Q4 2023 ServiceNow Inc Earnings Call
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Ladies and gentlemen, thank you for standing by my name is Corrado and that would be a conference operator today.
At this time I would like to welcome everyone to the Q4 2023 service now earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question Press Star one again please.
Please bear in mind that only one question will be allowed for the Q&A session.
I would now like to turn the call over to Gary yet.
Gary: <unk> President of Investor Relations.
Gary Yet: And the floor is yours.
Gary Yet: Good afternoon, and thank you for joining serviced out fourth quarter and full year 2023 earnings conference call joining.
Gary Yet: Joining me are Bill Mcdermott, our chairman and Chief Executive Officer.
Gary Yet: Central now, our Chief Financial Officer, and P. J Desai, our president and Chief operating Officer.
Gary Yet: During today's call, we will review our fourth quarter 2023 results and discuss our guidance for the first quarter and full year 2024.
Gary Yet: Before we get started we want to emphasize that the information discussed on this call, including our guidance is based on information as of today and contains forward looking statements that involve risks uncertainties and assumptions.
Gary Yet: We undertake no duty or obligation to update such statements as a result of new information or future events.
Gary Yet: Please refer to today's earnings press release, and our SEC filings, including our most recent 10-Q and 2022 10-K for factors that may cause actual results to differ materially from our forward looking statements.
Gary Yet: 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.
Gary Yet: Otherwise noted all financial measures and related growth rates. We discussed today are non-GAAP, except for revenues remaining performance obligations or RPI.
Current RPI and cash and investments.
Gary Yet: To see the reconciliation between these non-GAAP and GAAP measures. Please refer to today's earnings press release, and Investor presentation, which are both posted on our website at investors got service now Dot com.
Gary Yet: A replay of today's call will also be posted on our website.
Gary Yet: With that I'll turn the call over to Bill. Thank you Darren and thank you very much everyone for joining today's call service now closed an outstanding 2023 with a beyond expectations Q4 here is the state of our business artificial intelligence is injecting new fuel into our <unk>.
William R. McDermott: Already high performing growth engine the.
William R. McDermott: The company's Q4 results tell that story subscription revenue grew by 25, 5% at constant currency, that's 200 basis points above the high end of our guidance.
William R. McDermott: <unk> growth is 23% in constant currency also 200 basis points above our guidance operating margin was over 29%, that's approximately 200 basis points above our guidance.
William R. McDermott: 168 deals greater than $1 billion of net new HCV.
Gary Yet: From 126, a year ago, a 33% increase.
Gary Yet: Service now is Q4 performance is packed with milestone spanning the full breadth of our portfolio.
Gary Yet: <unk> technology customer and creator, we now have three workflow businesses over $1 billion in HCV.
Gary Yet: We have 11 individual product lines with north of $250 million in HCV.
Sam.
Sam: Tom and I Tam each had double digit deals over $1 million in Q4 <unk>.
Sam: Security and risk combined for 12 of the top 20 with nine deals over 1 million customer employee and create a workflows each had double digit deals over $1 million.
Sam: Our large new logo count continued to accelerate in Q4.
Gary Yet: We had a record 10, new customers signing deals over 1 million and an HCV, including a 10 million dollar win with a very large global financial services firm, which is our largest new customer logo and history.
Global iconic brands, such as Chipotle Air France T. I, a NTT data Group Corporation, and Bosch are digitally transforming with service now.
Gary Yet: Proud the TIAA one of our first 10 customers is still expanding their business with us through new out of the box functionality. So they can accelerate time to market.
Gary Yet: Following a record Q3 public sector continued its strong growth in Q4 with key wins, including in the United States Army.
Gary Yet: Postal service and Australian Department of Defense digital delivery group.
We are extremely proud to have finished 2023 operating at the rule of 55 plus.
Gary Yet: As Youll hear from Gena are 2024 guidance reflects our ongoing belief in service now strategic relevance our core business is rock solid and growing.
Gena Smith: Our perimeter is growing our platform adoption is growing we are in fact in a new era of business transformation powered by AI. This is unlocking massive opportunity in the enterprise software industry and.
Gena Smith: And service now is extremely well positioned not only to lead this movement, but to define it.
Gena Smith: 2023 was the latest successful milestone on this journey and we intend to make 2024 and even greater success to say, we're fired up would be an understatement.
Gena Smith: Let's spend some time framing the dimensions of this new AI world.
Gena Smith: Gartner estimates five trillion dollars in tech spending in 2024 growing to six and a half trillion by 2027.
Gena Smith: That means that spending will grow another trillion dollars and only two years accelerating from the decade, plus it took for us to get to five trillion.
Gena Smith: For the first time in a decade.
Gena Smith: Services will become bigger than communication services in 2024.
Gartner estimates that by 2027, nearly all of the growth in worldwide. It spending will come from software and it.
Services.
And when you drill deeper into the Gartner forecast between 2023 and 2027 three trillion dollars.
Gena Smith: We will be spent on AI.
Gena Smith: What we have here is a strong durable market being supercharged by a once in a generation secular trend service now has been investing innovating and preparing for this wave for years, which is why we're catching it. So early we have a long track.
Record of commercializing breakthrough technologies when I approached Skus were introduced we saw very exciting traction in customer adoption.
Gena Smith: Our pro plus offerings, which we launched just four months ago with our Vancouver release are outperforming the pace of the pro upgrade cycle.
Gena Smith: Right.
Gena Smith: The results in our first full quarter since launch validate this trajectory.
Gena Smith: Siemens AG.
Gena Smith: Using now assist for HR service delivery to resolve HR cases faster for its entire global workforce.
Gena Smith: This is one example of many.
Gena Smith: And as always service now strength and our capacity to deploy net new innovation, especially our ambitious Jan AI roadmap.
Gena Smith: In Q4, we released significant new capabilities.
Gena Smith: Virtual agent update drives faster issue resolution through advanced conversational AI chat employees get the immediate answer is they need businesses get higher selves are solve rates and it only takes 15 minutes to set it up.
