Q4 2022 ServiceNow Inc Earnings Call

Please standby we're about to begin.

Good afternoon, ladies and gentlemen, and welcome to the service now Q4 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.

Like to ask a question during this time simply press star one on your telephone keypad and if you would like to withdraw your question simply press Star One again and now at this time I will turn things over to you Darren yet Vice President Investor Relations. Please go ahead.

Good afternoon, and thank you for joining service now fourth quarter and full year 2020 earnings Conference call. Joining me are Bill Mcdermott, our chairman and Chief Executive Officer, <unk>, <unk>, our Chief Financial Officer, and CJ Desai, our president and Chief operating Officer.

During today's call, we will review our fourth quarter 2000, <unk> results and discuss our guidance for the first quarter and full year of 2023.

Before we get started we want to emphasize that 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.

Unless otherwise noted all financial measures and related growth rates, we discuss today are non-GAAP , except for revenues remaining performance obligations or RVO.

Current IPO 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 Bill. Thank you Darren and thank you, ladies and gentlemen for joining US today service now continues to perform at or beyond expectations company for Q4, we beat guidance with subscription revenue growth of 27, 5% in constant currency.

Operating margin was 28% two points above our guidance our free cash flow margin was 30% one point above our guidance.

102006 deals greater than $1 million in Q4, including our largest deals ever worldwide in EMEA and in Latin America are 98% renewal rate remains the industry benchmark with.

With 25, 5% constant currency <unk> growth, we actually had better than expected new business in Q4 with less reliance on early renewals.

Just on this new business search.

We are giving a very strong guidance for 2023.

Our guidance reflects a disciplined forecast that appropriately balances are well founded optimism foodservice now as business.

We will work hard to go beyond that and we'll begin that March in Q1.

Here's the main takeaway.

Even in a complex operating environment service now is executing at the rule of $58 five.

Driving net new innovation fast growth and operating leverage service now is the proverbial safe Harbor in all weather conditions.

Let me unpack the current environment for the.

The secular tailwind of digital transformation arent going anywhere.

<unk> research makes it clear that technology budgets are growing.

A forecast spend will grow 5% in 2023 software spend at 8%.

Software as a service spend at 15%.

So as businesses increased spend the only question then is where.

Well all of that investment go and is this the answer has everything to do with the great re prioritization.

The theme in Davos this year with cooperation in a fragmented world.

It all begins with a fragmented enterprise.

D level buyers don't want long term roadmaps to clean up a siloed maps are point solutions.

One integration.

Automation, great experiences and business impact.

CEO told me quote we can't afford 1000 points of them like we need a cohesive plan with a trusted platform and quote.

So this is now without any doubt a platform economy and only a few platforms will be relevant in this shift and none are as well positioned as service now.

This begins with our business model.

Service now was born in the cloud established itself in it.

An expanded from that core it accelerates with the realities of the multi cloud world.

Many enterprises are struggling to use public cloud capacity.

Yes.

Already procured.

Andrew service, now, which directly enabled cloud workload migration.

We are the control tower for any architecture public hybrid or multi cloud.

With open telemetry, we help business build and monitor cloud native applications.

It's all extends to driving automation.

Service now has natively embedded the complete toolset from AI to RPI to process mining in our platform.

Now professional developers and the rest of US real people like you and me can build mission critical applications to automate the world of work.

Everything culminates with real business outcomes.

Service now integrates the enterprise to deliver better customer service employee.

Experiences security risk management, and next generation business processes like procure to pay.

Technology Foundation hyper automation process orchestration.

With this completeness of vision service now is the end to end platform for digital transformation.

If all we did withheld.

With help existing customers consume everything this platform can do we would stay a fast growth company, but of course, our strategy goes well beyond this as does our proven ability to execute.

Right now many fine technology companies are working to shift resources from bad businesses. So good ones.

Service now only has good businesses our products and engineering team is building organic net new innovation with an unmatched level of speed and quality.

When we started to say it's noise in the macro early in 2022, we shifted immediately to a conservative cost management posture and running the company.

This allowed us to focus on execution with our team rather than look to workforce actions to leverage.

It also allowed us to continue hiring, especially in engineering and quota carrying rolls the results tell the story.

Sam was in 14 of our top 20 deals with 15 deals over $1 million.

Tom was <unk> 16 in the top 20 with 14 deals over $1 million security and risk solutions. We are in 13 of the top 20 with nine deals over 1 million customer workflows with 13 of the top 20 with 13 deals over 1 million employee workflows with 13 of the top 20 with 11 deals over.

$1 million in Korea to workflows, we're in 19 of the top 20 with 11 deals over $1 million.

We saw on new business growth.

New logos and major expansions with some of our existing customers.

Not in States Army expanded its service now roadmap to go well beyond <unk>.

Service now will improve the army's ability to consolidate service management.

It's over 1 million active military contractor and civilian population.

This works group one of the world's top retailers, we'll digitize, it's 11000 stores from retail locations to logistics on service now as its digital business platform.

