Service Now (NOW) Q1 2021 Earnings Call Transcript


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Service Now (NYSE:NOW)
Q1 2021 Earnings Name
Apr 28, 2021, 5:00 p.m. ET

Contents:

  • Ready Remarks
  • Questions and Solutions
  • Name Members

Ready Remarks:

Operator

Good day, and thanks for standing by, and welcome to the Q1 2021 ServiceNow earnings convention name. [Operator instructions] Please be suggested that as we speak’s convention is being recorded. [Operator instructions] I might now like at hand the convention over to your speaker for as we speak, Ms. Lisa Banks, senior vice chairman of finance.

Thanks, ma’am. Please go forward.

Lisa BanksSenior Vice President of Finance

Good afternoon, and thanks for becoming a member of us for ServiceNow’s first-quarter 2021 earnings convention name. Becoming a member of me are Invoice McDermott, our president and chief govt officer; and Gina Mastantuono, our chief monetary officer. Throughout as we speak’s name, we’ll overview our first-quarter 2021 monetary outcomes and focus on our monetary steering for the second quarter of 2021 and full-year 2021. Earlier than we get began, we wish to emphasize that a number of the info mentioned on this name, notably our steering, is predicated on info as of April 28, 2021; and incorporates forward-looking statements that contain dangers, uncertainties, and assumptions, together with these associated to the continued impacts of COVID-19 on our enterprise and international financial circumstances.

The steering we’ll present as we speak is predicated on our assumptions as to the macroeconomic surroundings through which we might be working. These assumptions are based mostly on the info we all know as we speak. Many of those assumptions relate to issues which are past our management and altering quickly, together with however not restricted to the time frames for and severity of social distancing and different mitigation necessities; the continued impacts of COVID-19 on clients’ buying selections; and the size of our gross sales cycle, notably for patrons in sure industries. Please consult with the press launch and the Threat Components and MD&A sections of our SEC filings, together with our most up-to-date 10-Q and our 10-Ok filed for fiscal-year 2020, for info concerning such dangers, uncertainties, and assumptions that will trigger precise outcomes to vary materially from these set forth in such forward-looking statements.

We might additionally wish to level out that the corporate presents non-GAAP measures along with and never as an alternative to monetary measures calculated in accordance with GAAP. All monetary figures we’ll focus on as we speak are non-GAAP, aside from revenues, internet revenue, remaining efficiency obligations or RPO, and present RPO or cRPO. To see the reconciliation between these non-GAAP and GAAP measures, please consult with our press launch filed earlier as we speak; and our investor presentation; and for prior quarters, beforehand filed press releases, all of that are posted at traders.servicenow.com. A replay of as we speak’s name may also be posted on the web site.

With that, I might now like to show the decision over to Invoice.

Invoice McDermottPresident and Chief Govt Officer

Thanks, Lisa, and good afternoon to all of you. Welcome to our Q1 earnings name. I hope everybody stays wholesome and protected and also you and your family members are benefiting from broader vaccine availability. ServiceNow stays grateful to be in such a powerful place to assist assist our households, communities, and clients.

We began 2021 with one other excellent quarter, delivering an ideal steadiness of development and profitability. Our workforce is executing, sustaining a swift tempo towards our path to $10 billion in income and past. In Q1, we grew subscription income 30% yr over yr, exceeding the excessive finish of our steering. We delivered sturdy profitability with working margin over 27%.

And we elevated free money move margin 7 factors yr over yr to 46%. Our important Q1 beat throughout the board represents the fervour our tradition has for innovating and our relentless concentrate on the shopper. We’re ideally positioned to ship what our clients want. Up to now yr, the transformation of labor has accelerated the adoption of digital merchandise, companies, and experiences.

In consequence, digital investments are at an all-time excessive and can complete greater than $7.eight trillion by 2024, in accordance with IDC. ServiceNow is the strategic authority for digital transformation throughout the enterprise. We now have expanded the boundaries from IT to worker, buyer, and now creator workflows for citizen builders. The digital economic system is firing on all cylinders and so are we.

Our tradition was born for this second. Our workforce of 14,000 colleagues are exponential thinkers. That is how we repeatedly deliver innovation to every little thing we do. In simply the previous 18 months, we’ve got greater than doubled the options and performance of our platform for our clients.

We’re on the epicenter of the workflow revolution. Our function has by no means been extra related. We’re making the world of labor, work higher for individuals. We’re serving to our clients dream massive and to construct their digital bridge to the long run.

Xerox, for instance, is working with ServiceNow to rework the companies industry. Leveraging our subject service administration, their technicians will use machine studying to proactively remedy buyer issues. They’re utilizing digital and augmented actuality instruments to resolve their clients’ points by way of desktop, cellular, and sensible glass units. On this daring new world, it is as if their brokers are there in particular person.

Digital transformation is about creating nice worker and buyer experiences. In an more and more distributed, hybrid workforce, firms have to create frictionless experiences that make it simple for workers to get work executed. This requires seamless cross-enterprise workflows linking techniques, silos, departments, and processes. Solely the Now Platform can do that with native integrations: the platform of platforms, the facility of 1, one knowledge mannequin, one structure, one enterprise answer to workflow each enterprise problem.

That is what ServiceNow delivers. We’re the one ones doing what we do the best way we do it. Sturdy demand for ServiceNow is clear in our outcomes, excessive development organically pushed at mass scale whereas aggressively investing in future development and delivering important profitability, an incredible enterprise mannequin, and a real testomony to the facility of the Now Platform. Our groups preserve innovating.

We’re proud that Quebec, our newest platform launch, delivered 1,700 new buyer capabilities; breakthrough improvements like predictive AI operations, AI search, and digital brokers that improve each expertise, to call just a few. ServiceNow helps clients transfer to the cloud and invent new enterprise fashions. The previous yr has demonstrated that giving individuals the precise productiveness instruments is important to success, particularly in distributed work environments. It is why organizations like Adobe, Deutsche Telekom, Logitech, Metropolis of Los Angeles, and Uncover are utilizing the Now Platform.

Uncover, actually, is totally using the Now Platform’s ease of improve, taking part within the early adopter program for our Quebec launch. Now Uncover is ready to concentrate on well timed availability and adoption of latest performance. The Now Platform is the gold customary for time to worth. By the top of 2021, Forrester Analysis predicts that 75% of growth retailers will use low-code platforms.