Gena Smith: Our techs to workflow capability dramatically increases developer productivity.
Gary Yet: Service now as developers have been using text to code for several months. They are generating high quality code using text to describe the type of code. They want this has increased our developer innovation speed by 52%.
Now assist for field service management reduces cost, while increasing revenue by helping technicians get the job done and the first visit identifying the necessary equipment, providing repair recommendations and automating follow up at speed.
Gary Yet: Beyond the platform itself, we see AI as a 360 degree strategic imperative.
It's why service now joined the AI Alliance to advance open safe and responsible AI.
Service now: It's also why we are continuing to grow our strategic partnerships to ensure every enterprise can use AI as the cornerstone of business transformation.
We expanded our strategic alliance with E Y to co create solutions for generative AI governance for our customers and of course.
Why will also be using service now is generative AI capabilities to enhance experiences for all of their employees.
Service now: We also unveiled another major expansion to our partner program.
Gary Yet: The latest addition in a series of investments as partners are building new business models on the service now platform.
Gena Smith: These are two examples of many I've told service now his team worldwide that the company is now moving into phase five.
Gary Yet: Combination of our long term goal of surpassing $10 billion, and HCV, which incidentally only a handful of software companies have ever achieved.
We have so much runway ahead for the long term growth of this company. There are two key elements of our strategy execution and scale execution. We know is an art form scale is all about capitalizing on new opportunities as a truly global platform company.
Gary Yet: One of those in our market, making alliance with.
Gary Yet: With visa.
Gena Smith: Today service now and visa announced a five year strategic alliance to transform payment service experiences.
Gena Smith: And the initial phase of the alliance the companies will launch service now disputes management built with visa a single connected solution for disputes resolution.
Gena Smith: This gen AI powered solution will offer end to end dispute resolution for customers globally everything from the first indication of a questionable charge through early investigation to final resolution.
Gena Smith: Another example is our growing partnership with AWS beginning this month service now will be available as a SaaS offering in the AWS marketplace.
Gena Smith: From an automation perspective, we have long believed that identifying legacy process challenges is in active stimulant for new workflows, that's the beauty of our platform.
The architecture gives us limitless ways to accelerate speed to value for our customers.
Gena Smith: And the more workflows, we drive the more value we create that's why we talked in ultimate suite, a task mining company to enhance intelligent automation across the now platform.
Gena Smith: If we can help customers find it service now can fix it.
Gena Smith: And we fix it and complete harmony with any existing software landscape delivered in a consumer grade user experience.
Gena Smith: <unk> don't want to wait another decade for technology to finally deliver on its promise one told me.
Gena Smith: I'm tired of excuses coming into my boardroom, we need new innovation and new experiences and we need it now that's obviously music to our ears and nicely on brand for service now.
There is plenty more to discuss about the company. We are building and the progress we're making we have more accolades then time to listen to them.
Gena Smith: <unk> analyst firms ranked service now as a leader in 14 separate reports in 2023 for our automation and AI capabilities.
Gena Smith: <unk> doors recent U S best places to work.
Gena Smith: This service now as number three overall and number one in software one of our proudest achievements as the American opportunity Index. This index is Databased base study, what really happens to employees at America's largest companies over time.
Service now scored fifth.
Gena Smith: And Thats out of 400 companies overall and service now was the number one technology company on the index that means the people who have fought hard to build a great company are being rewarded with a great life.
Gena Smith: This all means so much to us because culture is the glue that binds a winning team together, we have world class professionals and service now who care deeply about our customers and our partners since Fred Luddy invented the company.
Gary Yet: We've all made our contributions to help service now emerge as the hungry and humble winter. It is we believe in our platform, we stick together and we try to have some fun along the way to.
Fred Luddy: That's why the results show up the way they do it's also why over 1 million people applied to work here last year.
Fred Luddy: So all of our shareholders, who continue to invest your trust and service now we thank you and we've got your back.
Fred Luddy: We're building a masterpiece here and we're only getting started 2024 will show that we're putting AI to work for the world.
Fred Luddy: Now as ever the World works with service now I look forward to the questions and the discussion we'll have shortly in the meantime, I'd like to turn the call over to our outstanding Chief Financial Officer Gina.
Gina: Thank you Bill happy new year to all of you who are listening in Q4 was another exceptional quarter to conclude what has been a phenomenal year. Once again, we exceeded our top line growth and operating margin guidance metrics showcasing our team's relentless focus on execution.
Service now is agility in responding to enterprise needs has solidified our position as the trusted intelligent platform driving digital transformation.
Gina: In Q4 subscription revenues with $2 365 billion growing 25, 5% year over year in constant currency exceeding the high end of our guidance range by 200 basis points.
We closed out 2023, with 868 billion and subscription revenues also representing 25, 5% constant currency growth.
Gary Yet: All organic at a scale that hasn't been accomplished by any other enterprise software company.
Gary Yet: <unk> ended the quarter at approximately $18 billion, representing an acceleration to 27, 5% year over year constant currency growth.
Gena Smith: <unk> was $8 6 billion, representing 23% year over year constant currency growth at 200 basis point beat versus our guidance.
Gena Smith: From an industry perspective, energy and utilities business and consumer services and education were particularly robust in the quarter.
Government continued to show impressive growth and telecom media and technology after thoughts Ted.
Gena Smith: As Bill noted I am pleased to announce the customer workflows crossed $1 billion of ACD in Q4, SaaS following our creator workflows with hit that momentous milestone in just Q3, we now have three workflow category generating over $1 billion in ACB, highlighting the breadth of our portfolio.
Our renewal rate with our best in class, 99% in Q4, continuing to demonstrate the strategic relevance of our now platform as it remains a mission critical part of our customers' operations.
Gary Yet: We ended the year with over 8100 customers with a focus on landing the right new customers continuing to bear fruit as large new logo growth accelerated for the fourth consecutive quarter.
Gary Yet: We ended Q4 with 1897 customers paying us over $1 million in HCV.