Transition and it's a transformation and it will position the Schwartz grew at the forefront of the next generation retail industry.

From Banco do Brasil to AT&T consumer total we have countless stories that spans service now as workflows light step geographic regions and industries across the board, we're winning and as Youll hear from Gena, we grew new business, 100% year over year.

Across retail hospitality transportation and logistics, that's only one example.

And with the expansion of service now has impact we are setting the standard for speed of deployment and business value for our customers.

More than three years ago, I stated our ambition to be the defining enterprise software company of the 20 <unk> century.

And this is an ambition I will see through to its full completion.

Following my elevation to chairman and CEO I am delighted to announce that CJ Desai has been promoted to president and Chief operating officer.

T. J is the leader of consequence, well known in the industry is track record service now speaks for itself from strengthening our platform to driving our customer experience.

This is exactly how we are orchestrating our company to perform on an end to end basis from innovation to execution with our customers and I'd like to personally congratulate CJ for this latest well deserved endorsement of his leadership.

Maturation CJ.

In other news, we proudly welcome Masato cheat Suzuki as the new President of service now Japan. He brings a long history of successful leadership with some of the industry's most respected brands.

We will elevate service now Japan, So a fourth geographic region reporting directly to our proven Chief commercial officer, Paul Smith.

And to add fuel to the grow fire, we rolled out a new partner program to help our ecosystem drive full platform adoption of service now we're also getting an enthusiastic reception for the company's Premier Global initiative rise up with service now and under the thoughtful leadership of <unk>, We will continue.

Due to rise up.

We offer the training and certification to help people build a lifelong career working on this platform.

We have never seen so much interest in this service now franchise around the world as we are seeing right now and from an ongoing operating perspective, we enter 2023.

With much stronger sales coverage on a year over year basis.

We have the feet on the street.

We also see stronger pipeline coverage.

And the maturity of that pipeline much more so than we did a year ago.

The latest latest Glassdoor ratings feature service now as the ninth best place to work in the United States second best in the United Kingdom the.

The company is fully invested in all of our stated ESG objectives with our global impact report coming later this year.

All of this is a reflection of a proud culture built on Fred Luddy as founding vision for our company I was just in Las Vegas last week, where our sales kickoff event and I can tell you. Our team is fired up and ready to go for the year ahead really fired up.

I can only reiterate that we have said consistently.

There is only one way forward.

And that is innovation.

<unk> says that by 2027, the number of digital businesses on the S&P 500 with double.

Every industry is being re frame by a new paradigm or several.

The participants that lean in will lead the others will fall behind and quickly foodservice.

So service now we are committed to make the world work better for everyone. Our fundamentals are operating at peak performance net new innovation for our customers.

Does this impact driving long term stickiness of our platform.

The network effects, giving us a competitive moat with multiple avenues for market expansion and profitable growth with a pristine balance sheet. All in all when people talk about cloud Economics service now is the Blue chip standard.

Whenever the world vaccine stability, we will more than offset with relentless execution, our customers need to automate for cost reduction.

To innovate for growth, Yes service now helps them do both.

The World works with service now as the end to end platform for digital transformation.

Like to personally thank our customers partners and shareholders for their steadfast Trust and service now you can count on us where in your service are hungry and humble as ever I'd like to now hand, the call over to our CFO <unk> to know gena over to you.

Thank you Bill and happy new year to all of you who are listening in.

Q4 was another great quarter of execution, we exceeded our subscription revenue guidance and drove strong renewal and expansion rates are operating and free cash flow margins also exceeded our outlook as disciplined cost management to a tailwind to profitability.

In Q4.

Revenues of 186 billion growing 27, 5% year over year in constant currency exceeding the high end of our guidance range by 50 basis points.

<unk> ended the year at approximately $14 billion.

Representing 25% year over year constant currency growth.

Our Po was approximately $6 94 billion, representing 22% year over year growth and a two point beat versus our guidance, primarily driven by favorable FX.

<unk> in the quarter.

On a constant currency basis growth was 25, 5%.

While constant currency <unk> growth came in just shy of our guidance of 26%, we actually outperformed our targets for net new HCV and renewal HCV with contracts expiring in the quarter. The Delta came from fewer early 2023 renewals than is typical in a fourth quarter.

Given our strong renewal rates, which remained at best in class, 98% in Q4. This is only a timing issue.

We expect these customers to ultimately renew upon contract exploration providing opportunities to drive further expansion throughout 2023.

The timing of early renewal does not impact 2023 subscription revenue growth only rps.

Net new HCV is what drives incremental revenue growth and there we exceeded our forecast.

Larger than average Q4 customer cohort not only renewed at a very strong rate net expansion also remain robust.

What's more the strength in net new ACB wasn't limited to existing customers.

New customer net new ACD grew over 30%.

We ended the quarter with 1637 customers paying us over $1 million in ACB up 22% year over year.