With Quebec, we’re delivering new low-code instruments that transfer app growth past the borders of the engineering group and into the palms of citizen builders, workers with out software program experience who have to shortly create workflow purposes. We’re seeing sturdy response. The Nationwide Most cancers Institute on the U.S. Division of Well being and Human Providers is a superb instance.

NCI has established a digital service focus on ServiceNow’s low-code app engine platform. In simply 10 days, NCI leveraged ServiceNow to construct a brand new utility for an internet portal to gather and monitor specimens from COVID-19 sufferers. ServiceNow’s low-code app helps NCI workers assist the worldwide analysis neighborhood in understanding how genetic elements contribute to the severity of COVID-19 circumstances. We additionally launched course of and workforce optimization capabilities in our new enterprise SKUs.

This brings much more intelligence to our clients, permitting them to be extra agile. We’re placing new AI capabilities within the palms of our clients to allow them to improve productiveness whereas spending extra time on human creativity. With our latest acquisition of Intellibot, ServiceNow could have an unmatched clever workflow automation answer with RPA, AI, machine studying, and course of mining native to the Now Platform. You may hear extra about this from our chief product and engineering officer, CJ Desai, at our upcoming investor day.

Please be there. Now, let’s look extra intently at Q1 efficiency highlights throughout our portfolio. Our higher collectively options proceed to drive extra multiproduct offers. Our core IT workflows stay sturdy.

ITSM was in 12 of our prime 20 offers. Our AI and ML capabilities embedded with our professional SKU proceed to resonate with clients. ITOM had a powerful quarter and was in 13 of the highest 20 offers. EMEA was particularly sturdy.

We’re hitting a brand new gear with CEO engagement. We’re seeing extra demand throughout industries, together with monetary companies, as EU banking laws require firms to have full visibility into their property whereas additionally managing threat. HSBC, for instance, selected ServiceNow in a multiyear partnership as their workflow companion of alternative to assist them digitize at scale. Supporting HSBC’s workers, ServiceNow will ship the applied sciences wanted to simplify their architectural panorama.

This creates efficiencies, higher controls, and compliance. Australia and New Zealand Banking Group additionally selected the ServiceNow platform to consolidate, simplify its IT techniques and streamline operations to enhance the worker expertise. The Now Platform offers them the benefit of a completely built-in view of expertise and threat. We proceed to see power in our buyer workflows.

Our investments within the telco vertical are gaining traction each day and it is materializing in wins throughout the globe. Lumen Applied sciences, a number one telecommunications firm, is reworking its buyer care and assurance operate with ServiceNow buyer workflows. They may use the Now Platform to ship best-in-class buyer experiences throughout their networking, cloud, and safety options. Telia, a number one multinational telecommunications firm, chosen ServiceNow to rework service operations, connecting community operations, workers, and clients all over the world.

Creator workflows, our platform enterprise, was in 19 of our prime 20 offers. Three of our prime 10 app engine wins got here from APJ, the place we’re seeing elevated consciousness of ServiceNow and is constant to drive demand. A big international manufacturing firm in Japan is planning to make use of our app engine to automate handbook processes, take out prices and dangers related to migrating on-premise purposes to the cloud. This might be a motion in Japan.

Within the U.S., the Now Platform is on the coronary heart of the town of Los Angeles’ digital transformation, serving to to supply dependable entry to important companies for its Four million residents. Town is increasing its use of digital expertise to supply immediate-access companies, which permits residents to get the help they deserve. Worker workflows had been included in eight of our prime 20 offers. Zalando is a number one on-line platform for style and way of life connecting clients, manufacturers, and companions.

As a part of their HR transformation, they are going to implement a central worker companies portal utilizing ServiceNow’s worker workflows. Zalando sees this as a important element in supporting their development and bettering their worker experiences. Worker and office security are prime of thoughts for our clients. We’re the one firm with a whole suite of purposes to fulfill these important wants.

For the reason that begin of the pandemic, ServiceNow has been on the forefront of fixing unprecedented challenges. We noticed the necessity early and acted shortly, first, with our Emergency Response apps; then our Secure Office apps; and now with Vaccine Administration Administration. We leverage the velocity and agility of the Now Platform and the unimaginable expertise of our product workforce to innovate quick, ship market-leading options to assist our clients, and assist preserve them protected. You see organizations are trapped within the final mile of vaccine administration, as they lack the processes and infrastructure wanted to vaccinate individuals shortly.

That is the workflow problem of our time. To deal with these challenges, organizations are utilizing the Now Platform as their vaccine administration command middle. Our workflows are connecting organizations’ current expertise infrastructure to assist orchestrate the important components of the vaccine administration course of, together with distributing, administering, and monitoring vaccines. The Minnesota Youngsters’s hospital applied our Vaccine Administration Administration in 5 days so they might keep targeted on their No.

1 precedence, caring for youngsters. The hospital is utilizing ServiceNow digital assistant to reply questions and schedule affected person vaccinations. They’re leveraging stock monitoring and scheduling to make sure appointments, staffing ranges, and vaccines are all in sync. Germany’s largest state, North Rhine-Westphalia, is utilizing ServiceNow to assist vaccinations for tens of millions of individuals.

Inside two hours of the portal going dwell, 120,000 individuals have registered and acquired an appointment. ServiceNow ended Q1 working with over 100 organizations and governments globally to assist vaccinate individuals at scale. We’re supporting the supply and administration of tens of millions of vaccines globally. We’ll proceed to do extra.

The workflow revolution is all about serving to individuals. We’re humbled to be serving to so many individuals all over the world handle this workflow problem. In abstract, we had a fantastic begin to the yr with sturdy momentum. I am so pleased with what our workforce has completed over the previous yr and what they proceed to attain.

From the start of this pandemic, we’ve got targeted on caring for our individuals and caring for our clients. That is why we’re so grateful to be named to the Fortune 100 “greatest locations to work” record for the primary time. And we’re proud to have elevated our place on the Fortune’s Greatest Workplaces in Know-how record by greater than 10 factors. Our tradition demonstrates again and again how we have powered by all climate circumstances.

Our engineering pleasure is unmatched, our innovation relentless and our buyer focus tireless. We now have a really, very sturdy pipeline considerably higher than something we have seen earlier than. We now have all of the learnings of digital buyer relationship administration. Our sturdy go-to-market group is working in excessive gear.

