Q2 2023 ServiceNow Inc Earnings Call

Yeah.

Okay.

Please standby were about to begin.

Good afternoon, ladies and gentlemen, and welcome to the service now second quarter 2023 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 you would like to ask a question. During this time simply press star 100 telephone.

And if you would like to withdraw your question simply press Star One again and please note that we do ask that you. Please limit yourself to one question and at this time I would like to turn things over to Mr. Darren Vice President Investor Relations. Please go ahead Sir.

Thank you good afternoon, and thank you for joining service now second quarter 2023 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 second quarter 2023 results and discuss our guidance for the third quarter and full year 2023.

Before we get started we want to <unk>.

Besides that the information discussed on this call including 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 2022 10-K are 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.

Otherwise noted all financial measures and related growth rates. We discussed today are non-GAAP , except for revenues remaining performance obligations, our RTL current IPO and cash and investments.

The reconciliation between these non-GAAP and GAAP measures. Please refer to today's earnings press release, and Investor presentation, which are both posted on our website at investors got service now Dot com.

A replay of today's call will also be posted on our website with that I'll turn the call over to bill. Thank you Darren and thank you everyone for joining US today. Once again service now is Q2 results beat expectations for all key performance metrics subscription revenue grew 25% in constant currency one <unk>.

<unk> above the high end of our guidance.

<unk> grew 24% in constant currency, one 5% above our guidance and operating margin was 25% two points above our guidance, we had 70 deals greater than $1 million and net new HCV, which was up from 54, a year ago or a 30% increase as.

The market consolidates customers that move into service now as the intelligent platform for end to end digital transformation, we have now more than one trillion workflows running through service now each year and that metric is already growing at 40% annually.

Service now is long term trajectory is being supercharged by generate today.

Service now has the most differentiated asset in enterprise software.

First mover organic innovation led SaaS topline growth best in class profitability, 99% renewal rate.

Early stages of cross sell expansion around our moat.

We have said consistently service now will be the defining enterprise software company of the 20 <unk> century.

Q2 beat and raise is another step forward on that journey.

Looking at our solutions portfolio large deals were evenly spread in Q2, which illustrates the broad appeal of this platform.

Get them within 16 of the top 20 deals with seven deals over $1 million.

Tom was in 13 of the top 20 also with seven deals over $1 million together security and risk combined for 17 of the top 28.

Eight deals over 1 million customer workflows had a sensational quarter.

It's best net new <unk> growth in three years.

Customer within 16 of the top 20 deals with eight deals over $1 million.

Employee workflows, we're in 14 of the top 20 with seven deals over $1 million and creative workflows. We're in 18 of the top 20 with eight deals over $1 million.

Great organizations are transforming with service now, including Barclays BT Honda HP, Petrobras CES be bank in India, and Yokohama City in Japan to name a few.

We see a sustained demand environment and pipeline for all of our product businesses geographic regions and industry verticals. We are set up very well for a strong second half as youll hear from Gena, we are raising our full year guidance for subscription revenue.

And operating margin.

This is an unprecedented market environment for enterprise software are.

Our good friend and video co founder and CEO Jensen Huang joined US at knowledge 23 earlier this year.

And Janssen has stated the expanded Nvidia service now partnership.

It's really important their partnership of choice for enterprise.

Do you think that is an exciting growth opportunity for both companies. We agree we are in.

In the midst of a dramatic expansion of the software economy in 2023 alone IDC says platform as a service spending will grow 30% and software as a service applications will grow 17% when you correlate that to service now as a platform and all workflow leadership, it's clear we live in a great.

<unk> neighborhood on a Super Nice Street.

And maybe we're in the best House.

With regard to artificial intelligence, especially large language models.

Service now strategy has been laser focused for years, we accelerated that focus with our element AIA acquisition in 2020 today by some estimates generally today I could boost global GDP by almost $7 trillion.

We see unprecedented parallel adoption across consumer and the enterprise.

Our platform experts, who have worked for the greatest brands in technology.

In this moment is as transformative.

If not even more so than the internet or even the iPhone.

But they are careful to remind me, it's all about delivering enterprise grade domain specific large language models, which is the core of service now AI strategy.

These models will improve the accuracy of results leveraging a customer's enterprise data and align with their business rules, while maintaining the highest ethical standards for data privacy as.

As you saw at our financial Analyst Day service now is infusing generative AI into all of our workflow offerings, we have since announced now assess for virtual agent, which maximizes productivity by eliminating time spent searching for information.

Another example is service now generative AI controller.

It allows organizations to connect service now instances to both Microsoft Azure Open AI service and open AI API large language models.

We're going even further by expanding our generative AI capabilities with case summarization and text to code checks to flow and texts to new application development. Our customers are so excited for greater ROI and customer service better employee self service.

<unk> and a substantial boost in developer productivity.

Our ready to invest to drive these outcomes.

And based on the immense value our customers will realize from our generative AI innovation, we have a clear strategy for monetization.

Our existing pro offerings had a record quarter in Q2 based on the hyper automation technologies, we already engineered into those products for all new generative AI capabilities, beginning with our Vancouver release, we will introduce a new set of premium plus.

SKU offerings across it.

CSM and HR SD.

We have also introduced a new service now AI lighthouse customer program.

Alongside Nvidia and Accenture, all in lockstep to accelerate value realization at the cutting edge of generative AI.