From an industry perspective, retail and hospitality and transportation and logistics, so net new ACB growth of well over 100% year over year.

Government remains strong growing more than 50% year over year manufacturing.

Manufacturing and financial services also saw healthy double digit growth.

We closed 102006 deals greater than $1 million and net new ACD in the quarter, including two of our top five largest ever.

Please go 100% increases in the number of boats 5 million, plus and 10 million plus net new ACB deals.

More and more customers are seeing thats true power of the service now portfolio as a unified platform that.

That's leading to more multi product deals in Q4 five of our top 10 deals contained 10 or more products.

Turning to profitability operating margin was 28% 200 basis points above our guidance driven by disciplined spend management and less than expected FX headwinds.

Free cash flow margin was 53% up 650 basis points year over year.

For full year 2022, operating margin was 26% 100 basis points above our guidance and free cash flow margin was 30% also 100 basis points above our guidance.

Total free cash flow after 2022 with a robust $2 2 billion.

We ended the year with a healthy balance sheet, including $6 4 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 wanted to give a brief update on the trends we are seeing.

Heading into 2023, we believe we have prudently factored in the evolving macro crosswinds into our guidance.

Overall, the demand environment remains healthy.

Those are getting done the market opportunity is growing the ecosystem is expanding our reach.

And net expansion rates ended the year strong.

Our pipeline is robust.

With that in mind, let's turn to our 2023 outlook.

Expect subscription revenues between $8 4 billion and $8 5 billion, representing 22, and a half to 23, 5% year over year growth on both a reported and constant currency basis.

We expect subscription gross margin of 84%.

Reflecting the expected diminishing impact of the change in useful life of our data center equipment as well as investments to accelerate customer time to value as part of our impact offerings and higher inflation.

We expect operating margin of 26% of sales and marketing efficiencies are offsetting headwinds from gross margin.

We expect free cash flow margin of 30%.

We expect GAAP diluted weighted average outstanding shares of $206 million.

So Q1, we expect subscription revenues between $1 99 billion and 2 billion.

I think 25 to 25, 5% year over year growth on a constant currency basis, excluding a 300 basis point FX headwind.

We expect CRP outgrowth of 24% on a constant currency basis.

<unk> 300 basis points of FX headwind.

We expect an operating margin of 24% and we expect $204 million GAAP diluted weighted average outstanding shares for the quarter.

In conclusion, we had a strong Q4 capping a resilient year.

As we enter 2023, the macro challenges many enterprises space underscore a point we have made consistently.

Technology strategy has become the business strategy.

Digital technologies, our gross stimulating deflationary for us.

Our new business model accelerating productivity, while reducing costs.

Our unique ability to drive business model transformation, while delivering efficiency gains has created durable demand for the now platform.

Our investment strategy is laser focused on our customers most pressing issues.

And that continuous net new innovation translates into net new business for service now.

We are well positioned for 2023 and remain on our way to becoming the defining enterprise software company of the 20 <unk> century.

Finally, I'm extremely proud of our team's performance this year Bill and I can't Thank our employees enough for their continued hard work and dedication.

With that I'll open it up for Q&A.

Thank you Ms massive dwana, ladies and gentlemen, just to reminder, any questions. Please press star one and we do ask that you. Please limit yourself to one question and one follow up question well take our first question. This afternoon from Brad Zelnick of Deutsche Bank.

Great. Thank you so much and congratulations everybody.

We continue to hear from some of your largest partners of the great opportunity ahead in the Middle office for which service now platform just seems to be ideally suited how our customers prioritizing these opportunities right now and into this year and how do you position yourselves, particularly with partners in vertical industry solutions to best capture it and I've got a follow.

Up for Gina.

Yes, Thank you very much Brad and before I answer the first question, ladies and gentlemen, I just wanted to officially welcome T. J Desai as our newly minted President and CFO is joining me here today and I will have him continue to join me on these calls and I would also like to acknowledge.

Donna for powering through while she is a bit under the weather. So pleased our voice might be a little scratchy, but her passion is on fire. So she is in good shape, but losing a voice a little bit we've been all over the world from Davos to Vegas to hear so that's what happens when you travel a little bit.

Brad.

The partners and the largest partners are really doubling down on their investment with service now and I look at it as a multifaceted situation first on this rise up with service now we're going to train 1 million people in the ecosystem to be fully certified on the platform to ensure that we global.

We scale.

Partners are teaming up with us on an industry domain basis also based on persona and mapping that back to our solution roadmap and actually everybody is all in on the platform. So the big ones are really doubling down on the platform, what's interesting and you bring up a good point this is for the front.

The mid and the back office and there is a next generation <unk>.

ERP evolving here with things like procure to pay optimizing supply chains and other things, yes, definitely impacted middle office, but I would also say we have a great opportunity.

If you saw on new business surge in Q4, Youre seeing it play out where we'll go into net new logos and drawing net new business.

I think that'll be a big part of it C. J you might want to build on it from what you're seeing in the Middle office.