Our buyer companies and companion ecosystem is accelerating time to worth. Our enterprise is ever resilient, our alternatives by no means higher. We proceed to work with a number of the world’s best manufacturers, together with BMW, Bristol Myers Squibb, FIS, Subway, Commonplace & Poor’s. We’re honored to be their digital transformation companion.

And we’re additionally excited to focus on much more clients at our upcoming Data21 expertise in Might, which might be our greatest buyer occasion ever. And we stay up for seeing all of you at our upcoming investor day. This ServiceNow machine is firing on all cylinders. We’re not slowing down.

We’re properly on our method to $10 billion and past, and we’re striving with all we’ve got to be the defining enterprise software program firm of the 21st century. Gina, over to you.

Gina MastantuonoChief Monetary Officer

Thanks, Invoice. Q1 was a fantastic begin to the yr. On the heels of an amazing This fall, the workforce continued to execute properly and delivered one other sturdy quarter of outperformance. We exceeded the excessive finish of our subscription income, subscription billings, and cRPO steering; and people top-line beats carried by to a really sturdy working margin and robust free money move.

Q1 subscription revenues had been $1.293 billion, representing 30% year-over-year development inclusive of a Four-point tailwind from FX. Remaining efficiency obligations or RPO ended the quarter at roughly $eight.eight billion, representing 34% year-over-year development, placing us properly on our method towards our $10 billion income goal. Present RPO was roughly $Four.Four billion, representing 33% year-over-year development and a 100 foundation factors beat versus our steering. Notably, we delivered that beat with 100 foundation factors much less of an FX tailwind.

As a result of weaker euro, forex contributed Four factors as a substitute of our unique outlook for a 5-point tailwind. Q1 subscription billings had been $1.365 billion, representing 29% year-over-year development and a $50 million beat versus the excessive finish of our steering. FX and length had been a Four-point tailwind yr over yr. As Invoice talked about, we noticed explicit power in EMEA as investments made in 2020 are gaining traction.

In Q1, the area closed one in every of its largest offers ever, serving to to drive very sturdy year-over-year internet new ACV development. We’re additionally seeing bettering tendencies in APJ, the place we landed two of the highest three platform offers within the quarter. We proceed to see the secular tailwinds pushed by the intersection of digital transformation, cloud computing, and enterprise mannequin innovation. Each C-suite chief needs to create nice experiences for his or her workers and their clients, and ServiceNow is delivering.

The Now Platform gives the velocity, flexibility, and innovation firms want. The sustained power of our top-line development is the results of constant execution from throughout the group as we handle these alternatives, from our engineers who proceed to drive modern innovation, to the gross sales and buyer success groups who companion with our clients to make sure we’re delivering worth and everybody else in between that assist to ship nice experiences. It has been an amazing workforce effort. Our renewal charges remained sturdy at 97%, because the Now Platform stays a mission-critical a part of our clients’ operations.

We closed 37 offers higher than $1 million ACV within the quarter, together with seven internet new clients. Our concentrate on promoting complete options as a substitute of level merchandise proceed to drive extra multi-product offers as 17 of our prime 20 offers included three or extra merchandise. We now have 1,146 clients paying us over $1 million in ACV, up 23% yr over yr. And the variety of clients paying us $5 million or extra in ACV grew over 50% yr over yr.

Turning to profitability. Working margin was 27%, up 300 foundation factors yr over yr, pushed by our sturdy top-line outperformance and the timing of some spend that may shift into Q2. Our free money move margin was 46%, up 700 foundation factors yr over yr, pushed by sturdy collections and decrease T&E. Collectively, these outcomes present the facility of our enterprise mannequin and our means to drive a steadiness of development and profitability.

Earlier than I transfer to steering, I wish to give a short replace on the macro tendencies we’re seeing in our enterprise. The industries extremely affected by COVID that we outlined early final yr, which symbolize about 20% of our enterprise, remained resilient in Q1. We closed a number of seven-figure offers in these verticals, and renewal charges had been forward of the corporate common. Nevertheless, we did proceed to see some headwinds in severely impacted industries resembling airways.

Whatever the industry, in an more and more distributed and hybrid workforce, firms have to create constant and frictionless experiences that make it simple for workers to get work executed. Digital investments are at an all-time excessive and are anticipated to proceed rising, as firms should reinvest themselves for the brand new economic system. ServiceNow is the strategic authority in digital transformation, and we’re dedicated to serving to our clients reach that journey. These sturdy secular tailwinds, paired with the power and agility of the Now Platform, positions us properly for 2021 and past.

Pipeline era has remained sturdy globally even forward of our Data 2021 occasion, which is an enormous driver, notably for the Americas. It’s serving to to drive the web new ACV acceleration in our enterprise this yr. Enterprises all over the world are recognizing the power of our one structure mannequin; and its means to ship nice, scalable experiences with velocity and effectivity. Now, let’s flip to steering.

For Q2, we anticipate subscription revenues between $1.29 billion and $1.295 billion, representing 27% to 28% year-over-year development, together with a 300-basis-point FX tailwind. We anticipate cRPO development of 30% yr over yr, together with a 250-basis-point FX tailwind. We anticipate subscription billings between $1.25 billion and $1.255 billion, representing 23% year-over-year development. Progress features a internet tailwind from FX and length of 300 foundation factors.

We anticipate an working margin of 21.5%, which incorporates $15 million of gross sales and advertising spend that shifted out of Q1 and into Q2; and 202 million diluted weighted excellent shares for the quarter. For the full-year 2021, we’re elevating our top-line development steering on a constant-currency foundation. We’re rising the midpoint of our earlier subscription income expectations by $32 million based mostly on the sturdy tendencies we noticed in Q1. Nevertheless, a weaker euro resulted in a $59 million headwind to our development.

Taken collectively, we anticipate subscription revenues between $5.455 billion and $5.47 billion, representing 27% to 28% year-over-year development. This features a 200-basis-points FX tailwind. Equally, we’re rising the midpoint of our earlier subscription billings expectation by $50 million on a constant-currency foundation. Nevertheless, the weaker euro resulted in a $68 million headwind to our development.

