ServiceNow Inc (NOW) 2021 Q3 法說會逐字稿

Good afternoon. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to ServiceNow's Third Quarter 2021 Earnings Conference Call. (Operator Instructions) Lisa Banks, Senior Vice President of Finance at ServiceNow, you may begin your conference.

Good afternoon, and thank you for joining us for ServiceNow's Third Quarter 2021 Earnings Conference Call. Joining me are Bill McDermott, our President and Chief Executive Officer; and Gina Mastantuono, our Chief Financial Officer. During today's call, we will review our third quarter 2021 financial results and discuss our financial guidance for the fourth quarter of 2021 and full year 2021.

Before we get started, we want to emphasize that some of the information discussed on this call, such as our guidance, is based on information as of today and contains forward-looking statements that involve risks, uncertainties and assumptions, including those related to the continued impact of COVID-19 on our business and global economic conditions. We undertake no duty or obligation to update such forward-looking statements as a result of new information or future events. Please refer to today's earnings press release and our SEC filings, including our most recent 10-Q and our fiscal year 2020 10-K for the factors that may cause actual results to differ materially from those set forth in such forward-looking statements.

We'd also like to point out that we present non-GAAP measures in addition to and not as a substitute for financial measures calculated in accordance with GAAP. Unless otherwise noted, all financial measures we will discuss today are non-GAAP except for revenues, remaining performance obligations or RPO and current RPO or CRPO. To see the reconciliation between these non-GAAP and GAAP measures, please refer to today's earnings press release and accompanying 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.

With that, I would now like to turn the call over to Bill.

Thank you very much, Lisa, and good afternoon, everyone. Welcome to our Q3 earnings call. While a beat-and-raise headline from ServiceNow is familiar, it is no less extraordinary. Our team delivered another outstanding quarter, yet again significantly exceeding the high end of our guidance across all metrics. Subscription revenues were up 31% organically. This is unprecedented in our industry. CRPO was up 32%, subscription billings were up 28%, operating margin was 26%. We again have raised our guidance for the full year, strengthening our clear path to $15 billion-plus in revenue by 2026.

I was introduced as ServiceNow's CEO more than 2 years ago. We've all seen a lot since then. What we've never seen is such consistent innovation and execution at global scale. Thanks to our customers, employees and partners, we're well on our way to becoming the defining enterprise software company of the 21st century. And we're only getting started.

Before Gina gives you a complete report, let's talk about this dramatic structural incline at ServiceNow. The pace of digital investment is accelerating. IDC has consistently sized this opportunity at $7.8 trillion over a 4-year period. With this massive addressable market, ServiceNow is at the intersection of 2 generational opportunities: First, the need for a new technology foundation is supercharging our close partnership with CIOs. A recent Wall Street Journal report highlighted the role of CIOs as the architects of digital business.

Ongoing advances in public cloud and machine learning are forging a new era of software innovation. Technology teams want a fully integrated software cycle: planning, development, deployment, operations and service. ServiceNow is leading this 20th to 21st century migration for our customers. The Now Platform, with its immense versatility and scalability, has become the control tower for digital transformation.

The second dimension fueling ServiceNow is the reordering of the enterprise application platforms for hyperautomation. Leaders today recognize their technology architecture is their business architecture. Over several decades, enterprise has invested trillions into on-premise and first-generation SaaS applications. These applications satisfy the business process needs of the 20th century. Today, new business models require a fully connected value chain. Legacy environments are not adaptive enough to enable this change.

As the pioneer of modern digital workflows, ServiceNow is leading the renaissance. The Now Platform connects different applications and data sources to create intuitive mobile experiences, all at a consumer grade. We don't ask businesses to bet everything on a single system or collaboration tool. We give choice, which not only unlocks value from our platform but from other platform investments as well.

ServiceNow also empowers anyone to build applications on our platform. In its low-code development technologies report, Gartner estimates that 70% of new applications developed by 2025 will use low-code or no-code technologies. Gartner also named ServiceNow as a leader in its Magic Quadrant. These tailwinds are driving fast organic growth across our entire solutions portfolio. The number of deals greater than $1 million was 63, up 50% year-over-year, signaling substantial adoption of our platform strategy.

In Q3, IT workflows remained very strong. ITSM was in 18 of our top 20 deals while IT Operations Management had 10 deals over $1 million. For example, the U.S. Internal Revenue Service is in a multiyear digital transformation effort. In Q3, they chose ServiceNow to consolidate 12 complex systems into a single platform to support the agency's mission-critical operations. Demand for our entire IT portfolio is strong. And with the launch of Lightstep Incident Response in Q3, we are unlocking a new wave of product-led growth in application monitoring and observability.

Employee Workflows also had a fantastic quarter with HR in 13 of our top 20 deals. In Q3, NTT Data will leverage the Now Platform to create an employee experience portal, enhancing productivity for hybrid work and managing vaccine administration for its entire workforce. Momentum continues for Customer Workflows with CSM in 12 of our top 20 deals and 8 deals over $1 million. Industry vertical solutions are leading the way with major brands. Verizon is adopting our telco solution, American Century, our financial services solution, and Sunbelt Health, our health care solution.

