ServiceNow Inc (NOW) 2020 Q1 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 ServiceNow Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

  • I would now like to hand the conference over to your speaker today, Vice President of Investor Relations, Lisa Banks. Thank you. Please go ahead.

  • Lisa Banks - VP of IR

  • Good afternoon, and thank you for joining us for ServiceNow's First Quarter 2020 Earnings Conference Call. Consistent with where we are operating globally, our call today is work from home. 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 first quarter 2020 financial results and discuss our financial guidance for the second quarter of 2020 and full year 2020.

  • Before we get started, we want to emphasize that some of the information discussed on this conference call, particularly our guidance, is based on information as of April 29, 2020, and contains forward-looking statements that involve risks, uncertainties and assumptions, including those related to the impacts of COVID-19 on our business and global economic conditions. The forward-looking guidance we will provide today is based on our assumptions as to the macroeconomic environment in which we will be operating. Those assumptions are based on the facts as we know them today. Many of these assumptions relate to the matters that are beyond our control and changing revenue, including but not limited to the time frames for and severity of social distancing and other mitigation requirements, the impact of COVID-19 on our customers' purchasing decisions and the length of our sales cycles particularly for customers in certain industries. Significant changes in the future could cause us to modify our guidance higher or lower. Please refer to the press release and risk factors and MD&A in our SEC filings, including our most recent 10-K and our 10-Q that will be filed for Q1 2020, for information regarding such risks, uncertainties and assumptions 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 the company reports non-GAAP results in addition to and not as a substitute for or superior to financial measures calculated in accordance with GAAP. All financial figures we will discuss today are non-GAAP except for revenues, net income and remaining performance obligations. To see the reconciliation between these non-GAAP and GAAP results, please refer to our press release filed earlier today, our investor presentation and, for prior quarters, previously filed press releases, all of which are posted at investors.servicenow.com. A replay of today's call will also be posted on the website.

  • Please note that due to the short-term uncertainty of the ongoing COVID-19 crisis, we have decided to postpone our Financial Analyst Day for a future date. We expect it will occur in the second half of the year so we can provide more visibility into 2021 and the longer-term operating environment.

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

  • William R. McDermott - President, CEO & Director

  • Thank you, Lisa, and good afternoon, everyone. Welcome to our Q1 earnings call. Let me begin by extending my hope that you and your loved ones are healthy and safe. We wish a speedy recovery for anyone affected by COVID-19. And of course, our hearts go out to those who tragically lost a loved one. For the millions of people economically impacted, we're doing our part to support those in need and to get the world working again. We are truly in this together.

  • Here are the key takeaways I'll reinforce in today's remarks: First, ServiceNow is a unique platform, a very strong company. We are well positioned in this seminal moment. Next, digital transformation was a business imperative pre-COVID with $7.4 trillion of projected spend over the next 3 years. Post COVID, digital transformation will accelerate, and ServiceNow is the workflow standard for digital transformation. And most important, the Now Platform, the platform of platforms, has become the standard for workflow design experiences.

  • As the COVID-19 pandemic spread around the world in Q1, ServiceNow focused on protecting the health and safety of our employees, serving our customers and supporting our communities. Leadership by example has never been more important. We never stopped pushing. We will not slow down. You've seen our earnings release. We delivered a strong Q1, beating guidance and consensus. We have shown we can deliver. In March, as the pandemic was being felt everywhere in the world, our more than 11,000 employees seamlessly transitioned to a work-from-home environment. I'm so incredibly proud of how ServiceNow employees adjusted. Our team focused, they executed, they delivered. Employees feel motivated, inspired and proud. After shifting to work from home, we held our biggest all-hands company meeting ever, a live, global, digital event where we laid out our plans to support each other and to serve our customers. Feedback from our recent employee satisfaction survey is also very encouraging. 99% are excited about our future. 95% feel more inspired by our purpose than ever. 98% feel confident in our crisis response. ServiceNow employees are ready to lead.

  • We're strengthening the amazing purpose, culture and character of our company. Our seamless transition to work from home is a powerful demonstration of the Now Platform. Our cloud-native Now on Now solutions enabled our employees to maintain and often improve productivity. Our virtual agent technology, our Now Mobile app, our digitized workflows on the Now Platform, allowed employees to easily self-manage their work requirements. We didn't miss a beat supporting our customers. Our cloud uptime numbers remained world-class. Cloud consumption stayed high as customers relied on the Now Platform as a workflow workhorse. Around the world, we see that customers who are farthest along in their digital transformation are better equipped to manage this crisis. Companies lagging behind are realizing that they now have a burning platform. Accelerating digital transformation has become a business imperative.

  • Behind every great experience is a great workflow. Today, that matters more than ever. The power of the Now Platform has become self-evident to customers in this pandemic. They are leveraging the Now Platform to quickly deploy workflow apps that enable better crisis management and business outcomes. Our COVID-19 emergency response apps are a great example. These 4 apps, 1 developed in partnership with the Washington State Department of Health and 3 developed by our own team, were released at no charge at the end of March. More than 5,000 installations have taken place. Washington State, San Francisco and Los Angeles are just a few examples of how we are helping government agencies respond. CIOs are telling us that their teams are using the Now Platform to deliver workflow-designed experiences that their companies need now. For example, the Lowe's Corporation was facing a surge of emergency paid leave request due to COVID-19. Within 96 hours, they built a mobile leave request app on the Now Platform and deployed it to 330,000 employees. This is what Q1 was all about, leading, helping our customers deal with reality, helping them do what needs to be done.

  • Let's look at some of the results now. We had 37 deals greater than $1 million this quarter. That is up 48% year-over-year. In fact, most deals closed in the final weeks of March, consistent with normal linearity. Our renewal rate remained best-in-class at 97%. We saw strength in the Americas, our largest region. We also saw a strong growth in APJ despite the impact of COVID-19 throughout the quarter. Our Now cloud went live in Seoul, South Korea in March, where we signed 2 new customers representing major brands. We also saw strong deals completed in EMEA despite the challenging environment.