Gary Yet: It closed 168 deals greater than $1 million and net new ACD in the quarter, a 33% increase year over year that includes five deals over $10 million.
Gary Yet: For the full year 2023, we saw an approximate 30% increase in deals greater than $1 million and net new HCV.
Gena Smith: In Q4, again AI products drove the largest net new ACD contribution for <unk>.
Gena Smith: First full quarter at any of our new product family releases ever including our original pro scale.
Gena Smith: Turning to profitability non-GAAP operating margin exceeded 29% approximately 200 basis points above our guidance driven by the top line outperformance and disciplined spend management, our free cash flow margin was 55% up 250 basis points year over year.
Gena Smith: For the full year 2023, operating margin was 28% and free cash and margin was 30% total free cash flow for 2020 to me was a robust $2 7 billion.
Gena Smith: We ended the year with a healthy balance sheet, including $8 1 billion in cash and investments in Q4, we repurchased 400000 shares as part of our share repurchase program with a primary objective of managing the impact of dilution.
Gena Smith: As of the end of the quarter, we had $962 million remaining of the original one $5 billion authorization <unk>.
Gena Smith: Together. These results continue to demonstrate our ability to drive a strong balance of world class growth profitability and shareholder value.
Gena Smith: Moving to our guidance.
Gena Smith: We are raising our 2024 outlook to reflect the strong momentum with which we exited 2023.
Speaker Change: This partially reflects the early success, we've seen with our Gen AI products as those investments are accelerating the build of our already robust pipeline with customers lining up to be first movers. In this next wave of business transformation.
As always we continue to be prudent around our assumptions for incremental customer budgets and the macro cost wins in our guidance.
Speaker Change: With that in mind, let's turn to 2020 guidance.
Speaker Change: We are raising our subscription revenue outlook by $165 million at the midpoint to a range of $10 $5 5 billion to $10 $5 75 billion, representing 21, 5% to 22% year over year growth of 21, 5% on a constant currency basis.
Gary Yet: We expect subscription gross margin of 84, 5%, reflecting investments in our data centers in emerging growth opportunities offset by 100 basis point benefit from a change in useful life of our datacenter equipment from four to five years, resulting from an assessment completed earlier this month.
Gary Yet: We're also raising our full year operating margin target from 28% to 29% driven by continued opex efficiencies.
Gena Smith: We expect free cash flow margin of 31% up 50 basis points year over year, overcoming an incremental point of cash tax headwind.
Finally, we expect GAAP diluted weighted average outstanding shares of $208 million.
Gena Smith: For Q1, we expect subscription revenues between $2, five 1 billion and $2 $5 5 billion, representing 24 to 24, 5% year over year growth or 23, 5% to 24% on a constant currency basis, we expect <unk> growth of 20% on both a reported.
Gena Smith: And constant currency basis.
Gena Smith: This reflects the tremendous strength of our federal business, which has resulted in a higher mix of 12 month contract that will create a negative 150 basis point impact to Q1 <unk> growth. We expect that these contracts will renew in Q3 as service federal contract renewal rates are 99%.
Gena Smith: We expect an operating margin of 29%.
Gena Smith: Finally, we expect 208 million GAAP diluted weighted average outstanding shares for the quarter.
In summary service note Q4 outperformance is another example of the strength of our platform and our people it seems amazing.
Gena Smith: Amazing accomplishments in 2000 clients a set the stage for continued success in 2024.
Gena Smith: Service now its position as the intelligent platform for end to end digital transformation has gained momentum throughout the year leaders are shifting their investments into proven strategic platforms that leverage the power of AI to deliver growth across the top and bottom lines.
Gena Smith: With customers prioritizing quick time to value the now platform delivers.
Gena Smith: The accelerating pace of investment in workflow automation and interest and Gen II positions us well in our journey to becoming the defining enterprise software company of the 20 <unk> century.
Jane: They'll see Jane I would like to extend our gratitude to all our employees worldwide for their outstanding contributions to service now success this past year.
Jane: <unk> 2020 to me was a remarkable year and we look forward to any of the more exciting 2024.
Jane: With that I'll open it up for Q&A.
Jane: Okay.
Jane: At this time I would like to remind everyone in order to ask a question. Please press star.
Jane: Ladies telephone keep whole.
Jane: Star number one on your telephone keypad.
Jane: My apology.
Jane: Also just a moment to Paul Q&A website.
Jane: Your first question comes from the line of Brad Zelnick with Deutsche Bank. Your line is open.
Brad Zelnick: Great. Thanks, very much and congrats on an amazing finish to 2023.
Brad Zelnick: Bill it's clear the now platform as the destination of choice for enterprise AI and modern digital workflows.
Brad Zelnick: I'd love to hear your view of the environment versus what you see is now specific would be great. If maybe you can share a bit about close rates sales rep participation rates or even net new HCV performance. As you did last year just to help us contextualize, how what's going out there. Thanks, yes, Brett. Thank you very much for the question things are going very well out there and the most.
Brad Zelnick: Mentum is terrific.
Brad Zelnick: What's really happening and I can say this after 186 CEO meetings in the last six months.
Brent Thill: The Ceos are now getting very involved with.
Brent Thill: With the Gen AI Revolution, they realize there has to be architectural adjustments.
Brent Thill: To their environment and the manner in which they manage their data and the platforms, they're beholden to to actually take advantage of Jan AI and if you think about the half a century mess that exists out there with legacy systems in many cases multiples of the same system.
We have one unifying force in these conversations which is the now platform because we cooperate with the complexity this landscape.
Brent Thill: Without putting people in a position to rip and replace.
Brent Thill: Theyre looking for platforms that matter, where one of those and I think as Jim has said we are the intelligent platform for end to end digital transformation. When you have that sea level executive meeting they really get it now and with regard to Gen. AI. The momentum is outstanding as I said that SKU.