Creator Workflows, which helps businesses build their own applications, was exceptional in Q3 in 18 of our top 20 deals. We're partnering with Stanley Black & Decker to bring ServiceNow's new manufacturing vertical solution with App Engine to change how they serve their customers. Together, we're maximizing facility uptime and delivering great experiences for distributors, dealers and end consumers.

Fujitsu will also expand its use of the Now Platform to drive its own digital transformation. We couldn't be prouder that Uber, Honeywell, Telia and many others all chose ServiceNow in Q3. This is a complete performance for the company, strong growth across the Americas, EMEA and Asia Pacific/Japan.

As we look to a strong finish in 2021 and beyond, here are a few of the many factors giving us great confidence in this business. First, while lots of talent is raging out there, we're highly encouraged by the colleagues choosing ServiceNow in record numbers. Our new joiners, together with our amazing global workforce, are building a uniquely inclusive, driven and happy culture.

We're also seeing major developments in our partner ecosystem. Just 3 weeks ago, we announced a new partnership with Celonis. Celonis will deliver process mining insights, ServiceNow will build better workflows, our customers will gain from the integrated approach. We also deepened our long-standing partnership with Microsoft. ServiceNow's Employee Center can now be directly embedded in Microsoft Teams, reaching 250 million monthly users. Together with our expanding partner community, we will reduce complexity to make work better for people.

Finally, innovation without disruption is a hallmark of our best-in-class engineering tradition. When we say without disruption, we mean invisible, a seamless upgrade experience for our customers. In our Now Platform Rome release, we delivered countless new features to customers, including Mobile App Builder, an Automation Discovery tool, Employee Journey Management and new Customer Service Playbooks. Every business leader in the world is looking at the future of work. These new features give the Now Platform even more capability to build that hybrid future.

I'll defer to a comment made by industry analyst Josh Bersin, who said on our Rome Platform release. "This company seems to be able to build and deploy enterprise software faster than almost any I've ever seen, and that's why they're a juggernaut." Josh, naturally, I agree.

In closing, the company is firing on all cylinders. The quarter speaks for itself. We beat again, we raised again. The secular tailwinds are at our back. Our customer base is expanding just as our customer NPS is increasing. Our partner ecosystem is fired up. We accelerated our time line to be net zero. We help businesses drive their own ESG initiatives on our platform with a major release. The list goes on and on.

Overall, our message to the market couldn't be any clearer. Whatever systems, challenges or opportunities you have, however fast you need to move, you have a trusted innovator in ServiceNow. We want to make the world work better for everyone, and we'll never lose our focus on the privilege that comes with saying, the world works with ServiceNow.

I look forward to your questions. Gina, over to you.

Thank you, Bill. Q3 was another fantastic quarter with continued outperformance across all of our growth and profitability guidance metrics. Demand was strong globally across all 3 of our geos. The consistency of our results quarter after quarter exemplifies the strength of our product portfolio and the team's focus on building deep customer relationships.

Q3 subscription revenues were $1.43 billion, $22 million above the high end of our guidance range and growing 31% year-over-year, inclusive of 100 basis points tailwind from FX. RPO ended the quarter at approximately $9.7 billion, representing 34% year-over-year growth. Current RPO was approximately $5 billion, representing 32% year-over-year growth and a 2-point beat versus our guidance. Currency did not have an impact on year-over-year growth.

Q3 subscription billings were $1.38 billion, representing 28% year-over-year growth and a $55 million beat versus the high end of our guidance. FX and duration were 150 basis points tailwind year-over-year. We saw broad-based strength across the industries we serve, with transportation and logistics and business services seeing particularly robust net new ACV growth. Our renewal rate was a healthy 98% in Q3, a testament to the value ServiceNow delivers to our customers.

We view our relationships with customers as long-term partnerships, and we continually innovate to provide new solutions to address their evolving business needs. That land-and-expand motion has manifested into a base of 1,266 customers paying us over $1 million in ACV, up 25% year-over-year. As the breadth of our portfolio and the addressable opportunities have expanded, so too have our deal sizes. We closed 63 deals greater than $1 million net new ACV in the quarter, up over 50% year-over-year. And in Q3, all of our top 20 deals included 4 or more products.

Turning to profitability. Operating margin was 26%, 3 points above our guidance, primarily driven by the strong revenue beat. We also saw savings from the delay in return to work and lower travel. Our free cash flow margin was 15%. Together, these results show the power of our business model and our ability to drive a balance of growth and profitability.

We're delivering great experiences that drive powerful employee engagement, fierce customer loyalty and significant productivity gains. By delivering more intelligent automation that provides even better experiences, we are well positioned as the workflow standard on our journey to becoming a $15 billion-plus revenue company.

Turning to guidance. We're raising our guidance for the full year. We're raising our subscription revenue outlook by $32 million at the midpoint to a range of $5.565 billion to $5.57 billion, representing 30% year-over-year growth, including 200 basis points of FX tailwinds. We are raising our subscription billings outlook by $61 million at the midpoint to a range of $6.379 billion to $6.384 billion, representing 28% year-over-year growth.