It is I would say when we look at the engagement layer engagement layer has been around for a long time safe on our customer service requests so for a large financial services organization moving the workflow from the engagement layer on say a customer to complain to the mid office, where we really shine because.

Interoperability of the platform and our ability to integrate the systems.

And two different clouds, all the way to the back office and Thats, what is driving the middle office acceleration, but thats for a financial services organization Telecommunications Auto health care organization.

Excellent and I know Brad you had a second question I think for Gina.

Thank you so much and congrats I was remiss in not congratulating you C J.

For you Gina.

Appreciate the additional disclosure on net new HCV you guys clearly had a really strong quarter for new business, which is what matters most to investors, but as we think about <unk> and what you shared with us.

We're all trying to understand the customer mindset. During these uncertain times is it fair to conclude that perhaps there was less of a traditional Q4 budget flush in 2023, and if not what else would be the rationale as to why you would see that phenomenon. Thank you.

Yeah of course, Brad Thanks for the question and apologies for my throat.

So I think what Youre seeing is finally renewals, we're always correlated and still always correlated to net new ACB and when people early in the new it's really about co terming multiple contracts and certainly in the current environment. When I don't know if you want to say it's Beth.

Budget flush or just more tightening of budgets.

Okay.

The need or the desire to co term the contract is a little bit less than what we've seen historically not altogether surprising given the current macro it's why I wanted to be really clear about the fact that early renewals have no impact on future revenue right on in the quarter.

Our target forecast for net lease pool, as well as renewal ACB within the quarter actually over achieved which is why we were able to come out with a strong 2023 revenue guide and.

And why we feel good about not only the Q4 results, but also the position that we stand in the market as we're entering 2023.

Excellent. Thank you and thank you for the very important disclosure on net new HCV.

Thanks, Brad.

Thank you Brad.

Thank you. We'll go next now to Raimo Lynn Zhao at Barclays.

Hey, Congrats from me as well and I Hope you feel better soon.

Quick question, if you think about the different.

Pockets of.

<unk> growth you saw this quarter.

Do your HR and CRM part was a little bit stronger for Q4.

Can you talk a little bit about the drivers because like TSM.

You accept the number one player and the other once youre expanding so it's nice to see the expansion in there and then added wonderful opportunity now.

Yes, I'll make the first point Raimo in and then I think C. J can actually even give you some customer examples that might be.

Helpful.

We have become the platform for digital transformation and Thats, an end to end platform for digital transformation.

So what you're seeing now is a company that has evolved from it.

To the employee experience to customer service management, and then obviously the low code platform and how the creative workflow is exploding as demonstrated in our outstanding results and are very strong guide. So we're really now a platform company with a multi product approach to helping every customer.

In the industries. They operate in based on the persona were discussing business with and ultimately it's that completeness of vision now that has made US one of about a handful of companies in the entire world that really matter in the enterprise T. J you got some examples you might talk about absolutely. So.

Employee experience and employee productivity.

The two sides of the same coin and with <unk>.

HR service delivery product that is resonating really well.

In commercial markets, including we had a very strong public sector performance as Gino outlined where that product is resonating and during this macroeconomic times. When you think of our customer service you want to hold onto your customers and you want to serve them profitability. That's what is driving business for our customers.

Service management products. So we're seeing that besides the technology Foundation that is the business digital services out of the business because we're driving got it.

Item product lines, and what we call service operations, taking the best of service management and operations management.

And our customer service management are also driving growth in very specific industries from telco to public sector and healthcare.

Okay. Thank you very clear and then Gino.

One for you quickly on the margin and cash outperforming can you talk a little bit about factors that we should consider in terms of timing et cetera that might have impacted this more where were you kind of don't want to extrapolate into next year et cetera. Thank you.

Yeah, Great question. So I gave I gave a good strong guide for operating margin as well as free cash flow margin for 2023, I think what you saw in Q4 from an operating margin perspective.

Continued discipline on the cost side as you have seen us do and as you will consistently see us too.

On the free cash flow side, obviously that disciplined cost management flows through but also we did see some capex spend.

<unk> come through towards the tail end of Q4, which means that the payments are not due until Q1 of 'twenty three so that does drive a little bit of headwind on the free cash flow margin in 'twenty, three which is why you see the guide that I gave.

Hopefully that's helpful. Yes.

Super Thank you.

Thank you thank you Ramon.

Thank you we'll go next to Sterling Auty at FCB.

Yeah.

Hey, guys. Thanks, just wanted to circle back on the CRP given the constant currency was $25 five is more of the.

Issue that you described more happening internationally than in the U S and how should we think about kind of the appetite to do renewals and is there any concern about expansion into some of those international customers here in the first part of 'twenty three thank you.

Yes, Sterling it has nothing to do with the with the renewal dynamics internationally versus domestic.

The difference between the constant currency growth and nominal growth really just has to do with FX rates that moved within the quarter. So no real differences internationally versus the Americas on the renewal side of things with respect to the early renewals what I would point to is the.