Jim Smith: As outsold any other new introduction, we've put into the marketplace. So there's a real appetite to invest and Gen. II and there is no price sensitivity around it because the business cases are so unbelievable I mean, if youre improving productivity, 40%, 50%. It just sells itself. So I think we are in.
C. J.: Really really good place the Gen AI investments are coming we're actually getting orders because we have great product. Thanks to C. J and it is unbelievable engineering team. So I would tell you at this time last year compared to this time. This year you should be more bullish now.
Brad Zelnick: It's great to see it reflected in the guidance. Thanks, so much for taking the question. Thank you Brad.
Brad Zelnick: Your next question comes from the line of Mark Murphy with J P. Morgan Mark the floor is yours.
Brad Zelnick: Thank you very much so bill I don't think I've heard.
Brad Zelnick: Any other software companies say that its gen AI products produced the strongest net new HCV of any product family.
Mark Murphy: We had a contact saying, it's really the only platform with where real life uses of AI right now.
Mark Murphy: I'm wondering if you think that is accurate and that's what's driving it or.
Mark Murphy: Should we related more to the work you've done getting ahead on pricing and packaging should we think back to the efforts of that element AI team.
Tim: Tim which is so fantastic or maybe maybe it's some other factor in your mind, that's really allowing you to see faster adoption of AI.
Tim: Yes.
Tim: I'll, obviously, let see Jay comment on this also but if you look at the visa strategic partnership using Gen. AI solution to manage end to end dispute resolutions with customers. I mean this is one of the great brands in the world one of the substantial companies and just think about the impact.
C. J.: <unk> has and radically simplifying their conversation with their customer and deflecting all the human capital. It takes to resolve these cases when technology can do it.
C. J.: If you look at E Y and the idea of instilling Gen AI governance on a single pane of glass to manage risk and compliance for some of the biggest corporations in the world.
Gary Yet: If you look at the opportunity every single industry has a great opportunity I was in Germany recently, and I was talking to a home appliance industry participant post COVID-19. They went from 25% online sales to much more.
C. J.: And then 50% and it's growing so when CJ and his team broad field service management with <unk> AI to the marketplace just think about <unk>.
C. J.: One call.
C. J.: The agent instead of the rep, instead of using a clipboard and a pencil he's got it on the mobile knows exactly what part to bring resolves the case on the spot that's one part of it but he is another part of it.
C. J.: The consumer will pay a lot more if they can get a same day repairs agreement along with the appliance and the margins on same day repair.
C. J.: Far greater than the box itself plus you create a nice annuity stream. So all we're talking about here is fundamentally rethinking the way business has transformed using our platform and Gen III and C. J I know and I do want to congratulate you and thank you for.
Mark Murphy: The <unk> job that you continue to do bringing this innovation to the marketplace. Please give us your thoughts. Thank you Bill and Mark here is how I would say some of the questions that you asked us absolutely spot on element AI team was absolutely a game changer from <unk> perspective.
Mark Murphy: And our investments in AI that you are very familiar with since 2017 continue but us not only on the speed of innovation, but what we learned from our customers. Let me give you a couple of quick insights we were the first ones one of the first ones to release the product.
Gena Smith: Use case specific generative AI starting in September so we definitely heard first rewards advantage from that perspective, however from a customer sentiment perspective, I will tell you there were two wall Street banks.
Mark Murphy: Selling me specifically that they wanted to be the first ones.
Mark Murphy: On the Street Wall Street in New York to go with our <unk> solution and one of them signed with US and you know you work for one but in the sense that this is highly regulated environment regulators want to know how AI is done and we were able to sign with the first Wall Street Bank in New York in Q4 in addition.
Gena Smith: We also signed with a large manufacturing company that wants to fundamentally transform their employee productivity and then we also signed with a very large restaurant food retailer, who wanted to transform employee experience and overall shared services productivity. So that their margins can go.
Gary Yet: <unk>. This is definitely a game changer, we are learning a lot from our customers. We are seeing very significant momentum and I was here. When we launched <unk> 2018 September PSM pro and as Bill and Gina shared that this has exceeded all of our expectations on how well we do.
Good.
C. J.: On the monetization of our pro plus Skus.
Mark Murphy: Thank you Mark.
Mark: Thank you congrats on being so far ahead.
Mark: Thanks, a lot mark.
Mark: Our next question comes from the line of Arjun Bhatia with William Blair. Your line is open.
Arjun Bhatia: Perfect. Thank you guys, so much and I'll add my congrats.
Arjun Bhatia: I wanted to maybe touch on the strength that you're seeing in customer and employee workflows, because if I look at the net new HCV that youre driving there the mixes relatively stronger than the night workflows. There this quarter or is that attributed to some of the AI adoption and plus SKU or are there other drivers there that youre seeing.
Drive that momentum.
Arjun Bhatia: And those solutions.
Thank you very much origin I really appreciate it just a couple of statistics on the customer workflows 18 of our top 20 deals. What we're seeing is there's a tremendous opportunity to really take service now and squarely place it.
Arjun Bhatia: On the customer relationship management category.
Fred Luddy: When you think about front mid and back office and the fact that we can align all three of those things and nobody has to lose for us to win we can fill in all the blanks for what the current participants don't do especially with their integration problems. It's just a fantastic opportunity.
Fred Luddy: For our customers and I think it's important to note when I gave the field service Management example are net new HCV and field service management, specifically was up over 50% year over year. So I think it's important to recognize that we have a whole.
Fred Luddy: List of new logos in this space and employee workflows.
Fred Luddy: One of our top 20 deals and what's kind of interesting every single CEO now.
Gary Yet: Is looking to make the people packed far more productive than it is and with natural language.
Gary Yet: To have your employees seek the data and the information they want and have it reported back to them in just a very nice paragraph of content and data. So they can do their jobs better is kind of like in the no brainer category and we have some really.
Gary Yet: Great logos that I'm sure.
Gary Yet: Jay I would like to share with you as well, but both of those areas are really good and incidentally.
Gary Yet: That employees spot that I mentioned was up 80% year over year.
Gary Yet: Thank you Bill and our June.