Specifically this involves our engineers locking arms with and videos to co develop new use cases for the enterprise.

We already have the most significant pharmaceutical financial services manufacturing and healthcare companies engaged with us additional.

Additional customers will become design partners for new AI capabilities and their specific industries.

We're currently evaluating a range of customers who are candidates for this program and the interest is continuing to search these engagements share one sentiment perfectly in common.

The propensity to buy is there.

Even as our underlying growth is already strong as our Q2 results indicate.

AI represents a market, making tailwind to service now intelligence is only relevant when it is delivered where work actually gets done it's.

It's why our single architecture single data model workflow platform has never been more relevant than it is right now.

It's AI goes to work humans will be the real machines, because in most cases AI augments people it doesn't replace them at.

At a moment when employers space, a 17 year high and unfilled job openings January today, I will lift human productivity. So we can chase even bigger dreams for the global economy and for the world with our integrated suite of automation technologies, including AI RP.

And process mining service now is uniquely positioned to lead the intelligence Revolution, and we will.

Looking broadly at the state of our business, we have the momentum with our upcoming Vancouver lease in September our products and engineering team will deliver even more AI innovation. Our partner ecosystem has never been more invested than they are right now we announced an expanded strategic partnership with.

Cognizant to accelerate adoption of AI driven automation we.

We expanded our partnership with KPMG to co develop joint offerings through our finance and supply chain workflows, we launched a new collaboration with Guidewire to improve insurance experiences.

We're also seeing extensive third party recognition of our products service now has been recognized for AI ops.

App engine and cloud observed ability by prominent industry analysts from.

From customer service to risk to employee experience and ERP simplification.

We can go on and on this.

This has fueled our rise into the fortune 500 for the first time and this is another tribute to Fred Luddy founding vision for a hungry and humble market leading company.

And we're only getting started.

In closing this is a dynamic period for the industry.

About it this way.

Every leader in every department and every business and every industry is writing a new playbook for the AI World.

Ceos are sponsoring now.

The C suite across all functions is funding now.

And for the few true platforms, the opportunity is bigger than ever.

Service now inject speed into the business architecture, our platform has become the de facto standard for intelligent automation. We are a growth company, we are profitable and durable and thanks to the relentless execution and results speak for themselves. We believe in our people are.

Culture, our platform and our partners the world is changing and imagination is the only limit service now is on the move.

I spoke to this summer some things up perfectly she said and I quote everywhere I go people are talking about service now whatever you all are doing it's working and quote.

It's one of the many reasons, we proudly say now as ever the World works with service now.

Thank you all very much I look forward to your questions, but first let me turn it over to a great CFO Gina.

Thank you Bill Q2 was another exceptionally strong quarter for service now we exceeded the high end of our guidance range for all of our key performance metrics delivering robust subscription revenue and <unk>, while continuing to drive operating margin expansion and very healthy free cash flow.

In Q2 subscription revenues with 2.08 billion growing 25% year over year and constant currency exceeding the high end of our guidance range by 100 basis points.

<unk> ended the quarter at approximately $14 2 billion, representing 22, 5% year over year constant currency growth.

Hi, RPI was approximately $7 2 billion, representing 24% year over year constant currency growth.

150 basis point beat versus our guidance.

From an industry perspective, transportation and logistics led the way with over 80% growth in Q2.

Led by very strong growth in education business, and consumer services energy and utilities and government in fact U S. Federal had its best Q2 ever continuing the trend of strong growth over the past several quarters.

Our best in class renewal rate was 99% in Q2, demonstrating the resilience of our business as the now platform remains a mission critical part of our customers' operations.

With that foundation from which to grow top line strength in the quarter was further driven by healthy expansion of our existing customers.

We ended the quarter with 1724 customers paying us over $1 million in ACD.

<unk> 45, paying us about $20 million at 55% increase year over year.

The better together story, continuing to resonate with C suite driving larger multi product deals as enterprises are looking to consolidate purchasing with us strategic platform like service now in.

In Q2, 19 of our top 20 deals contained five or more products with nine of them containing tenable products.

In addition to our cross sell upsell motion also remains very strong ICM Pharrell had its strongest growth quarter since 2020, driven by both upsells from the standard SKU and seat expansion from existing customers.

Overall, we closed 70 deals greater than $1 million and net new ACD in the quarter up from 54, a year ago, representing 30% year over year growth. What's more 12 of those deals were over 5 million of which three were over $10 million.

We also saw strong performance from our industry Skus with our telco and technology Skus closing six deals over $1 million and net new ACB and our newly launched public sector SKU, gaining further momentum in lending another seven figure deal in the quarter.

Turning to profitability non-GAAP operating margin was 25% 200 basis points above our guidance driven by continued disciplined spend management.

Our free cash flow margin was 21%.

I would also note that given our path to sustained profitability in Q2, we recorded a large GAAP income tax benefit, reflecting a 965 million valuation allowance release related to our deferred tax assets in the U S.

We ended the quarter with a robust balance sheet, including seven 5 billion in cash and investments.

Given the current macro environment and our strong cash position in May the board of directors authorized the company's first ever share repurchase program. The new program authorizes the purchase of up to one 5 billion of common stock.

<unk> primary objective is managing the impact of dilution.

Together. These results continue to demonstrate our ability to drive a strong balance with world class growth profitability and shareholder value.

