Q1 2024 ServiceNow Inc Earnings Call

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Good day, everyone and welcome to the first quarter of 2024 service now earnings Conference call. Today's call is being recorded I would now like to turn the call over to Darren yet the group Vice President of Investor Relations. Please go ahead.

Darren: Good afternoon, and thank you for joining service now it's first quarter of 2024 earnings Conference call. Joining me are Bill Mcdermott, our chairman and Chief Executive Officer, Jean I'm, asking to now our Chief Financial Officer, and CJ Desai, our president and Chief operating Officer.

Darren: During today's call. We will review, our first quarter 2024 results and discuss our guidance for the second quarter and full year 2024.

Darren: 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.

Darren: We undertake no duty or obligation to update such statements as a result of new information or future events.

Darren: Please refer to today's earnings press release, and our SEC filings, including our most recent 10-Q and 2023 10-K for factors that may cause actual results to differ materially from our forward looking statements.

Darren: 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.

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

Current RP O and cash and investments.

Darren: 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.

Darren: A replay of today's call will also be posted on our website.

Darren: With that I'll turn the call over to Bill.

William R. McDermott: Thank you very much Dan and thank you everyone for joining today's call service now as first quarter results were outstanding we once again outperformed our guidance across all topline and profitability metrics subscription revenue grew by 24, 5% year over year in constant currency that's approximately.

William R. McDermott: 50 basis points above the high end of our guidance.

William R. McDermott: <unk> grew 21% year over year in constant currency 100 basis points above our guidance.

William R. McDermott: Operating margin was over 30%.

William R. McDermott: 150 basis points above our guidance.

Even if Q1 is not traditionally a large quarter, we had eight deals over $5 million and net new HCV are 100% increase year over year forward deals that were over $10 million, which is a 300% increase year over year.

William R. McDermott: Service now is strengthening its position as the AI platform for business transformation.

William R. McDermott: This is fueling strong performances for each of our key businesses.

William R. McDermott: Tim and Tom or <unk>, and 16 of the top 20 deals security and risk.

William R. McDermott: Bind warrant 11 of the top 20 customer.

William R. McDermott: Customer creator and employee workflows, we're in 10 of the top 20 deals Jenny.

William R. McDermott: Zen AI adoption remained on a tear in Q1 companies are leaning into Gen. AI as a powerful deflationary force to drive productivity, that's Y N N HCV for pro plus its record breaking in fact, it's the fastest selling offering in the company's history.

William R. McDermott: Iconic brands are adopting service now's now assist AI as the standard for their Gen. AI Roadmaps. This quarter, we expanded our long standing partnership with Microsoft to include New generative AI capabilities, while also integrating <unk>.

Now assist AI and co pilot into employee experiences really exciting.

William R. McDermott: Hitachi energy is used in case summarization with now assist for GSM to resolve cases faster saving millions equinix is deploying now assist AI for HR workflows aiming to increase agent productivity by 30%.

William R. McDermott: Service now and IBM are combining the power of the now platform with Watson X to increase productivity for Ibm's employees customers and partners.

William R. McDermott: <unk> Mellon and service now are exploring the utilization of AI and other leading technologies in it service management, helping to unlock additional value for the bank and its clients. We look forward to further demonstrating the exceptional gen AI customer successes.

William R. McDermott: Detailed roadmap at our financial Analyst day on May six in Las Vegas.

William R. McDermott: From an industry perspective public sector continues to excel globally major.

William R. McDermott: The major transactions in Q1 included government of Australia, as Health Department, and the government of Italy Division, So Jack <unk>.

William R. McDermott: The government of Sao Paolo Motor vehicle Department created an App on service now to give customers.

William R. McDermott: In that case citizens, a fast transparent digital experience that handles request 10 minutes.

William R. McDermott: Our global footprint is booming, we're seeing expansion in our most important geographies this quarter, our Japan team signed the largest and an HCV deal in its history Novartis in Switzerland is implementing service now Gen AI technology to transform the business.

William R. McDermott: It's one of the most innovative companies in therapeutic medicine neon.

William R. McDermott: Alright. Thank service now single data model, along with other partners to scale its services across the middle East region, while seeking to create the first cognitive city, we're data driven intelligence meets urban everyday needs.

William R. McDermott: <unk> Tokyo gas.

William R. McDermott: <unk> systems are all top deals signed in Q1.

William R. McDermott: And this is just scratching the surface of what we achieved this quarter. There's a lot of guesswork out there right now about the geopolitics and economic policies. Among other things service now as philosophy is simple we focus on the things we can control building great products delivering great service for our customers and.

William R. McDermott: Forging a winning culture, where people can do the best work of their careers and that's why we performed well when some others don't.

William R. McDermott: Also why our guidance as Youll hear from Gena remains strong.

William R. McDermott: Let's talk about the demand environment for enterprise software AI is not simply a fast maturing technology.

William R. McDermott: It's a catalyst for business transformation, when I speak to Ceos, all over the world. They recognize this is a change moment.

William R. McDermott: Over the past 15 years enterprise has experienced a massive decentralisation of technology governance as every department became an it buyer. The result was too many systems too many apps data quality and high vulnerability to cyber security risk.

William R. McDermott: And here's the case those decisions have been made so even as Ceos want to consolidate onto strategic platforms for the long term.

William R. McDermott: They also don't want to delay the potential of net new innovation in the short term they want to de risk the past, while getting immediate business value from AI.

William R. McDermott: Process optimization is the number one Jan AI use case in the global economy. Today. This is why service now strategic relevance as the AI platform for business transformation has never been higher.

William R. McDermott: Every business workflow in every enterprise will be engineered with Gen AI at its core.

We are the single pane of glass that enables end to end digital transformation at service now we pride ourselves on being the living embodiment of an AI run company through our now on now strategy every.

Every week that passes the impact of our own now on now AI deployments continues to grow Gen. AI deflection rates have doubled for both our employees and customers and they are improving each and every month software engineers are accepting 48%.

William R. McDermott: <unk> of text to co generation visa.

William R. McDermott: These are meaningful productivity improvements and it's only the beginning that's why IDC estimates and 11 trillion dollar impact from AI in the next three years. It's also why businesses will spend more than a half a trillion dollars on gen. AI in 2027, according to IDC.

William R. McDermott: So contrary to some opinions out there we are witnessing the biggest enterprise software market opportunity in a generation.

William R. McDermott: Business leaders are waking up to the fact that they have a fresh choice now they can radically simplify the tech stack.

William R. McDermott: We are entering a new frontier.

William R. McDermott: We are in a race to put AI to work for people and that is the right service now intends to win for our customers. There is a lot happening at service now that only heightens, our optimism for the remainder of this year and beyond our recent Washington DC platform release included very.

William R. McDermott: Exciting new features for our customers now assist AI for Tom AI Ops Supercharging service now has market leading solution applying generative AI to speed up issue resolution.

William R. McDermott: Sales and order management unites the sales order life cycles across the front middle and back office teams on the service now platform.

William R. McDermott: Service now is also staying at the forefront of building innovative enterprise Gen. AI applications. As one example, now assist AI for Telecommunications service management, what we call TSM.

William R. McDermott: Which also uses Nvidia AI will boost agent productivity and build on our great partnership. It is also worth noting the service now research team is stacked with world renowned AI experts, helping our customers stay on the cutting edge we're expanding.

William R. McDermott: Our ecosystem capacity to meet growing customer demand. One example is our investment in platform <unk>.

William R. McDermott: A global consultancy and leading service now implementation partner to enhance expertise and generative AI enabled technology and.

William R. McDermott: And anyone who would like to get the full story I warmly invite you to join US for knowledge 2024 in Las Vegas on May seven.

In closing I'll end, how I began the company is in a market leading position we have the product recognition from the industry analysts all of them were showing up on all of the most admired company lifts and we're moving up the ranks every year, though.

William R. McDermott: Things are always encouraging and we're proud of it all.

William R. McDermott: But the biggest indication I can give you as qualitative.

How our team feels about what we're doing together. This culture is different it's rooted in service now as earliest days as a customer obsessed company where ever Hungary ever humble. So when I am told that over a million people applaud applied to join us last year.

Speaker Change: Not surprised.

Speaker Change: When you have a galvanizing ambition to become the defining enterprise software company of the 21st century people want to be a part of that.

Speaker Change: They recognize this is about more than technology. This is about helping people to know more care more and do more we will continue on this mission in Q2.

To thank all of you for the trust that you've invested in service now we're going to keep working hard for you and we're going to keep striving to honor our brand promise the world works with service now I'll now hand things over to our outstanding CFO Xena Mattson tuna gena over to you. Thank you.

Xena Mattson: Vale Q1 set a strong precedent for the year ahead building on the momentum from Q4, our team delivered another exceptional outperformance, we surpassed all of our topline and profitability guidance metrics for the quarter with Gen. AI conversation, serving as a digital transformation catalysts, we see.

Xena Mattson: That momentum carrying into Q2.

Xena Mattson: Turning to our results in Q1 subscription revenues of $2 $5 3 billion growing 24, 5% year over year in constant currency exceeding the high end of our guidance range by approximately 50 basis points.

R. P. O ended the quarter at approximately $17 7 billion, representing 27% year over year constant currency growth.

Xena Mattson: We continue to see average contract terms increase year over year as the strategic importance of the now platform has driven longer duration deals kind of IPO was 845 billion, representing 21% year over year constant currency growth of 100 basis points beat versus our guidance.

Xena Mattson: From an industry perspective technology media and telecom was extremely robust growing net new HCV over 100% year over year.

Xena Mattson: Education had a fantastic quarter growing nearly 50% year over year transportation and logistics business and consumer services and retail and hospitality also saw strength.

Xena Mattson: Our renewal rate was the best in class, 98% as the now platform remains a strategic imperative for our customers' operations.

Xena Mattson: We closed 59 deals greater than $1 million and net new ACD in the quarter with four deals greater than $10 million, representing 300% year over year growth our focus on selling a comprehensive platform continued to drive more multi product deals as 15 of our top 20 deals included seven or more products.

Xena Mattson: We now have 1933 customers paying us over $1 million in HCV. In addition, the number of customers paying us $20 million or more grew over 50% year over year.

Xena Mattson: In Q1, our Gen AI products continued to see very healthy adoption as Bill mentioned, our pro plus net new HCV to date continued to trend ahead of any new product family launched for the comparable period.

Xena Mattson: Jen AI products with seven of our top 10 deals and we closed seven deals over $1 million in HCV in the quarter, we had wins at a second Wall Street Bank, a leading cyber security firm and many more including a significant win for <unk> Pro plus which just launched in March.

Xena Mattson: Turning to profitability non-GAAP operating margin was over 30% approximately 150 basis points above our guidance driven by the timing of marketing spend opex efficiencies and our top line outperformance.

Xena Mattson: Our free cash flow margin was 47% up 12 points year over year.

Xena Mattson: We ended the quarter with a robust balance sheet, including $8 $8 billion in cash and investments in.

In Q1, we bought back 225000 shares as part of our share repurchase program with a primary objective of managing the impact of dilution.

Xena Mattson: As of the end of the quarter, we have approximately $787 million remaining of the original $1 $5 billion authorization.

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

Xena Mattson: Moving to our guidance.

Xena Mattson: In Q1, we initiated a program to hedge a portion of our foreign currency denominated revenues. The initiative is expected to lessen the impact of recent movements in the euro and pound, but the incrementals strengthening of the U S. Dollar has still resulted in FX headwinds compared to our previous guidance.

Xena Mattson: Given our Q1 outperformance, we are raising our 2020 for topline outlook to more than offset those moves.

Xena Mattson: For 2024, we are raising our subscription revenues by $20 million at the midpoint of the range to more than offset an incremental $17 million headwind from FX. This raises.

Xena Mattson: Increase of $3 million on a narrowed range of 10 561 billion to $10 $5 75 billion, representing 21, 5% to 22% year over year growth or 21, 5% on a constant currency basis. We continue to expect subscription gross margin of 84, 5% operating margin.