Gary Yet: Some of the questions that you asked you are spot on.
Bill: So AI and specifically pro plus SKU was a catalyst both for our employee and customer workflow. So that's number one number two within customer workflow, which had an amazing quarter and I'm. So proud of that team and service now to cross $1 billion of HCV.
Jim Smith: With just a few years ago was $10 million Thats, a multiple orders of magnitude growth on that difference we are making in customer service because we our service now and we know how to do customer service, So service and our growth was unbelievable from customer service.
C. J.: Customer workflow perspective, two sectors I'll call out besides <unk>.
Gena Smith: <unk> point on field service management number one.
Gena Smith: Our telco products.
Gena Smith: Specifically designed for telco industry.
C. J.: Triple digit growth with some of the largest telcos in the world.
C. J.: Related to customer service.
C. J.: And also we saw in public sector from a direct to citizen perspective customer service management did really well in Q4 and an employee workflow as gene outlined we had many million dollar deals across the industries, including public sector and that business. In addition to.
C. J.: To HR service delivery with workplace service delivery and legal service delivery continues to do very well growing very strongly.
C. J.: Great to hear thank you Sanjay. Thank you Bill Congrats again, thank you so much thank you.
C. J.: Your next question comes from the line of cash went on.
C. J.: With Goldman.
C. J.: Your line is open.
Gena Smith: Congratulations Bill Gina CJ, great to hear that you are among the first.
C. J.: Set of software companies to give us splendid results and.
C. J.: I feel better about 2024 already just based on your numbers.
Bill: Bill question for you.
Bill: It looks like generative AI is making sales cycles easier if I, if I could say that and <unk>.
<unk> has the potential to bring in repeat business with existing customers at a faster pace and magnitude can you talk a little bit about how much easier. It has gotten despite the environment staying tough, but regenerative. They are how much easier has gotten for the company to generate that initial lead and close that deal.
Bill: And do more repeat business.
Bill: Okay. Thank you.
Gary Yet: Hey, guys. So.
Gina Mastantuono: I will touch on this from a couple of things demand environment as Gino has outlined it continues to be still tough right. We are not ready to say that things have improved significantly. It is our platform strategic relevance as Gino called out is very high which has allowed us to what you saw.
<unk> million dollars deals and large deals that happened in our Q4 across the globe across the industries. The performance was very strong. So let me just touch on that on generative AI.
Gina Mastantuono: The demand for agenda.
AI varies by industry, but we are I'll give you. An example of a large manufacturing company.
Gina Mastantuono: <unk> reached out to me in October wanted to do a four weeks.
Gina Mastantuono: And.
Gina Mastantuono: And purchased it in December so from a sales cycle perspective that was a top down decision moving very very fast a largest retailers is currently also doing a proof of concept with service now proved plus SKU because it is a CEO initiative that bill talked about so from a demand on <unk>.
Gina Mastantuono: Specifically it is very very clear that customers are pulling us in that direction in certain industries and for those sales cycles. Yes, we're very fast they want to see a large manufacturing company CEO of that bill met in Germany.
C. J.: I had a follow up call in December and he said C. J I'm going to kick off on Proclus SKU for this specific use cases on <unk> and you and I should review the results end of February this is faster than DSM Pearl sales cycle, and so I would say overall environment.
Gena Smith: Still similar from what we saw in Q3 to Q4, and Gena I will touch on it but Jen AI.
C. J.: And a faster cycle.
C. J.: May I also just add one thing cash.
C. J.: If you think about every single industry. They all have their own personalities. So for example, I had the opportunity to meet.
Gena Smith: Pharma company and as you know the.
C. J.: The average life cycle for example for clinical trials is over six and a half years.
C. J.: And this is an industry that dropped $200 billion a year on this clinical trial process and 90% of them fail. So if you just think about that for a minute you say well what can generative AI due to automate document generation for example that would be in line with regulatory.
Gina Mastantuono: Protocols and you come up with a site.
Gina Mastantuono: <unk> contracting agreements for example that also include the patient because the patient has to be engaged in the process otherwise they won't stay in the trial and every time a patient opts out they lose money 20000 per patient so generative AI on the service now platform obviously.
C. J.: <unk> can go in there and radically cut down the cycle time of these clinical trials. So Ceos right out of the gates are ready to go.
Our team my team, let's figure this out so there is a real appetite and I think why I'm. So bullish as we have a platform that already has it.
C. J.: Amazing Thank you so much.
Kash: Thank you Kash.
Your next question comes from the line of Keith Weiss with Morgan Stanley Keith the floor is yours.
Kash: Excellent. Thank you guys and again congratulations on a really strong end to 2023.
Wanted to talk a little bit on the expense side of the equation you guys really outperformed nicely on the operating margin side of the equation. This quarter looking for further expansion next year.
Kash: At sort of where you guys are hiring I was a little bit surprised to see.
More strength on the R&D side of the equation that sales marketing sales and marketing head count is only up 6% can you talk to us about sort of that.
C. J.: That relationship changing a little bit.
Gina Mastantuono: R&D head count is almost matching sales and marketing head count right now if we went back five years ago. It sales and marketing was 50% and head of R&D. So how are the investment priorities changing now, especially as you go into 2024, and how are you guys feeling about sales capacity and sort of the necessity to expand sales capacity heading into 2024.
Gina Mastantuono: Hi, Keith its Gina thanks, so much by the question. So yes, we're really proud of the beat on the topline as well as the bottom line in Q4, and obviously continuing to expand those margins in 2224, specifically when you think about investments in R&D head count is all around continued innovation.
Gina Mastantuono: And our investments in Gen, AI and AI and so not not surprising given the commentary that you've already heard we're continuing to double down in investments on fingers on keyboards.
Gina Mastantuono: And engineers really driving the Gen. AI Revolution. So youll continue to see more of that on the sales side, it's really about scale and leverage right and so sales and marketing head count there is a lot in there it's not just quota bearing feet on the street sales right. So you've got marketing you've got marketing operations you have sales operations.