Moving to our outlook.

While we continue to prudently factor the evolving macro cross link into our guidance. Our first half outperformance has driven strong momentum as we head into the back half of the year. As a result, we are raising our top line and operating margin guidance.

For 2023, we are raising our subscription revenue outlook by $95 million at the midpoint to a range of 858 billion to $8 6 billion, representing 24, 5% declined 5% year over year growth or 24% on a constant currency basis.

We are raising our full year operating margin target from 26% to 26, 5%.

And we continue to expect subscription gross margin of 84% free cash flow margin of 30% and GAAP diluted weighted average outstanding shares of $206 million.

For Q3, we expect subscription revenues between $2, <unk> 5 billion and $2 195 billion, representing 25, 5% to 26% year over year growth or 23% to 23, 5% on a constant currency basis.

We expect <unk> growth of 25, 5% or 21, 5% on a constant currency basis, we expect an operating margin of 27% and we expect $206 million GAAP diluted weighted average outstanding shares for the quarter.

In conclusion Q2 was another tremendous quarter of outstanding execution, and we are well positioned for the remainder of the year.

Our pipeline remains strong as we've already seen a half of $1 billion of pipeline generation from our knowledge 2023 event in may.

The week long event of keynote panel and customer discussions showcase the power and the endless possibilities achievable. This service now workflows, along with the incremental opportunities unlocked with our Gen AI roadmap.

One 3 billion in pipeline attended with an over 50% increase in executive program attendees.

The response has been overwhelming.

Our intelligence platform for end to end digital transformation uniquely positions us to seize the opportunities in front of us as we continue to deliver durable top line growth and margin expansion on our journey to becoming the defining enterprise software company. The 20 <unk> century.

Bill and I would also like to extend a heartfelt. Thank you to our employees around the globe for their continued hard work and dedication.

Their commitment to excellence, which has propelled service now into the Fortune 500, and we couldnt be proud of.

This distinction is a testament to our win as a team core value and a culmination of the outstanding results, we accurately delivered together and service to our customers partners and investors.

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

Thank you Ms not from Toronto, Ladies and gentlemen at this time CGM. The questions again, some press star one and you can remove yourself from the queue. If you find your question has been addressed by pressing star one again and again, we do after you. Please limit yourself to one question, we'll go versus afternoon to Keith Weiss Morgan Stanley .

Excellent. Thank you guys for taking the question.

Really nice quarter.

Still we understand is still not a super solid spending environment. So it definitely looks like service now is outperforming in that environment.

The focal point for a lot of investor does going beyond sort of the generic genii.

We continue to innovate there continue to rollout new solution.

I'm not sure. If this is for bill or Gina.

Maybe you could help us kind of understand how we should be thinking about the timeframe.

We're going to see some release in September how should we be thinking about the timeframe of when it actually gets adopted by customers and maybe more for Gina when should we start to think about seeing actually like revenue contributions coming from these <unk> solutions in the service now model.

Well. Thank you Keith for all of those comments I appreciate that.

Vancouver launch is the end of September . So if you think about from a timing perspective, we won't see it even in the market really into Q4, I'll, let <unk> talk a little bit more about our very exciting lighthouse program, but as we think about longer term guidance.

Our our scale is such that it's going to take a little while for us to see real impact on the topline, but rest assured we absolutely are very bullish on the opportunities in front of us as we think about the value that we're creating for our customers with jet AI.

Thank you Gina.

Thank you Keith for the question and the way I would answer it in terms of.

The demand that we're seeing from some of the largest companies.

Some of them.

Mentioned earlier from the industry perspective, it's very real.

We believe that agenda to AI in context of service now will deliver higher productivity and I stay consistent that we are going to monetize only when we get.

Higher values that are delivered for our customer and get a fraction of that value whether it is $10 90 or whatever safe customer gets 100 points of early February saw keeps 10 customer thats, 90% of the revenue.

What I mean here is our premium skus that bill outlined will be proved plus so this will be on top of DSM pro CSM grow HRS, the pro with an exciting new offering for service to our developers that we showcased at knowledge, which will be <unk> two core text to workflow. This.

Products that are being released in September we will see we know how our adoption curve was for <unk> and CSM growing 2019. So we have some models where customers wanted to first see the value and then we will share with you at the next earnings on housing.

Separately.

Nice job guys.

Thank you Keith.

Thank you the next now to some odd Simona at Jefferies.

Great. Thanks for taking my question and congrats on the strong quarter I wanted maybe ask a follow up question. You mentioned Vancouver is coming out in the end of September I guess, one of the questions. I wanted to ask is is it changing how customers are thinking about renewal timing and I want to tie that to maybe the <unk> guidance that you just gave for the third quarter how should we.

Think about what you are thinking about the release of the new products and maybe how that informs the short term guidance that you've just given for the third quarter and what that implies for the fourth quarter as well as we think through the rest of this year in particular.

Yeah, Great. It's a great question, Marty and what I'd say is listen at the end of the day, what you've seen quarter after quarter Fund service now is solid execution.

The demand environment is very durable.

And <unk>.

That being said, we continue to be prudent with our guidance right at the end of the day, we absolutely believe that generative AI could potentially bring renewals forward, but im not baking that into our guide right. Now we just don't know what that's going to look like what I can tell you is that from a if you think about the Q3 guide.