  • Q1 results reinforce the strength of our portfolio. Hear this: 18 of our top 20 deals with companies such as Merck, Humana and Siemens included 3 or more products. This included our second largest new customer transaction ever, which was signed with a Fortune 50 leading U.S. insurance company. We saw great momentum with ITSM Pro, which delivers increased automation and operational resiliency for our customers. Our business continuity and integrated risk management products continued their strong momentum. 16 of our top deals included multiple IT products. Chevron, for example, is realizing the power of the Now Platform by using multiple ServiceNow products across their business to drive productivity. They're now using our suite of IT products, and they deployed our HR products to their entire 44,000-person workforce. We saw a continued traction in HR and customer service management. Customers such as the U.S. Department of Health and Human Services are leveraging HR service delivery to respond to COVID-19. Half of our top 20 deals included HR.

  • We now have more than 50 CSM customers greater than $1 million, including one of the fastest-growing digital streaming services. This company launched an innovative, game-changing digital business. They did it with ServiceNow. Our customer service management technology is foundational, helping them scale faster than anyone imagined possible. In Q1, we also landed our largest CSM deal ever in APJ. Japanese-based Murata Manufacturing purchased CSM to enhance their customer support, reduce time to resolution and increase customer satisfaction. We also launched Orlando in March, our most innovative Now Platform release ever. Our day 1 adoption was ServiceNow's highest ever. Orlando features Now Intelligence, which gives customers unmatched AI, analytics and mobile capabilities across the Now Platform to support any workflow design experience. Driving new levels of enterprise productivity is what Orlando is all about. The Office of Information Technology at Princeton University, for example, successfully upgraded to Orlando and went live with CSM. For instance, CIO Jay Dominick says they moved fast to implement CSM functionality to serve current and prospective graduate students, staff, faculty and other stakeholders.

  • And I'm talking to many CEOs and C-suite leaders worldwide. Here's what they're telling me. In crisis, they are focused on protecting revenue, ensuring business continuity and driving productivity. They want an enterprise workflow platform that delivers ROI in 12 months or less. The good news is fast time to value is a ServiceNow core strength. The ServiceNow advantage is one architecture, one data model, one platform. This gives us strategic authority to be the clear choice for all customers across IT, employee and customer workflows across all geographies, industries and personas. Our partner ecosystem sees it -- sees this clearly, and they're doubling down on ServiceNow. We value how our partners, Accenture, Deloitte, DXC, EY, KPMG and many others, have stepped up to support our shared customers.

  • Our Q2 fast-start playbook is focused on the priorities that matter most to our customers. We're engaging our customers like never before. Our Q2 fast-start playbook includes 5 key messages: digitally scale operations quickly and efficiently; reduce technology debt, there's a lot out there; ensure resilience for critical business operations; deliver employees the right digital experience from anywhere; and create new workflows fast. Each one of these priorities drives great employee and customer experiences. Last week, in fact, we engaged current and potential customers with these. These solutions, in a global, company-wide prospecting day, were built to drive pipeline. The results were simply outstanding. Our teams delivered 3x greater pipeline than any previous prospecting day ever. Our messages and solutions are resonating in every sector and every geography around the world.

  • We're also engaging customers and building pipeline through our digital Knowledge event. This launches on May 5. I encourage everyone to join us. We have 6 weeks of incredible content and digital experiences for our ServiceNow community. Knowledge already has more than twice the number of registered attendees that we had anticipated in the physical event we planned in Orlando. We expect the audience to keep growing throughout the next 6 weeks. It is going to be one heck of an experience. And this is a great example of how we have pivoted. We remain focused on delivering our customers and partners the connection, inspiration and education that makes Knowledge such a special event every year. And most importantly, it keeps the ServiceNow community strong.

  • Hey, I've covered a lot here. So let me recap. We seamlessly transitioned to a work-from-home environment and drove very strong Q1 performance. Our customers are innovating on the Now Platform to meet their crisis management, business continuity and productivity needs. ServiceNow is enabling customers to do what they must do to get the job done. Our pipeline is really strong. Our solutions are resonating. Our customers are asking for more. These are the actions and insights that have informed our outlook. Gina will provide more details on our guidance. She has led an exceptional analysis and thorough, bottoms-up effort on all possible scenarios. Our guidance reflects a slightly broader range considering the well-known uncertainties our customers face as a result of COVID-19 in the marketplace. Even as I say that, please keep in mind that ServiceNow is strong in all industries across the Fortune 500 and we are confident in our opportunities, our ongoing customer demand and our solutions and in the strong pipeline we see in our business. We are aware of the hard work ahead. We are taking nothing for granted. This is an innovation-led company with an incredible team. We have a proven track record and an unwavering commitment to customer success. Ladies and gentlemen, if it can be done, ServiceNow will do it. We are on the move.

  • I'd like to thank you very much for your time and attention. And I'll now turn over the call to Gina.

  • Gina M. Mastantuono - CFO

  • Thank you, Bill. We had a strong Q1, continuing the momentum coming out of 2019. We exceeded the high end of our guidance for subscription revenues and subscription billing, and we delivered another strong quarter of operating profit and free cash flow.