Taken collectively, we anticipate subscription billings between $6.19 billion and $6.205 billion, representing 24% to 25% year-over-year development. This features a internet tailwind from FX and length of 150 foundation factors. When it comes to quarterly seasonality, we’re persevering with to see a shift of Q2 and Q3 subscription billings into This fall. We now anticipate about 21% of our complete subscription billings to be in Q3 and 37% to be in This fall.

We proceed to anticipate subscription gross margins of 85% and an working margin of 23.5%. Lastly, we anticipate free money move margin of 30% and 202 million diluted weighted excellent shares for the yr. You may hear extra about our technique and long-term alternative at our upcoming investor day on Might 10, which might be webcast on our Investor Relations web site. Along with making work, work higher for individuals, we’re additionally dedicated to creating the world work higher as properly.

This week, we unveiled our first-ever international influence report. At our investor day, I am excited to have the ability to share ServiceNow’s international influence technique with you. In conclusion, ServiceNow is main this “as soon as in a era” alternative to make work, work higher for individuals. We’re targeted, disciplined, and dedicated to serving to our clients succeed.

We now have the platform companies want, and we are the workflow customary for enterprise transformation. Clients are utilizing the Now Platform to create new workflows for brand new worth chains to enhance experiences throughout siloed techniques and features to cut back friction in individuals’s each day lives, and it is displaying in our monetary outcomes. I am very excited in regards to the future in entrance of us. Lastly, earlier than shifting on to Q&A, I simply wish to thank all of our workers all over the world for serving to to make ServiceNow one of many Fortune 100 greatest locations to work.

ServiceNow’s best power is its individuals, and also you all proceed to make us ServiceNow sturdy. Invoice and I could not be prouder of this workforce. And with that, I am going to open it as much as Q&A.

Questions & Solutions:

Operator

[Operator instructions] Your first query comes from the road of Keith Weiss with Morgan Stanley.

Keith WeissMorgan Stanley — Analyst

Thanks, guys, for taking the query, and good to see the actually sturdy begin to the yr. I believe — a query for Invoice. I believe one of the notable sort of KPIs that we noticed is that pickup within the platform enterprise going to 20% with that new ACV, up from 15% simply final quarter. That appears to be a fairly large pickup.

Are you able to speak to us and provides us a bit little bit of coloration when it comes to what’s enabling these larger, extra strategic platform gross sales? Was there any processes you place into place with the gross sales pressure, or was it the brand new partnerships? Or give us some sort of concept of sort of how that picked up a lot within the outcomes this quarter.

Invoice McDermottPresident and Chief Govt Officer

Sure, completely. I might be pleased to, Keith. Thanks for the query. I believe the reply is we have executed all of these issues.

With Quebec, we’re delivering new low-code instruments that transfer app growth past the borders of simply the engineering group and actually into the palms of the citizen builders. In order you realize, with digital transformation, there’s a complete transfer to modernize apps, and that is actually tying engineering and enterprise collectively. And we’re seeing a higher market consciousness for ServiceNow’s digital transformation enablement to automate handbook processes inside organizations. And we’ve got a spotlight on this firm on being the platform of all platforms, which suggests we do not want anybody to lose for us to win.

So a number of of us combine into the Now Platform. And our low-code, no-code app growth to create new workflows that ship nice experiences is actually taking off, and I gave a few examples in our ready remarks. One such instance is Nationwide Most cancers Institute if you consider what they’re doing at NCI. They established a digital service middle of excellence, and so they’ve executed that round ServiceNow’s low-code app engine platform.

And when you consider time to worth: In simply 10 days, they had been up and operating with an internet portal to gather and monitor specimens of COVID-19 sufferers. So we expect that that is going to be a runaway success story for the corporate. And while you take a look at the year-on-year development right here and also you take a look at the pipeline, we’re extraordinarily bullish on this enterprise.

Keith WeissMorgan Stanley — Analyst

Glorious. That is useful.

Invoice McDermottPresident and Chief Govt Officer

Thanks, Keith.

Operator

Our subsequent query comes from the road of Karl Keirstead with UBS.

Karl KeirsteadUBS — Analyst

If I may simply ask you in regards to the seasonality in subscription billings this yr, perhaps type of a two-parter. When it comes to 2Q, it seems like, your constant-currency billings information of 20%, that is a few 5-point step down from what you probably did in Q1, but the 2Q evaluate, I believe, within reason simple provided that was a tricky quarter for everyone in software program within the year-ago interval. After which when it comes to the full-year billings information, it seems just like the constant-currency information is about 23% on the midpoint. Simply to make clear, was it about 22% earlier than so you have actually upped it by a proportion level or so? Simply to make clear.

Thanks a lot.

Gina MastantuonoChief Monetary Officer

Positive. So I am going to take the primary query, on the Q2 billings and the deceleration from Q1. So first off, you possibly can see in our IR deck that in Q1 we had $11 million in multiyear billings that we do not anticipate to happen in Q2. In order that’s a part of the deceleration.

As properly, we speak about timing. And we have talked about this prior to now, and why billings just isn’t the perfect metric, proper? As a result of if clients are co-terming throughout a contract interval, they typically renew early, which adjustments the timing of renewals and actually impacts billings and so one of many explanation why billings just isn’t the best of metrics and why we’re pointing to and giving steering now for cRPO of 30% in Q2. What I might say is that we’re actually seeing a reacceleration of internet new ACV in Q2 given the Q2 comp from final yr. It is simply that there’s a lot of noise in billings, and so I simply proceed to actually stress that we ought to be trying extra at cRPO.

After which for the total yr, it is about 28% normalized as a result of, keep in mind, final yr, we had the pull-forward of $80 million of billings out of Q1 of 2021 and into This fall. And so the full-year information, we’ve got elevated it by nearly the total Q1 beat that you just’re seeing.

Karl KeirsteadUBS — Analyst

Received it. OK. Very useful. Thanks, Gina.

Gina MastantuonoChief Monetary Officer

You are very welcome.

Operator

Your subsequent query comes from the road of Alex Zukin with Wolfe Analysis.

Alex ZukinWolfe Analysis — Analyst

Hey, guys. Thanks for taking the query. So perhaps, first, on simply the pipeline and the visibility, for Invoice. I might love to simply get a way for the way you are eager about sort of the massive strategic offers.