Xena Mattson: 9% and free cash flow margin of 31%.

Xena Mattson: Finally, we expect GAAP diluted weighted average outstanding shares of $208 million.

Xena Mattson: For Q2, we expect subscription revenues between 252, 5 billion and $2 five $300 billion, representing 21, 5% to 22% year over year growth or 22% on a constant currency basis, we expect CRP yogurt of 25% both on a reported and constant currency basis, we expect.

Unknown Executive: and bye. Good day, everyone, and welcome to the first quarter of 2024 ServiceNow Earnings Conference Call. Today's call is being recorded. I would now like to turn the call over to Darren Yip, Group Vice President of Investor Relations. Please go ahead.

Xena Mattson: And operating margin of 25%.

Xena Mattson: Finally, we expect $208 million GAAP diluted weighted average outstanding shares for the quarter.

Darren Yip: Good afternoon, and thank you for joining ServiceNow's first quarter 2024 earnings conference call. Joining me are Bill McDermott, our Chairman and Chief Executive Officer, Gina Mastantuono, our Chief Financial Officer, and CJ Desai, our President and Chief Operating Officer. During today's call, we will review our first quarter 2024 results and discuss our guidance for the second quarter and full year 2024. 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. We undertake no duty or obligation to update such statements as a result of new information or future events.

Xena Mattson: In summary, Q1 was a great start to what we expect to be another tremendous year.

Xena Mattson: Organizations are under more pressure than ever to maximize the benefits of the technology investments in this environment service now has traction as the intelligent platform for end to end digital transformation continues to intensify.

Xena Mattson: Jan AI is only as powerful as a platform. It's built on the now platform gives us deep insights with a remarkable ability to tailor AI outputs to the specific needs of our customers business users need AI to power actions across the enterprise. Our workflows are designed to do just that deliver a complete solution.

Darren Yip: Please refer to today's earnings press release and our SEC filings, including our most recent 10-Q and 2023-10-K, for factors that may cause actual results to differ materially from our forward-looking statement. We'd also like to point out that we present non-GAAP measures in addition to, and not as a substitute for, financial measures calculated in accordance with GAAP. Unless otherwise noted, all financial measures and related growth rates we discussed today are non-GAAP except for revenues, remaining performance obligations, or RPO.

Darren Yip: Current RPO, and Cash & Invest. 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.servicenow.com. A replay of today's call will also be posted on our website.

Xena Mattson: To supercharge experiences, creating extraordinary value.

You'll hear more about these experiences our strategy and long term opportunities at our upcoming Investor day on May six which will be webcast on our investor Relations website.

Xena Mattson: Finally, before moving on to Q&A I want to thank all of our employees worldwide for helping make service now one of the Fortune 100, Best places to work yet again in 2024.

Xena Mattson: Service now is greatest asset is its people and you all continue to make US service now strong bill and I couldn't be prouder of this incredible team with that I will open it up for Q&A.

Speaker Change: Thank you. Thank you I would like to ask a question on the phone lines. Today. Please press star one on your telephone keypad. If you find you would like to remove yourself from the queue that is star one again I would like to remind everyone to please limit yourself to one question. We will now take our first question from Kash Rangan with Goldman Sachs.

William R. McDermott: With that, I'll turn the call over to Bill. Thank you very much, Darren, and thank you, everyone, for joining today's call. ServiceNow's first quarter results were outstanding. We once again outperformed our guidance across all top line and profitability metrics. Subscription revenue grew by 24.5% year-over-year in constant currency, which is approximately 50 basis points above the high end of our guidance. CRPO grew 21% year-over-year in constant currency, 100 basis points above our guidance. Operating margin was over 30%, 150 basis points above our guidance.

Kasthuri Gopalan Rangan: Thank you very much your first earnings report and software for the year Bill good to see the optimism.

Kasthuri Gopalan Rangan: My question on AI is at what point does it get more broadly adopted at least from a sales cycle standpoint that despite the tough economic environment, you can actually draw in more potential prospects into the category because of the cost savings here and one for Gina I noticed that.

Gina: I know, it's still too early in the year <unk>.

Gina: Seasonality there can you give us some insight into what to make of the rest of the year. Thank you so much and congratulations.

William R. McDermott: Even though Q1 is not traditionally a large quarter, we had 8 deals over $5 million in net new ACV, a 100% increase year-over-year. Additionally, four deals were over $10 million, which is a 300% increase year-over-year. ServiceNow is strengthening its position as the AI platform for business transformation. This is fueling strong performances for each of our key businesses, ITSM and ITOM, or for each in 16 of the top 20 deals. Security and risk combined, we're in 11 of the top 20.

Gina: Thank you very much for the question cash as I said process optimization.

Gina: Is the single biggest Jan AI use case in the enterprise.

Speaker Change: Any process that exists in the enterprise today.

Speaker Change: We'll be re-engineered or engineered depending on how messy the processes with Gen. AI. So every workflow and every enterprise will be rethought.

So just think about the sales process for example, and the whole order to cash process for example, or think about employees and onboarding and training them and providing all the services to them.

William R. McDermott: Customer creator and employee workflows were in 10 of the top 20 deals. Gen AI adoption remained on a tear in Q1. Companies are leaning into Gen AI as a powerful deflationary force to drive productivity. That's why NNACV for ProPlus is record-breaking.

Speaker Change: Think about agent productivity, which is something that we're obviously moving very quickly on where you can bypass the systems that don't integrate very well and instead of swivel chairing around of putting customers on hold or I'll get back to you tomorrow have real time data, where most of the cases of deflected from virtual.

William R. McDermott: In fact, it's the fastest selling offering in the company's history. Iconic brands are adopting ServiceNow's NowAssist AI as a standard for their Gen-AI roadmaps. This quarter, we expanded our long-standing partnership with Microsoft to include new generative AI capabilities while also integrating NowAssist AI and Copilot into employee experiences. It's really exciting. Hitachi Energy is using case summarization with NowAssist for ITSM to resolve cases faster, saving millions. Equinix is deploying NowAssist AI for HR workflows, aiming to increase agent productivity by 30%.

Speaker Change: Agent, but if an agents involved they have choice AARP, which ones more pleasing to the customer okay. You're like me you got it you got paid and in the cases closed think about managing complex cases across an enterprise where all those screens are open and data is being processed and instead of having spread.

Speaker Change: Sheets and work Arounds and emails and texts now you have everything done on one platform with full case information in case closure, so literally from running our business in every department to building software like I said with the breakthrough on natural language tax turning into <unk>.

Speaker Change: <unk>.

Every single enterprise will run completely differently because of Gen AI and because of our clean sheet platform.

William R. McDermott: ServiceNow and IBM are combining the power of the Now platform with Watson X to increase productivity for IBM's employees, customers, and partners. BNY Mellon and ServiceNow are exploring the use of AI and other leading technologies in IT service management, helping to unlock additional value for the bank and its clients. We look forward to further demonstrating the exceptional GenAI customer successes and a detailed roadmap at our Financial Analyst Day on May 6th in Las Vegas. From an industry perspective, the public sector continues to excel globally. Major transactions in Q1 included the government of Australia's health department and the government of Italy's IT division, SOGIEC.

Speaker Change: Yeah and cash on your on your question around seasonality that CRP, Oh, So first and foremost really proud of the fact that we beat our guide in Q1 by 100 basis points that beat was twofold, one strong net new HCV growth as well as higher early renewals and so from a.

Speaker Change: Seasonality perspective, Youll remember, we talked about the fed duration and so Q2 is slightly more impacted right before it pops up again in Q3, and so we feel really good about the trends that we're seeing.

Speaker Change: And.

Speaker Change: Again feel really good we continue to be prudent in our guide around early renewals, while we are seeing them stronger than we saw last year again from a guidance perspective in our forecast perspective, we're continuing to be prudent they're awesome. Thank you.

William R. McDermott: The government of Sao Paulo Motor Vehicle Department created an app on ServiceNow to give customers, in that case, citizens, a fast, transparent digital experience that handles requests in minutes. Our global footprint is booming. We're seeing a vast expansion in our most important geographies. This quarter, our Japan team signed the largest NNACV deal in its history.

Speaker Change: Thanks Kash.

Speaker Change: We will take our next question from Kirk Karl Keirstead with UBS.

Speaker Change: Yeah, Hi, Thanks, Bill and Gina and maybe even see Jay I Wonder if you could just comment on the environment that Youre seeing I think in prior quarters, you've described it as a.

Speaker Change: After a pretty rough call it year stretch it started to stabilize in <unk> and stabilized again in <unk> was that still the case in Q1.

William R. McDermott: Novartis in Switzerland is implementing ServiceNow Gen AI technology to transform the business into one of the most innovative companies in therapeutic medicine. NEOM is harnessing ServiceNow's single data model along with other partners to scale its IT services across the Middle East region while seeking to create the first cognitive city where data-driven intelligence meets urban everyday needs. Suzuki, Tokyo Gas Inet, and ANA Systems are all top deals signed in Q1, and this is just scratching the surface of what we achieved this quarter. There's a lot of guesswork out there right now about geopolitics and economic policies, among other things.

Speaker Change: There are one or two verticals that maybe maybe like maybe some of the puts and takes about how the environment broadly felt thank you.

Speaker Change: So I would say Karl I would start first is.

Speaker Change: Environment.

Speaker Change: Shared this in January Bill G&A and I.

Speaker Change: It remains pretty much the same from our perspective is it and what we mean by that it is not 2021, specifically so it still takes.

Speaker Change: So many approvals and all the things that we've discussed from a sales perspective in trying to get business validation done order purchase being made.

Speaker Change: Pretty much I would say thats, a standard across industries and geographies, we are absolutely executing well within that environment, given our promise of efficiency and automation. So that is absolutely resonating and combine that with our.

William R. McDermott: ServiceNow's philosophy is simple. We focus on the things we can control, building great products, delivering great service for our customers, and forging a winning culture where people can do the best work of their careers. And that's why we perform well when some others don't.

Speaker Change: In platform generative AI.

William R. McDermott: It's also why our guidance, as you'll hear from Gina, remains ever strong. Let's talk about the demand environment for enterprise software. AI is not simply a fast maturing technology. AI is a catalyst for business transformation. When I speak to CEOs all over the world, they recognize this is a change moment. Over the past 15 years, enterprises have experienced a massive decentralization of technology governance.

Speaker Change: Which also resonates really well because that is a <unk>.

Speaker Change: Accelerant to the productivity enhancements that an organization can take so whether it's wall Street banks, whether it's.

Speaker Change: Our life Sciences Corporation, whether as governments that story of automation digital productivity.

Speaker Change: So we have gen. AI is absolutely resonating and that is what is helping us despite the environment continuing to be the same.

William R. McDermott: As every department became an IT buyer, the result was too many systems, too many apps, low data quality, and high vulnerability to cybersecurity risks. And here's the key: those decisions have been made so even as CEOs want to consolidate onto strategic platforms for the long term, they also don't want to delay the potential of net new innovation in the short term. They want to de-risk the past while getting immediate business value from AI. Process optimization is the number one Gen AI use case in the global economy today.

And I would just build on that Karl just for your benefit on the.

Speaker Change: The budgets themselves the budgets are going up.

Speaker Change: And what I definitely see is the preference for Gen. AI now I think we're ending one era and the enterprise and we've begun to another and we're into a new frontier now where Gen. AI has opened up the eyes of the customer to say there might be a different way of doing this and thats, creating real opportunity.

Speaker Change: For us So C. J has it exactly right on the value based economy, but also I do see the budgets not only going up in it but I also see gen AI, becoming more of a business imperative and if you can increase productivity take cost out and show that in a value case. This morning.

William R. McDermott: This is why ServiceNow's strategic relevance as the AI platform for business transformation has never been higher. Eventually, every business workflow in every enterprise will be engineered with Gen AI at its core. We are the single pane of glass that enables end-to-end digital transformation. At ServiceNow, we pride ourselves on being the living embodiment of an AI-run company through our now-on-now strategy. Every week that passes, the impact of our own now on now AI deployments continues to grow. Gen AI deflection rates have doubled for both our employees and customers, and they are improving each and every month. Software engineers are accepting 48% of text-to-code generation.