With strong net new HCV grows in Q4 tells you and and by the way that we have strong expansion rate. In Q4 tells you that customers are not changing their behaviors with respect to renewals.

On time, the new rules or with new expansion, what you're just seeing is a little bit of.

The lack of needing to do co terms and bring things forward in the current macro again with 98% renewal rates across the board we remain as.

As positive as ever that not only will we continue to expand in 2000 today as you've seen us doing. Thank you, but also continued to renew at those best in class renewal rates.

Yes.

Thank you.

Thanks, Charlie.

We'll go next now to Karl Keirstead at UBS.

Thanks, Janet sort of asking.

Have you use your voice again, but how are you feeling about the 'twenty 'twenty four targets I think the consensus view is that the $11 billion might be a little bit of a stretch given that you've had to absorb a pretty heady FX headwind. The operating margin target of 27 seems doable, but when I look at your free cash flow target of 33 that would.

300 bps improvement in calendar 'twenty five so that one feels like a little bit of a push do you mind, just commenting on those targets much appreciate it.

Yeah, Great question, Carl what I would say is overall the underlying growth that we're seeing remains healthy.

FX headwinds have eased slightly, but certainly I still material and with the uncertain macro backdrop, we're going to continue to monitor the markets and provide an update on our long term targets at our analyst day in May you I'd say again underlying demand really strong.

Operating margin well on the trajectory to hit 27% with respect to top line and free cash flow with the impact of FX and that keeps moving along we'll update those targets for you in may but let's go back to what bill talked about earlier, we remain very well positioned.

Given the current.

Macro environment, we are the platform of choice for digital transformation and that opportunity is has not changed if anything it continues to grow.

Got it okay. Thank you.

Thanks Carl.

And we'll hear next now from Mark Murphy of JP Morgan.

Yes. Thank you very much bill just given your comments on the pipeline coverage and also the maturity would you say that the macro headwinds have actually dissipated.

Somewhat if you compare it back to the summer or are those wins still blowing fairly steadily, but youre, just able to kind of navigate through them.

Through willpower and execution rigor.

Yes, Mark Thank you very much for the question.

Did call. It out I think maybe we were the first ones to call. It out but there were some clouds on the horizon back then.

With the macro and we all know the forces that will blow in between.

Ukraine inflation tightening monetary policy, the supply chain dislocation and everyone's beat that.

Two of pulp so we don't need to go there I think what happened back then as most businesses we're not.

Already for that market and we immediately revamped our go to market and the way we approach the customer because we knew the customer would have to do more with less automate their business take cost out and improve productivity per person and the work wasn't going to go away it's still.

It would be done in steps service <unk> platform.

And then we also knew at the same time that Ceos, 98% of them. This is the fact have a digital first strategy worried about the other 2%, but I'm good with the 98% because that makes a lot of sense.

And we also knew that they weren't going to give up on their digital business dreams, and they would be investing to reorient business models as Gino said and think differently about their enterprise, which C. J as examples underscored and growth would still remain on the agenda.

It's just a question of what.

It will librium between growth and cost take out would be necessary for them to achieve their goals. The good thing is with service now as platform you can say, yes to both and you don't have to make that choice.

What I see in the market markets I see commodity tech that was at the peak of the hype cycle during the pandemic being dialed down or eliminated and I see that investment freeing up to platforms that actually matter. So I do think our circumstances are.

Improving because of this particular macro because it's well known now that service now can take the cost down if that's what you need immediately and given the layoffs that were seeing and the stories that were reading I clearly see that our company is rising accordingly, and I see that in the.

I see that in the majority of the pipeline, which is a really important fact and this year. We came in with sales productivity at least 20% better than I had at the start of last year based on the feet on the street and the readiness of those fees because they have been well trained and certified to do their job.

All these forces coming together in a way that gives me a feeling the market will be on our side, but our execution excellence will never have to rely on the weather conditions were ready.

Very clear.

Thank you Bill and Gina sorry, again, given your voice, but.

Just again on the topic of the lower mix of early renewals from 2023 should we interpret it at all as Cup.

Customers may be a little hesitant to renew early just because the cost of capital is higher they want to hang onto cash a little longer or is it on.

On the flip side.

Is there some element of maybe maybe you actually enjoying the luxury of not having to encourage as many early renewals because you did see so much strength on the new logo side.

Yeah, great Great point arc and certainly.

Youre seeing a little bit of both and what I keep telling folks is with <unk>.

But we are not having to rely on early renewals as much as we've done in the past shows the resilience and the strength and the power of the now platform, but yes. I also think that in this market people are holding onto cash a little bit longer and that's not altogether.

Surprising either.

Excellent. Thank you very much.

And Mark one thing I would just build on with Ciena is saying and forever investor out there when you don't need to rely on early renewals that means you have a competitive advantage with your technology. It also means that you are able to preserve your pricing power as you go into the renewal cycles on their normal.