Excluding the early customer payments in 2020, our normalized subscription billings growth outlook would be 32% year-over-year at the midpoint. Growth includes a net tailwind from FX and duration of 200 basis points. We continue to expect 2021 subscription gross margin of 85%, and we're raising our full year 2021 operating margin from 24.5% to 25%. This reflects the increase in our top line growth and savings from the delay in return to work and lower travel.

We're also raising our full year 2021 free cash flow margin by 50 basis points from 31% to 31.5%. And we expect diluted weighted average outstanding shares of 202 million. For Q4, we expect subscription revenues between $1.515 billion and $1.52 billion, representing 28% year-over-year growth, including a negligible impact from FX. We expect CRPO growth of 27% year-over-year. This includes a 150 basis point FX headwind due to sharp movements recently in the euro and pound. On a constant currency basis, we expect CRPO growth to be 28.5%.

We expect subscription billings between $2.305 billion and $2.31 billion, representing 26% year-over-year growth. Excluding the early customer payments in Q4 of 2020, our normalized subscription billings growth outlook would be 32% year-over-year at the midpoint. Growth includes a net headwind from FX and duration of 50 basis points. We expect an operating margin of 22%, which includes accelerated demand generation spend in the quarter to set us up for a strong start in 2022, and we expect 203 million diluted weighted outstanding shares for the quarter.

In summary, the pace of digital investment is accelerating, and ServiceNow is rising up to seize the opportunities before us. The team has never been more engaged and focused on serving the enormous needs of our customers. And as ServiceNow becomes the defining enterprise software company of the 21st century, we are also remaining steadfast in our goal to create positive impact in the world. I'm happy to announce that in September, we committed to reaching our net zero emissions goal by 2030, 2 decades earlier than our previous goal.

We've never been prouder of our employees and their continued focus on serving our customers, partners and communities as we make not only work, work better but the world work better, too. Our hungry and humble culture is stronger than ever. We can't thank our employees enough for their hard work and dedication.

And with that, I'll open it up for Q&A.

(Operator Instructions) Your first question will come from Kash Rangan from Goldman Sachs.

Bill and Gina, outstanding, outstanding quarter. Bill, I wanted to just get your high-level thoughts, coming as we did -- after a spectacular quarter and listening to your compadre, Satya Nadella, on his call yesterday, who talked about tech as a percentage of global GDP going from 5% to 10%. I think he said that before, which leaves us with the inescapable conclusion that tech density, enterprise tech density is just going higher. It's not the world from 10 years back where a couple of ERP systems and that's it. Now it's thousands and thousands of SaaS applications and the whatnot. So where does that leave ServiceNow in terms of business prospects for spreading horizontally, vertically with your ITOM, IPS and the Workflow Engine, obviously, given that enterprise tech density is just set to go from higher or even higher levels.

And 1 for you, Gina. When you look at this year, this year has been fascinating. Net new business has been accelerating for a few quarters. I know that you've not given us thoughts on '22 yet, but how do you feel qualitatively stepping into 2022 with a renewal base that looks very solid? Your net new business trends are getting better. Curious to get your thoughts.

Well, Kash, thank you very much for your kind remarks. You called the progress of our share price early on in the year. Congratulations to you. You had it nailed. A couple of things, Kash. If you look at the geographies around the world, every single geography not only beat expectations but they actually beat their internal plan handily. So every geography is expanding with ServiceNow at a record clip.

If you look at our expansion in industry, we saw a growth across all of our industry categories this quarter. It's amazing. Industries that were COVID-impacted like transportation, logistics, business services, telecom, media, technology, financial services, government, education, every single one of them was an unbelievable success story this quarter. And we have expanded dramatically in manufacturing, health care, life sciences, telecommunications and banking, just to name a few. So think geo, think industry.

Also think persona. This Employee Workflow business of ours is unstoppable because the employee experience is unstoppable, especially in a labor market that requires talent. And as you pointed out, Satya's remarks are absolutely right. The GDP growth in tech is inescapable because it's the only way out in a hybrid world to manage a competitive company, especially when you're competing for talent and you have to give them a great experience, example, onboarding experience, connecting all of their training tools, really making them a part of the culture when they might not even be in your buildings.

Customer Workflows. We announced a partnership with Twilio, dealing with WhatsApp and various messaging techniques because all the old school ways are going away quickly. So with our CSM, our Employee Workflows, the experiences we're giving to people is just unreal. And don't forget the Creator Workflows. 500 million net new applications will be developed in the next 2-plus years and that will be developed for companies by companies in their own technology departments, and there's not enough engineers to do that in the world, so the Now Platform is a growth sensation.

All of these forces are coming together at once. And that is why I could not be more confident in the bullish stance on ServiceNow not just in the short term. We run our business with clear messaging, clear facts. We could see the pipeline way into 2022 and, in some cases, beyond. It is a fantastic situation right now, Kash.

