can be can you comment on how the expansions have been going both on the early renewals.
Prospects for those do you expect to renew in <unk>.
Yeah, Great question, Michael expansion rates, you know, we don't give expansion rates anymore on a quarterly basis, but we reported last year expansion rates of 125 for that and we've seen very strong similar expansion rate throughout 2022.
Okay. Thanks.
Great. Thank you. Thank you.
Thank you and thank you all on the network.
Thank you and ladies and gentlemen that will conclude the service now Q3 2022 earnings conference call I'd like to thank you also much for joining us.
A great evening Goodbye.
Please wait the conference will begin shortly.
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