Terms. So this is actually a super healthy thing and that's why the guide for 2023 was above all the consensus estimates that you guys have.

Makes sense. Thank you very much.

Thank you Mark.

We'll go next Matt to cash Rangan at Goldman Sachs.

Thank you very much I would think that at a time of inflationary environments that people would want to get rid of cash and preserve the purchasing power, but anyway. So.

The counterintuitive that was not my question anyway. So congratulations first of all bill.

And Gena I will spare you I'll give you some time off and not ask you a question. So you invest your voice.

One one thing that occurs to me is that.

You've scaled a very successful technology company before.

What are the patterns that you see at this point in the evolution of service now it can be so many things that could be doing from a differently from a go to market perspective.

Verticalizing the product.

<unk> distribution.

Our partnerships with <unk>.

Resellers potentially.

There's so much innovation I look at the number of products that you have it.

Mine.

Mind blowing almost.

Flex how do you how do you ensure that this all does not get underway of your mission to build the defining enterprise software company of the 20 <unk> century, and how do you make these catalyst a tailwind and ensure that nothing gets in the way since you've especially seen this pattern play out and you've successfully done this before.

Yes.

Yes, absolutely, yes cash as I said, we've been through this movie before.

And I would like to show.

So here's the situation, we're keeping it real simple for 22000 of our closest friends within service now and for our partners. We have the end to end platform for digital transformation.

That platform is applicable to each industry.

Every persona within the enterprise.

And we're going to expand that across the world and you saw the move we made with Japan, our ambitions are going to India to the middle East and many other places.

End to end platform by industry persona, NGO and we kept it very simple for our colleagues and also our partners.

We are focused on net new innovation.

We'll build the future we have the best engineering leader and the best Engineering team in the industry.

Hearthstone.

We have an incredible go to market machine and we're betting on ourselves. So we're going to keep it real simple around net new innovation and net new HCV, that's it and with a loyal customer base.

We will remain ever loyal with many Upsells cross sells the same account revenue growth.

New business on top of that because you're building the best product in the world Youre going to have the defining enterprise software company of the 20 <unk> century.

Wonderful congrats and congrats again to see Jay take care.

Thank you very much cash.

Thank you we'll go next now to Peter Lee Bernstein.

Thank you.

And congratulations on the performance, particularly on the net new ACD.

In fact, that's what I'd love to help.

A little bit of help unpacking that because obviously, it's including both new logos and expansion and I think we heard last quarter and correct me if im wrong.

At.

New customer.

Acquisition had slowed relative to say Q2, where I think for new revenue you had talked about maybe 10% of.

Growth was coming from new customers.

When you look forward now and looking forward to next year at the revenue growth.

Are you seeing most of that growth.

Coming from existing customers relative to what you would have normally done with new customers I guess as part of the question and then the other side of the question is.

Peers that.

<unk> declined by about 300 basis points quarter over quarter end in your guide it would anticipate continuing decline.

In MLR by probably another 300 basis points to hit your guide.

What is really creating that weakness in the kind of the renewal MLR relative to recent quarters have been pretty consistently at or above.

130%.

Hi, Peter.

I'll take the first question so clear.

Clearly with thrilled with the net new <unk> growth that we're seeing.

And not only our expansion rates strong within the quarter and for the full year in 2022.

We were really really pleased to see that new customer net new ACD grew over 30% year over year, despite the headwind.

You've talked about this in the past, we've really evolved our focus away from that.

The number in the volume of new customers to landing the right new customers.

Land with us and expand with us over time and so the fact that these new lands are growing is testament to the platform and testament to the breadth of products on the platform and so as we think about 2023 and beyond.

Absolutely expect to continue to see strong expansion rates.

As well as good new logo growth, but again, it's about not the volume of new logos, but the quality and really you can see that in.

With respect to your comment on and are declining by 300 basis points.

That's not what we're seeing so I'm not sure what math youre doing but I'm sure that offline.

Darrington can Ken can talk you through it but but our net retention rate and expansion rate remains very strong in Q4 and for the whole year in 2022.

Thank you.

Thanks Peter.

Thank you we'll go next now to Keith Weiss with Morgan Stanley .

Excellent. Thank you guys for taking the question and very nice end to the year with that.

New business growth there.

Gene I wanted to dig in on gross margins, a little bit up I'm still trying to wrap my head around a.

200 basis point decline.

Haven't seen 84% subscription gross margins in surface now since 2016, if im looking at my model correctly.

I believe you told US last year at this time that Theres still an incremental 50 basis points of tailwind that you would get from the accounting change on useful life. So there is somewhere around 250 basis point offset that's driving down gross margin can you help us understand what that is a little bit better what is that added expense that has such a wait.

On gross margins heading into FY2023.

Yeah, Great question. So first of all your math is a little off right. So we had in 2021, we had 85% gross margin and then this year 86, and we talked about that 100 basis points.

The the.

Change in depreciation life of our assets.