  • Q1 subscription revenues were $995 million, representing 36% year-over-year constant currency growth. Q1 subscription billings were $1.055 billion, representing 32% year-over-year adjusted growth. Remaining performance obligations, RPO, ended the quarter at approximately $6.6 billion, representing 32% year-over-year constant currency growth. And current RPO was approximately $3.3 billion, representing 33% year-over-year constant currency growth. Our renewal rate remained best in class at 97%. The strong top line performance during the quarter was driven by continued expansion of our existing customers. We also continue to see strength in adding new customers. We closed 3 new customers that are paying greater than $1 million in ACV. Our cohort of customers paying us more than $1 million annually continues to grow significantly, up 30% year-over-year. We now have 933 customers paying us more than $1 million in ACV. We saw strong profitability in Q1 with operating margin at 24% driven by our strong revenue performance and lower travel expenses due to the current work-from-home environment. Our free cash flow margin was 39%, benefiting from a seasonally high amount of collections from our strong Q4 billings. Our first quarter results demonstrate our position as the trusted innovator and partner to help our customers digitally transform.

  • Before I move to guidance, I want to briefly discuss the impact of COVID-19 on our business. Many of our customers are now operating under very challenging circumstances. In response, companies especially those in highly affected industries, such as transportation, hospitality, retail and energy, may reevaluate how they're spending their dollars. CIO surveys and our own conversations with customers suggest though that software spending will prove to be more durable. We're seeing companies place a greater emphasis on return on investment and time to value. We remain well positioned to weather the short-term challenges. The Now Platform remains a mission-critical part of our customers' operations. We have a strong customer base across almost every industry, and over 80% of our business is serving large enterprises globally. As a result, we expect to sustain our high renewal rates. In fact, we saw many of our customers in the highly affected industries renew their contract and expand their usage of the Now Platform in the quarter with a large portion of this occurring in March.

  • As Bill mentioned, we entered Q2 with a fast-start playbook and I've been thoroughly impressed with how quickly we pivoted our go-to-market motion in this work-from-home environment. We've seen early success as our pipeline continues to grow, and we have been successful in closing business with both new and existing customers in the first few weeks of April. With that said, the challenges our customers are facing particularly in Q2 have been taken into account in our assumptions. While our customers value the Now Platform and we know they are prioritizing their investment in it, customers may delay new transformation initiatives until we have greater visibility into the future operations of their business. Given the current operating environment, we expect some variability. However, we believe this will be most acutely felt by our customer base in the highly affected industries we previously discussed, which represent approximately 20% of our business. The other 80% are in industries that are less effective. We are very committed to helping our customers manage through this difficult time. When required, we've taken measures to provide our customers with greater flexibility to manage through these challenges. As Bill said, we are engaging our customers like never before. We have done rigorous analysis to understand both the risks and opportunities ahead of us.

  • Because of the potential short-term impact to our business, we have made the following adjustments to our guidance methodology: First, our guidance assumes that the most significant headwind will occur in Q2 and Q3. We're also assuming these headwinds will ease and the economy will open more broadly by the end of the year. Second, we've increased the guidance range for subscription billing. This accounts for the increased uncertainty of new business, timing of renewals and billing terms particularly with customers in highly affected industries. While our guidance is based on the current assumptions about the macro environment, we are confident in our updated guidance and believe that by making these adjustments, we are appropriately factoring in the risks created by COVID-19. As a reminder, we have good visibility into our subscription billing. On average, 50% is driven by backlog, more than 25% by renewals, and the remaining portion comes from net new ACV. Subscription revenue is even more predictable. Approximately 80% of the revenue that will be recognized for the remainder of 2020 is already contracted and included in our backlog.

  • Now let's turn to guidance for the second quarter and full year 2020, which reflects the impact of COVID-19 and the FX headwinds as a result of declines in the British pound of 5%; the euro, 1%; and Australian dollars, 12% versus the U.S. dollar. For Q2, we expect subscription revenues between $995 million and $1 billion, representing 29% to 30% year-over-year constant currency growth. We expect subscription billings between $960 million and $980 million, representing 20% to 22% year-over-year adjusted growth. We expect a 23% operating margin, up 500 basis points year-over-year due to a reduction in travel expenses and the transition of Knowledge to a digital experience.

  • For the full year 2020, we expect subscription revenues to be between $4.125 billion and $4.145 billion, representing 28% to 29% year-over-year constant currency growth. This guidance reflects the headwind of $52 million from foreign currency and $43 million reduction driven by lower net new ACV compared to the midpoint of our previous guidance range. We expect subscription billings between $4.60 billion and $4.66 billion, representing 23% to 25% year-over-year adjusted growth. This reflects the headwind of $52 million of foreign exchange and $123 million reduction driven by the lower net new ACV compared to the midpoint of our previous guidance range. We continue to expect 2020 subscription gross margin at 86%, and we are raising our guidance for full year 2020 operating margin to 23%. This reflects savings from reduced travel, lower G&A hiring and the transition of Knowledge20 through digital experience. Looking into next year, we expect our investment in these areas to return to previous levels. Importantly, as we continue to feel confident about the long-term opportunity and path to $10 billion in revenue and beyond, we will continue to invest in strategic areas such as R&D and sales, and we expect to maintain a thoughtful pace of hiring throughout 2020. As always, we will continue to be disciplined as we evaluate our investments to ensure we generate the greatest ROI possible. We are maintaining full year 2020 free cash flow margin guidance of 29%, reflecting an increase in operating margin offset by a decrease in collections due to the expected increase in DSOs. Finally, we expect second quarter and full year 2020 diluted weighted average outstanding shares of 196 million.

  • In summary, as we navigate through this global pandemic, a few things have become clear. Digital transformation is accelerating as companies react to unexpected disruptions of their business. We will help companies transform the way work gets done. We have a world-class management team and the right product portfolio to weather the short-term challenges. We will help our customers evolve and we'll emerge from this crisis an even stronger and better positioned company. We're in a very strong financial position exiting Q1 with $6.6 billion in RPO and a strong net cash position of $2.2 billion. We will continue to invest for long-term growth. We have never been prouder of our employees and their continued focus on serving our customers, partners and communities. Our hungry and humble culture is stronger than ever. We can't thank our employees enough for their hard work and dedication.