Gina Mastantuono: And that if you actually were able to break it down to feed on the street corner Bank sales you would see that growth rate much higher and in fact as I think about sales capacity going into 2024, we have a larger increase in ramped reps going into 'twenty four that we've had in years sell from a capacity.
Gina Mastantuono: Perspective, we feel great about how we're entering 2024.
Gina Mastantuono: Excellent.
Gina Mastantuono: Awesome. Thank you and it seems like it seems like it really speaks to an increasing cell efficiency. Then you just need less people to support any given quota carrying sales reps.
Gina Mastantuono: Absolutely productivity and efficiency is going up as well as the fact that from a scale perspective in outgrowing some set some of the operational hedge as much.
Got it Super helpful. Thank you guys and will and we will be definitely increasing hiring as we go into 'twenty four as you would expect.
Gina Mastantuono: In case, you know Gee.
Gina Mastantuono: <unk> doesn't brag about this needed those Russ Elmer who's our.
Office of General Counsel lead.
We're using the now platform, so and all the back office functions of the company, where so automated so productive and theyre getting things done on the now platform that it would take other companies five and six times the head count to do the same job.
Gina Mastantuono: And that is really something we actually even had with legal service delivery AI tell us that we're spending too much time on contracts less than 250 K are all for the General Counsel Ross made the decision based on AI that we can fundamentally change that and reorient the workflow around those.
Gina Mastantuono: Signs of agreements, which gave us a huge rush and he didn't have to hire anybody and then he actually took that product and our great engineering team built it we call. It LSD legal service delivery and now lawyers all over the world They want to jump on so everything we do internally with now on now has an external marketing for us.
Gina Mastantuono: Associated with it and Keith.
Gina Mastantuono: Gina handle this really well in terms of sales efficiency, but one of the things that Bill mentioned that I just wanted to call out that we are really proud of our sales teams. Besides unit expansion of our platform and different buying centers, but also the new logo growth the new logo growth for 2023.
Was way ahead of what our expectations were specifically in Americas, and Europe compared to 2022, including the large transaction that build reference, but many of our sales capacity and sales efficiencies specifically is improving while you are also gaining new.
Gina Mastantuono: Logos.
Gina Mastantuono: It's just very super proud moment for us in 2023.
Gina Mastantuono: Okay.
Gina Mastantuono: Your next question comes from the line of semis Samana with Jefferies. Your.
Gina Mastantuono: Your line is open.
Gina Mastantuono: Hi, Thanks Congrats.
Congrats on a great close to 2023, Gina I was wondering if maybe you could help us understand that on the CRP upside if you think about the 200 basis points.
Gina Mastantuono: Could you kind of breakdown for us how much of it was.
Gina Mastantuono: Adoption of Gen AI in the net new ATB that that drove exceeding expectations versus just kind of more strength than expected.
Gina Mastantuono: The renewal.
Gina Mastantuono: Yes.
Gina Mastantuono: What the mechanics of the outside worse.
Gina Mastantuono: Yes sure.
Gina Mastantuono: We beat our Q4 see RPM growth guidance by 200 basis points at you know as you know and I would say, it's driven probably half and half by net new HCV outperformance and certainly Gen AI isn't there, but it's not all Jenna.
Gina Mastantuono: Jenny I assume are our core business is also doing well and then we also did see higher early renewals than we had assumed in our guidance and I would say, it's about half and half.
Gina Mastantuono: The total <unk>.
Great and then maybe for you or for Steve J, but as you think about the product portfolio and some of the newer products you've talked about over the last year or so beyond gen as well.
Whether it's the durability or ERP workflows, where are you seeing the most demand or interest outside of journey II and what are you most optimistic about in 2024.
Steve J: So you can add.
Steve J: Absolutely so somewhat hit is what I would say in general.
Gina Mastantuono: Brief single workflow grew for us on network television, which is always a great thing that say a balanced performance across every single workflow and so really proud of the team both our go to market and engineering teams that we continue to deliver innovations in our go to market teams. They know how to sell that innovation.
Gina Mastantuono: Across our product lines. So that's number one number two.
Speaker Change: When I look at some of our industry products that I called out specifically for TMT as in telco media and tech. They are seeing very nice traction. We also released in our technology workflow under the leadership of Pablo Stern operational technology product that also grew very nicely bill called out full service managed.
Speaker Change: Ren.
Speaker Change: Customer service management had an amazing not only Q4, but 2023 and then employee workflow also grew so.
Bill: Walking through this list besides Jan AI, and then I can tell you the same to grow our security risk and so asset management had a phenomenal 2023. So I expect all of these product lines to continue to have momentum besides agenda to AI.
Bill: Great. Thank you so much.
Yes.
Bill: Yeah.
Bill: Your next question comes from the line of Alex with Wolfe Research, Alex the floor is yours.
Bill: Thanks.
Bill: Thanks, guys.
Alex Wolfe: So first of all congratulations on a fantastic quarter and I think the amount of.
Alex Wolfe: Conversation about Gen AI and the tangible impacts a bit on the model in the quarter.
Alex Wolfe: Really great to hear about and see.
Alex Wolfe: I just wanted to dig in a little bit to see if you could dimensionalize further either from a revenue contribution.
Alex Wolfe: <unk> bookings contribution in the quarter or attach rate that youre seeing with pro plus.
Alex Wolfe: As you go to market and how should we think about that for fiscal 'twenty four what's the aspiration here for Q1, just give us a better.
Alex Wolfe: I would say a better indicator or something that we can kind of monitor and track.
Alex Wolfe: Where we can.
Alex Wolfe: Let's see.
Alex Wolfe: <unk> penetration.
Alex J. Zukin: Going forward and I have a quick follow up sure Alex It's gene.
Alex J. Zukin: What I'd say is and we called this out in my script right at the end of the day.
Alex J. Zukin: Jen AI products drove the largest net new ACD contribution in the first full quarter of any of our new product family releases ever including original pro SKU. So I get the question often do we expect the adoption curve to be steeper for our pro <unk> or pro certainly in the first full quarter.