And Kash, on your question with respect to '22, obviously, it's a bit early to talk guidance, but you are 100% correct, right? Our renewals base is very strong. We've seen very strong net new ACV acceleration throughout the year, as I've been talking about. And so we feel really bullish on the opportunities ahead of us in '22.

The one thing that I would note is that FX has turned against us a little bit as we head into '22. And so I'm sure you would have all seen, especially with respect to the euro, the dollar increasing. And so we have a bit of a headwind on FX as we look into '22 but feel really good about the underlying health of the business, our renewals, our net new ACV. And so we're poised to have a strong 2022.

Your next question comes from Karl Keirstead from UBS.

Gina, 3 months ago on the 2Q call, you prepped us in terms of the back half seasonality into thinking 3Q would be a little bit subseasonal, 4Q stronger as you were seeing that deal skew. In fact, you put up numbers where the 3Q actual and the 4Q billings guide of 26% are roughly even. So I'm just curious whether since you made that call, that seasonality 3Q, 4Q has changed and whether it played out in the way that you expected.

Thanks for the question. I really appreciate it. Listen, I think we are really proud of the Q3 beat that we saw. Bill talked about all geos operating on all cylinders, and that's across the geographies, across all of the product portfolios. And so we were really pleased with the beat that we saw in Q3.

We absolutely continue to see more business back half weighted to Q4. That is going to be a trend that we continue to see. When you look at our Q4 results and our Q4 guide, you have to remember last year Q4. We had that $80 million of early payments that were brought forward that really drove a higher growth number in Q4. And if you normalize that, it's why I called out pretty transparently in the script, if you normalize for that, we're seeing 32% growth in Q4 billings. And so a really strong guide, given our scale and our base.

Your next question comes from Kirk Materne from Evercore ISI.

Bill, can you just talk a little bit about the federal business this quarter and sort of the opportunities for that going into the fourth quarter or maybe next year? And then Gina, just 1 follow-up to Karl's question on the fourth quarter guide. I realize that seasonality is getting more compounded. There's a lot of co-term activity that goes on around the fourth quarter. I guess people are wondering why maybe the guidance wasn't upsized a little bit relative to where it was implied going into it. So I was just kind of curious, I realize there's a lot of permutations that go into the fourth quarter, just given the size of it. But was there anything else that maybe is making you be a little bit more conservative just in terms of visibility into to add-on deals and things like that?

Kirk, thank you very much for your question. We had a very, very strong federal quarter. 15 deals over $1 million. 14 federal agencies are now paying us more than $10 million. Key strategic wins included the IRS, which I talked about already, but it's certainly not limited to that. It's pretty amazing how the government is rethinking strategies in terms of communication and providing services digitally to the citizens, which is incredible because as you know, that's all about the user experience and it's a workflow challenge.

For example, look at how difficult it was for the government to get money out to small businesses during COVID. There are also some big opportunities with new initiatives in the administration, including resiliency, business continuity, outages, terrorism, COVID, cybersecurity on top of many lists. The White House actually put out an executive order on improving the nation's cybersecurity after recent ransom attacks. So that's all workflow related, leveraging existing systems that don't talk to each other very well. You're certainly not going to rip and replace them, right? So that's where the Now Platform comes in.

And then just think about vaccine management. It remains one of the greatest workflow challenges the government faces. And boosters now will likely need to be re-administered on a regular basis. This, again, is a workflow challenge to distribute, administer and monitor vaccines. So we're in the mix on all of that. And what we're seeing is the connection of federal, state and cities that are all implementing the Now Platform to engage with citizens. So they're using products like Customer Service Management to help digitize these workflows that can no longer be processed in person because the offices are still closed due to the pandemic.

So overall, take this as a strong, aggressive, bullish, confident reply that the public sector is embracing the Now Platform as its transformational opportunity at federal, state, local, university and all public entities that are quickly embracing us because our Net Promoter Score is so high and at word of mouth, they're saying this is the way to go, go now.

And Samad (sic) [Kirk] on your follow-up question with respect to Q4, and so I talked a bit about the normalized billings, right? So that's 32% for Q4. We actually have a 50 basis point FX headwind in Q4 of this year versus we had a 150 basis point tailwind in Q3. So we really are moving in the right direction. What I would also call out is last year, Q4 saw tremendous growth even when you normalize for those $80 million in collections.

And so we are basically a 32% growth in Q4 this year normalized on top of a 32% growth last year, so strong growth upon strong growth. I will say also that not only did we raise the guide for Q4 by our Q3 beat, but we increased it by another $13 million in billings. We are seeing headwinds in Q4 for FX, but excluding that, constant currency, constant duration growth is really strong.

Your next question comes from Brad Sills from Bank of America Securities.

Wanted to ask about the Celonis partnership. It seems interesting. Natural interplay with some of the AI features and the enterprise additions. Where do you see that partnership providing the biggest boost when you look across the stack at ServiceNow?