  • With that, operator, we'd like to now turn over the call for questions. Thank you.

  • Operator

  • (Operator Instructions) Your first question comes from the line of Alex Zukin with RBC Capital Markets.

  • Aleksandr J. Zukin - MD of Software Equity Research & Analyst

  • Congrats on a good quarter. Bill, I guess you gave us some great insight on the kinds of customer conversations you're having right now. If you -- given where you sit and kind of how you're driving these conversations forward, can you give us a real-time look at the pace of business closing right now in April? You talked about the fast-start playbook. How -- can you just help us understand what you're facing right now and how you're pivoting the message given the breadth and flexibility of the portfolio? And then I've got a quick follow-up.

  • William R. McDermott - President, CEO & Director

  • Alex, it's a great question. As you know, the in-process measures of what companies do in times of crisis cannot be overstated in their importance and you're in a race against the clock in terms of how you execute. Having been through a few cycles in my career like this, it was clear to me that we had to immediately jump in on the COVID response actions we took with the 4 apps to work-from-home initiatives, the all-hands communication to get people rallied around our customer and then also, along with our leadership team, galvanize the company around a Q2 playbook that really sold into what the customer needed in the face of a market crisis. Gina did a great job telling you about the market dynamic that we handle mainly high-end customers in the Fortune 500 and 80% of them are in industries that, of course, feel some effects of COVID, but it's the 20% that feel the greatest shocks of COVID. So the stage is set for ServiceNow to perform well. What I'm seeing in the trenches as it relates to April is a continuation to what Gina and I told you about March. From a linearity basis, March closed as we would expect March to close, and April has actually started faster than April did last year. So on a year-over-year basis, our pipeline is bigger than it was last April. And what we actually have in the door is, on a percentage basis, higher than we had last April. And the forecast is not shaky. It is very solid when you talk to our sales leader, the executives that report into him, and you participate in the daily conversations in the trenches like I do with people that run companies and run government entities. So right now, things are going very well at ServiceNow.

  • Aleksandr J. Zukin - MD of Software Equity Research & Analyst

  • Perfect. And then maybe just one follow-up for Gina. You mentioned payment terms or DSOs. And investors right now, I think, are closely scrutinizing customer churn, dollar churn, contract flexibility, payment terms. So maybe what are you seeing right now from customers, particularly in that 20% of industries that are impacted? And how does that inform some of your visibility and confidence around the guidance for subscription billings, current RPO and any other factors?

  • Gina M. Mastantuono - CFO

  • Sure. Well, I'll say that we've not had any customers at this point that are unable to make payments. And so our customer base remains very healthy. That being said, we have provided some flexibility and extended payment terms to a portion of our company -- of our customers, and those are the ones that I was talking about in the highly affected industries but so far has not been [a significant portion of our] customer base. We don't anticipate that payment deferrals or adjusted payment terms will have a meaningful impact on revenue or billings. It is why we cast our free cash flow margin guidance flat even though we're increasing our operating margin by 100 basis points. We do feel like there'll be a little bit that will push into early '21. But for the most part, we feel very comfortable in our guide on free cash flow and billings.

  • Operator

  • Your next question comes from the line of Brad Zelnick with Crédit Suisse.

  • Brad Alan Zelnick - MD

  • Great. Congrats on the continued leadership as demonstrated by these results. Bill, if I can, can you elaborate on how you're adapting your go-to-market strategy during these crazy times? Clearly, your value prop only becomes more appealing as the entire world pivots to digital. But how have the field priorities changed, if at all, as it relates to new logo versus expansion business?

  • William R. McDermott - President, CEO & Director

  • Well, one of the new logos, Brad, that I had mentioned was Merck, and there were quite a few new logos in Q1. But here's the big thing. It might be a little counterintuitive actually. But one of my goals, as I told you in the last earnings call, was to be the trusted innovator for the C-suite and actually to elevate the level of contact that ServiceNow utilized in the marketplace. Right now, C-level executives and CEOs in particular are easier to get to than they ever have been because they're in their home office and they're looking for a good phone call or a good Zoom. And in ServiceNow, they're finding one. So what we're doing is we're aligning the presale especially on the value drivers that are important to a customer in their specific industry, in their specific persona. And on an outside-in basis, we're studying very carefully, especially in the COVID environment, what we can do to help them. We schedule our team to essentially do in a physical world, we have what we called, executive briefing center meetings. Now in a virtual world, we simply have the same executive briefing center meeting, only we can have many more of them because we don't have the wear and tear or the difficulty of getting calendars aligned because people have time on their hands for things that are mission-critical and things that can give them immediate time to value and the priorities that they care about. And as I said, Brad, they care a lot about protecting the revenue they already have. Obviously, everyone wants to grow, but job 1 is protect what it has.

  • And then this business continuity thing, you can't overstate it. For example, there's very -- one very large consulting company out there with hundreds of thousands of people. And think about something like asset management and how you get the tool set, whether it's a phone or a computer or anything the workforce might need to work from home physically to them, trace and track it and make sure that it's executed well across the value chain. So think about all those enterprise asset management needs now being managed on a workflow basis between a virtual and a physical world. So this platform of platforms is really resonating. So I believe that it's logical for people to be concerned to say, "Wow, you're primarily an enterprise, direct sales go-to-market," but actually, it works even better in digital because the activity set increases and it's just easier to do business with C-level executives now than it ever has been before.