Alex J. Zukin: <unk> launch it absolutely has shown that that being said, it's very early days and so from a revenue contribution perspective, it's not going to be huge but it certainly helped when I thought about my guide for 'twenty, four and that increase of $165 million at the midpoint right. So Jenny.
Alex J. Zukin: AI.
C. J.: Early days, but.
Gina Mastantuono: The adoption curve, so far is steeper than the original pro.
Gina Mastantuono: We will keep an eye on it and as the numbers get larger we will continue to update you and everyone else as to the penetration, but right now excitement and interest from our customer base is much stronger than we ever saw in the first and early days of our pro SKU and we're excited by them that momentum at the <unk>.
Gina Mastantuono: Same time being conservative as I think about the guide for 'twenty four because it's still so early.
Gina Mastantuono: Yes.
Gina Mastantuono: Super Helpful. And then I guess, if I think about.
Gina Mastantuono: Just the opportunity around.
We're actually just the CRP.
Gina Mastantuono: Linearity throughout the year, you talked about the headwinds in the first half how does that trend through the second half of the year.
And what other things should we be paying attention to there.
Gina Mastantuono: So we called out the 150 basis points.
Gina Mastantuono: Impact in Q1 that increases to about 200 basis points in Q2, So we expect similar levels from <unk>.
Gina Mastantuono: Q1 to Q2, I'm not going to guide out any further than that at this point, but what I will tell you is that increased the full year 2024 die by $165 million, we remain as confident as ever in our guide of $15 billion, plus in 2006, and Jen AI and the innovation in our.
Gina Mastantuono: All of our product portfolio is going to help drive that growth.
C. J.: Perfect. Thank you guys congrats again.
Alex J. Zukin: Thanks, Alex.
Your next question comes from the line of Mike cycles, when Needham <unk> Co. Your line is open mic.
Alex J. Zukin: Hey, guys. Thanks for taking the question here and I'll, let go my sentiment as well along with my peers I just wanted to come back I think earlier during the Q&A see jade kind of teased.
Alex J. Zukin: And maybe the monetization for the close to us relative to the pro Skus exceeding your expectations and just wanted to make sure I was interpreting that properly can you give us any indication for what that <unk>.
Mike cycles: Price capture is like relative the.
Mike cycles: Pro Skus, which we've had out of the market now for a couple of years.
Gina Mastantuono: Yes so.
Gina Mastantuono: Mike first of all the pro Skus as you know that we launched it in 2018 Q3. So we have five years of consistent trajectory.
Gina Mastantuono: Measures on how we did on pro across idea some CSM and so on.
Gina Mastantuono: And that we shared at financial Analyst day in May and June I shared that number that we got 25% uplift when I look at <unk>, plus <unk> and just to underscore what Gina said that.
Gina Mastantuono: It definitely exceeded our expectation did really really well and the fastest growth we've launched so many products or so many years. This definitely exceeded our expectations. So that's number one number two just simple thing.
Gina Mastantuono: I am looking at award based on the volume discounts.
Gina Mastantuono: Tumors leaning in asking us to try out from POC Pov perspective.
Gina Mastantuono: It is in line with what my expectations were on how we would get the price uplift so right Nova as Bill said I.
Gina Mastantuono: Did not get any Oh, my God C. J. This is not going to work for us, but it's the value we have to always Arnaud alright, and deliver the value for our customers, but right now it is in line with my expectations.
Gina Mastantuono: Terrific. Thank you very much guys. Thank.
Gina Mastantuono: Thank you Mike.
Your next question comes from the line of Carl Lee UBS, Carl the floor is yours.
C. J.: Great maybe I'll direct this to bill and C. J you both mentioned.
Speaker Change: Service now its largest ever new customer win with a bank I guess I'm surprised that there was a big bank out there that's not already on service now, but I'd love to hear a little bit more about that and I'm not even sure how big a deal would have to be to be our largest new wins, so any any size and color would be fabulous. Thank you.
Yes, I think we were I think Mike you called it I think we were at 23 out of 24 of the world's largest and most significant ones and now we're at 24 out of 24, and just seriously want to credit.
C. J.: The amazing platform of service now the MRA process and integrated risk management and the complexity of going into an environment like that is pretty serious stuff.
C. J.: And to have a marquee brand trust us and believe in us and believing in service now the way. They did is really inspiring and I really have to turn it over to C J and give them so much credit.
C J: For the hard work that he put into it and I know firsthand because I had the the.
C J: The front row seat to watching it and in how we spend time with this wonderful customer on C. J I'm sure you got some call that you might want to put on that.
C J: Great to hear from you.
I would say fundamentally when I look at that particular financial services institution 100 percentage.
C J: So true that it is on our core of the core so from a service management perspective. It operations management perspective. This is not generative AI specific deal, but it was very much a very strategic transaction on the foundational platform for automation and digital.
C J: Services at this large financial services institution.
It is.
C J: The largest new logo win that we had there and it is in eight figures of net new HCV. So that is material.
C J: Okay. Congrats.
Congrats: Congrats on that.
Congrats: Thank you very much Carl Thanks, Scott appreciate it.
Speaker Change: Your next question comes from the line of Joel Fishbein with trees Securities Joe the floor is yours.
Speaker Change: Thank you for taking the question and then I'll also echo the outstanding execution guys have done well I guess this is for you just around the public sector vertical has been very strong for you.
Speaker Change: For several quarters I guess two things number one is.
Speaker Change: How is the spending.
Joel P. Fishbein: It remains such as it used to be very cyclical there in the second.
Joel P. Fishbein: And around public sector is what do you think there.
Joel P. Fishbein: Adoption cadence is going to look like from your perspective.
Yes.
Very much for the question I really appreciate it.
Joel P. Fishbein: Our federal business is really outstanding and for the benefit of our shareholders. I think that there is a tremendous opportunity to replicate what we're doing in the United States Federal and many other governments around the world that is clearly an ambition that we have and we have many.