Speaker Change: It will be spent and maybe different people approving it but the money will be spent I also want to acknowledge some really great partnerships that we've we've achieved with Microsoft and IBM and Nvidia and I look at great companies like Novartis really rethinking the whole pharma process altogether with Gen III does.

Speaker Change: So much goodness going on in this market and I feel that you're coming off a strong Q.

Speaker Change: Q4, tableau, great print like this in Q1 with the momentum going into knowledge I don't think I've ever felt as good in the five years that I've been here than I do right now in this call with you right now Brian absolutely the best Hotel.

Speaker Change: You bet.

Brian: Thanks Carl.

Speaker Change: We will take our next question from Matt Hedberg with RBC capital markets.

William R. McDermott: These are meaningful productivity improvements, and it's only the beginning. That's why IDC estimates an $11 trillion impact from AI in the next three years. It's also why businesses will spend more than half a trillion dollars on GenAI in 2027, according to IDC. So, contrary to some opinions out there, we are witnessing the biggest enterprise software market opportunity in a generation. Business leaders are waking up to the fact that they have a fresh choice now. They can radically simplify the TEXT Act.

Speaker Change: Great. Thanks for taking my question guys.

Matthew George Hedberg: Given your comments on pro plus new ACB growth are you seeing faster protocols steel cycles relative to what you saw when the pro SKU was first launched in and anything interesting to call out from a discounting perspective on protocols relative to maybe some of your initial expectations.

Speaker Change: Yeah, Hey, Matt.

Speaker Change: I'll take that one so yes, we are absolutely seeing faster pro plus adoption versus trial.

Speaker Change: It's two quarters out right. So it's early days, but we feel really good about the adoption curve and we've been talking about whether or not that adoption curve would be faster and we and we posited that it would be and that certainly.

William R. McDermott: We are entering a new frontier. We are in a race to put AI to work for people, and that's a race ServiceNow intends to win for our customers. There's a lot happening at ServiceNow that only heightens our optimism for the remainder of this year and beyond. Our recent Washington, D.C. platform release included very exciting new features for our customers. NowAssist AI for ITOM AIOps supercharges ServiceNow's market-leading solution, applying generative AI to speed up issue resolution. Sales and Order Management unified the sales order life cycle across the front, middle, and back office teams on the ServiceNow platform.

William R. McDermott: ServiceNow is also staying at the forefront of building innovative enterprise-gen AI applications. As one example, NowAssist AI for telecommunications service management, or what we call TSM, which also uses NVIDIA AI will boost agent productivity and build on our great partnership. It's also worth noting the ServiceNow research team is stacked with world-renowned AI experts, helping our customers stay on the cutting edge. We're expanding our ecosystem capacity to meet growing customer demand. One example is our investment in Platformation, a global IT consultancy and leading ServiceNow implementation partner to enhance expertise and generative AI-enabled technology. And anyone who'd like to get the full story, I warmly invite you to join us for Knowledge 2024 in Las Vegas on May 7th. In closing, I'll end how I began.

Speaker Change: Proving out to be the case, although again early days with respect to discounting versus initial expectations. We are we feel really good about the realized pricing and it has been very much in line with our initial expectations and we'll talk a lot more as you would expect at Investor day about.

Speaker Change: The overall Gen AI opportunity for service now as well as where we're where we are to date, but feel very good about what we're seeing in the market as customers are really leaning in and we talked about seven seven deals in the top 10 had gen AI in it.

Speaker Change: Significant deals over 1 million.

Speaker Change: As well, so we're definitely seeing monetization happening already.

Speaker Change: Thank you gene.

Gene: Thanks, Matt.

Gene: Okay.

Gene: We will take our next question from Brad Sills with Bank of America Securities.

Bradley Sills: Oh, great. Thank you so much a question for Gino please.

Bradley Sills: Real nice results on <unk> I think this is the second quarters since we've seen significant outperformance there versus CRP Oh, just just curious what's driving that and does that give you some visibility perhaps for CR CRP it'll ramp from here given perhaps a ramping component in there. Thank you yeah, It's a great point and I did call that out so RPM grow.

Brad Sills: <unk> was 27% year over year in constant currency.

Brad Sills: Which is 300 basis points of improvement versus last year, and yes that is our longer term backlog. So as you think more longer term about the opportunity in service now I couldnt be more excited about that we are seeing the average duration growing and in fact duration. This Q1 is.

William R. McDermott: The company is in a market-leading position. We have product recognition from industry analysts, all of them. We're showing up on all of the most admired company lists, and we're moving up the ranks every year. Those things are always encouraging, and we're proud of it all. But the biggest indication I can give you is qualitative. It's how our team feels about what we're doing together. This culture is different.

Brad Sills: Is that is the largest it's been since.

Brad Sills: Q1, since I think 2019, and so feel really good about what that means for the mid and long term.

Brad Sills: Opportunity here for sure.

Speaker Change: Great to hear thanks Gino.

Gino: Thanks, Brad.

Gino: We will take our next question from Keith Weiss with Morgan Stanley.

Gino: Okay.

Tien: Hi, Tien tsin sitting in for Keith Weiss.

Tien: Bill I wanted to ask a little bit about.

Tien: Jenny I adoption within service now you mentioned now on on now but in terms of just like the DNA adoption, both broadly and with the engineering team it looks like you're hiring for this quarter in R&D kept pace.

William R. McDermott: It's rooted in ServiceNow's earliest days as a customer-obsessed company. We are ever hungry, ever humble. So when I'm told that over a million people applied to join us last year, I'm not surprised. When you have a galvanizing ambition to become the defining enterprise software company of the 21st century, people want to be a part of that. They recognize that this is about more than technology. This is about helping people know more, care more, and do more. We'll continue on this mission in Q2.

Tien: Jenny I adoption chain.

Tien: Changing or not changing your hiring plans more broadly and specifically into the engineering team.

Tien: So.

Tien: This is CJ and hit as read I would say that specifically, we absolutely believe and.

Tien: And we have seen it that journey II is helping our software engineers cord faster I mean straight up it helps us are software engineers core processor, whether they are junior software engineers are very senior software engineers, they still can leverage and continue to leverage under <unk>.

William R. McDermott: I'd like to thank all of you for the trust that you've invested in ServiceNow. We're going to keep working hard for you, and we're going to keep striving to honor our brand promise: the world works with ServiceNow. I'll now hand things over to our outstanding CFO, Gina Mastantuno. Gina, it's over to you.

Tien: So I'll start with that is increasing our engineering productivity and it varies depending on how senior the engineer is on how junior engineers and number two it helps us increase our innovation velocity. So that is really really important to us that it increases our innovation velocity when I flew.

Gina Mastantuono: Thank you, Bill. Q1 set a strong precedent for the year ahead. Building on the momentum from Q4, our team delivered another exceptional outperformance. We surpassed all of our top-line and profitability guidance metrics for the quarter.

Tien: Therefore, our customers is that when customers leverage service now generative AI and if they can.

Gina Mastantuono: With GenAI Conversations serving as a digital transformation catalyst, we see that momentum carrying into Q2. Turning to our results, subscription revenues for Q1 were $2.523 billion, growing 24.5% year-over-year in constant currency, exceeding the high end of our guidance range by approximately 50 basis points. RPO ended the quarter at approximately $17.7 billion, representing 27% year-over-year constant currency growth.

Tien: <unk> automation faster, whether it's using text to code our techs to workflow types of use cases than they can not only increase the number of workflows that they put in service now where secondly, it also increases their digital efficiency. So it's both ways.

Engineers are able to innovate faster and then our customers are able to workflow faster because of <unk>.

Gina Mastantuono: We continue to see average contract terms increase year-over-year as the strategic importance of the NOW platform has driven longer-term deals. Current RPO was $8.45 billion, representing 21% year-over-year constant currency growth. A 100 basis points beat versus our guidance. From an industry perspective, technology, media, and telecom were extremely robust, growing Net New ACV over 100% year over year. Education had a fantastic quarter, growing nearly 50% year-over-year.

Tien: And one thing.

Tien: Just to share with you Keith we are 2020 <unk>.

Tien: <unk> cases on the now on now story within service now.

Speaker Change: And our Chief Information Officer, Chris that he put a very interesting linked in post out there. Please.

Speaker Change: Please take a look at it not only is he is doing a great job, but if you think about service now we have a financial system in service now it's a system of record we have one of them.

Gina Mastantuono: Transportation and logistics, business and consumer services, and retail and hospitality also saw strength. Our renewal rate was at a best-in-class 98% as the Now Platform remains a strategic imperative for our customers' operations. We closed 59 deals greater than $1 million in net new ACV in the quarter, with 4 deals greater than $10 million, representing 300% year-over-year growth. Our focus on selling a comprehensive platform continued to drive more multi-product deals, as 15 of our top 20 deals included 7 or more products.

Speaker Change: Unlike many customers out there that have hundreds.

Speaker Change: We have a CRM system, we have one of them.

Speaker Change: And we have an HR system, we have one of them.

Speaker Change: They are feeding to service now platform. So all the data from those systems of record in terms of how we run this company we run the whole company on service now.

Speaker Change: And now we have 20 different gen AI use cases across all the departments of the company. So my full expectation is that Sunday, we could do the earnings call, but we're all in this room together and we will take you through the living learning lab, a Virgin run company here at service now.

Gina Mastantuono: We now have 1,933 customers paying us over $1 million in ACV. In addition, the number of customers paying us $20 million or more grew over 50% year over year, and in Q1, our Gen-AI products continue to see very healthy adoption. As Bill mentioned, our Pro Plus Net New ACV to date continued the trend ahead of any new product family launch for the comparable period. Our Gen AI products were in 7 of our top 10 deals, and we closed 7 deals over a million dollars in ACV in the quarter.

Speaker Change: Yeah.

Speaker Change: And I think I'd like to just add we are absolutely customers are 100% on all of our Gen 10.

Speaker Change: Today I.

Speaker Change: Use cases deflection rates have doubled for both our employees and customers and they are improving every month right. It's really early days, though.

Speaker Change: It's it's learning faster and faster software engineers are accepting 48% of text to cogeneration. So there's absolutely the ability to see leverage in.

Gina Mastantuono: We had wins at a second Wall Street bank, a leading cybersecurity firm, and many more, including a significant win for ITOM ProPlus, which just launched in March. Turning to profitability, our non-GAAP operating margin was over 30%, approximately 150 basis points above our guidance, driven by the timing of marketing spend, OPEX efficiencies, and our top-line outperformance. Our free cash flow margin was 47%, up 12 points year over year. We ended the quarter with a robust balance sheet, including $8.8 billion in cash and investments.

Our R&D as we look to the made a long time. So thank you for the question.

Speaker Change: I appreciate all the thoughts thank you.

Speaker Change: We will take our next question from Keith Bachman with BMO.

Keith Frances Bachman: Hi, many thanks, I have two questions, but I'll ask them as one first.

Keith Frances Bachman: Christine I don't know if this is for you or not but.

Keith Frances Bachman: Acknowledged that the adoption does seem quite strong for the various gen AI offerings.

Keith Frances Bachman: So how would you characterize it.

Speaker Change: Going to be accelerating growth through 2024.

Gina Mastantuono: In Q1, we bought back 225,000 shares as part of our share repurchase program with the primary objective of managing the impact of dilution. As of the end of the quarter, we have approximately $787 million remaining of the original $1.5 billion authorization.

Christine: So what's not growing as well as Ginny I is getting great adoption, probably small dollar amount contribution.

Christine: What's not growing as well and the second part is perhaps going to come at the analyst day, but is there any specific metrics you could give us.

Gina Mastantuono: Together, these results continue to demonstrate our ability to drive a strong balance of world-class growth, profitability, and shareholder value. Moving to our guidance, in Q1, we initiated a program to hedge a portion of our foreign currency denominated revenues.