  • The other thing I would mention to you, and I said it in my opening remarks, is it's all about value, right? The one thing about value that's changed though is the fuse has to be really short. Not dissimilar to 2008, it has to be very, very short. I told you a story about Lowe's where we had them up and running on something with 330,000 employees in 96 hours. We have people installing ITSM Pro in a couple of weeks, and just compare that to the old system of record world and how long it takes to get to value. So we're so relevant. And I want everybody to just think about the old value chains and how they are splitting apart and being reassembled into these end-to-end, mobile-first workflows on the Now Platform and how quickly you can get to value and just how willing people are to engage digitally. And even the order agreements, it's all digital. You don't have to go out there and get things signed anymore. So that's pretty much the net of it.

  • Brad Alan Zelnick - MD

  • It's all very helpful, Bill. Maybe just quickly for Gina. I think you mentioned slowing down on hiring. How has the hiring plan evolved since the beginning of the year? And have you noticed that it has gotten easier over the last several weeks or a month or so to find talent?

  • Gina M. Mastantuono - CFO

  • Yes. I would say that when I talked about slowing hiring, we were talking specifically about G&A now and into the back half. We will continue to aggressively hire [obviously] in sales and in fact through the end of Q1 and even through today have been [according to plan] in our hiring in some of those areas. And so we have really not seen a slowdown to date in our ability to hire and attract really strong talent, which is great. I think what we're trying to do is be really thoughtful about hiring as we go forward especially in (inaudible). We will absolutely continue to hire for the critical work from the critical areas. I want to make sure that we are well positioned to weather the short-term storm here.

  • William R. McDermott - President, CEO & Director

  • Brad, I just want to give you and everyone else on the call a little color, right? To build on what Gina is saying, we're hiring 9s and 10s. And just to net it out, this is a brand destination that's super successful and talented people now know about. One example is our Chief AI Officer, Vijay Narayanan. Keep in mind this guy has 15 patents. He ran data science solutions at Microsoft and engineering at Pinterest. We have the ability to attract the very, very best people in the market. And he was getting offers from everybody, and he chose ServiceNow. So we're -- as we bring in engineers, as we bring in talented go-to-market people, we're also making sure that they're 9s and 10s. We're not interested in 8s and below. We'll leave that to the open market to rationalize.

  • Operator

  • Your next question comes from the line of Sarah Hindlian-Bowler with Macquarie.

  • Sarah Emily Hindlian-Bowler - Senior Analyst

  • Bill and Gina, especially for providing us an outlook, I think we all understand it's very challenging given what we're seeing right now, and sharing your process with us was extremely helpful. So thank you for doing that. And I wanted to ask you a few questions. My first one is for you, Bill. We're hearing a lot about some of our companies -- now granted they have far more SMB exposure than you do but really working ahead of time on the renewal side. And I was wondering if ServiceNow is pulling together a renewals team or some kind of prioritized focus on making sure that some of those distressed customers come through even under potential contract extensions? And then I have a follow-up with Gina.

  • William R. McDermott - President, CEO & Director

  • Absolutely. Sarah, first of all, thank you very much for the question. We really want everybody to know that this company is all about driving long-term customer loyalty. The sustenance of these customer relationships is everything in the cloud economics sense, but even more, it's everything in the sense of the ServiceNow culture. We have presale, sale, post-sale customer support, our consulting and partner ecosystem aligned in a value chain. We do this by industry. We also segment it by persona. In the 20% of our customer installed base most affected by COVID-19, we have a cross-functional team that also includes legal, finance, presale, sale and post-sale involved in the process. So we do all we can to make our customers successful. We haven't had a single down-sell. We have been flexible on cash where we needed to be, which Gina stated. But we're also looking at things that are win-win in their orientation.

  • So even if COVID were even worse than it is today, we expect that it will get better. But even if it was worse, we find that customers are realizing that the Now Platform is a "keep the lights on" technology in these companies. It is a have to have, and therefore, nobody has disputed whether or not they need to renew. It's just simply a consequence of can we help them get through this very difficult time. So keep that in mind. The loyalty effect is getting even stronger because customers really are relying on the platform even more. And as I look at the root causes of why companies win and lose, customers have to love that product in good times and in bad and be willing to stick with that product because they really believe it's essential to their future. And that has been the case in every engagement, even the ones where customers needed our help the most.

  • Sarah Emily Hindlian-Bowler - Senior Analyst

  • Awesome, Bill. That was extremely helpful. I appreciate it. Very thorough. And Gina, I just wanted to follow up with a fairly simple question but an interesting one. Especially given the depth of work you've done on the guidance, the fiscal year outlook, the way you've cut numbers was better than I was fearing and definitely a relief to me. And you walked through how you were building the model. I'm wondering if there is some maybe primary one particular driver. I know being the customer success platform is relevant. But are you potentially also seeing or expecting to see a continued boost from enabling IT operations in a very distributed perimeter and a work-from-home environment? And is that the primary driver of the revenue build? Or is it as mathematical as you've outlined?

  • Gina M. Mastantuono - CFO

  • Yes. Thanks, Sarah, for the question. I think that as IT becomes the business now, IT ops is going to be super important. But that's not the only place where we continue to see strength. And so we did a very bottoms-up, deep dive analysis and completed extensive scenario planning for our pipeline coverage, our conversion, our renewal rates, et cetera. And so it's really about whether or not -- from our original guide, we're just thinking that some of our customers in these highly impacted industries, we believe our renewal rates will stay strong. But as we think about net new and digital priorities, some of them may be delayed. And so that's really where we're focused on when we brought down the guide. We absolutely believe that we'll be able to maintain our strong renewal rates. We believe that digital transformation will remain a big priority, as Bill has talked about. And so we feel very confident right now with our current guidance.