Joel P. Fishbein: Use cases, and many references to back that up so.
So C. J I think you spent a lot of time with our team.
C J: And I know that I mentioned some of the names like the United States Army United States Postal service as an example.
C J: Really marquee wins really really important stuff why.
Why don't you build on that yeah. So Joe.
C. J.: Everything that we have seen as you saw in 2023.
C. J.: Consistent performance in our what we call global public sector. So let me start that U S. Federal we highlighted the strength in Q3, followed by some of the logos that Bill discussed however, I do want to state that we are also doing really well our platform is poor state.
C. J.: And local governments in the United States and that growth was also very inspiring and 2023, so not only U S. Federal but also U S state and local now let me take an example for Q4 besides the United States. We also did really well in public sector in the United Kingdom.
C. J.: On Bill's asking our customers ask I spent some time in London with our public sector customers and they continue to also leverage service now for similar use cases that we have seen in the U S. Federal and then in Q4, our Australia public sector team also did really well.
And we had significant platform expansion with some of the large central governments, there agencies, including generative AI. So.
Gina Mastantuono: It is a pretty good picture and we see in 2024. Besides these.
Gina Mastantuono: Nations when I look at Canada, when I look at Germany, and many others the opportunity remains largest bill called it out.
Gina Mastantuono: Okay.
Gina Mastantuono: Great and just just as the follow up on the public and the public sector adopting AI can you just give us a little color on what you think the trajectory is there.
Gina Mastantuono: The trajectory so I just want to make.
Make sure that you understand first is that our.
Gina Mastantuono: Jen AI conversations have started with the government of one of our first logos in Q3 was with a large public sector agency as I call. It. We also had a few wins in Q4 in public sector.
Gina Mastantuono: And as we go into 2024 across state local and federal across countries. We will continue to see the demand. It's early days I would say compared to like a financial services or manufacturing and others, but given our position of our platform and the strength we have with AI we are definite.
Gina Mastantuono: You're going to see in the second half.
Alex J. Zukin: Option of generative AI.
Great. Thank you so much thank you.
Alex J. Zukin: <unk>.
Your next question comes from the line of Peter Lee.
Thanks.
Peter Lee: <unk> the floor is yours.
Peter Lee: Thank you.
Congratulations on the laser.
Asia continued momentum.
Peter Lee: Wins that you are seeing with the latest releases.
Peter Lee: And I guess building on that.
Peter Lee: I would say prior to this year for several years.
It's really nice stability and kind of expansion in <unk>.
Peter Lee: Customers like the Qunar hedges.
Peter Lee: And really confident but I think this year there has been some deceleration than that driven by macro as.
Peter Lee: As you look out to 2024 do you see signals that we may be able to see some acceleration were <unk> in 2004.
Christopher Merwin: Exceed what the kind of dipped to this year.
Christopher Merwin: Or.
Christopher Merwin:
Christopher Merwin: Is this kind of like the new normal and kind of from here.
Christopher Merwin: They continue to trend down.
Christopher Merwin: You very much.
Christopher Merwin: Thanks, Peter for the question, what I'd say is that where we are we feel great about our expansion rates at the scale that we're at as well as our new logo growth. So CJ mentioned earlier, our new logo growth, especially in our larger.
Christopher Merwin: <unk> has been in <unk>.
Christopher Merwin: Accelerating each and every year.
Christopher Merwin: And each and every quarter over the last.
Christopher Merwin: Yes, and so at our scale our expansion rates remain extremely strong and as does our net new logo growth and so you will continue to see a nice mix of existing customers upselling with us as well as new logos.
Christopher Merwin: Joining us in cell.
Christopher Merwin: <unk> eight 7 billion in revenue going to 10 575 next year at our scale. These expansion rates are best in class and we remain extremely proud of them.
Christopher Merwin: We have time for one more question and that question will come from the line of Brad Sills with Bank of America branch floor is yours.
Christopher Merwin: Oh, great. Thank you so much I wanted to ask about the <unk>.
Bradley Sills: A large new logo strength, we just haven't heard from a lot of enterprise applications companies on that this year. It seems like a tough environment to close big transformational new application deals. So I wanted to ask why now.
Bradley Sills: I know this has been a focus but any color on.
Bradley Sills: Where you're at in kind of closing that gap on some of these large global organizations and then also what does that mean for your expansion opportunity does this give you more line of sight to that given that these are large organizations with big wallets, just getting started with service now. Thank you, yes, so Brad I will touch on it.
Bradley Sills: So financial services institution, we also saw.
Many large.
Bradley Sills: New customer wins in manufacturing specifically automotive we also saw in public sector, we got new logos with new agencies and commercial business.
Bradley Sills: Is a massive strength for service now continued to outperform large new logos and in my initial commentary I stated that Americas and Europe.
Bradley Sills: Also had.
Bradley Sills: Large logo new growth. So this is something that Paul Smith and the team focused on starting with the first quarter and continued to build throughout the year and as I told Keith Wise. This is something we're really really proud of in terms of just our ability to focus on.
Paul Smith: On high quality logos that matter and even these logos, whether it's in public sector manufacturing financial services or our commercial segment is not that we have maxed out even this large financial services. They just bought idea similar item and when I look at a large automotive it was just <unk>.
Paul Smith: So yes, we are starting at a bigger scale, but this specific.
Paul Smith: Accounts will continue to expand for us and one last thing I'll touch on that some of the big ones.
Paul Smith: Who became our customer for the first time.
Gina Mastantuono: Our teams did a beautiful job working with our customer that he wants to implement Ci TSM in next six to nine months than they have.
Gina Mastantuono: Set aside budget for IP asset management for security at risk. So that has been also built in as we go into 2024.
Gina Mastantuono: Thank you C J great to hear.
C J: Thank you Brett Thanks, Pat.
C J: Ladies and gentlemen that concludes today's call. Thank you all for joining you may now disconnect.
C J: Please wait the conference will begin shortly.
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