Christine: On dollars of ACD or anything else related to the Ginnie skus or should we wait for analyst day, perhaps to some more specific indications on what the adoption.

Speaker Change: What's the adoption is thank you, yes. So it will definitely give you a lot more details on all things that AI at added at Investor Day, and Thats in a in a week and you know and weaken a bit so stay tuned there.

Gina Mastantuono: The initiative is expected to lessen the impact of recent movements in the euro and pound, but the incremental strengthening of the US dollar has still resulted in FX headwinds compared to our previous guidance. Given our Q1 outperformance, we are raising our 2024 Top Line Outlook to more than offset those moves. For 2024, we are raising our subscription revenues by $20 million at the midpoint of the range to more than offset an incremental $17 million headwind from FX.

Speaker Change: Yes, the adoption curve is stronger than we've seen in any new product calorie launch, but thats going from zero right. So it's a small dollar at this point in time, but the speed at which it's going to grow to be a really meaningful contributor is faster than anything we've seen and so what I'd say is.

Speaker Change: That you know.

Gina Mastantuono: This raises a net increase of $3 million on a narrowed range of $10.560 billion to $10.575 billion, representing 21.5% to 22% year-over-year growth or 21.5% on a constant currency basis. We continue to expect subscription growth margins of 84.5%, operating margin of 29%, and free cash flow margin of 31%. Finally, we expect a gap diluted weighted average outstanding shares of $208 million

<unk>, 24.5% revenue growth at the scale at which we are the largest law of large numbers is pretty incredible and we see continued traction across the board, whether it's our technology workflows, our customer workflows or our creator as well and so really across the board employees.

Speaker Change: Really strong quarter customer had a really strong quarter.

Speaker Change: <unk> core remains healthy and 16 of our top 20 deals 10 deals over $1 million item was included also in 16 of the top 20 deals with nine deals over 1 million security and risk in totality still doing well and so you know it's the great thing about having a platform.

Gina Mastantuono: For Q2, we expect subscription revenues between $2.525 billion and $2.530 billion, representing 21.5% to 22% year-over-year growth or 22% on a constant currency basis. We expect CRPO growth of 20.5%, both on a reported and constant currency basis. We expect an operating margin of 25%. Finally, we expect 208 million GAP diluted weighted average outstanding shares for the quarter.

Speaker Change: With the breadth that service now has that we continue to drive really really good growth at our scale across the platform.

Speaker Change: And the only thing I would add there.

Speaker Change: Is every single workflow.

Speaker Change: Continuous to still grow double digits, plus plus so we have no paid this is been taken out of X. So this has been taken out of Hawaii. Besides G&A individually, calling out all our growth vectors.

Gina Mastantuono: In summary, Q1 was a great start to what we expect to be another tremendous year. Organizations are under more pressure than ever to maximize the benefits of their technology investments. In this environment, ServiceNow's traction as the intelligent platform for end-to-end digital transformation continues to intensify. Gen AI is only as powerful as the platform it's built on.

Speaker Change: Whether it's our core which is <unk> or whether its our growth, which our CSM and other products App engine part of creator and customer all of them continue to grow very nicely and it grew very nicely in Q1.

Gina Mastantuono: The Now platform gives us deep insights with a remarkable ability to tailor AI outputs to the specific needs of our customers. Business users need AI to power actions across the enterprise. Our workloads are designed to do just that, deliver complete solutions to supercharge experiences, creating extraordinary value. You'll hear more about these experiences, our strategy, and long-term opportunities at our upcoming Investor Day on May 6th, which will be webcast on our Investor Relations website.

Speaker Change: Many thanks.

Speaker Change: Thanks Keith.

Speaker Change: We will take our next question from Tyler Radke with Citi.

Tyler Radke: Yeah. Thanks for taking the question I wanted to ask you how you're seeing the momentum just in terms of standard pro migrations, we talked a lot about pro plus but wood.

Tyler Radke: It would seem that still a huge opportunity in terms of.

Tyler Radke: Close to 50% of the install base on standard if you started to see an acceleration in those migrations can you just talk about the opportunity there. Thank you.

Gina Mastantuono: Finally, before moving on to Q&A, I want to thank all of our employees worldwide for helping make ServiceNow one of the Fortune 100 best places to work yet again in 2024. ServiceNow's greatest asset is its people, and you all continue to make us ServiceNow Strong. Bill and I couldn't be prouder of this incredible team.

Speaker Change: So of course.

Speaker Change: MS. Tyler one quick example that.

Speaker Change: I was in a conversation at a bank.

Speaker Change: Very technical audience in their technology organization.

Speaker Change: They were still on <unk> standard once they saw what we have done with probe plus they actually bought through and proved plus together.

Unknown Executive: With that, I'll open it up for Q&A. Thank you. If you would like to ask a question on the phone lines today, please press star 1 on your telephone keypad. If you find you would like to remove yourself from the queue, that is star 1 again.

And that is just amazing that they've bought both technologies together.

Speaker Change: Just saying, Hey, I'm going to go to pro and then staircase to probe plus Thats a very specific example, but the way we look at this specific product line, whether its idea similar whether its CSM customer service is I look at both pro and enterprise in total so when I look at Pru and enterprise in total so IMAX.

Unknown Executive: I would like to remind everyone to please limit themselves to one question. We'll now take our first question from Cash Rangan with Goldman Sachs. Thank you very much.

William R. McDermott: First earnings report and software for the year. Bill, good to see that optimism. My question on AI is, at what point does AI get more broadly adopted, at least from a sales cycle standpoint, so that despite the tough economic environment, you can actually draw in more potential prospects into the category because of the cost savings here? And one for Gina, I noticed that it's still too early in the year for CRPO, RPO, a bit of seasonality there.

Speaker Change: <unk> pro plus on purpose here, so pro and enterprise, which are the bigger skus at a higher price demand there.

They grew nicely for TSN for CSM bought out HR service delivery three of our anchor businesses. When you combine pro and enterprise that is still high growth business and then you add probe plus that sort of allows us at this scale of 252 billion.

William R. McDermott: Thank you very much for the question, Cash. As I said, process optimization is the single biggest Gen AI use case in the enterprise. Any process that exists in the enterprise today will be re-engineered or engineered, depending on how messy the process is, with Gen-AI. So every workflow in every enterprise will be rethought. So just think about the sales process, for example, and the whole order-to-cash process, for example.

Speaker Change: To grow at 24, 5%.

Speaker Change: Thank you.

Speaker Change: Yeah.

Speaker Change: We'll take our next question from Gregg Moskowitz with Mizuho.

Gregg Moskowitz: Okay. Thank you very much for taking the question bill getting back to the topic of it budgets.

Gregg Moskowitz: Budgets as it relates to service now.

Gregg Moskowitz: You took a sense of how much of journey II software spend is incremental today as opposed to perhaps coming from other areas of <unk>. Thank you.

William R. McDermott: Or think about employees and onboarding and training them and providing all the services to them. Think about agent productivity, which is something that we're obviously moving very quickly on, where you can bypass the systems that don't integrate very well and instead of swiveling chairs around or putting customers on hold, or I'll get back to you tomorrow, have real-time data, where most of the cases are deflected from the virtual agent, but if an agent's involved, they have choice A or B, which one's more Okay, you want B, you got it, you got B, and the case is closed.

William R. McDermott: Yes, it's a really important question, Greg I really believe the it budgets in their own right will go up on a standard rate basis as we've seen now for many many years.

Business executives however.

Speaker Change: Our inserting there will enter the generative AI revolution, because the CEO is in a board room with her senior team sitting around the table with the board of directors and they're like Hey, what are you guys doing on Gen AI.

Gina Mastantuono: Think about managing complex cases across an enterprise, where all those screens are open, and data is being processed. Instead of having spreadsheets and workarounds and emails and texts, now you have everything done on one platform with full case information and case closure. So literally, from running a business in every department to building software, like I said, with the breakthrough in natural language text turning into code, every single enterprise will run completely differently because of Gen AI and because of our clean sheet platform. Yeah, and Cash, on your question around seasonality about CRPO. So first and foremost, I am really proud of the fact that we beat our guide in Q1 by 100 basis points. That beat was twofold.

Speaker Change: And they know now that they've got to go into that room with the story because this is a lot like when we had the Internet then we had the iPhone moment everything went mobile everything's going Gen. AI is just a question of how quickly you get there. So I believe that a lot of the business operating spend will be move to Gen AI technology.

You use cases that serve the business and the reason I believe I'm right on that if you look at great companies some of them in this quarter like Microsoft and Novartis, So Hitachi energy or Equinix or IBM. They are looking at this as hey, what does this mean to my employees to my customers to my partners and theirs.

Speaker Change: Very well aware of the fact that inflation sticky and rates are high and they are on their own they kind of deal with this stuff and the only way to change the game is to rethink the game and move from checkers to chess.

Gina Mastantuono: One, strong net new ACV growth, as well as higher early renewals. And so from a seasonality perspective, you'll remember we talked about the Fed duration. And so Q2 is slightly more impacted right before it pops up again in Q3, and so we feel really good about the trends that we're seeing. And again, we feel really good.

Speaker Change: And Jen AI is now opening up the window for transformational conversations and Thats why I say, we are the AI platform for business transformation, because we are using technology to transform the business how can the business run at a lower cost they're asking questions like why am I on several differ.

Gina Mastantuono: We continue to be prudent in our guidance around early renewals, while we are seeing them stronger than we saw last year. Again, from a guidance perspective and a forecast perspective, we're continuing to be prudent there. Awesome. Thank you. Thanks, Cass.

Speaker Change: Releases on premise and in cloud and why do I have all these systems I need a system for every 1000 employees. It's ridiculous so they want to rethink things and so I think there's two things that are going to happen. One is business budget is going to move into the Gen. AI category and it's not going to take away from the it spend in the yen and <unk>.

Speaker Change: Two there's going to be real winners and real losers.

Unknown Executive: We'll take our next question from Karl Keirstead with UBS. Hi, thanks. Bill and Gina, maybe even CJ, I wonder if you could just comment on the environment that you're seeing. I think in prior quarters you've described it as after a pretty rough, call it, you know, year stretch. It started to stabilize in 3Q and stabilized again in 4Q. But was that still the case in Q1? And were there, you know, one or two verticals that maybe, maybe lagged?

Speaker Change: And real winners and real losers has already begun its formation because if you don't plant the flag in the ground in the next eight months theres not going to be an NII flagged to put in the ground and ours are getting put in the ground all over the global economy, and the company that I see out there doing extremely well in that regard is what Microsoft.

He is doing with co pilot and see what we are doing with now assist AI and I think it's the combination of those two players in the enterprise and obviously, you've got the great ones like in video and so forth. It's building the GPU force, but that is really what I am seeing and I'm also super honored this quarter to see IBM.

Unknown Executive: Maybe some of the puts and takes about how the environment broadly felt. Thank you. So I would say, Karl, I would start first.

Chirantan Jitendra Desai: Environment, and you know, we shared this in January, Bill, Gina, and I; it remains pretty much the same, from our perspective, as it and what we mean by that it is not 2021, specifically. So it still takes, you know, many approvals and all the things that we discussed from a sales perspective, in trying to get business validation done or a purchase being made. And pretty much, I would say that's a standard across industries and geographies. We are absolutely executing well within that environment, given our promise of efficiency and automation. So that is absolutely responding.

Speaker Change: Really jump in as a friend and partner with service now and we feel the same way about Watson acts and we're very open to all the participants that are making llm's and they can all integrate with service now and we will own the domain specific to service now, but we welcome all participants and I think that's another unique part of service now that we're not.

Speaker Change: Interested in shutting anybody out we're actually technology capable enough to open up to everybody and that's really turning on the whole ecosystem in our favor so plants are being put in.

Speaker Change: Flags in the ground and the Kingdom of Saudi Arabia, all the way to Japan and beyond we are winning.