Got that 100 basis points was going to come down to 50 right. So you would take you take you take any <unk> that gives you 85 it.

And so what you are seeing what I tried to call out in my script is.

Number one we are seeing impact of inflation right not surprising and we talked about but also we are also investing heavily in ensuring that our customers are getting to success in getting to implementation lots.

Basket with respect to our impact product and still very conscious investment decisions being made there.

Bye.

Sales and marketing efficiencies that you've come to expect from US which is why the operating margin guide remains absolutely where you would've expected to be because we're making investments in cost of sales to get our customers to implementation into value.

Offset by the sales and marketing efficiencies.

Excellent. Thank you guys.

Thank you Keith.

We'll take our next question now from our taken at Wolfe Research.

Hey, guys. Thanks for taking the question Congrats see Jay Congrats guys on a solid quarter I guess, we're all trying to unpack.

Think two metrics that would be very very helpful.

From the quarter itself, so apologies for the more.

Financial oriented question, but can you.

Quantify the renewal headwind from black.

The smaller early renewals and can you comment on the net retention rate itself was it still 125 for the full year because.

When you said when you take a step back it looks like the <unk> guide for Q1 is a lot stronger than where people thought it would be which implies that maybe that renewal headwind becomes a tailwind.

If you get those renewals are maybe you've gotten them already in the quarter and the guide for the full year to your point I think a lot stronger and more people realize so.

We're all trying to kind of piece together that those two dynamics and questions.

So.

I won't quantify the exact renewal headwind, but what I would say is that if not for the early renewals we would have beat our.

<unk> guide and with respect to the NR.

We don't comment on exact numbers it was absolutely consistent.

And well be close to the 125 that you quote.

Perfect Super helpful.

Maybe a technical one.

Our product oriented one for.

For you Bill or C J.

With respect to some of the other.

New areas of innovation that you're bringing to bear, particularly in industries.

Going forward can you maybe highlight some early anecdotes and examples of kind of some of the larger customer wins in verticals that give you confidence to kind of for gas on the fire there.

Absolutely so great to hear from you Alex.

I would say.

One of the products that were Verticalizing pretty early on was in the telco media and tech.

Back in started building that in 2019, seeing very strong traction everything from order management to mid office to back office in telcos in that product line, which was created for the industry is now at top 10, telcos and continue to win market share and this.

Place multiple systems, whether it's a telco company on a media company. Similarly, the public sector, we created a product for public sector as well as healthcare that is seeing strong traction as well and all in all between the new product horizontal products like we haven't done in the word up ERP on procure to pay.

Our supplier lifecycle management and combine that with some of this new industry products. We are winning seven figure deals sometimes much larger and having massive traction in that specific customers that are actually going live in three to four months.

Very helpful color. Thank you guys again.

Thank you Alex by the way C. J had one go live yesterday with 50 agents and we were in a board room together as we were watching the go lives and it was flawless.

That's a customer service management example, one of the most prestigious brands in the World. So you can count on our customer service management business to continue to rock the house. So we're ready to go and by the way I don't get caught up in this <unk> thing because it's only a forecasting based on prior year assumptions has nothing to do with.

What actually happened the net new business was fantastic and all those renewals are sitting for us in 2023, and obviously, because we're delivering business value and impact just sitting there for us at the right pricing structure. So it's actually the super good thing from a shareholder value creation perspective.

Thank you we did go next now to Brad Rebecca staple.

Great. Thanks, very much Bill last week, you spoke pretty adamantly about continuing to hire hiring net new down ticked a little bit here in <unk> versus the previous few quarters, maybe you can give us.

What the plan is for this year.

Yes. Thank you very much Bret as Jean said, we're going to be very intentional about how we manage the head count in the corporation.

We are protecting this house is a primary objective and we have invested very heavily as you know for the last three and half years for sure.

On head count and we have what we need.

Our investing and we will continue to invest primarily will be code <unk>.

People that actually write the code and also people that are actually responsible for the customer relationship and carry a quota. So we're going to be very very intentional.

And I'm really Super site, because we are in great shape on our workforce, we are really happy workforce, our retention rates are better than ever.

Last door.

Rankings speaks to some of that so what we're finding is because of our intentionality, we're getting nines and tens in here.

The people, we are choosing to hire come from a pool of thousands and thousands and only the best guess at go to service now and I think that's going to build an even stronger service now going forward. So no no problem with the workforce everything is about driving innovation or net new HCV.

Net new innovation net new HCV, that's the ballgame.

That's great. Thanks go ahead Jean answer Brian .

If I could just add.

Entering 2023, and Bill alluded to this earlier, we are entering 2023 with significantly more ramp reps than we entered into 'twenty. Two so that grows yes, we might have had a little bit of a slowdown in hiring in Q4, but that was not on quota bearing sales our engineering, we're entering 2023 from a ramp rep.

Perspective.

<unk> strong, which gives us confidence not only with the pipeline with <unk>, but with the productivity that we'll get out of those ramp ups.