Yes. Brad, thank you very much. I mean, the quick answer, right, is the Creator Workflow platform. But what you're seeing out there is many businesses really have not maximized the value of their digital investments because they lack insight into the inefficiency of their processes, and that's what's holding back their business operations. So if you want to move the needle, organizations are going to need to understand how work is done across people, processes and systems.

So what's happening here is ServiceNow and Celonis will help customer map those elements in real-time and then build digital workflows to more efficiently automate work. So we're going to create a seamless product experience for customers that's going to make it easy and simple for them to get insight into their processes across multiple enterprise systems. You'll be able to use Celonis' EMS platform and convert that insight, the x-ray, into action, automation and remediation on the ServiceNow workflow platform.

So think about bringing together process mining, automation, machine learning, RPA and low-code app development into a seamless combined product experience that customers will be enabled to quickly and continuously improve the flow of work. So shorter answer is the Creative Workflow platform, but what's happening is Celonis gets the x-ray, especially in the non-ServiceNow environments. And then we use all the power of the Now Platform, including process mining in the ServiceNow environment, to give them a fast automation platform to make that business process home and really drive business outcomes. So I think this one is going to be really exciting. And I think my good partners, Alex and Bastian and Martin, I know our engineers are very committed to each other and we're going to nail it.

That's great to hear. One more if I may, just on that same topic there. With Creator, the progress you're seeing this quarter, 18 of the top 20 deals, are there any patterns you're seeing emerge in terms of common applications that are perhaps repeatable through the SI channel? Or just any color on where you're seeing traction there on the application side?

Yes, it's amazing. We literally had a review of this business just yesterday and our outstanding leader just took us through it. And what we're basically saying is the Now Platform is integrated with all systems of record, right? So customers can build applications fast. And we really are the platform of all the other platforms. I've been saying platform of platforms for a long time.

And I want to make it clear, like we respect all those other platforms, all those other excellent brands. Our job is to make all of them even better by moving into the action layer or the hyperautomation layer on the Now Platform. And the trend we're seeing is the younger generation of workers, they're not going to submit tickets. They want action. So enterprises are creating these centers of excellence, and they're letting citizen developers build a solution to solve for the business challenges.

So I believe that hyperautomation is a key differentiator. And because we have this one platform that does it all, RPA, low-code, process mining all on a single platform and now with Celonis, we get process mining in the non-ServiceNow environments, we bring everything together so customers can completely rethink their business model.

Example I gave in the script is Stanley Blacker -- they're based -- Stanley Black & Decker. They're combining their new manufacturing vertical solution with the App Engine to build over 70 custom applications. This is all being done on the Now low-code Application platform. And Fujitsu also is an example where they're using App Engine to drive digital transformation and sustainability across the company, moving the green line, not just the top and bottom line.

Your next question comes from Samad Samana from Jefferies.

Bill, maybe 1 for you. You've talked a lot about hiring and continuing to sustain growth. I noticed as I look at hiring in your professional services department, you've already added more people in 2021 than you did, I think, in the last 2 years combined. I'm just curious, should we see that as a leading indicator of projects that are firing up or ServiceNow taking a more active role in helping their own customers implement new deals? Just how should we think about that?

You should think of ServiceNow as a growth company, as a company that is firing on all cylinders and as a company that is attracting the best talent in the industry. And that's really a sustaining part of our success. I'll give you an example. You take somebody like Erica Volini, who joined from Deloitte. She had a fantastic career at Deloitte, and she wanted to come in and help us transform the service experience for our customers.

We're collapsing the pre- and post-sale conversation. Everything here is about business impact and we're rethinking the whole services model. That's why our customer satisfaction and our Net Promoter Score is soaring. Not just our retention, we're focused on the in-process measures. That's why Jon Sigler came to us after a great career at Apple, Microsoft and Salesforce and said he believed that the Now Platform was the future of business.

And what we have been able to do is hire thousands of people even in a pandemic because the Now Platform enables us to create these seamless hiring, onboarding, immediately skilling people up to our culture and their training needs and then managing them in a hybrid world in a way that gives them the experience of our culture. And the word gets out there quickly. We are literally harder to get into than Stanford statistically, even as you see thousands joining.

So we are not opportunity constrained. And that's what I've been saying the whole time, why are we organically growing? Why are we committed to our engineering? Why are we fiercely committed to our market leadership? Because we can be. This is the platform of this generation, and we're investing primarily in great engineers and great go-to-market, especially quota-bearing, where we can deliver for our shareholders, our customers and our partners.

The other thing I want to underscore is we have really expanded the ecosystem. So as you even see us hiring thousands, just think, the ecosystem is hiring even more thousands and thousands to get around this Now Platform and get their piece of the action in geos, in industries and personas. This is a growth story.

Bill, not only do we see it as a growth story but one of the best growth stories. So maybe Gina, just a quick follow-up for you, if I can squeeze it in. Just as I think about some of the new customers signed in 4Q of last year, there is still a lot of uncertainty in the market. Are you seeing those customers expand at a higher rate or maybe being easier to upsell as you get -- as you lap the cohorts maybe that were signed up late last year as new adds, just as we get more certainty in what looks to be a stronger macro environment?