Chirantan Jitendra Desai: And combine that with our in-platform generative AI, which also resonates really well, because that is an accelerant to the productivity enhancements that an organization can take. Digital Productivity, enhanced via Gen AI, is absolutely resonating. And that is what is helping us despite the environment continuing to be. And I would just build on that, you know, Karl, just for your benefit on, you know, the budgets themselves. The budgets are going up. And what I definitely see is the preference for Gen AI now. I think we're ending one era in the enterprise, and we've begun another.

Perfect. Thanks Bill.

William R. McDermott: Thank you Greg.

We'll take our next question from Mark Murphy with Jpmorgan.

William R. McDermott: Mark.

William R. McDermott: I do apologize it looks like Mark has disconnected we will take our next question from Brad Zelnick with Deutsche Bank.

Brad Zelnick: Great. Thanks, so much for taking the question, it's great to hear all the traction in international you called out deals in Australia, Italy, Brazil, but I want to focus on what you just mentioned about the kingdom of Saudi Arabia, where in your press release, you called out a $500 million investment in that market, given obviously, what's a massive massive opportunity.

Brad Zelnick: Gina can you double click into the $500 million investment youre, making over what time period, where it lands on the financials and maybe more generally how should we think about your strategic use of capital in Capex for these types of deals. Thanks.

William R. McDermott: And we're into a new frontier now, where Gen AI has opened up the eyes of the customer to say, there might be a different way of doing this. And that's creating real opportunity for us. So CJ has it exactly right on the value-based economy.

Brad Thanks, so much for the question. So we're really excited about the investment in Saudi in and rest assured that 500 million is is a long term investment over a long horizon period and it will be.

William R. McDermott: But also, I do see the budgets not only going up in IT, but I also see Gen AI becoming more of a business imperative. And if you can increase productivity, take costs out, and show that in a value case, there's money that will be spent. There may be different people approving it, but the money will be spent.

Brad Zelnick: In most of that investment is in data centers, so it'll be in cost of sales, but you'll again, we manage our margin very tightly and the growth that we're expecting from that investment is huge the opportunity that we see in Riyadh and Saudi Neon is great and Bill Spence.

William R. McDermott: I also want to acknowledge some really great partnerships that we've achieved with Microsoft and IBM and NVIDIA. And when I look at great companies like Novartis, really rethinking the whole pharma process altogether with Gen AI, there's just so much goodness going on in this market. And I feel that, you know, you're coming off a strong Q4. To have a great print like this in Q1, with the momentum going into knowledge, I don't think I've ever felt this good in the five years that I've been here than I do right now on this call with you right now, right now. Absolutely the best I've felt.

Brad Zelnick: A nice time, there at that conference and we're really excited about really pulling our technology to really help that society grow and become a digital first economy and they're leaning in very heavy with service now are really excited about our product portfolio not only our gen AI, but really the breath of the <unk>.

Brad Zelnick: <unk> of the portfolio. So it will be within our Capex guidance that you have always seen its not on top of.

Brad Zelnick: We're just really excited about planning flags.

More in the Middle East.

Gina Mastantuono: Thank you both. Thanks, Karl. We'll take our next question from Matt Hedberg with RBC Capital. Great, thanks for taking my question, guys. You know, Bill, given your comments on ProPlus, that new ACV growth, are you seeing faster ProPlus deal cycles relative to what you saw when the ProU was first launched? And anything interesting to call out from a discounting perspective on ProPlus relative to maybe some of your initial expectations? Yeah, hey Matt, I'll take that one. So yes, we are absolutely seeing faster ProPlus adoption versus Pro. It's two quarters out, right?

Speaker Change: Awesome, Thanks for the color.

Speaker Change: Thanks Pat.

Speaker Change: Yeah.

Speaker Change: And Mark Murphy hostile Bakken, we will go to Mark Murphy with Jpmorgan.

Mark Murphy: Thank you I'm going to try to not hang up the phone.

Mark Murphy: Bill I am curious how youre looking at the Onboarding of talent into the service now ecosystem, because we're being told that the demand.

Mark Murphy: For service now consultants is at a multiyear high.

Mark Murphy: We're wondering if the economy.

Mark Murphy: Can create those jobs.

Quickly enough to keep up with the bookings that you're driving at and just also is there a pivot point coming.

Gina Mastantuono: So it's early days, but we feel really good about the adoption curve. And we've been talking about whether or not that adoption curve would be faster, and we posited that it would be. And that's certainly proving out to be the case, although, again, early days. With respect to discounting versus initial expectations, we feel really good about the realized pricing, and it has been very much in line with our initial expectations. And we'll talk a lot more, as you would expect, at Investor Day, about the overall Gen-AI opportunity for ServiceNow, as well as where we are to date, but I feel very good about what we're seeing in the markets. Customers are really leaning in.

Gina Mastantuono: We talked about seven deals in the top 10 had Gen-AI in them, significant deals over a million dollars as well. So we're definitely seeing monetization happening already. Thank you, Gina.

Mark Murphy: You would want to crank up your own.

Mark Murphy: Hiring engine within service now to keep up with the top line growth.

Yes first of all Mark. Thank you very much instantly my compliments on the research that you put out I read your email this morning, and you call the quarter exactly as it was so super well done on your part not surprising considering the great company to work for.

Speaker Change: I will give you a couple of things.

Speaker Change: Leadership is everything we just hired a great leader, who is leading our training initiatives globally, both internally and externally.

Speaker Change: World renown.

Speaker Change: And she is going to drive not only our knowledge revolution within our own company, but also within the ecosystem and no we're not going to build a services company here.

Speaker Change: Very comfortable with the ecosystem and building out the ecosystem, we made a commitment with rise up with service now that we'd have 1 million people trained around the world on the service now platform and we're well on our way to achieving that goal I talked about.

Unknown Executive: Thanks, Matt. We'll take our next question from Brad Sills with Bank of America. Oh, great. Thank you so much.

Speaker Change: Platforms <unk> as one company that probably not everybody on this call ever heard of but you know all the big ones and they're all investing huge human capital contributions and some of them have literally multi multibillion business plans built with service now so we really like the fact that we.

Gina Mastantuono: Question for Gina, please. Real nice results on RPO, I think... importers. Transcribed by https://otter.ai. Yeah, it's a great point, and I did call that out.

Can impact the customers value case with our service now six Sigma knowledge team and then we can extend the feet on the street through the ecosystem and also the trust that we have with the ecosystem, where they know we're not trying to duplicate their business models on the contrary we need.

Gina Mastantuono: So RPO growth was 27% year over year in constant currency, which is 300 basis points of improvement versus last year. And yes, that is our longer-term backlog. So as you think more long term about the opportunity and ServiceNow, I couldn't be more excited about that. We are seeing the average duration grow. And in fact, duration, this key one is the is the largest it's been since in a key one since I think 2019.

Speaker Change: To invest in their business models to move our ambition to be the defining one forward. So it's a really good question actually and you are right. We are working really hard at it but it's also true for you to know that the partners see the opportunity like never before and they're doubling down on service now. So we think we got.

Speaker Change: A good form formed strategy and we think that we are going to be able to cover this global economy.

Gina Mastantuono: And so I feel really good about what that means for the mid and long term upward opportunity here for sure. Great to hear. Thanks, Brad. We'll take our next question from Keith Weiss with Morgan Stanley. Hi, Ivan Sanjit Singh, in for Keith Weiss.

Speaker Change: We're moving at warp speed to do so.

Speaker Change: Thank you so much really appreciate it.

Thank you Mark.

Speaker Change: We will take our next question from Samad Samana with Jefferies.

Chirantan Jitendra Desai: Bill, I wanted to ask a little bit about, you know, Gen-AI adoption within ServiceNow. You mentioned, you know, now on, but in terms of just like the Gen-AI adoption, both broadly and with the engineering team, it looks like you're hiring for this quarter in R&D, you know, kept a pace. How is Gen-AI adoption changing or not changing your hiring plans more broadly, specifically with the engineering team? So this is CJ, and here is where I would say that specifically, we absolutely believe.

Samad Samana: Hi, good evening, Thanks for taking my questions Hey, how are you I hope everybody is doing well.

Samad Samana: Thanks as always for squeezing me in I guess, Bill I wanted to follow up a little bit tomorrow.

Samad Samana: To Mark's question, because sales and marketing hiring in the first quarter was basically as many heads as you did the last three quarters of 2023, and I know theres some seasonality to it but is that you guys ramping hiring back up as you see more demand is it a certain type of salesperson that you need as you think of more AI driven sales just maybe help us.

Speaker Change: To understand what you saw in <unk> and maybe the philosophy around it.

Chirantan Jitendra Desai: And we have seen that Gen AI is helping our software engineers code faster. I mean, straight up, it helps us our software engineers code faster, whether they are junior software engineers or very senior software engineers; they still can leverage and continue to leverage generative AI. So I'll start with that. That is increasing our engineering productivity. And it varies depending on how senior the engineer is or how junior the engineer is.

Speaker Change: We see the biggest opportunity.

Speaker Change: We've ever seen and we know the Gen AI Revolution is real and we're doubling down.

Speaker Change: What youre seeing our investments are very focused on building the best software in the world.

Speaker Change: And selling the best software in the World.

Speaker Change: So we have great leadership on both the engineering side and the go to market side, and we're going to have more clarity of focus and the way we drive the go to market now we're getting to size and scale that calls for that so there are various motions to market that will have single line of sight account.

Chirantan Jitendra Desai: And number two, it helps us increase our innovation velocity. So that is really, really important to us that it increases our innovation velocity. When I flip that for our customers, what happens is that when customers leverage ServiceNow, and generative AI, and if they can do automation faster, whether it's using text-to-code or text-to-workflow types of use cases, then they can not only increase the number of workflows that they put on ServiceNow, but second, it also increases their digital efficiency. So it's both ways.

Ability and responsibility for a number.

Speaker Change: And the accountability can't be stressed highly enough because we need leaders that can run businesses here and thats, what really big leaders, we want to do anyway and.

Speaker Change: And Gena are rightfully pointed out we don't do anything without the margin in mind.

Speaker Change: So we have a pipeline we manage the whole company on something we call. The CEO dashboard, we are in real time with our rolling four quarter average pipe. We have our gen. AI use cases that are against the pipe based on the stage of the sales cycle. So we know how many we can afford to hire based on probability of closure within.

Chirantan Jitendra Desai: Our engineers are able to innovate faster, and then our customers are able to work faster because of generative AI. And, you know, one thing just to share with you, Keith: we have 2020. Gen AI cases are on the now on now story within ServiceNow, and our Chief Information Officer, Chris Petty, put a very interesting LinkedIn post out there. Please take a look at it. Not only is he doing a great job, but if you think about ServiceNow, we have a financial system in ServiceNow. It's a system of record. We only have one of them.

Speaker Change: 1% to 2% and that is how we drive the financial performance of the company and how many people we let in the door I do want to stress because we run a claim platform here and we run a gen. AI company here, that's our absolute commitment we're going to run a super efficient company. So on the G&A side of the equation, we continue to be.

Speaker Change: And as we get bigger as a percent of revenue that will drop even further so I think youre going to like that and I think a lot of companies now is showing up here at our doorstep. They want to see that now on now story because they are like how is it that you could have one financial system with thousands and thousands and one HR system and one CRM system when Mike.

Chirantan Jitendra Desai: Unlike many customers out there that have hundreds, we have a CRM system. We have one of them, and we have an HR system.

Chirantan Jitendra Desai: We have one of them, but they are feeding the ServiceNow platform. So all the data from those systems of record in terms of how we run this company, we run the whole company on ServiceNow. And now we have 20 different Gen AI use cases across all the departments of the company. So my full expectation is that someday we could do an earnings call where we're all in this room together, and we'll take you through the living learning lab of a Gen AI-run company here at ServiceNow.

Company has hundreds and I can't even keep track of them, all and and I think a lot of what I'm trying to explain to you is we're in the beginning stages of the end of one era.

And the beginning of another.

Speaker Change: And I would just add Gary.

Gary: I would just add that.