Last year, we have a full year now of slower macro demands right. So really Q3 is when things started to shift for Q3 of last year had an incredible Q4 of 'twenty, one and an incredible Q1 of <unk> two in <unk> <unk>.

<unk> guide now for QD is strong we are reflecting lower level of early renewals as we've continued to see.

Youre, 100% right, the Genesis AI potential and opportunity could absolutely have some upside that we've not reflected into our guide right now.

Great. Thanks for that congrats again.

Thank you so much.

Thank you well go next to Matt Hedberg at RBC capital markets.

Great I'll offer my congrats again, guys on the strong quarter.

Hearing seat expansion within Ikea, Some pro is great, especially when there is some investor questions about fewer developers in the Jennie O World could you put a little bit more context, I guess on what drove that it would be.

Given the history build that you have and what are the long term trends for developers in this journey C. J. Obviously, you can comment, but I think you'd have some perspective, there as well.

Okay. So first of all thanks, Matt and I will start.

As it was outlined that IP SM pro as well as CSM, which are very similar customer facing agents and employee facing agents.

Had amazing growth in second quarter, and even when I look at the percent of total.

I feel very good about the approach trajectory that would be hoping on in this market for the past few years based on automation and other features that we deliver we approach now.

On your question on the <unk> expansion.

I think about it is P times Q types or <unk> the rate of increase so if you look at <unk>. What we have seen is besides the 25% uplift that Gino shared at the financial Analyst day Vascepa expansion has been 10%.

So you may ask Okay. Why is that the reason is very simple.

As the world is becoming more digitized as the corporations are becoming more digitized.

<unk> volumes on a customer service requests are going up so while theyre leveraging the pro features vascepa expansion, if Nordic coincidence, because number of incidents whether you look at security incidents.

Incidents our digital products continued to grow and Thats why I look at few times two times are on are being the rate of increase on the number of.

If you keep the quantity constant the Dod is driven by higher level of Digitization.

So when I think of our generative AI specifically.

We look at this space, so true and we think of our plus and given the value that is already being delivered by through drove plus will allow you to gain additional value.

Whether it's the employees, whether it's our customers' customers or whether it's other agents and Thats why we feel very comfortable with the monetization strategy with <unk> plus <unk>.

Because our customers will get value because of higher productivity and we'll get a small percent.

And Matt what I would.

Build on from CJ commentary is this is the entire enchilada as it relates to transforming businesses.

Generative AI and these LLM models.

We're now putting CEO is in a position where they have to come up with a new playbook.

So if you are talking for example to a telecom media and technology CEO .

We're thinking how to reinvent my customer service orientation. The offers that I'm, making how do I manage the network, how do I deliver great service operations.

<unk> you might be surprised a little bit to know how forward leaning the public sector as they are thinking like self service citizen experience, how do I really rethink citizen facing assisted services.

How do I drive employee productivity and really rethink the way, we're running things and manufacturing I met with one CEO that for every minute the shop floor is down or isn't as productive as it should be every minute is $500000. So thats.

Factory employee the sourcing and supply chain building, a digital factory, how do I rethink sales and service.

In health care.

Kerr CEO who's running probably the most prestigious health care institution in the World said, how do I rethink health.

Healthcare and completely model something that doesn't exist today as it relates to the patient care and how I can move services from an in house establishment to somebody's home like it's all on the table. So the point that I want to make is this service now is now in all of those conversations and many of those.

You might have thought of as well that sounds like ERP modernization will it probably sounds like a supply chain chase or manufacturing case, so actually that's the point.

We have become the intelligent enterprise spend 10 digital transformation and we're lifting people out of soul crushing work in modernizing these companies with a 20 <unk> century platform. That's resonating you combine that with the combination of Nvidia and others I really think this is a once in a generation mode.

Sure.

Thank you.

Thanks, Matt.

We'll go next to Mark Murphy at Jpmorgan.

Yes. Thank you I'll add my congrats bill.

Bill It sounds like you generated real pipeline coming out of the conference last month can you comment on the trend in business confidence and willingness to invest in particular is the exit velocity coming out of June and July turning a corner. If you think if you compare to how it felt coming out of April with March.

I'm also just curious is there more consistency in the U S.

Europe and Asia at the moment.

Well. Thank you very much for the question Mark are first of all when we get to the C level.

And we're talking to the corner office.

It's all about innovation.

And there is no lack of interest in digital transformation. There is no lack of interest in rethinking the employee or the customer experience or even how you empower people to do their best work, especially engineers and it professionals because the digital strategy has become the business strategy. So the whole thing for us is not so much based on.

One month or one quarter versus another it is having a chance to portray the broad vision and the completeness of vision, we have with C level decision makers that understand what transformation really is all about so that is the only limiting factor just making sure we get a chance explain the breadth and depth.

Our story in terms of the geographic scenario.

We're growing in all of them very well, they're each have their own individual scenarios obviously.

Well aware of energy and security.

Honestly, the Ukrainian situation, which is just a human tragedy.

<unk> is an extremely strong Europe is strong in spite of that because they need technology to dig their way out of a lot of the complexity and our Asia is going well for us, especially in Japan, where we have a new leader now and we really feel like we plan to set up a flag in Japan, and we have a new frontier thats going to grow really fast so we're feeling good.

About all the Geos.