Yes. I mean, we're really pleased with our new logos, both from Q4 of last year and throughout 2021. We're seeing strong growth even in Q3 with 6 new customers greater than $1 million. And they're across industries, just in Q3 alone. That's banking, retail, manufacturing and energy, just to name a few. And we're absolutely seeing our deal sizes grow, right? New customers, average deal size growth quarter-on-quarter and year-on-year.

And we're seeing healthy growth abroad in EMEA and APJ as well. And so we're really focused on evolving our plans to the right new customers. And IT continues to be a high percentage of those new logos, and we're seeing -- but we're actually seeing a much higher percentage also of lands occurring with CSM, App Engine and HR. And so those cohorts are growing very well, our expansion rate is doing very well and just really firing on all cylinders across all 3 of our geographies.

Your next question comes from Keith Weiss from Morgan Stanley.

Gina, a question for you. Just trying to kind of understand the kind of the very varying trajectories of kind of what you're describing in terms of billings growth. It sounds like it's accelerating into Q4. And granted there's a lot of normalizations in here, I think this is where the answer is to get to that 32% normalized billings growth in Q4 versus the current RPO growth, which you guided to a pretty sharp deceleration, I think going from like 32% growth to 28.5% on a constant currency basis. Are there any kind of factors that we should be aware of in terms of adjustments or sort of changing contract dynamics that would cause that variance in the trajectories?

Yes, it's a great question and so rightfully so, you took into account the FX is impacting our CRPO. Most of the remaining CRPO growth deceleration is actually due to seasonality within our renewal cohort. And so our typical customer contract term, as you know, is around 36 months on average, and we have a large cohort coming up for renewal in 2022. So this is starting to flow out of Q4 of this year, right, which -- because it won't include the future renewals until they renew within 2022. And so that deceleration is really what's driving that -- it's the seasonality of the cohort that's driving that deceleration. And once that cohort renews in 2022 and with 98% renewal rates across the board, right, we feel really good and strong about our renewal base, that will have a stabilizing impact to the RPO growth in 2022.

Your next question comes from Alex Zukin from Wolfe Research.

Congratulations again. Bill, maybe just the first one for you around your -- I know you beat this drum quite a bit for the first 3 quarters, but I want to ask it again. As we look to 2022, your approach towards and thinking about organic versus inorganic growth, obviously, the organic growth and the profile of the company has been second to none to date. How are you thinking about the road to $15 billion-plus as you sit here today within that construct? And I have a quick follow-up for Gina.

Alex, it's a great question. I could not be -- I could not possibly be more confident in our ability to achieve the $15 billion-plus on an organic basis by 2026, which is exactly what I said at the Investor Day. And I also underscore the fact that we recognize that our balance sheet is extremely strong and will be even stronger as we move into the future. And we continue to source, look at, consider all options that would benefit shareholder value creation without ever passing on any tech debt to customers as many others have done.

So just know that everything is always on the table, but at this time, there are no substantial acquisitions on the table, not a single one. And we could not be more confident in our organic growth. In fact, that's where we are looking at our investments and we're prioritizing them because we're certainly not opportunity-constrained, Alex. The company is in fantastic shape.

That's awesome. And Gina, maybe 1 for you. We've talked a lot about growth and confidence in growth both into Q4 and even beyond. I wanted to ask you a question about margins. Some of your peers have talked about models coming out of the pandemic that are more efficient, learnings that maybe not every salesperson has to get on a plane, and there's more productivity to be had in a remote world and construct. While others have talked about investing more aggressively for growth and doubling down and seeing some of the tailwinds from the pandemic savings potentially revert next year, where does ServiceNow fit in from a margin conversation standpoint as we start to think about a more normalizing environment, hopefully?

Absolutely. It's a great question. Thank you so much, Alex. So first of all, 100%, I'd note that many of our learnings from working remotely will absolutely have lasting effects on our overall efficiency. But I've been pretty transparent throughout the year that it does give us the ability and the agility to redeploy savings elsewhere, right? Bill just talked about organic growth, right? We are at an inflection point where we have no lack of opportunity. And we are, first and foremost, a growth company and we will absolutely invest behind that.

That being said, at our Financial Analyst Day in May, I talked about committing to 26.5% margin by 2024. We absolutely remain committed to that and on that trajectory. But I don't think that, that increase is going to be linear, right? As we think about offices reopening and travel becoming more consistent and in-person events happening more, we definitely don't believe that it's going to be a linear path to 26.5%. I'm not actually in a position at this point to guide to 2022, but we are 100% committed to, over that 3-year period, getting to 26.5% because we absolutely believe that we'll have savings that we'll be able to take from these learnings and efficiencies from the pandemic and redeploy them on growth opportunities that we see absolutely in front of us today.

Your next question comes from Tyler Radke from Citi.

I noticed that the $1 million customers were up pretty nicely year-over-year here in Q3. Was wondering kind of the drivers of that. Was there some one-offs? And should we expect that type of strength in kind of $1 million customer adds heading into your seasonally strongest quarter?