That's great thanks very much.

Thank you Brian .

We will take our next question now from Keith Bachman of BMO.

Many thanks for the question and gene I Hope you feel better.

And a clarification first the clarification.

Crescive metric you provided on the net new customer.

ACB growth of 30% just for context can you give us what that same number would have been.

Last year in the December quarter, or an average of the last two years in December quarter, I'm, just trying to see what the what the calibration point is.

And then my other question as it relates to.

The up sell it in particular on items and Ics.

In the past you provided updates on kind of the SKU mix in other words going to pro to enterprise. If you could just give us an update on.

Is that slowing up at all given the economy or are customers kind of forging ahead, and just where are if you could give us some update on the transition thats. It from me many thanks.

Yes, Keith I'll tell you that 30% net new ACB that new customer ACB growth, we're really proud of the quarter, we haven't given those metrics in prior quarters.

Pfizer to say that we continue to see those net new customer ACD is growing as we are landing larger deals with new customers and those new customers are able to expand with us more so really strong growth in the quarter, but we've not.

We have not consistently given that but I.

Would you say that we are continuing to see that grow.

With respect to ICI TSM pro we've talked about penetration being at about 35%.

And that continues to do well.

And so as that continues to move higher through the year or is that kind of stuff.

Is there any pressure on that stalling out at all in terms it has tumors willing to mix up.

It has continued to grow.

We don't give that percentage every single quarter, we will give it every time it hits. The next five if that makes sense, but we absolutely are seeing <unk> penetration continuing TJ I don't know if you wanted to add.

Thirdly, Keith Here's what I can say so the number continues to increase since we launched this in 2018 and horrible Super encouraging in Q4 was that some of the new logos that we got with DSM also landed with IBM <unk> decided about existing cohort upgrading <unk>. So.

35%.

Currently very very optimistic and at financial Analyst day, we will provide updates on whats happening with Ibs and Brian Enterprise.

Okay perfect. Thanks.

Thank you Keith.

We'll go next to Tyler Radke Citi.

Thanks for the question, maybe for Bill or C. J.

Just given the widespread conversations around cloud optimizations as we heard from Microsoft last night can you just talk about how you're approaching these conversations with your customers are there specific products that.

You are leading with and then C. J, just I would love to get an update on.

Your view on the service now observe ability strategy heading into 2023 kind of what are what are your key milestones from a product perspective and how it is just the progress gone since the most recent acquisition.

Absolutely. So let's first start with the cloud optimization question, Lisa AMA product lines since day, one, but then you look at <unk>.

Our asset management, our ability to discover assets, whether that an on prem cloud private cloud public cloud or multi cloud has continued to be best in class. So we help our customers connect that trying to optimize the empower spend thats great. If they are trying to move to public cloud and they wanted to accelerate our journey.

<unk> escalate too so our portfolio is best suited for meeting our customers, where they are on their cloud journey and where they want to go so I feel actually pretty good in terms of just how the portfolio has relevance in this multi cloud as safe and how our different product lines can help them with that.

<unk> and optimization and on the variability.

What was really encouraging for me in Q4 is that we had three fortune 100 companies decided Dubai resolves derivative solution light's debt at a meaningful scale and this is a real workloads that are really being monitored by our lifestyle solution.

And as I think about 2023 milestones as you know Tyler we bought a company called Ed obvious broad log management solution, we will fully integrate backing out observer rated platform. So we have not only primary observer solution, but also unit part of <unk> solution that work across multi.

So very optimistic going into 2000.

Thank you.

Thank you Joe it looks like we have.

Thank you and we do have time for one more question. This afternoon will take that now from Sarah <unk> bowler at Macquarie capital.

Great. Thank you so much for squeezing me in I really appreciate it and congrats the CJ wonderful to see.

Really I think just given that you're operating in this what feels like rarefied Air let me sort of slip things over a little bit and ask if there were any vertical.

But you haven't called out or regions and in particular, where you saw any softness or perhaps.

Perhaps extra layers of scrutiny on overall spending.

So I would say I'm going to take this thank you very much but overall, we feel very balanced performance Gino called out certain verticals Super proud of what we did in public sector. Typically in Q3, we had expected to do well in public sector, but even in Q4, we did really well.

And as Gino called out 50% growth, so whether it's public sector, whether it's retail whether it's health care and others very balanced performance and strong growth and amazing quarter I would say as bill just touched on we are really excited about our growth potential in Japan, and India and with new appointment in Japan.

And Japan being the four geographies reporting to us.

Paul Smith, Chief commercial officer is some there.

Really want to pay attention to and we are very optimistic on the market side of it.

Alright, Thank you very much appreciate that.

Thank you for calling into our I appreciate you.

Thank you and again, ladies and gentlemen would like to thank you all for joining today's service now Q4 2022 earnings conference call again that will bring a goodbye today's call.

Thank you for joining us have a great afternoon goodbye.

Please wait the conference will begin shortly.

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