I believe there is a concern that final yr was a time to actually go and promote into the bottom and that there is not quite a lot of incremental monetization alternative obtainable in a number of the massive clients, however it does appear we’re at the least choosing up in our checks that could not be farther from the reality and that there is much more strategic alternative obtainable. So perhaps simply, first, I might love to listen to sort of your tackle that, Invoice. After which I’ve received a fast follow-up for Gina.

Invoice McDermottPresident and Chief Govt Officer

Positive. Completely, Alex. And to begin with, while you take a look at the pipeline, in my ready remarks I used to be very cautious to level out that it is by no means been higher than it’s proper now. And actually, it is excellent, and there is a few driving forces right here.

One, if you happen to take a look at EMEA as a theater, the EMEA enterprise is smoking sizzling. And also you noticed 80% year-on-year development within the first quarter out of EMEA. So let that be the primary indicator that the model is now alive and properly. We’re working extraordinarily properly by the Rolodex of EMEA.

And the CEOs throughout numerous industries and numerous mission-critical geographies are adopting us because the workflow customary. Proceed to consider in EMEA as a fantastic wellspring of development for ServiceNow, and that was an enormous one for us to get actually rolling. The opposite piece is APJ. We’re seeing now excellent development out of APJ, and I might say the identical is true for the model.

Now we’re well-known, and we’re on hearth in Japan. As you realize, Japan is an on-premise market and wishes to maneuver to the cloud. The workflow revolution is one nice method to get them going into cloud. I gave an instance of that in my ready remarks.

We’re additionally anticipating higher issues out of Australia with the management changes that we have made. We see South Korea doing extraordinarily properly, so I need you to consider APJ is yet one more wellspring of development that may go greater and better for ServiceNow. We have at all times been sturdy within the Americas. The Americas had a rare This fall, as you realize.

And they’ll sit back into their regular development charges and better and be heading in the right direction with the place we wished them to be on the finish of Q2. So that you add all that up within the geographic theaters and the enterprise is in nice form. The opposite factor we have executed is actually targeted on some breakthrough industries. Monetary companies and telecommunications shortly come to thoughts, the place as soon as we get rolling, the bowling alley impact takes impact very, in a short time right here.

And have in mind we’re now in a worldwide economic system that’s shifting shortly to lights again on. Final yr, GDP was down considerably within the international economic system, but digital transformation spend was up. This yr, because the economic system comes again, they are not slowing down digital transformation spend truly. It is also going up, however the economic system is waking up.

So what’s beautiful about this for us is we now have the CRM methods of digital promoting. Mix it with the direct promoting that at all times labored properly; and a number of the methods that we have enabled additionally on inside promoting; and the way we have taken the entire advertising worth chain, from the model and communications to subject advertising, industry specialization, product advertising after which all of the sources within the subject to principally take that industry-specific, value-driven story to the shopper. And we have aligned that with our companies group and an expansive ecosystem, with all the massive companions betting lengthy on ServiceNow, organising international practices with ServiceNow. So, Alex, I have been on this enterprise for 20 years.

I’ve by no means seen a chance like this in my profession, and I truly assume we’re simply getting began.

Alex ZukinWolfe Analysis — Analyst

That is superior. Thanks, Invoice, for that. After which perhaps only a follow-up for Gina. In order we take into consideration shifting our forward-looking indicators to present RPO and RPO, I suppose, are you able to perhaps remind us of are there any sort of quirks or seasonality or issues we should always have in mind? As a result of I believe some persons are going to do adjustments in RPO, which is a bit bit tougher when there’s much less decimal locations, fairly frankly, to do it from.

However something we should always have in mind? You are guiding to that 30%. There’s a bit little bit of FX tailwind there. Something we should always take into consideration there?

Gina MastantuonoChief Monetary Officer

Sure. I imply, cRPO is unquestionably a greater information. And there is much less noise in it than billings, however there’s noise. There isn’t any excellent ahead indicator for you.

And so if you consider contracted upsells, for instance, and the timing of renewals, that might influence cRPO. Moreover, self-hosted offers may doubtlessly influence cRPO vis-à-vis income development. So there isn’t any one excellent indicator, however cRPO is unquestionably a stronger indicator with much less noise, so we’ll proceed to information one quarter out. And we’ll proceed to emphasize that it has much less noise and fewer confusion in it than the billings metric.

Alex ZukinWolfe Analysis — Analyst

Received it. Thanks, guys. Congrats.

Gina MastantuonoChief Monetary Officer

Thanks.

Invoice McDermottPresident and Chief Govt Officer

Thanks very a lot.

Operator

Your subsequent query comes from the road of Samad Samana.

Samad SamanaJefferies — Analyst

Hello. Good night. Thanks for taking my questions. Good to see the sturdy begin to the yr as properly.

Possibly on the federal facet, simply with the change in administration, I am curious if there’s been any change in both the demand surroundings there; or if there’s been a change in perhaps the linearity of how we should always take into consideration federal and, for that matter, state and native authorities offers this yr as properly. After which I’ve one follow-up.

Invoice McDermottPresident and Chief Govt Officer

Sure. Thanks, Samad. It is truly very apparent that, with the change in administration, everyone has to get their places of work and get settled in place. And budgets should be allotted and so forth, so we see the lights turning on, on the enterprise mannequin on the federal degree very strongly in Q2.

And we anticipated that each one alongside. So makes up about 10% of our enterprise now, so it is a massive a part of our enterprise. And the pipeline is totally swelling. And it is swelling due to the change in administration, however the administration, as you realize, could be very targeted on digital transformation as a result of it is actually the one method to run a way more refined, low-cost, high-delivery course of for the constituents that put you in workplace.

So everyone is extremely conscious of that. And we do unbelievable, as you realize, in federal. And actually, Homeland Safety and lots of different departments have chosen us for vaccine administration, simply as one factor to provide you — and state and native, we’re doing actually good and once more a groundswell of alternative there. And I do consider, as we undergo Q2 and into Q3 and This fall, the offers will simply get bigger, and the enterprise will are available stronger as we go.

We’re doing nice in federal, state, and native.

Samad SamanaJefferies — Analyst

Very useful. After which perhaps, Gina, simply as a follow-up for you, on the remark across the internet new ACV accelerating, may you perhaps assist us perceive if — bifurcate that from new ACV from new clients to ServiceNow versus new ACV from current clients and if both/each of these are accelerating or simply perhaps how the development line there seems.