Gary: Last year might have looked like we slowed down sales and marketing, but theres a lot in that number and we talked about this a lot of operations sales ops and we actually were very focus even last year on continuing to higher quota bearing feet on the street sales folks. We're entering we entered 2024 with a higher the highest.

Chirantan Jitendra Desai: Yeah, and I would just add, I think I would just add we are absolutely customer zero 100% on all of our Gen AI use cases. Deflection rates have doubled for both our employees and customers, and they're improving every month, right?

Increase in ramped reps that we have in a while so yes, we will be re accelerating we feel really good about tight we feel really good about demand.

Gary: And so but I want to make clear that we didn't stop hiring salespeople feet on the street Lat last year, we continue to hire and.

Gary: And we will continue to do that because our pipe looks strong and demand looks great.

Gina Mastantuono: It's really early days, so it's learning faster and faster. Software engineers are accepting 48% of text to code generation. So there's absolutely the ability to see leverage in our R&D as we look to the mid and long term. So thank you for the question. I appreciate all the thoughts.

Speaker Change: Very helpful. And then I had a quick follow up for you on <unk> you mentioned I think.

Speaker Change: So another question about maybe some early renewals in <unk> can you maybe just help us understand if it was.

Gina Mastantuono: Thank you. We'll take our next question from Keith Bachman with BMO. Hi, many thanks.

Speaker Change: Its material enough to impact your guidance or just I know the guidance is good but just trying to think through on that timing. If theres anything we should consider for Q2, and then maybe even the back half based on your expectations on our renewals.

Gina Mastantuono: And I have two questions, but I'll ask them as one. First, Gene, I don't know if this is for you or not, but acknowledge that the adoption does seem quite strong for the various Gen AI offerings. And so how would you characterize it, and yet you're pointing to decelerating growth through 2024. So what's not growing as well?

Speaker Change: Yeah. So if you remember some odd last year, we've been over the last year, we've been more prudent in how we have been forecasting early renewals because it's hard to forecast, it's very customer specific and customer by customer and so in Q1, our beat was really strong with our net new HCV growth.

Gina Mastantuono: If Gen AI is getting great adoption, probably small dollar amounts of contribution, but what's not growing as well? And the second part is perhaps going to come at analyst day, but are there any specific metrics you could give us on dollars of ACV or anything else related to the Gen AI skews, or should we wait for analyst day? Yeah, so we'll definitely give you a lot more details on all things Gen AI at investor day, which is in a week and a bit. So stay tuned for more there.

We also saw early renewals that are prudent forecast I haven't changed how we're thinking about forecasting I'm still remaining prudent.

Given the macro and so you know as we think about seasonality I talked about Q2 being lower slightly lower but then it bounce back up in Q3, when fed is our strong quarter and so again it wasn't material enough to impact the Q2 guidance, but I'm not I'm not assume.

Gina Mastantuono: Yes, the adoption curve is stronger than we've seen in any new product category launch, but that's starting from zero. So it's a small dollar at this point in time, but the speed at which it's going to grow to be a really meaningful contributor is faster than anything we've seen. And so what I'd say is that 24 and a half percent revenue growth at the scale at which we are is pretty incredible.

Speaker Change: <unk> better.

Speaker Change: Early renewals in Q2 like we saw in Q1.

Speaker Change: Awesome, you guys going to weaken a bit.

Speaker Change: Awesome. Thanks, so much of it by the way some odd when you show up you will notice that it'll be a stunning knowledge and youll see thousands more people than you saw last year, we just keep getting bigger and bigger so get ready for the best Vegas show you've ever seen.

Speaker Change: Looking forward to a bill. Thank you. Thank you.

Speaker Change: We will take our next question from Patrick <unk> with JMP Securities.

Speaker Change: Yes.

Gina Mastantuono: And we see continued traction across the board, whether it's our technology workflows, our customer workflows, or our creator as well. And so really across the board, employees had a really strong quarter, customers had a really strong quarter. ITSM core remains healthy in 16 of our top 20 deals, 10 deals over a million. ITOM was also included in 16 of the top 20 deals with nine deals over a million.

Speaker Change: Okay.

Speaker Change: Okay.

Speaker Change: Patrick Your line is open. Please go ahead.

Patrick: Oh, great. Thank you Bill and in C. J can you help us understand how important it is.

To have an release your own L. L. Evans. So you guys had stockholder in February.

Patrick: <unk> March largest say snowflake did there are two family.

Patrick: Okay.

C. J: I would say it is extremely important Patrick is the simple answer here are the three things we are solving for with our own LMS first of all they are to use case specific.

Gina Mastantuono: Security and risk in totality, are still doing well. And so it's the great thing about having a platform with the breadth that ServiceNow has that we continue to drive really, really good growth at our scale across the platform. Yeah. And the only thing I would add there is that every single workflow continues to still grow double digits plus plus. So we have no, hey, this is being taken out of x, or this has been taken out of y.

C. J: And service now has many use cases that are used by our customers, whether it's service management customer service our item all of our key product lines. These are the use case specific and sometimes you would say even for what bill talked about agent summarization and other things our techs to court, we always want to use case spin.

Gina Mastantuono: Besides Gina individually calling out all our growth vectors, whether it's our core, which is ITSM and ITOM, or whether it's our growth, which is CSM and other products, App Engine, part of creator and customer, all of them continue to grow very nicely. And they grew very nicely in Q1.

<unk>. So then the question is why.

C. J: One the accuracy is higher.

C. J: Number two.

C. J: These are smaller models, which are efficient to run as you have seen our gross margin guidance that <unk> provided that we feel comfortable with the cost to run this models because when the model so smaller the <unk>.

C. J: Cost to run them is not high and number three from them.

Chirantan Jitendra Desai: Thanks, Keith. We'll take our next question from Tyler Radke with Citi. Yeah, thanks for taking the question. I wanted to ask you how you're seeing the momentum just in terms of standard to pro migrations. We talked a lot about Pro Plus, but it would seem that, you know, there is still a huge opportunity in terms of, I think, you know, close to 50% of the installed base on standard. If you started to see an acceleration in those migrations, can you just talk about the opportunity there? Thank you. So first, I'll use Tyler, one quick example of that. I was in a conversation at a bank, with a very technical audience in their technology organization. They were still on the ITSM standard.

C. J: End user perspective, a smaller model always performs better.

C. J: So I consider this as a unique strategy that we are fortunate to have a great AI teams that service now focused on not only the engineering execution, but combine that with research and experience on how our customers will consume probe plus.

C. J: These things matter and Thats why domain specific excellence small language models is the right strategy for service now we can run it in our cloud.

C. J: <unk> data is protected and.

C. J: They have higher throughput and get higher value.

C. J: Yes.

Chirantan Jitendra Desai: Once they saw what we did with ProPlus, they actually bought Pro and ProPlus together. And that is just amazing that they bought both technologies together, not just saying, hey, I'm gonna go to Pro and then upgrade to ProPlus. That's a very specific example.

Speaker Change: That's super helpful. Thank you.

We will take our next question from John <unk> with Guggenheim.

Speaker Change: Yeah.

John: Thank you for taking my question.

John: Gina Bill you both talked about the strong government across the world and emphasizing international I know the U S. Government's it's strong for you in <unk>.

Chirantan Jitendra Desai: But the way we look at this specific product line, whether it's ITSM or whether it's CSM, our customer service, is I look at both Pro and Enterprise in total. So when I look at Pro and Enterprise in total, I'm excluding ProPlus on purpose here. So Pro and Enterprise, which are the bigger SKUs at a higher price point, they grew nicely for ITSM, for CSM, for our HR service delivery. Three of our anchor businesses; when you combine Pro and Enterprise, that is still a high-growth business. And then you add Pro Plus, that's what allows us at this scale of 2.52 billion to grow at 24.5%. Thank you.

John: Suppose it's still pretty good pretty good for you, but do you see that you didn't mention it.

John: A list of.

John: Of verticals that did well this quarter can you can you comment a little bit more on the U S. Federal government and what you expect for the rest of the year.

Speaker Change: Absolutely John Thanks for the question.

Speaker Change: I didn't mention it because we had such great results and so many other industries and sectors, but our federal business also was strong and had its biggest.

Speaker Change: Biggest Q1 ever with 8 million dollar plus deals and net new ACD growth had accelerated and so we hosted our largest stead foreign ever with customers representing more than a $1 billion in HCV and triple the number of attendees at our executive circle and over 35 partners sponsorships and so.

Unknown Executive: We'll take our next question from Gregg Moskowitz with Mizzouho. Thank you very much for taking the question. Bill, getting back to the topic of IT budgets as it relates to ServiceNow broadly, do you have a sense of how much of JMAI software spend is incremental today as opposed to perhaps coming from other areas of IT? Yeah, it's a really important question, Gregg.

Speaker Change: A really strong federal business and actually our Gen. AI offerings are reinforcing our ability to help accelerate the transformation journey for our federal customers and so we're seeing early adopters and healthy industry.

Speaker Change: Sorry healthy interest in our domain specific models, which offer better security that C. J, just talked about and really can drive tremendous efficiency gains and so exciting themes ahead for 2024 and and feel really good about what the federal business will continue to do for us as well as public sector as a.

William R. McDermott: I really believe IT budgets in their own right will go up on a standard rate basis, as we've seen now for many, many years. But business executives, however, are inserting their will into the generative AI revolution because the CEO is in a boardroom with her senior team sitting around a table with the board of directors, and they're like, "hey, what are you guys doing with Gen AI?" And they know now that they have to go into that room with a story, because this is a lot like, you know, when we had the internet, then we had the iPhone moment, everything went mobile, everything's going gen AI. It's just a question of how quickly you get there.

Speaker Change: So thanks, so much for the questions. Thanks Gina.

Speaker Change: We will take our next question from Ethan Brook with Wolfe Research.

Ethan Brook: Hey, guys. This is Alex zukin.

William R. McDermott: So I believe that a lot of the business operating spend will be moved to next-gen AI technology use cases that serve the business. And the reason I believe I'm right about that is, if you look at great companies, you know, some of them in this quarter, like Microsoft and Novartis, or Hitachi Energy, or Equinix, or IBM, they're looking at this as, hey, what does this mean to my employees, to my customers, to my partners?

Ethan Brook: From Wolfe Thanks for taking the question.

Aleksandr J. Zukin: Maybe just the question.

Ethan Brook: Because you guys have done a couple of times on pro plus adoption listen it's very clear that the enthusiasm is there the interest level is there you talked about it.

Ethan Brook: At length in terms of the new product launch.

Being the fastest ever is there.

Ethan Brook: They're a way to kind of stratify or at a high level, just give us a sense for what percentage of your deals or pipeline.

Ethan Brook: Either for Q1 included pro plus and how it looks for the rest of the year and how that compares to your kind of expectations. When you set on this journey and then I've got a quick follow up.

William R. McDermott: And they're very well aware of the fact that inflation's sticky and rates are high, and they're on their own. They've got to deal with this stuff. And the only way to change the game is to rethink the game and move from checkers to checks, and Gen AI is now opening up the window for transformational conversations, and that's why I say we are the AI platform for business transformation because we're using technology to transform the business. How can the business run at a lower cost?

Speaker Change: Hey, Alex good to hear from you. So I'll take this one so there are a couple of things we are seeing so.

Speaker Change: When we launch pro in 2018 September and we launched <unk> plus in 2023 September as Bill outlined in his comments the approved plus.

Aleksandr J. Zukin: Uptake by our customers is at a higher pace than Pru uptake was across not only just <unk>, but also CSM and also HR, which are three big product lines for service now so when you look at exactly.

William R. McDermott: They're asking questions like, "Why am I on several different releases on-premise and in the cloud, and why do I have all these systems? I need a system for every 1,000 employees. It's ridiculous.