Some of the industries are doing incredible things and yet at the same time, we want to make the point back to the platform.

Had 19 of our top 20 deals with five or more products in the in the deal bomb.

In Ghana.

And nine of the deals we had 10 or more products and thats attributed to see Jay and his amazing engineering team, but also in concert with Paul and our go to market machine. The collaboration on taking innovation from the factory and getting it in the hands of the customer quickly is really establishing itself.

As an art form here and I'm Super proud of the team and I just wanted to give it up to the team.

Thank you very much.

Thank you thanks Mark.

Well go next to John di Fucci at Guggenheim.

Thanks for taking my Hi, Shannon how are you. Thanks for taking my question.

So you said the fed vertical where the U S fed.

Had its best quarter ever which is really interesting.

I guess, just a little more color on that were you referring to new HCV and if so whatever you can share with us like a rough gauge of that like how much. It grew maybe or anything that you can share further on that.

Yes, so what I said was that it had its best Q2 ever and.

Okay.

No, it's always a great quarter for fed.

But what I said was continuing the trend so it had its best Q1 ever.

Q2 ever had its best Q4, as well and so it's not bigger than Q3, but it had a great.

Great quarter, it saw $10 million deal, including one over $8 million and what Youre really seeing is that our message around accelerating digital transformation journey is resonating.

Do you think about what they are looking to really partner with service now in platforms like service now much more of an enterprise land more strategic multi year and Theyre really looking too.

<unk> transformed the citizen experience across the board and so we're really excited about the continued trends that we're seeing we have an incredible new leader, our industrialized IR doing incredible work with that whole team and so.

You can only imagine that that the opportunity remains really strong.

And if I could just build one thing on <unk> commentary, John you might remember the grid, Kevin Haverty that ran all of our sales force for a double digit years, Kevin is not only with us, but he oversees the whole government business as an entity for the corporation.

And we see amazing opportunities to take what we have done in U S. Federal also state and local don't forget 40 out of the 50 States here running service now we see a great opportunity to take that to Asia, specifically, India, and Japan, obviously across Europe , Germany.

<unk>, France, the U K to name a few and we also see expansive opportunities.

In the Middle East and I, just wanted to shout out to Kevin because.

Being here and being a part of our future and also a mentoring Raj and really building a powerhouse is just so exciting to me personally and I loved the fed team and I just wanted to give them a little shout out to because they are amazing.

Okay. Thanks, Bill, Thanks, Gena and nice job nice job Kevin.

Yes, thanks, Thanks John .

We'll go next to Rob Owens at Piper Sandler.

Great. Thank you for taking my question and I know Theres been a.

A lot of discussion around pipeline and enthusiasm towards the second half, but just wanted to drill down I guess more from an economic standpoint, there's been a lot of discussion I guess around the edges here, but.

As you look at the second half willingness to invest from customers and obviously service now is taking share in executing in this environment, but do you think that there's an all clear signal here that you're giving us with the strength in this quarter just once you the paint the landscape for us. Thanks.

Yeah, I would I would not say that we're giving you.

And all in all clear sign on the economy I think we continue to execute extremely well, but from a macro perspective, I would say that there's not a whole lot of change.

Except for the commentary on Gen. AI right. So everyone is really excited about the productivity gains and the value that NII is going to create for the business what that means for the back half is I believe it's early it's early to tell but at the end of the day, what I will tell you is our pipeline remains <unk>.

And we actually see higher pipeline coverage ratios going into Q3, and we saw last year a lot of momentum coming out of knowledge 'twenty three I talked about in my script over $3 billion in pipeline attended that knowledge conference and we saw a 50% increase in the executive.

Program attendees. So if you think it with C suite, the higher up folks are coming to understand with service now can do and provide and so we've created approximately half a billion in pipeline to date out of that event and we continue to see strong demand for our team to fly out and be demos Sim.

To what we presented at K 23, especially around jet Gen AI and so I'd be cautious there.

Is it a whole lot of change in the macro but theres a lot of excitement about what gen. Eight Gen AI and in particular with service now as Jen AI strategy can do for customers in the short mid and long term and one set of facts that might be interesting to see you and others.

Is the loyalty effect.

We know you understand cloud economics of course, but there's also the human effect of loyalty right now.

<unk>.

Took a very strong position with our employees that we would remain loyal to them.

Out of the weather conditions in the marketplace that we would do it together.

And we now have the best retention rates in the history of the company.

We have 99% retention rate with our customers.

So if you take the loyalty effect into consideration the net present value of what that means and you combine it with the net new ACD that we think we can get out of this amazing platform and the innovators that are leading the charge for us.

We have a tremendous sense of purpose and confidence within the company and I think that really is.

Fun to watch and it's pretty thrilling to see what we can do with our customers and I'm excited about this this brave new world.

And we are really fired up and ready to go over here.

Great. Thanks for the finer points around the topic.

Thanks.

We'll hear next from Kash Rangan at Goldman Sachs.

Thank you very much one for you Bill and once the CJ and Gino will get to you on the follow up calls.

When you look at the last 12 months challenging time for the economy, but the service now our executed gained share so when the cycle turns to towards being more.

Constructive what this service now pricing power look like and how do you get for a few regenerative AI investments and gained share of the precious budget and once a U C. J you talked about $100 of value and how you keep 10.