Gina MastantuonoChief Monetary Officer

Sure. I might say that we had been actually happy with new brand development in Q1. We noticed sturdy development in our new logos and 7 new clients higher than $1 million throughout a number of verticals, proper, pharmaceutical, insurance coverage, e-commerce, simply to call just a few. Most of those offers truly had four-plus merchandise, and so we’re persevering with to see good traction within the new logos and clearly current as properly.

And so we noticed — we’re not going to provide you numbers, however I wished to ensure once more, with billings noise, that folks understood that we noticed sturdy internet new ACV acceleration in Q1 and anticipate that as properly in Q2 and all year long.

Samad SamanaJefferies — Analyst

Nice. Thanks once more for taking my questions. Good night time.

Gina MastantuonoChief Monetary Officer

Bye, Samad. Thanks.

Operator

Your subsequent query comes from the road of Kash Rangan with Goldman Sachs.

Kash RanganFinancial institution of America Merrill Lynch — Analyst

Very a lot congratulations on the very good quarter, Invoice and workforce. Invoice, I’ve a query for you. It has been a yr now since we have been working and operating the enterprise nearly. And so at one finish, you may argue that the offers are getting closed as we speak or at the least that — received into the system a few yr again or so.

Now as we stay digital, how do you consider lead era and driving the enterprise for calendar ’21 and past? And likewise given that you have had super success promoting nearly and scaling the enterprise nearly, does opening of the economic system actually drive any advantages for ServiceNow incrementally talking? And for you, Gina, I am going to save the follow-up.

Invoice McDermottPresident and Chief Govt Officer

Positive. And, Kash, thanks very a lot for the query as a result of it is an important one. Someway, a way, I truly assume some individuals have this phantasm that ServiceNow was advantaged due to COVID; and the reality is that’s not the case. The reality is that we leaned into vaccine administration on an emergency response, return-to-work, and vaccine administration degree.

It was nice for our model. It was the precise factor for our function. And it was great when it comes to increasing the inspiration of ServiceNow within the international economic system. On a monetary degree, we, like everybody else, had to determine a brand new method of connecting with clients.

And in that surroundings, you may at all times do higher, along with your current clients that already actually such as you and are loyal to you, when it comes to increasing your portfolio throughout your base. What you are going to see now could be internet new logos, internet new ACV actually kick up into excessive gear at ServiceNow, which makes this such an thrilling story, as a result of our gross sales pressure is a largely go-to-market direct gross sales pressure. And now they are going to be capable of make the most of all of these abilities which were constructed into that tradition and are wired for perfection, actually wired for perfection geographically, by industry, and by persona. And that may now be a brand new tailwind for the traders to get pleasure from as we progress in 2021.

Lead era, I attempted to cowl that earlier too, Kash, as a result of I wish to actually make this clear. We now have actually refined the corporate within the context of producing leads. And what I imply by that’s we took the model. We ran a marketing campaign as we speak if you happen to care to see it.

You may take a look at The Wall Road Journal. And you may see the Wonka marketing campaign as a result of we’re letting the world know that the workflow revolution is on and even the Willy Wonka chocolate manufacturing facility can run higher on the spine of the ServiceNow platform. And we’re educating a complete new era round what workflow is actually all about. And we have taken the model, the communications, the sector, the product, advertising; and align that to the industry, the geo, the persona, the within gross sales, the direct gross sales.

And we’re managing that funnel with a meticulous degree of element round machine studying and AI. That manifests itself finally in a CEO dashboard, however we handle the entire firm on a CRM degree that’s actually, actually world-class. Actually, I’ve by no means seen it anyplace on the depth of analytics we’re operating the enterprise on now. So the leads are usually not all equal.

It’s important to perceive the way to handle the pipeline. It’s important to handle the noise within the pipeline. And because the economic system opens up, these processes have been constructed now for industrial mass scale. So I wish to let you realize, watch internet new ACV.

Watch internet new logos. And watch this machine kick into excessive gear on the again of Data21 and an already sturdy and swelling pipeline. We’re actually in nice form.

Kash RanganFinancial institution of America Merrill Lynch — Analyst

It seems like now we go. Gina, a query for you. So Invoice’s tackle how the economic system opening up could have some implications, ramifications. How a lot of that have you ever dove into steering? Or are you conserving steering comparatively conservative not taking to account all of the upside that Invoice — as he talked about opening of economic system, that — if it does materialize?

Gina MastantuonoChief Monetary Officer

Sure. I believe that we really feel actually good about our steering from prime line to backside line. I believe the expansion is robust. Pipeline is nice.

From an working margin perspective, it is sturdy, free money move at 30%. I imply, the place are you seeing development that you just’re seeing prime line and free money move margins of 30% with the size that we’re at? So we really feel actually good in regards to the steering, really feel actually good in regards to the development. And we’ll simply proceed to maintain executing in accordance with plan.

Kash RanganFinancial institution of America Merrill Lynch — Analyst

Sensible. Thanks a lot.

Invoice McDermottPresident and Chief Govt Officer

And, Kash, one factor that is actually fascinating is when Gina talks about these numbers, which I completely agree with, let’s have in mind it is natural.

Kash RanganFinancial institution of America Merrill Lynch — Analyst

Completely.

Gina MastantuonoChief Monetary Officer

Thanks, Kash.

Invoice McDermottPresident and Chief Govt Officer

Thanks, Kash.

Operator

Your subsequent query comes from the road of Michael Turits with KeyBanc.

Michael TuritsKeyBanc Capital Markets — Analyst

Hey. Good afternoon, everyone. Thanks a lot. I’ve one for Invoice and one for Gina.

So, Invoice, very massive image query however loads that you have executed to do extra in automation with the Intellibot acquisition. There’s quite a lot of exercise in that sector. I might wish to know the place you assume ServiceNow matches into that broader automation scheme, with so many various kinds of gamers on the market, over the medium to long run. And, Gina, I’ve one for you.

Invoice McDermottPresident and Chief Govt Officer

Yeah. Glorious query, Michael. A lot of our clients are attempting to drive automation. They usually’re attempting to drive it throughout a mixture of legacy and, in fact, trendy purposes.

And when you consider RPA, it is not a very differentiating expertise, however it’s notably necessary for integrating with legacy purposes that do not assist API-based integrations. So what Intellibot does is — it has a really sturdy expertise in growing RPA options and has current product capabilities and technical expertise that may assist us speed up and improve our automation efforts. So give it some thought this fashion: Our focus is on delivering world-class automation in a platform we name the Now Platform, and what we wish to do is speed up digital transformation. And RPA is a chunk of that technique.