Yes, you should expect it to continue, Tyler. The reality is we've become a platform company. I came in a couple of years ago now, and we've really seen the transformation of the company to full-scale enterprise software company. And we took the strength that we had in IT, and we have made it really our hallmark because it's very clear now in this world, as the world is dealing with digital transformation, everybody understands that the technology architecture is the business architecture.

And that has given us enormous responsibility but also permission to expand the perimeter into the employee experience, into customer service management, including direct-to-consumer, field service management. This Creator Workflow business, which is just an absolute sensation, ties together so many of these disjointed processes, systems and silos and enterprises today and really puts together an enterprise software market-leading approach from ServiceNow. So think of us as an enterprise player on a platform that is unstoppable.

Great. And Bill, you mentioned earlier that transportation and logistics were particularly strong on net new ACV. And was just curious kind of on the angle of supply chain constraints that a lot of industries are facing. Are you finding that, that's kind of a catalyst for a conversation around digitizing and kind of creating more efficient workloads? And just help us understand the balance of that versus potential challenges, closing deals, just given the supply chain constraints.

Yes. Actually, it's a great question, Tyler, because I know in some industries, they talk about the supply chain dilemma and boats off the port with a lot of things in them. But this is actually an opportunity for us because what's happening now is companies have to reorient their business models. They have to think about their extended supply chain. They have to rewire who their partners are actually going to be and who they're not going to be. How they're going to source things from different places in the world that they've never even worked with before. And this is all going to create the extended supply chain opportunity for the Now Platform.

You might have noticed, for example, we acquired [Gekkobrain], which is a small company in Denmark because we are in so many different ERP-related conversations where we're helping our great ERP friends. Instead of doing mass customization through consultants that would take years and years, with the Now Platform, you can do it in days. So this is creating a groundswell of opportunity on the ERP level, on the supply chain level, on the finance level, on the procurement level. It's just unbelievable. I mean, I've never seen an opportunity like this in my entire career.

Your next question comes from Sterling Auty from JPMorgan.

Just 1 question from my side. Bill, I just wondered if you can give us an update in terms of the experience you saw in the quarter around the customer service use case. And then separately, when you look at the observability process -- or progress that you're making, if you could just give us an update on kind of where you stand in kind of moving into that market segment.

Yes. Thank you very much, Sterling. I really appreciate it. So let me start with Lightstep, first of all, because I want to give a big shout-out to Ben and his great team. We love Ben, we love his team and they're just going to be a sensation here. We are continually impressed by the depth of engineering talent at Lightstep and the observability solution. We're still in the early innings of integrating the business, as you know, but we've had strong upsells from existing customers, and we're seeing that as a testament to how they value Lightstep's product, and it's already delivering to organizations.

It's currently being sold on a stand-alone basis, but we expect that to be going to market solidly with ServiceNow at an enterprise level in 2022. We're also doing some product direct sales with the Lightstep product in the Internet channel, and I think that is also a potential elixir that markets may not be expecting from ServiceNow. It's kind of a new play in the playbook and we're pretty excited about it.

On CSM, I'm really excited about our leadership in CSM. We have a fantastic leader in CSM with industry-renowned experience. And we're winning in verticals everywhere. Whether it's financial services, telecom, health care and life sciences, it's pretty incredible. What you're seeing here, and I actually went through this business review yesterday as well, you're seeing CSM completely rethink direct-to-consumer, you're rethinking customer service management and you're thinking about messaging, you're thinking about WhatsApp differently, you're thinking about Twilio and ServiceNow embedding these really swift solutions to the customer experience.

Think about field service management, think about the connected experience for the ultimate consumer. Yes, other CRM companies have done a very good job on the engagement layer. Unfortunately, the customer experience doesn't end with the engagement layer. It begins with the engagement layer. So the operations layer of the company and the back-office IT capability of the company has to be tethered to that engagement layer, which is giving us net new opportunities, including IoT opportunities with field service and fleets of products, fleets of trucks, fleets of cars, EV marketplaces that we've never seen the likes of.

And then you combine that with the Creator Workflow where it's kind of like, "Hey, I can have it my way? You mean, I could customize that?" Yes. And guess what, when you do the upgrade with ServiceNow, you don't have to get the consulting team in to rethink the whole implementation with us, it's invisible. It's like driving a Tesla. You press a button, the next day, you have a new Tesla. That's what ServiceNow is doing, incredible innovation.

Your next question comes from Raimo Lenschow from Barclays.

Congrats from me as well. Bill, you now are in new areas with RPA and observability from the acquisitions a few months ago. What has been the customer feedback? And then since you announced Celonis as well, how do you kind of draw the line between partnership versus doing yourself? And how is that playing out so far?

Yes. Well, thank you very much, Raimo. Again, as I said, ServiceNow's platform has process mining. We have RPA, we have machine learning. We have AI ops. We have all the predictive technologies based on the moves we made, as you know, built in. But there are non-ServiceNow environments, especially if you think about large-scale ERP environments as just 1 example, where business processes are fragmented. There are multiple instances of multiple participants.