Why not more than 10 can you tell us how the customer gets that $90 of value will be I'm sure that you've done some process mapping substantially about financials et cetera, just curious to get your thoughts. Thank you so much and congrats once again.

Yes, Kash. Thank you so much for the question first of all the pricing power in a technology company is always representative of.

It's innovation.

And again I.

Thank the leaders from CJ, all the way through the engineering organization as companies for their great Great leadership, and I believe strongly we have.

You can reference Thats quite fact base.

We have already introduced AI into the service now platform for some time as T. J said and we're seeing the pro version of the service now platform grow more than 50% five zero percent year on year.

And in terms of putting a figure on it with probe plus where we are building those LLM models into the service now platform and extending those partnerships I'll, let C. J talk about what we think we can get what it is on top and it is pretty significant because the business cases for the customers.

<unk> are so compelling.

Yes, Thank you bill and smart on surpass.

We have always talked about pricing of services.

In the context of what value our customers get better when we launched <unk> through which was exactly five years ago and we have kept the same price.

<unk> growth for the past five years now in terms of drop plus.

Based on very specific use cases, so I'll start with specific use cases, which we call domain specific.

Those large language models.

We do not need to run Super large language models, because we are saying that hey for ESN.

This model will give you additional productivity on top of growth and that productivity based on the use is pretty significant so from a pricing perspective on the list price, we would like to be at cliffs minimum 60% plus when we start.

On top of.

So you had a pro customer we are already getting the value we have seen it over the past five years and we have seen the seat expansion happened as well so on pro plus you start with 60% plus customers are trying out. This large language models. The models have accuracy. We are trying to learn themselves Hey, do I take the prediction that comes out of largely.

Mr Bartels, who I just accepted but we fundamentally believe which is what I shared at the financial analyst day that generative AI is a tailwind for <unk>.

<unk> business, but most importantly, the value that customers get so I wanted to start with <unk>.

Explaining the value because you can see somebody is more productive what a particular task.

Repeating over and over again, but what percent of the day they spend on the task and how do we look at the.

Critical work, we bought a customer service agent.

And then if we can say okay for the industry for these use cases in service now.

We believe we can deliver very high value and hence there is a premium we outgrow plus and to start with a $10 90 met and as we see more and more value getting delivered of course, we are going to ask for higher prices.

Okay.

Thank you so much congrats again.

Thanks, Kevin Thank you Kash.

We'll go next to Steve Bachman at BMO.

Hi, it's Keith Bachman, Thank you very much.

To follow up on that just a clarification.

In the past you've had at TSM pro and enterprise.

Still be an enterprise or does the pro plus subsume that in some way and then the question is at the analyst event that you had.

We talked a lot about.

As Jen.

Rolls out you are not sure what the.

C may seat count maintenance may impact too, but in the lighthouse program I just wondered if you've got any perspective from any customers.

As they're thinking about rolling out Gen AI solutions.

Well you had additional thoughts or feedback on how that may increase the <unk> gene and you said what is he has been doing so I'm really asking on a prospective basis what seat count may too as you rollout. These gen AI solutions for TSMC SM.

Et cetera, many thanks.

Absolutely. So first of all thank you Peter.

Lots of questions in there.

I would say when we launched <unk> in September 2018. The exact same question was asked.

And at that point I said, okay listen even in Q remains the same with.

With the 50% on the list price uplift, we should be able to deliver value for our customers and how it has played out though is that not only we have been able to get 25% uplift on idea. Some pro but in addition to fit count went up by 10%, which is the rate of increase.

I look at it under a new AI.

To answer your first question not on lease plus because it's also enterprise plus because enterprise features things like process mining workforce optimization skills mapping for the workforce.

Your customer service. So these are not related to AI free chipset. So enterprise is a very different pace.

So we are pro plus as well as enterprise plus so that's number one and number two any other question around our lead customer conversations customers are still dealing with labor shortage.

Still trying to figure out how they can make their labor force more productive it as always of our efficiency. So they can get more work done.

In that environment.

We believe right now the agenda is the catalyst so that that employee base is still more productive and so even if <unk> remains the same I am still optimistic on the rate of increase as well as the price we will get because of the value we are going to deliver.

Okay. Many thanks.

Thanks Keith.

And ladies and gentlemen, just a reminder to please limit yourself to one question. We'll go next now to Alex Zukin at Wolfe Research.

Hey, guys. Thanks for taking the question I think a lot of us are kind of taken aback by.

Some of the pricing commentary on <unk>.

So I wanted to maybe I had other questions, but I'll throw them to the side I guess is do we think about the potential for that type of uplift can you walk us through.

Specifically is this more going to come from.

<unk>.

Increase is it more of a consumption dynamic is there any thoughts about the percentage of adopt an aspirational you anticipate through throughout your client base and finally from an investment perspective is there a big Capex cycle required you mentioned the intensity of the model right.

Be that needed to be found.

Foundational models in every case so just.

Can you contextualize some of those points.

Yes, absolutely Alex so I'm going to have Gina and sub debt Capex and cost question and then I'll answer your question.

So from a capex perspective, Alex baked into our margin guide for this year I am not concerned right. So any incremental demand is reflected in the in the free cash flow for 2023, as we think about going forward at this point, we don't see any.

Large requirements for increases, but as as we see where demand kind of starts coming through in Q3 and Q4 in the back half of the year I will reflect that in my guidance for 2020, or but rest assured as as you have known us to always deal. If there is some pressure on gross margins.