So RPA will prolong our core ServiceNow workflows. And it will automate sure repetitive duties and it will combine with these legacy techniques for principally clever end-to-end automation. And that is strengthened with our current applied sciences resembling AI and ML. And because it pertains to our participation within the open market, I can let you know that clients inform me that they really feel like RPA has left them with islands of automation.

And it is getting tougher for them to handle as they scale. They’re sort of hitting a wall, so what they’re searching for is what we’re offering, which is a single platform the place workflow is the core engine that drives the method. After which they’ve a alternative of the precise automation expertise for the use case based mostly on integrations, RPA, resolution administration, or synthetic intelligence. So what we’ll give them is we’ll give them one thing that is natively built-in into the Now Platform, however for instance, if — UiPath or another well-known RPA expertise on the market resembling Automation Anyplace, in the event that they’re trying to work with them, that merely integrates into the Now Platform.

They usually assist us and we assist them as a result of we’re all on the facet of the shopper, and that is what actually issues. And I actually assume it is a breakthrough second on this Q&A as a result of we’ve got taken that place with all individuals out there, that we do not want anybody to lose for us to win. What we do is we workflow end-to-end enterprise processes, and we’re automating work to make it work higher for individuals. And if the shopper has a sure vendor that they are working with, it integrates seamlessly inside the Now Platform, it is OK, however there’s much more of them that’s saying, “Give it to me on one platform.

Make my life easy. I do not need islands of automation. I desire a platform that actually manages my enterprise in a sensible method.” Both method the shopper needs to work with us, we’re pleased to work with them.

Michael TuritsKeyBanc Capital Markets — Analyst

Thanks very a lot, Invoice. And, Gina, my query for you. In some sense, it could be an extension of what Kash was asking, however I — as you identified, you raised the steering for subscription billings for the yr by slightly below the 1Q increase. And there’s nonetheless some — even ex the $11 million, there’s some slight decel within the subsequent quarter, so is there something that’s, actually, holding you again from a steering that may have been greater at this level?

Gina MastantuonoChief Monetary Officer

No. The one purpose why the total information wasn’t put by to the total yr was we had some pull-through of billings from Q2 into Q1 of about $7 million. We really feel actually good in regards to the information. And there is — I imply, I believe it is a sturdy information all through, and we’ll actually see the seasonality, proper? So Q2 and Q3, I attempted to speak about that, whereas we’re seeing an increasing number of billings being pushed into This fall.

That is actually what you are seeing right here. We’re seeing very sturdy acceleration of internet new in Q2, in addition to into Q3 and This fall.

Invoice McDermottPresident and Chief Govt Officer

Yeah. I believe that is value noting that — prefer it’s the best way the shopper needs to do enterprise, proper? So once they have a multiproduct contract and so they wish to eat and mix and do all these items, we’re simply seeing the development strains go extra towards the This fall from the seasonality standpoint, however the excellent news is — and that is why I believe Gina did a fantastic job with altering sort of the nomenclature round this to RPO as a result of that is what the shopper needs. We give the shopper what they need and the timing that they need, however what I believe our traders need out there’s they wish to know, “Are you guys getting new logos? Do you guys get internet new ACV? Is your pipeline doing nice? Do we’ve got room to consider that it is a story that may preserve delivering?” And the reply to all these questions is sure, sure, sure.

Michael TuritsKeyBanc Capital Markets — Analyst

Thanks, Invoice. Thanks, Gina.

Invoice McDermottPresident and Chief Govt Officer

My pleasure.

Gina MastantuonoChief Monetary Officer

Thanks.

Operator

Our subsequent query comes from the road of Brad Sills with BofA Securities.

Brad SillsFinancial institution of America Merrill Lynch — Analyst

Nice. Hey, guys. Thanks for taking my query. One on the DevOps launch.

It is thrilling as a result of it actually may additional that evolution of ServiceNow as a customized apps platform. There’s at all times been that potential for ServiceNow to play in that market, however primarily, the success has been in packaged purposes, ITSM; ITOM; worker, buyer workflows. So my query is, is that the case? Does this DevOps answer speed up the corporate’s sort of transfer towards a customized apps platform? And provided that that is such an unlimited market, are there sure areas or use circumstances that you just would possibly see success early? Thanks a lot.

Invoice McDermottPresident and Chief Govt Officer

Sure, I believe that is a very insightful query, for positive. When you consider what is going on on — like I talked about Uncover within the ready remarks, proper? They had been an early adopter of the Quebec launch, and what they’re doing is attempting to provide worth again to the enterprise. So this — they shared that it is a greater time to be a developer on the ServiceNow platform than ever earlier than as a result of they use the brand new person interface builder. And this functionality has allowed them to principally create trendy and data-rich purposes at an unimaginable tempo.

After which on the identical time, what you see taking place is innovation on the fringe of the enterprise. Like I am the chief sponsor for one of many greatest banking clients on the planet. They have to modernize 5,000 purposes. So that they’re saying to me is, “How can I, for my enterprise individuals, modernize an utility actually fast or construct a internet new utility?” So what you are seeing is that this convergence now between the builders and the enterprise individuals demanding innovation change swiftly coming collectively on the Now Platform.

This enterprise, I might not be stunned if it finally ends up being the most important enterprise we’ve got. I see the cash going to the cloud, whether or not it is multi-cloud platforms. It is SaaS platforms or it is app innovation on the fringe of the enterprise, and we’re proper there. And the truth that we will join it throughout all of the expertise zones all the best way again to IT, safety, DevOps, and so on., offers us a novel aggressive differentiation and aggressive benefit.

Brad SillsFinancial institution of America Merrill Lynch — Analyst

That is nice, Invoice. Thanks a lot.

Invoice McDermottPresident and Chief Govt Officer

My pleasure. Thanks.

Operator

Your subsequent query comes from the road of Sterling Auty with — we do apologize. Sterling Auty.

Sterling AutyJ.P. Morgan Chase & Co — Analyst

With JPMorgan. Thanks, guys. Only one query from my facet. So on these hardest-hit industries, you known as out airways.