  • William R. McDermott - President, CEO & Director

  • And Sarah, one thing and I think everybody will be interested to know this. It's kind of your question but it's probably on everyone's mind. Why is it that we have such confidence? It's really because the customer is telling us they have confidence in us. So take the Department of Home Affairs in Australia. What they are doing is basically integrating the outdated, underperforming, old solutions into an integrated platform. And that is helping them simplify their environment, drop down cost and improve productivity. The state of California, as an example, is a perfect one because they went for a cloud-first initiative. And that's all about getting stakeholders, vendors and partner agencies to cooperate. And that's why they chose ServiceNow customer service management. So what you're seeing here is a recognition that the integrated nature of the platform, what the platform can do and how it's so simple now to plug the processes into something that's modern, cloud and on the move versus the things that they're bogged down by in the old 20th century tech. So we're feeling good.

  • Operator

  • Your next question comes from the line of Samad Samana with Jefferies.

  • Samad Saleem Samana - Equity Analyst

  • Congrats on a great quarter. Maybe the first question -- and I know you guys have touched on it a little bit, but as you think about customers with everybody working remotely -- I know you've talked about the sales motion. But how about in terms of implementations, are those cycles moving at the same speed as before? Are they moving more quickly? And maybe what are the puts and takes around the ability to do a full implementation from a remote perspective?

  • William R. McDermott - President, CEO & Director

  • Yes. That's actually a good question, Samad. I know initially, probably people had concerns as to how viable that was. But the reality is it is very viable and that's, in fact, what's happening. So not only can ServiceNow virtually implement the system but so too can the ServiceNow ecosystem. And initially, there may have been some training that was required with certain partners on how to do that. But our substantial partners absolutely know how to do that, and that is the manner in which ServiceNow is being implemented. It's done virtually by ServiceNow as well as our ecosystem partners, not an issue whatsoever.

  • Samad Saleem Samana - Equity Analyst

  • That's helpful. And then maybe one more on just the go-to-market. With the T&E being down, with the events moving virtual, coming out of this -- and it's tough to answer, but it seems like maybe the customer acquisition cost may just structurally come down over time. How do you think about that? As those of us that are thinking beyond this crisis eventually abating, do you think that it will just allow customers to be acquired more efficiently just going forward? Thanks again for taking my questions and I wish everybody well.

  • William R. McDermott - President, CEO & Director

  • Well, Samad, I wish you well, too. And I'd tell you're asking some great questions here because who would have thought that ITSM Pro could have been implemented by our partners in 21 days or less remotely, pretty cool. And then who would have thought we would have canceled our Knowledge event in Orlando, which has been the physical event of the year, the epicenter of the ServiceNow story, where we expected to have 25,000 people physically in Orlando. We already have 50,000 registered and signed up for our event, our Knowledge event in a virtual environment. And yesterday, our Head of Marketing and Communications who is leading this event and doing a great job, I might add, told me that his anticipated head count now for the event is over 100,000. So you're on a good point here. We might very well learn that companies that are digitally transformed and attracting others who want to be digitally transformed might actually get some brand recognition power from this and actually a lower cost to sale because of the bandwagon effect. And the second part is our motion on a virtual basis of coordinating all of the pre- and post-sale layers I discussed is becoming far more refined than it was in the prior highly physical, high-touch world. So we might still be able to deliver high value but do so at a higher volume, in which case you can lower cost of sale, get more deals and more flow through to the bottom line. I wouldn't rule it out. I'll put it to you that way.

  • Operator

  • Your next question comes from the line of Kirk Materne with Evercore ISI.

  • Stewart Kirk Materne - Senior MD & Fundamental Research Analyst

  • Yes. And I'll add my congrats on the quarter and glad everyone is doing well. I guess Bill, just to start with you. Obviously, you all are standing out in what is a very difficult economic period. I mean the answer seems somewhat self -- or somewhat obvious, but when you're talking to CFOs, I think when we go out and hear about things like CapEx spend, obviously, budgets are under a lot more pressure. People are really focused on their bottom line maybe more so than ever and nervous about their own outcomes. So are you just getting the sense that you're consolidating wallet share within the IT organization or the organization in general? Are you tapping in the new line of business spend that perhaps you weren't before this happened? Because I think what stands out is not only do you have a good quarter, but obviously, your business seems to be doing really well through a month, and I think that will be pretty unique when we hear from everyone else. So can you just talk about sort of how you all are maybe just consolidating spend amongst your customers at this point in time?

  • William R. McDermott - President, CEO & Director

  • Yes. Sure. Well, Kirk, I want to thank you very much for the question. It's a really, really smart question because I start every meeting off with the C-level executives or heads of government that we're speaking with regularly daily, in fact, on this concept of behind every great experience is a great workflow. And the Now Platform is the platform of platforms. You heard me say that when I first came into the company, but digital workflows are becoming a substantially important asset within every company. And what we see happening here is we see that the great experiences that every CEO wants for their employees and customers includes mobile, web and conversational tools. We see clearly that the IT workflow is also essential to enable employee workflow, customer workflow. And then anything they want to uniquely customize, they can use the app engine on our platform to do it. And having this one platform with one data model and one architecture, which, by the way, no debt because of how well ServiceNow engineering has been handled for the last 15 years, you're able to really streamline, eliminate a lot of waste in these companies. And what I see happening is companies are telling me, why would I want to double down on a system of record when I can take the data from the system of record and put it into a new workflow, where, by the way, with the Orlando Now Platform, they can apply machine learning and AI and get the real analytics that they need to drive employee experiences and customer experiences.

  • So it's actually such a great return on investment. I haven't seen one scenario yet where I can't go to a C-level executive and say, "You wanted this from me today. I give you 5x or better the ACV value this year." And then it's kind of like, "Well, why wouldn't you do it?" One customer, for example, in the software asset management scenario will also do hardware asset management, as you know. That "I know that I have all the outdated solutions, I'm underutilizing, I have shelf wear," and so forth. And I said, "Well, we'll analyze it for you. It's something we do. We haven't found a business case yet where we can't take 20% of the cost out." And the guy goes, "Really? Then why don't we have it?" I said, "Look, if anyone's got any problem with it, I'll just split the profits with you." "No, no, no. I'll order it from you." So that's the kind of environment we're in. If you want to talk cost, we can take it out. If you want to talk experience, we're the workflow behind it. If you want to talk executional excellence in a virtual world, this is the platform that cuts across all the systems of record and enables all of the mobile, web and conversational experiences to help the employees do their job or inspire the customers to be happy and loyal. So I really think it's relevancy, it's quick return on investment, and it's making things better for everybody. And I really truly believe our purpose of helping people and really making work, work better for people is truly resonating at this critical time in the world's history.