And the customer really needs an x-ray, what's going on around here. And we combine that knowledge of all the non-ServiceNow environments that require process mining x-ray with what we do ourselves to get a force multiplier effect. And as a result, Celonis is here. There's no doubt the gold standard for workflow automation in the enterprise is ServiceNow. Why would we want to spend our time building the gold standard? We partner with you. We moved the x-ray into the action layer and together, we offer the customers something they never got before, a great x-ray and an unbelievable immediate value to action process on the Now Platform.

And I really think this is a perfect example of trust being the ultimate human currency. I would have never done the partnership with Alex and Bastian and Martin and their terrific team. I might add Munich, Germany, one of my great friends and the world knows how much I love Germany as a second home. So it's really fun to work with them. They all went to the Technical University of Munich, by the way, where I have great relationships. And just think about all the customers in Germany that are going to hear this news, that they're going to be like, "Wow, I'm trying to modernize my architecture. Can you give me an x-ray and then you can move all the innovation on to an action layer, and then I can start to drive business outcomes in days, weeks and months as opposed to multiple years? I think I'd sign now."

Your next question comes from Matt Hedberg from RBC Capital Markets.

Congrats from me as well, guys. I guess whether it could be for either Bill or Gina. You mentioned -- I guess, there was an earlier question from Alex on sort of the future of work. I'm just sort of curious, what is ServiceNow's philosophy on the future of work? And I guess, Bill, I'm wondering, as reps, sales reps get out on the road and there's more in-person conferences, industry conferences, do you suspect that, that could help improve pipelines even further than more of a remote selling process?

Yes, Matt, there's no doubt, it's all upside, right? Because what you're seeing now is a purely digital motion to the marketplace. The great news is CEOs, management teams and leaders of all kinds and companies, both in the public and the private sector, have accepted this new way of communication, which I believe has expedited collaboration and has expedited decision-making because you don't have the clunkiness and the clumsiness of the heavy travel to get something done in a few minutes as opposed to a few weeks, especially in a global company, is a blessing.

However, there is nothing that will ever replace humans being in the same room, ideating, collaborating, dreaming, thinking about the next frontier. And that's why it's all upside for us because we're going to combine everything we're doing now in the playbook with the direct motions, and we're going to leverage the hybrid world, both for ourselves, our customers and our partners. So I actually think the tailwind going into an economy that's opening up is probably underestimated by everybody on the call today.

Looking forward to that as we look into 2022. Congrats, guys.

And we have time for 1 last question. It will come from Arjun Bhatia from William Blair.

I'll add my congrats on the quarter. Bill, in your prepared remarks, you talked about companies consolidating, your customers consolidating legacy systems on ServiceNow. I'm curious whether you're starting to get to the point where within the systems that you're replacing, we're starting to see some maybe more modern SaaS applications that are being removed and folded into the Now deployment as well. Or are we still at this phase where there's still so much work to be done on legacy on-prem systems so you're not seeing those modern applications kind of fold into your platform?

Yes. It's a really good question, Arjun. What I'm seeing is there's still a massive set of customers out there with legacy. And what you're also seeing -- and Gina, as an example, is our internal champion on ESG, works here beautifully with the engineering team when we announced one of the greatest ESG-in-a-box solutions in the world, actually, I think it's the only 1 in the world.

But what's amazing is, there's all these islands of automation. Everybody is doing something good that's a modern system or a modern product or a modern tool. That's fine, but it doesn't necessarily unify on a common architecture where there is security, there's enterprise coherence, there's business operations, there's 1 end-to-end process that includes all the people, all the processes and all the technology and that's where the Now Platform comes in.

And it's especially true in the world of 20th century architectures because even if you move them to a cloud, just think about the cost, the time, the risk and the companies that are dealing with do-or-die moments today, they just don't want to wait. So to have an action platform that can absolutely simulate the perfect enterprise at record speed, and I might add, with a gorgeous consumer-grade UX, is a sensational business case. And that's why you're seeing the deals get bigger, you've seen us go into a platform company model, and you now see that ServiceNow is a clear sensation. It's because we're giving the customer what they want.

And what I also learned, and I think it's an important attribute of our engineering culture and our great engineering leader and all of his leaders, we always say here at ServiceNow that our strategy is informed by our customers' strategy and deeply understanding their issues and their opportunities. And we are so quick to be able to innovate and get new releases out to market at excellent quality. And then even the ones that we didn't get out in the release can be handled by the Creator Workflow platform.

We also built something inside of ServiceNow called NowX, where we have a series of on-deck organic innovations that are going to hit the market and take it by storm. I had an earlier question on supply chain. That's one of the major areas where we're focused on. So there's such an opportunity with legacy. There's still such an opportunity to unify these enterprises on common platforms. There's such an opportunity for hyperautomation to automate what people thought they already automated, that I just can't see any constraint to the growth agenda of ServiceNow.

We are out of time for questions today. This will conclude today's conference call. Thank you for your participation. You may now disconnect.