I am simply sort of curious. What proportion of these, that roughly 20% of income within the hard-hit industries are within the airline use case, the place there’s nonetheless a headwind versus the remainder that perhaps are beginning to bounce again and perhaps take a look at incremental funding for digital transformation?

Gina MastantuonoChief Monetary Officer

Sure. So thanks, Sterling. It is a lot, a lot smaller. It is lower than 5%.

And so we’re actually seeing a bounce again within the bulk of these industries that we have known as out final yr as being a part of the 20%. And we talked about some actually massive offers in a few of these verticals, together with retail, leisure, transportation, and manufacturing, on this quarter; in addition to the renewal charges in these industries are literally greater. So what’s actually taking place, as you possibly can think about, is these clients who’ve been tougher hit, they’re extra targeted than ever on decreasing threat, taking out prices, driving productiveness. And so they’re leaning in much more closely with ServiceNow than earlier than.

And so I simply wished to guarantee that individuals understood that not each buyer is in that fortunate place proper now. And there are nonetheless some which are hard-hit, and we proceed to work with them and assist them by it, however sure, the majority of those industries are actually bouncing again pretty properly and actually serving to lean into this digital transformation that we’re seeing.

Sterling AutyJ.P. Morgan Chase & Co — Analyst

Received it. Thanks.

Gina MastantuonoChief Monetary Officer

You are welcome.

Operator

And we do have time for yet another query from Derrick Wooden.

Derrick WoodenCowen and Firm — Analyst

Query again on the low-code facet of the market. There actually appears to be simply much more market dialogue round low-code instruments to speed up transformation, and Invoice, I might love to listen to. Who’s championing these initiatives? And can you be trying so as to add new sorts of gross sales motions to focus on the citizen developer outdoors of IT? After which perhaps, if you happen to can simply contact on — I believe Quebec had a concentrate on advancing some low code. Something to focus on there? Thanks.

Invoice McDermottPresident and Chief Govt Officer

Sure. Positive. Initially, I’ll simply remind you that like ServiceNow’s positioning enabling line-of-business customers to develop workflow automation is actually excellent. And we’re on the sort of epicenter, I’ll say, of secular tailwinds that are forming across the convergence of IT and enterprise, which I mentioned earlier.

So app modernization, operational transformation, IT within the enterprise, they’re all shifting as shortly as doable to drive higher effectivity and extra agility. It is a product already as we speak the place we’ve got a really succesful chief in engineering, Josh Kahn, who’s been with us now for a while. And once I first got here in right here, the very first thing he mentioned to me is, “Hey, I am elevating my hand. This may very well be massive.” And I mentioned, “Properly, we’ll get all behind you.” So we have already got specialist gross sales pressure that enhances the overall line to guarantee that we capitalize on this chance.

And I believe the explanation that this chance is so smoking sizzling proper now could be there simply aren’t sufficient builders to construct the purposes that the enterprises want to rework their enterprise. So this enormous unmet want in utility supply is actually falling proper onto the Now Platform. And these artistic workflows are actually driving the muse of the partnership with our clients, tying collectively engineering and the enterprise executives. So I’ll simply say to you that we need not like rent new gross sales pressure to do that.

We already received the specialists. We already received a fantastic engineering, and our workforce actually understands app engine and actually understands the platform. Even the general-line AE within the subject sees this as a golden alternative. And we have aligned all of the empowerment ranges and the compensation schemes and all the main target to be there as a result of we all know that is the place the cash is.

Gina MastantuonoChief Monetary Officer

I am going to simply add one factor, Derrick, to say that the IT organizations have gotten an increasing number of necessary right here as a result of the companies, whereas — sure, they purchased these purposes. The IT group is liable for making certain they’re protected, safe, proper? And so the partnership between the enterprise and IT is changing into stronger and stronger. And ServiceNow is the platform that is strategic to IT, trusted, scalable, and safe. And it is a platform that IT goes to proceed to make use of to construct these mission-critical purposes for the strains of enterprise.

And so actually, we’re very properly positioned given our strategic relevancy within the suite with the CIO.

Invoice McDermottPresident and Chief Govt Officer

And, Derrick, have in mind – proper. Gina is totally proper. The corporate began in IT, so that is truly a core power of ours. After which we moved to the worker and the shopper, and now it is all in regards to the app engine and type of this low-code world that we see converging between enterprise and IT.

Our firm grew up there. It is now prime time as a result of enterprise is pulling at engineering and IT to say, “I need my new trendy utility and I wish to now.” So we’re sort of proper there. The opposite factor we in all probability may have coated in higher element, however I believe you already all know this, is that this one structure, one knowledge mannequin, and one platform, is actually coming by sturdy now as a result of most firms on the market are both better of breed the place they do one factor notably properly however not many issues or they’ve many alternative platforms that are not so properly built-in. In our case, whilst we put new innovation on the Now Platform, it is all built-in and all of it works.

So of us are actually enthusiastic about that inside these enterprises as a result of they received loads using on no matter they put money into working, pleasing individuals, delivering a constructive ROI, and actually making the decision-makers that put money into the platform look good as a result of there isn’t any tech debt with ServiceNow.

Derrick WoodenCowen and Firm — Analyst

Nice. Cannot wait to see the Wonka marketing campaign too. However thanks for all.

Invoice McDermottPresident and Chief Govt Officer

Thanks very a lot.

Gina MastantuonoChief Monetary Officer

Thanks.

Operator

[Operator signoff]

Period: 65 minutes

Name individuals:

Lisa BanksSenior Vice President of Finance

Invoice McDermottPresident and Chief Govt Officer

Gina MastantuonoChief Monetary Officer

Keith WeissMorgan Stanley — Analyst

Karl KeirsteadUBS — Analyst

Alex ZukinWolfe Analysis — Analyst

Samad SamanaJefferies — Analyst

Kash RanganFinancial institution of America Merrill Lynch — Analyst

Michael TuritsKeyBanc Capital Markets — Analyst

Brad SillsFinancial institution of America Merrill Lynch — Analyst

Sterling AutyJ.P. Morgan Chase & Co — Analyst

Derrick WoodenCowen and Firm — Analyst

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This text represents the opinion of the author, who could disagree with the “official” advice place of a Motley Idiot premium advisory service. We’re motley! Questioning an investing thesis — even one in every of our personal — helps us all assume critically about investing and make selections that assist us turn out to be smarter, happier, and richer.





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