  • Stewart Kirk Materne - Senior MD & Fundamental Research Analyst

  • Okay. That's really helpful. And just one really quick one for Gina. Just Gina, in your cash flow guidance for the full year, have you made any sort of assumptions around sort of invoicing duration changing and all? That sounded like outside that 20% of the customer base, you haven't seen any real need to think that way. But I was just trying to get a sense on sort of how you're modeling on that front.

  • Gina M. Mastantuono - CFO

  • Yes. As I said earlier, the real issue that we've seen it in hasn't been tremendous given that only 20% of our business is with customers in the heavily impacted industries. We are not seeing any real issue with respect to invoicing duration or timing.

  • Operator

  • Your next question comes from the line of Jennifer Lowe with UBS.

  • Jennifer Alexandra Swanson Lowe - Analyst

  • Maybe just to quickly follow up on the last question, some of the earlier ones. Gina, you've mentioned a couple of times that 20% is industries most directly impacted by the current crisis, 80% is less impacted. But as we think about sort of the assumptions feeding into the guidance, is the assumption that, that impact remains relatively contained in that 20% with relatively little sort of downstream effects on the other 80% of large corporations? Or are you assuming that there's some further disruption? I'm just trying to sort of quantify. Or to the extent that it's possible, just think about what happens if things expand beyond the industries that are currently impacted directly.

  • Gina M. Mastantuono - CFO

  • Sure. Thanks for the question. So basically, not only is only 20% of our business in the heavily impacted industry, 80% of our business is Fortune 500. And so we are not as exposed to smaller SMB type of business. And so our guide does reflect some lower expectations from what we normally would see on our growth, on our net new ACV. The bulk of that, we believe, will come from companies that are more heavily impacted. But some, right -- some -- as some of these companies still may delay some of their spending and they look forward, we've definitely incorporated some of that as well.

  • Jennifer Alexandra Swanson Lowe - Analyst

  • Great. And earlier, there was the mention that the guidance assumes things continue to stay difficult for a couple more quarters. But also April, there was some positive momentum on the pipeline front and things like that, and we're seeing press about industry starting to reopen maybe a little earlier than have been feared. So if we think about the sensitivity potentially on the more positive side, what are sort of the KPIs that you're looking at in your own business to get that forward look on how things are trending? And if we do start to see things open up a bit sooner, does that get us back to sort of what the guidance might have been previously? Or is there going to be just business that you don't think comes back? How do we frame out what the upside could look like?

  • Gina M. Mastantuono - CFO

  • No. I think that there's definitely potential upside if the economy opens up more broadly sooner, right? I think that as we talked about, we are very well positioned once the economy opens up. Digital transformation is more imperative than ever, and our customers are really engaging with us like never before. And so there certainly would be upside in my eyes if the market opened up sooner. As you know, we are very Q4 weighted. And we're also, within each quarter, very last month weighted. And so as we look at the actual conversion of the pipe, we talked about pipeline being stronger than ever, our current conversion rates are higher than normal. And so we are very well positioned if the economy opens up more broadly to potentially be in a position to have more opportunity versus the current guide. Does that help?

  • Jennifer Alexandra Swanson Lowe - Analyst

  • Yes. That's great.

  • Operator

  • Your next question comes from the line of Raimo Lenschow with Barclays.

  • Raimo Lenschow - MD & Analyst

  • A quick question, Bill, on digital transformation. So that can mean a lot of things for a lot of people but also for ServiceNow. Can you talk a little bit about how you're kind of tilting your sales approach here in terms of different subgroups especially when times are a little bit tougher, people look for quicker ROIs. Like how have you changed the sales approach over the last few weeks to kind of still do digital transformation but take advantage of maybe faster projects and faster time to money? And then Gina, quickly on gross margins this quarter, they were at record level for subscription. Was there anything special in there? Or what drove that?

  • William R. McDermott - President, CEO & Director

  • Well, Raimo, I'll start us off. As you'll remember from 2008, the world was feeling very good in September of 2008 about things until the crisis hit on the financial level. That was pretty substantial. And that was when cloud solutions that offered OpEx versus CapEx and fast time to value really became the ultimate move for the enterprise because the power moved across the management team. The CEO basically said, do what you have to do to get the job done, do it on your budget. And CapEx slowed and cloud took over as the pervasive computing theme of the 21st century at that moment. In our case, we're already a pure-play born in the cloud market leader. So what do you do? We essentially wrote a playbook with 5 main plays that do what you said, take our platform and our market-leading solutions and shape them in a way that gives customers what they need fast. So digitally scaling your operations quickly and efficiently, as an example, combines our CSM, our ITSM Pro, and our mobile capabilities and our ITOM capabilities in one out of the box, pre-packaged solution that's ready to run. If you want to reduce your technology debt, we have our SAM, software asset management, Cloud Insights and application management tool out of the box, ready to run. If you want to ensure resilience for your critical business operations, we have governance risk compliance, IT operations and security operations out of the box, ready to run.