As a result of a little bit more capex will be offsetting that with operational efficiencies.

We continue to rollout jet AI capabilities within our own organization.

Got it so Alex the two things that I do want to share based on <unk> comments is number one.

We do not require large language models with hundreds of billions of.

There are meters because.

What our domain specific use case, we can run what we have seen with text to court. For example is 110th the size of open AI model. So that allows us to run it efficiently and allows us to run while respecting the privacy of our customers data. So there is some.

And that goes into the Cogs and so that Gina Gail based on the initial demand and customers that we are working right now in terms of your question around.

P times Q.

The uplift that we believe we can absolutely price it would be.

Underprice the quantity remains the same the uplift will be on top of Peru with the list price, 60% uplift and then of course, our sales team works with enterprise discounts all that how that plays out and Thats why if you assume that.

Why is that 60% is the number it is all based on the value that we believe our customers who desire with additional gen. AI features that we are going to release four ideas.

Or whether it's for customer service management.

Are those things that.

Currently that has a cost of R&D and as well as cost to run something like that but it will always be based on the value. They get so I feel pretty comfortable on the uplift list price on that specific price at the seat level and then the second thing I would say is that we have.

<unk> because of Digitization.

DSM through which was the point I was trying to make earlier.

<unk> have expanded.

By 10% over last five years, while the price uplift that we have realized which is 50% on top of DSM and we got 25%.

And Alex one thing I would also like like you to know and everybody else is we're getting a lot of new logos and every time you get a new logo you get new seats.

The other thing is on the platform expansion in the company.

We are now in a world.

Where we're selling multi product solutions business solutions to significant companies and industries and we're communicating with all the personas. So one data point that you might find interesting is in 19 of the top 20 deals. This quarter, there was five or more products in there that's a lot of seats.

And nine of our deals it was 10 or more products in the deal.

And then finally, if you think about.

Large scale enterprise deals.

We are growing our deals in the 20 plus million category, 50% year on year.

So.

We're getting a lot of new seats.

And I think that is something that you should always keep in mind, new logos expanding on the platform and every company going into new Geos and new personas, all new seats and then if you apply the logic of innovation and pricing as CJ said.

Youre going to get a lot of good outcomes for the customer and for the shareholders.

It sounds like a pretty good recipe for success guys. Congrats.

Thank you Alex.

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

Thank you Hey, Gena three months ago, you guys put up a solid quarter, but you did tell us that the fitness vertical which is.

One of your largest.

Felt a little wobbly or macro uncertainty picked up do you mind, just giving us an update with the passage of three months, how that vertical track for service now in the quarter and how it might through yearend. Thanks, so much.

Yes.

If you remember I talked about the fact that we actually in Q1, despite the macro.

Stuff going on within that industry, we saw growth in Q1 and that was cycling huge growth in Q1 of 2022 and so we were really pleased as at least on Q1 and I would say, we continue to see strength in financial services and we had.

Good growth in there and that's it. Thank you Dustin talked about field with Barclays. For example, and so we continue to be demonstrating.

Really strong value in all our financial services customers.

Continued strength that cough.

And I'll just add one thing Carl on genus point is that specifically in Q2, we didn't spin in the banking sector, we saw measurable progress across our portfolio.

In the United States, and Canada as well as in Europe . So the platform is resonating.

Larger of the largest bank expanded and I can tell you that one bank, which expanded with US is now close to <unk> level.

$100 million.

When they renewed with us in Q2, so we are seeing that banks are back.

And that is a.

Very decent pipeline in the second half as well.

Thank you.

Okay.

Thanks Carl.

So next now to Peter we'd at Alliance Bernstein.

Thank you.

<unk>.

Thank <unk>.

One of the areas you have been emphasizing.

All of our future growth lever has been ramping up of channel and its ability to really deliver.

Along side.

Service now.

In the past you've talked maybe 15% 20% of revenue, it's kind of really channel directed and more was supported.

How is that going in.

How large do you see that getting to over the coming year or is this something that you might start breaking out something that you might speak about regularly.

The earnings going forward.

Yes.

It's a good question Peter one of the things that.

I would just share with the group here is we have really really great partnerships and I mentioned the <unk>.

<unk> partnership they are accelerating their adoption of AI, driven automation with us and taking that to market KPMG.

<unk> finance supply chain and procurement.

We talked a little bit about accenture.

The first mover in joining the service now customer lighthouse program, but we also have other channel partners that are developing giving our sales force expanded reach very large technology companies and.

Reporting on that might be worth doing in the future certainly wouldn't be against it but you are right that a lot of the technology partners.

Whether they are hyper scalar is there part of the technology stack or Theyre, just strong technology companies. They recognize the power of their solutions. When you combine it with workflow automation from service now because then instead of selling boxes or.

Products and its SKU they move into business solutions and then they can customize that story by industry and we're even having some situation in the channel where we're developing smaller bite sized turnkey solutions that can be sold in a virtual world. So we can do.

A lot with the channel I think it's early days for those technology channel partners. The size of all adopted US all have now the big ones. All have $1 billion plus practices are one is beyond $5 billion. So you're on a good point.

And what we should talk about that a lot.

Thank you well go next now to Brad Sills of Bank of America.

Oh, great. Thank you.