William R. McDermott: So they want to rethink things and so I think there's two things that are going to happen. One is business budget is going to move into the Gen AI category and it's not going to take away from the IT spend in the end and two there's going to be real winners and real losers and real winners and real losers has already begun its formation because if you don't plant the AI flag in the ground in the next eight months there's not going to be an AI flag to put in the ground and ours are getting put in the ground all over the global economy and the company that I see out there doing extremely well in that regard is what Microsoft is doing with CoPilot and I see what we are doing with now Assist AI and I think it's the combination of those two players in the enterprise and obviously you've got the great ones like NVIDIA and so forth that's building the GPU force but that is really what I'm seeing and I'm also super honored this quarter to see IBM really jump in as a friend and a partner with ServiceNow and we feel the same way about WatsonX and we're very open to all the participants that are making LLMs and they can all integrate with ServiceNow and we'll own the domain specific to ServiceNow but we welcome all participants and I think that's another unique part of ServiceNow that we're not interested in shutting anybody out we're actually technology capable enough to open up to everybody and that's really turning on the whole ecosystem in our favor so plants are being put in flags in the ground in the kingdom of Saudi Arabia all the way to Japan and beyond we are winning, Terrific insights. Thanks, Bill. Thank you, Gregg. We'll take our next question from Mark Murphy with J.P. Morgan. Oh, I do apologize. It looks like Mark has disconnected.

Aleksandr J. Zukin: Two quarters in two days that we have been in the market. It has exceeded our internal projections on what drove plus we'll do and our ability to sell them and as gene outlined that not only it was in the seven out of 10 deals which are the top deals of course.

Aleksandr J. Zukin: Service now in Q1, we had 7 million dollar plus deals including public sector deals.

Aleksandr J. Zukin: In a regulated environment, where our engineers have made the technology work for those regulated environment. So overall when I see what is happening on the demand environment. It is at a higher pace given very clear metrics around productivity for whether it's <unk> customer services.

Aleksandr J. Zukin: HR stuff all for the employees and Thats, what is driving the demand because it accelerates the productivity or multiplies. It heavily on I'll call. It. The second thing I would say is when I look out Q2, Q3, Q4, I still see significant interest from customers and they are saying.

Aleksandr J. Zukin: Okay C J, what's going on with the customers who purchase the same. So for example, Q4 now here is a really positive news that I do want to report and we will share more details.

Aleksandr J. Zukin: At our financial Analyst day, Alex is that customer.

Aleksandr J. Zukin: Customers are for the first time.

Aleksandr J. Zukin: Very eager to turn on pro plus and want to see and work with us on where the productivity improvements. They are seeing and say help us understand I saw that when a car got transferred from one it is into the other idea agenda and follow the Sun model.

Aleksandr J. Zukin: Summarization help them significantly so they didn't ask the end user. The same question. So there are a lot of nuances. We are learning as we worked with our customers, but they are deploying and when I say deploying us in implementing growth plus at a much faster rate than Pearl, which is allowing us and our sales.

Gina Mastantuono: We'll take our next question from Brad Selnick with Deutsche Bank. Great, thanks so much for taking the question. You know, it's great to hear all the traction in international markets. You called out deals in Australia, Italy, and Brazil.

Gina Mastantuono: But I want to focus, Bill, on what you just mentioned about the Kingdom of Saudi Arabia, where, in your press release, you called out a $500 million investment in that market, given, obviously, what's a massive, massive opportunity. Gina, can you double-click on the $500 million investment you're making over what time period, where it lands on the financials, and maybe more generally, how should we think about your strategic use of capital and CAFX for these types of deals? Thanks.

Aleksandr J. Zukin: Team to use this as an example, while convincing other customers to sell so overall no.

Aleksandr J. Zukin: Not only the demand environment I am seeing is better for proved plus then through if you asked me. The same question in 2019 in April.

Aleksandr J. Zukin: Five years ago, but I'm also seeing that customers are turning on pro plus and working with US saying here is what I am seeing the improvement here is how I should think about it and our engineering teams are doing phenomenal job releasing improvements literally on a monthly basis to make sure that our customers are successful with pro plus.

Gina Mastantuono: Brad, thanks so much for the question. So we're really excited about the investment in Saudi Arabia and, and rest assured that 500 million is a long-term investment over a long horizon period. And most of that investment is in data centers. So it'll be in the cost of sales.

Aleksandr J. Zukin: Okay.

Aleksandr J. Zukin: And we'll take our next question from Michael <unk> with Wells Fargo Securities.

Aleksandr J. Zukin: Okay.

Michael: Hey, great. Thanks, I appreciate you squeezing me in Jena, 47% free cash flow margin certainly stands out.

Michael: Maybe walk us through the drivers of strength there for Q1 anything one time for us to consider and maybe just given we're calling on to the margin guide for the year, just how we should think about seasonality of free cash flow throughout the rest of the year. Thank you.

Gina Mastantuono: But you'll see, again, we manage our margin very tightly. And the growth that we're expecting from that investment is huge. The opportunity that we see in Riyadh and Saudi Arabia and Neom is great. And Bill spent a nice time there at their LEAP conference.

Speaker Change: Yeah. Thanks, Michael for noticing we're really proud of the 47% free cash flow margin.

Speaker Change: Year over year, though you have to remember that Q1 of last year was.

Speaker Change: The lower than normal given the Silicon Valley Bank and regional bank crop prices that happen that quarter all of that being said, even if you normalize for that we are significantly higher than that.

Gina Mastantuono: And we're really excited about really pulling our technology to really help that society grow and become a digital first economy. And they're leaning in very heavy with ServiceNow, and they are really excited about our product portfolio, not only our Gen AI, but really the breadth of the entirety of the portfolio. So it will be within our CapEx guides that you have always seen, it's not on top of, and we're just really excited about planning more flags in the Middle East. Awesome, thanks for the color.

Testament to the strong margin operating margin and some nice work that we've been doing on working capital efficiencies and so we feel really good seasonality for free cash flow will be similar to what you've seen historically.

Speaker Change: And so just really strong results. The team has done an outstanding job on working capital efficiencies and we'll continue to see that as well.

Gina Mastantuono: Thanks, Brad. And Mark Murphy has dialed back in. We'll go to Mark Murphy with J.P. Morgan. Thank you. I'm going to try not to hang up the phone this time. Bill, I'm curious how you're looking at the onboarding of talent into the ServiceNow ecosystem, because we're being told that the demand for ServiceNow consultants is at a multi-year high. We're wondering if the economy can create those jobs quickly enough to keep up with the demand that you're driving.

Gina Mastantuono: And also, is there a pivot point coming where you would want to crank up your own hiring engine within ServiceNow to keep up with the top-line growth? Yeah, first of all, Mark, thank you very much. Incidentally, my compliments on the research that you put out. I read your email this morning, and you called the quarter exactly as it was. So, super well done on your part. Not surprising considering the great company you work for. I will give you a couple of things.

Speaker Change: And we have time for one last question, we'll take our last question from Derrick Wood with Cowen.

James Wood: Oh, great. Thanks <unk>.

James Wood: Jay just to kind of follow up on that last discussion.

James Wood: Just in terms of how youre seeing adoption of Gen. <unk> I guess on one end of the spectrum, perhaps it's easier to drop this into the hands of workers' let them experiment quickly figure out how to drive productivity on the other end of the spectrum. Perhaps there is a lot of data hygiene investments needed you need size to come in and help drive real Prost.

James Wood: Strange change and really drive the learning curve I guess, where do you guys. What ends of the spectrum are you seeing when it comes to adopting <unk> labs within the service now platform.

Speaker Change: So first of all thanks for the question here is how I would describe it.

William R. McDermott: Leadership is everything. We just hired a great leader who's leading our training initiatives globally, both internally and externally, and she is going to drive not only a knowledge revolution within our own company but also within the ecosystem. And no, we're not going to build a services company here. We're very comfortable with the ecosystem and building out the ecosystem.

Speaker Change: Our design goals and engineering goals were.

Speaker Change: This has to be super simple to turn it on and broke plus once he our umbro.

Speaker Change: And you can start to using our proved plus capabilities, whether it's what agents employees and so on that has been our design principle. The setup is super simple and customers are turning it on and seeing where they are seeing improvements on productivity, whether it's what agents are employees. So that's number one number two I absolute.

William R. McDermott: We made a commitment with Rise Up with ServiceNow that we'd have a million people trained around the world on the ServiceNow platform. And we're well on our way to achieving that goal. I talked about platformation as one company that probably not everybody on this call has ever heard of. But you know, all the big ones, and they're all investing huge human capital.

Speaker Change: <unk> do not expect that this requires a heavy system integrator.

Speaker Change: Self implementation that is drawn out in the all machine learning technologies, where you create a model refining the model and you need data scientists machine learning engineers and so on this is pretty straightforward for service now use cases <unk>.

William R. McDermott: And some of them have literally multi-multi billion dollar business plans built with ServiceNow. So we really like the fact that we can impact the customer's value case with our ServiceNow Six Sigma knowledge team, and then we can extend the feet on the street through the ecosystem.

Speaker Change: System integrators can help is what bill talked about that hey is there a new way to look at this process and should I, even put in another process on service now platform because I can see this is just super fast to get value out of service now so in terms of implementation.

William R. McDermott: And also the trust that we have with the ecosystem, where they know we're not trying to duplicate their business models. On the contrary, we need them to invest in their business models to move our ambition to be the defining one forward. So it's a really good question, actually.

Speaker Change: Cycles, they are actually faster.

<unk> plus than they have ever been before and we don't expect a heavy.

Speaker Change: <unk> cost.

However, if our customers want to loaded system integrators, the biggest value that they always said is helping them think through what additional agility way I use cases, they can use and redefining processes.

William R. McDermott: And you are right; we're working really hard at it. But it's also true for you to know that the partners see the opportunity like never before, and they're doubling down on ServiceNow. So we think we have, you know, a good form-formed strategy. And we think that we are going to be able to penetrate this global economy. And we're moving at warp speed to do so. Thank you so much.

And Derik I would just give you one thing to think about too you can take great companies like Novartis, who want to be a global leader.

Speaker Change: In their industry and that industry has been held back with six and a half year clinical trials.

William R. McDermott: I really appreciate it. Thank you, Mark. We'll take our next question from Samad Samana with Jeffreys. Hi, good evening. Thanks for taking my questions. Hey, how are you?

And these kinds of Ceos are rethinking everything and they're using generative AI as the gateway to change and.

William R. McDermott: I hope everybody's doing well. So thanks, as always, for squeezing me in. I guess, Bill, I wanted to follow up a little bit to Mark's question, because sales and marketing hiring in the first quarter was basically as many heads as you did the last three quarters of 2023. And I know there's some seasonality to it, but are you guys ramping hiring back up as you see more demand? Is there a certain type of salesperson that you need?

Speaker Change: And they are looking at not only gen AI, but theyre also looking at service now as a fresh new platform designed to take on some of the tougher process challenges that has slowed companies down and as T. J said, which I think is a major point.

Time to implementation on these gen. AI use cases has been faster than anything I've seen not just against pro.

William R. McDermott: As you think of more AI-driven sales, just maybe help us understand what you saw in 1Q and maybe the philosophy around it. Yeah, Samad, we see the biggest opportunity we've ever seen. And we know the Gen AI revolution is real, and we're doubling down.

Speaker Change: But against anything they want it in now so there is an urgency and that urgency is coming from the C suite and it's a movement.

Speaker Change: Never seen a desire for implementation speed like I have for Gen III and that to me is a big factor as you navigate and the way you think about this business. This business model in <unk> as a category who's going to win who's going to lose and which customers really want the solution how quickly.

William R. McDermott: What you're seeing is investment very focused on building the best software in the world and selling the best software in the world. So we have great leadership on both the engineering side and the go-to-market side. And we're going to have more clarity of focus in the way we drive the go-to-market. Now we're getting to size and scale the calls for that. So there are various motions to market that will have a single line of sight, accountability, and responsibility for a number.

Speaker Change: Do they want the solution if they see the value they want it yesterday and Thats a great sign for us.

Speaker Change: Yeah.

Speaker Change: Okay.

Speaker Change: Thank you and with that that does conclude today's presentation. We thank you for your participation today and you may now disconnect.