  • And we do this for the employees. We also do this when you're building any workflow. So for the employees, you want the right digital experience from anywhere. You listen to any CEO on a business council call and that's what they want, "Give me the right digital experience for my people anywhere." So we have the human resource service delivery pro ready to go, out of the box. It's all mobile and it's ready to run. And of course, I talked earlier in my remarks about asset management. You have to get the assets to the people where they're physically located, and you have to track and trace this stuff as well, again out of the box, ready to go. And finally, on creating new workflows fast when you need the most, the app engine is now a soaring component of the ServiceNow platform. And I think we really kicked off a new awareness for that with our COVID-19 apps. People like, "Whoa, I can do my own app? And I can do it at mass scale with that kind of speed? Are you kidding?" We built them in 3 days. I had one CEO who was fascinating. He said, "My goodness. I was trying to do an employee rewards program because I want to do -- I want to get a great score on Glassdoor. And on ServiceNow, I had a business analyst do it in 3 days." So everything we do is superfast, out of the box, ready to go, and we align the whole value chain within our company to provide that to customers in a virtual world.

  • Gina M. Mastantuono - CFO

  • And on your question with gross margins, we did see higher gross margins in the quarter of about 87%. That was really driven by a greater mix of self-hosted revenue during the quarter. We expect, in our guidance for the full year, that will be more normalized at 86%.

  • Operator

  • Your next question comes from the line of Phil Winslow with Wells Fargo.

  • Philip Alan Winslow - Senior Analyst

  • Congrats on a great quarter. And above all, glad to hear that all of you are healthy and I hope the same for your families and your team. Bill, a question for you first. Obviously, as you mentioned, you've seen lots of downturns like this in the past over the course of your career. And frankly, you've actually sold a lot of different software products, HR, financials, CRM, obviously now ITOps and ITSM. When you talk to executives, how do you think the focus sort of within these segments has changed and priorities versus maybe past downturns? And then I just have one follow-up for you and Gina.

  • William R. McDermott - President, CEO & Director

  • So I think -- first of all, thank you for your question, and safety and wellness to your family. Please give everybody my best, Phil. Executives today are very keen on digital transformation. You can't go to any meeting where a CEO among CEOs isn't in some way trying to digitize their company and trying to make sure that digital transformation is at the top of their to-do list because they know if they're not digitally transformed and their competitors are, they're going to get wiped out. So this is where the action is. We're in the sweet spot, and we don't have to sort of explain that. Now ServiceNow is hitting the main stage with the biggest companies in tech, and we have a very prized position because the problem with systems of record and the technologies that have passed is they do one thing well in a specific domain. It's not that that's unimportant, but those investments have been made. So the CEOs that I talked to want us to help make those investments work better. And that's where the platform of platforms comes in because we're so well positioned to take all the investments they've already made and enable them to do what they want done, which is to create workflows that inspire their people and provide outstanding service to their customers.

  • And Phil, one of the big learnings in CRM as an example, the engagement layer has been well penetrated. We all understand SFA, we all understand marketing, we all understand upsell, cross-sell engagement. But what hasn't been done so well is mid-office operations, how does a health care provider take care of 50 million claims and make sure things are done well for each and every constituent. Or it could be making sure on field service level, for example, deep analytics and machine learning is applied to understand how things can be corrected remotely. But when you do have to manage an incident, it's done with the right person, the right tool set, the right training with the right preparation so when they do activate a resolution process, the productivity curve goes way up, the customer satisfaction and loyalty effect hits. Now you're also seeing virtual agent on the platform where we can handle 50 million plus consumers at any one given time on the Internet. So it's really evolved, and ServiceNow is leading in digital transformation. And workflow is hitting mainstream awareness, which is a new curve for CEOs, and they like it.

  • Philip Alan Winslow - Senior Analyst

  • Great. That was very helpful. And then when you think about the sales and marketing line, obviously, we saw a pretty significant jump in head count this quarter. One of the things that you've talked about is needing more distribution for a broadening product set. So I guess a jump-off for Bill and Gina, how are you thinking about just head count there in that line going forward as you balance sort of the long-term growth potential but also maybe near-term productivity?

  • William R. McDermott - President, CEO & Director

  • Yes. Maybe what I could do is just start off and then I'll let Gina pick it up. So here's the deal. We have the platform of platforms. You know we are doing fantastic in ITSM. There's no question about all the solutions in that portfolio. Employee is taking off like a rocket and continues to grow. Incidentally, we're very supportive of the systems of record out there, and that's also helpful to the customer because we hide all the complexity and make the user experience great. On CSM, as I mentioned to you, we can handle the engagement layer, the mid-office or the field service layer, like no one in the market. But if there's someone already entrenched in a certain account, we have no quarrel with that. We just make everything that they do work better. And then there's, of course, the app engine. What I see as our priority is to make sure we align the value chain by industry and persona in every geography and we go to market with tremendous consistency and meticulous attention to detail on the presale, sale, post-sale customer support, services and ecosystem, and that motion is completely aligned. And now I think the virtual environment is the best way to do it at mass scale, quite frankly. I think we all learned that in this crisis.

  • Now in the past, we would invent a new product or a new line and then have to have a specialist sales force to support it. I think more and more, we're going to be able to do that with our core sales professionals because we're finding a new level of expertise in preshaping these things, in training on these things and aligning the value chain. So over time, I think we'll get more done with less as opposed to every time we want more, we have to add more. And that's the mentality we're putting into this. That's why we're only hiring 10s, maybe 9s that have high potential. Gina?

  • Gina M. Mastantuono - CFO

  • Thanks, Bill. Yes. I would just say that you're right. We had strong growth in our sales and marketing head count in Q1. It was the strongest sales hire in quarter ever. And we continue to invest aggressively in our long-term growth in both sales and marketing as well as R&D. I would also say that we've also seen strong productivity, which tells us we're getting good yield on the hiring investment made and affords us the ability to maintain these aggressive targets. So we feel good. We will continue to invest here and continue to drive the long-term growth trajectory of the business.

  • Operator

  • Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.