Wanted to ask about customer workflows, you called out some strength there you can see it in the net new ACB contribution this quarter, we're certainly hearing that from the channel as well what would you attribute that strength to have such a broad portfolio are there any any applications or use cases that you're seeing there and might we expect to see create or follow the trend that youre seeing there with customer.

Perhaps there is a channel play here, where there is some pipeline builds and some execution against that.

Any color on just what's driving the strength in customer workflows and could create a followed that thank you.

Yes so.

Thank you so as Brad So first of all I would start with.

Pro for CSM also had its best quarter, besides customer workflow overall, including our field service management also had a great quarter. So when I think about this category.

We're very good on time front office to the mid office to the back office and that Hasnt been our differentiator not just the engagement layer, but actually getting work done when a customer leases that request and now we have some of the largest brands in the world with shored up our knowledge 23 events.

On how they are using our customer workflow solution all the way from engagement layer to mid office and back office workflows. So that's number one.

Other comments that were shared earlier by Gina is that we're also seeing in certain specific industries customer workflows resonate really really well.

One is telco at Gina shared on our industry specific skus, but also when I look at public sector.

And I look at government to citizen experience all of that on our ability to get work done on service cloud platform and leveraging our back office experience and tying that to the front office is resonating at the largest brands in the United States and Europe and.

We remain extremely optimistic on this particular product line as we transform how customers can be served better menu tied the front office to the mid office and back office.

And unclear.

So <unk>.

Very very nice growth in Q2, driven by <unk>.

Just.

There was an earlier comment on U S. Federal but we are seeing App engine, which provides low core capabilities for our customers the ability to integrate with all of the systems that are available as well as our platform encryption and just the security features of our platform that.

Is resonating really well from financial services to health care and many other organizations, including sub verticals within public sector.

The App engine, when you think of our low cord and the techs to core innovation that we will deliver in September which we showcased at our knowledge conference.

There is so much demand and bill touched on this early on.

I speak to some of our largest customers our mid sized customers.

Backlog on service now remains very high and what I mean by backlog they want to automate more things using service now.

They don't have enough people, who can automate more tanks using service now so generally we AI and texts to court and text to workflow capabilities, that's what really excites them. So that they can reduce the backlog automate more using our platform, but they've got higher value and become an efficient organization.

Yes.

Great to hear thanks C J.

No Brad.

<unk>.

And ladies and gentlemen, we do have time for one more question. This afternoon will take that now from Ryan Lynch child at Barclays.

Hey, Thanks for squeezing me in.

Just maybe a quick high level question on the end.

If you think about.

Okay.

The adoption this year.

Could be tougher corporates, because the budget was set for enterprises last year, there was a lot of inflation from the vendor side.

So you kind of squeezing AI out of kind of tightened budget. How do you think about next year and maybe in some of your comments.

Conversations with board members.

Like how are they thinking about just the.

Generational shift and how would that impact how you budget and how you plan for the coming years. Thank you.

Alright, well thank you Frank.

Yes, thank you very much.

Go back to one of the comments I made earlier there is no lack of interest in the C suite for Gen. AI. In fact every one of them knows they have to have a playbook and they are extremely focused on this and most of the really forward leaning ones are demanding of the C suite.

Direct reports that they are using this in their everyday business activities to run a better company to run a more margin efficient company and ultimately a company to take better care of their people and their customers. So this is set in stone now. This is this is real this is happening.

And what's interesting.

It budgets and this is something that I shared a little bit with Alex earlier.

Where.

As the standard which is great because the IC strategy has easily become the business strategy, but we are now going across all the for some of those in an enterprise.

Great about the cloud business model a lot of these personas have their own budgets and they're going to fund their own initiatives and Theyre looking at service now now as a company that can fundamentally change the game, so I think that the.

The future is bright.

And whether you're thinking about customer and employee service techs desk, where you have virtual agents.

That is search queries in general how twos, you think about text to code. If you think about automating class.

Classification of different cases, and how you resolve them how you take operational support not only across it but proactively manage cases that go through all the other departments. How you have touch list correspondence and literally onboard all the business processes. So if you <unk>.

Are you thinking about who will my partners, who am I going to procure things strong how am I going to make this on boarding process and all the visibility into all business operations completely seamless.

So this is what's happening at every company right now and I think we're going to be a big benefactor, because we became a platform company and we now have the relationship capital with these executives to go way beyond just the it budget not that thats not a good place to be but its better when you can go into the entire.

<unk> of the budget and Thats, where all the user counts are that's where the business model innovation is and Thats, where we have the biggest impact so that's where we're going to be so I think the future. As you look into 2024 is going to be extremely bright and I think we have to now do all the hard work to make sure. We're the benefactor of.

Big cut of that overall budget in the company, whether it's at the department level or the centralized level.

Yes, okay, except thank you congrats.

Thank you very much room.

Thank you and ladies and gentlemen that will bring us to the conclusion.

<unk>.

Quarter 2023 earnings call I'd like to thank you all so much for joining us and wish you all a great evening Goodbye.

Please wait the conference will begin shortly.

[music].

Sure.

Yes.

Yes.

Okay.

Okay.

[music].

Yes.

Yes.

Yes.

Okay.

Sure.

[music].

Thanks.

[music].

Yes.

Okay.

[music].

Yes.

Yes.

[music].

Okay.

Okay.

Thanks.

[music].