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William R. McDermott: And accountability can't be stressed highly enough because we need leaders that can run businesses here. And that's what really big leaders want to do anyway. And Gina rightfully pointed out, we don't do anything without the margin in mind.

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William R. McDermott: So we have a pipeline, we manage the whole company on something we call the CEO dashboard, we are in real time with a rolling four quarter average pipeline, and we have our Gen AI use cases that are against that pipeline based on the stage of the sale cycle. So we know how many we can afford to hire based on the probability of closure within one to 2%. And that is how we drive the financial performance of the company and how many people we let in the door. I do want to stress, because we run a clean platform here.

William R. McDermott: And we run a generation AI company here; that's our absolute commitment; we are going to run a super efficient company. So on the GNA side of the equation, we continue to be lean. And as we get bigger, the percent of revenue that'll drop even further. So I think you're going to like that. And I think a lot of companies are now showing up here at our doorstep. They want to see the now one now story, because they're like, how is it that you could have one financial system for 1000s and 1000s and one HR system, and one CRM system when my company has hundreds, and I can't even keep track of them all. And I think a lot of what I'm trying to explain to you is when we are in the beginning stages of the end of one era and the beginning of another.

Gina Mastantuono: And I would just add that, you know, last year might have looked like we slowed down sales and marketing, but there's a lot in that number. And we talked about this a lot of operations, sales ops, and we actually were very focused even last year on continuing to hire quota-bearing feet on the street sales folks. We entered 2024 with the highest increase in ramp reps that we've had in a while.

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Gina Mastantuono: So yes, we will be accelerating. We feel really good about pipeline, and we feel really good about demand. But I want to make clear that we didn't stop hiring salespeople on the street last last year. We continued to hire. And we will continue to do that because our pipeline looks strong and demand looks great. Very helpful. And Gina, I had a quick follow-up for you.

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Gina Mastantuono: On CRPO, you mentioned, I think, in response to another question about maybe some early renewals in 1Q. Can you maybe just help us understand if that was material enough to impact the 2Q guidance or just, I know that the guidance was good, but just trying to think through on that timing, if there's anything we should consider for 2Q and then maybe even the back half based on your expectations and renewals. Yeah, so if you remember Samad, last year, we've been more prudent in how we've been forecasting early renewals because it's hard to forecast, it's very customer-specific and customer by customer.

Gina Mastantuono: And so in Q1, our beat was really strong on our net new ACV growth. But we also saw early renewals that were prudent forecast. I haven't changed how we're thinking about forecasting; I'm still remaining prudent. Given the macro, and so, you know, as we think about seasonality, I talked about Q2 being lower, slightly lower, but then it bounced back up in Q3, when Fed is our strong quarter.

Gina Mastantuono: And so, again, it wasn't material enough to impact the Q2 guidance, but I'm not assuming better early renewals in Q2 like we saw in Q1. Awesome. See you guys in a week and a bit.

William R. McDermott: Awesome, thanks Samad. By the way, Samad, when you show up, you'll notice that it'll be a stunning knowledge, and you'll see thousands more people than you saw last year. We just keep getting bigger and bigger. So get ready for the best Vegas show you've ever seen.

William R. McDermott: Looking forward to it, Bill. Thank you. Thank you. We'll take our next question from Patrick Walrabens with JMP Securities. Patrick, your line is open. Please go ahead.

Chirantan Jitendra Desai: Oh, great. Thank you. Bill and CJ, can you help us understand how important it is to have and release your own LLMs? So you guys had Starcoder in February, Databricks and DVRx in March, just as Snowflake did their Arctic sample.

Chirantan Jitendra Desai: I would say it is extremely important, Patrick, is the simple answer. Here are the three things we are solving for with our own LLMs. First of all, they are use case specific, and ServiceNow has many use cases that are used by our customers, whether it's IT service management, customer service, or ITOM, all of our key product lines. These are use case specific, and sometimes you would say, even for what Bill talked about agent summarization and other things or text to code, we always want use case specific LLMs. So then the question is why. One, the accuracy is higher. Number two.

Chirantan Jitendra Desai: These are smaller models that are efficient to run, as you have seen from the gross margin guidance that Gina provided, that we feel comfortable with the cost to run these models because when the models are smaller, the cost to run them is not high. And number three, from an end user perspective, a smaller model always performs better. So I consider this a unique strategy, and we are fortunate to have a great AI team at ServiceNow, focused on not only the engineering execution, but combining that with research and experience on how our customers will consume ProPlus. These things matter, and that's why domain-specific SLMs, small language models, are the right strategy for ServiceNow. We can run them in our cloud, customers' data is protected, and they have higher throughput and get higher That's super helpful.

Chirantan Jitendra Desai: Thank you. We'll take our next question from John Caffucci on Guggenheim. Thank you for taking my question. Gina and Bill, you both talked about strong governments across the world, emphasizing international. I know the U.S. government's been good for you, and I suppose it's still pretty good for you, but Gina, you didn't mention it in the list of verticals that did well this quarter. Can you comment a little bit more on the U.S. federal government and what you expect for the rest of the year?

Gina Mastantuono: Absolutely, John, thanks for the question. I didn't mention it because we have had such great results in so many other industries and sectors. But our federal business also was strong and had its biggest, biggest Q1 ever, with $8 million in deals and net new ACV growth that accelerated. And so we hosted our largest Fed forum ever, with customers representing more than a billion in ACV and triple the number of attendees at our executive circle. And we have over 35 partner sponsorships.

Gina Mastantuono: And so, really strong federal business. And actually, our Gen AI offerings are reinforcing our ability to help accelerate the transformation journey for our federal customers. And so we're seeing early adopters and healthy industry – sorry, healthy interest in our domain-specific models, which offer better security that CJ just talked about and really can drive tremendous efficiency gains. And so exciting themes ahead for 2024, and I feel really good about what the federal business will continue to do for us, as well as the public sector as a whole. So thanks so much for the question. Thanks, Gina. We'll take our next question from Ethan Brooke with Wolf Research. Hey guys, this is Aleksandr Zukin from Wolf.

Aleksandr J. Zukin: Thanks for taking the question. Maybe just the question that you guys have got a couple of times on ProPlus Adoption. Listen, it's very clear that the enthusiasm is there, the interest level is there. You talked about it at length in terms of the new product launch, you know, being the fastest ever. Is there a way to kind of stratify or, at a high level, just give us a sense for what percentage of your deals or pipeline, you know, either for Q1 included ProPlus and how it looks for the rest of the year and how that compares to your kind of expectations when you set out on this journey? And then I've got a quick follow-up. Hey, Aleks, great to hear from you. So I'll take this on.

Chirantan Jitendra Desai: So, there are a couple of things we are seeing. So, you know, when we launched Pro in 2018, September, and we launched Pro Plus in 2023, September, as Bill outlined in his comments, ProPlus uptake by our customers is at a higher pace than Pro, across not only just ITSM but also CSM and also HR, which are three big product lines for ServiceNow. So when you look at exactly two quarters and two days that we have been in the market, it has exceeded our internal projections of what ProPlus will do and our ability to sell it.

Chirantan Jitendra Desai: And as Gina outlined, not only was it in the 7 out of 10 deals, which are the top deals for ServiceNow in Q1, but we had $7 million plus deals, including public sector deals, in a regulated environment where our engineers have made the technology work for those regulated environments. So overall, when I see what is happening in the demand environment, it is at a higher pace, given very clear metrics around productivity for whether it's IT agents, customer service agents, HR staff, or employees. And that's what is driving the demand because it accelerates productivity or multiplies it, whatever you want to call it.

Chirantan Jitendra Desai: The second thing I would say is when I look out Q2, Q3, Q4, I still see significant interest from customers. And they are saying, okay, CJ, what's going on with the customers who purchased this in, say, for example, Q4? Now, here is a really positive news that I do want to report, and we will share more details at our financial analyst day, Alex, is that, Customers are for the first time, very eager to turn on ProPlus and want to see and work with us on where the productivity improvements they are seeing and say help us understand I saw that when a call got transferred from one IT agent to the other IT agent on follow the sun model the quick summarization helped them significantly so they didn't ask the end user same question so there are a lot of nuances we are learning as we work with our customers but they are deploying and when I say deploying as in implementing ProPlus at a much faster rate than Pro which is allowing us and our sales team to use this as an example while convincing other customers to sell so overall not only the demand environment I'm seeing is better for ProPlus than Pro if you ask me the same question in 2019 April which was five years ago but I'm also seeing that customers are turning on ProPlus and working with us saying here is where I'm seeing the improvement here is how I should think about it and our engineering teams are doing phenomenal job releasing improvements literally on a monthly basis to make sure that our customers are successful with ProPlus. And we'll take our next question from Michael Turrin with Wells Fargo Securities. Hey, great, thanks. I appreciate you squeezing me in.

Michael Turrin: Gina, the 47% free cash flow margin certainly stands out. Maybe walk us through the drivers of strength there for Q1. Anything one time for us to consider and maybe, just given we're holding on to the margin guide for the year, just how we should think about seasonality of free cash flow throughout the rest of the year. Thank you.

Gina Mastantuono: and some nice work that we've been doing on working capital efficiencies. And so we feel really good. Seasonality for free cash flow will be similar to what you've seen historically.

Gina Mastantuono: And so just really strong results. The team has done an outstanding job on working capital efficiencies, and we'll continue to see that as well. And we have time for one last question. We'll take our last question from Derek Wood with Cowett. Oh, great, thanks.

James Wood: CJ, just to kind of follow up on that last discussion, just in terms of how you're seeing adoption of Gen AI, I guess on one end of the spectrum, perhaps it's easy to drop this into the hands of workers, let them experiment, and quickly figure out how to drive productivity. On the other end of the spectrum, perhaps there are a lot of data hygiene investments needed; you need SIs to come in and help drive real process change and really drive the learning curve.

James Wood: I guess where you guys are on the spectrum when it comes to adopting LLMs within the ServiceNow platform? So, first of all, thanks for the question, Derek. Here is how I would describe it.

Chirantan Jitendra Desai: Our design goals and engineering goals were: This has to be super simple to turn it on, as in ProPlus, once you are on Pro, and you can start using our ProPlus capabilities, whether it's for agents, employees, and so on. That has been our design principle. The setup is super simple, and customers are turning it on and seeing where they are seeing improvements in productivity, whether it's for agents or employees. So that's number one.

Chirantan Jitendra Desai: Number two, I absolutely do not expect that this requires the heavy system integrator types of implementation that is drawn out in the old machine learning technologies, where you create a model, refine a model, and you need data scientists, machine learning engineers, and so on. This is pretty straightforward for ServiceNow use cases. Where system integrators can help is what Bill talked about, that, hey, is there a new way to look at this process? And should I even put in another process on the ServiceNow platform?

Chirantan Jitendra Desai: Because I can see that this is just super fast to get value out of ServiceNow, and before, and we don't expect a heavy implementation cost. However, if our customers want to leverage system integrators, the biggest value that they always add is helping them think through what additional generative AI use cases they can use and redefining processes. Derek, I would just give you one thing to think about, too.

William R. McDermott: You know, you could take great companies like Novartis, who want to be a global leader in their industry and you know that industry has been held back with six and a half year clinical trials, and these kinds of CEOs are rethinking everything and they're using generative AI as the gateway to change, and they're looking at not only Gen AI but they're also looking at ServiceNow as a fresh new platform design to take on some of the tougher process challenges that have slowed companies down and as CJ said which I think is a major point, The time to implementation on these Gen AI use cases has been faster than anything I've seen, not just against pro, but against anything. They want it in now.

William R. McDermott: So there's an urgency, and that urgency is coming from the C-suite. And there's a movement. And I've never seen a desire for implementation speed like I have for Gen AI. And that, to me, is a big factor as you think about this business model and Gen AI as a category, who's going to win, who's going to lose, and which customers really want the solution and how quickly they want the solution. If they see the value, they want it yesterday.

Unknown Executive: And that's a great sign for us. Thank you. And with that, that does conclude today's presentation. We thank you for your participation today, and you may now disconnect. Please wait; the conference will begin shortly.