ServiceNow Inc (NOW) — Q1 2018 Earnings Call Transcript

Good afternoon, and thank you for joining us. On the call with me today is John Donahoe, our President and Chief Executive Officer. During today's call, we will review our first quarter financial results and will discuss our financial guidance for Q2 and full-year 2018. We'd like to point out that the company reports non-GAAP results in addition to, 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 and revenue growth. To see the reconciliation between these non-GAAP and GAAP results, please refer to our press release filed earlier today, and for prior quarters, previously filed press releases, all of which are posted at investors.servicenow.com. We may make forward-looking statements during this call, which are subject to risks, uncertainties, and assumptions. Please refer to the press release and risk factors and documents filed with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K, for information on risks and uncertainties that may cause actual results to differ materially from those set forth in such forward-looking statements. I would now like to turn the call over to John.

Thanks, Mike. Good afternoon, everyone, and thank you for joining us on today's call. The year is off to a great start, continuing the strong momentum from our record-breaking finish to 2017. Our teams keep executing with strong focus and commitment to customer success. We closed 21 deals in the first quarter with ACV greater than $1 million. The 536 customers now doing more than $1 million in business with us represents year-over-year growth of 43%. And we saw strong expansion with existing customers. Our opportunity to be a strategic technology partner enabling digital transformation and driving great employee and customer experiences continues to grow. Our performance was strong worldwide with particular strength in EMEA. Nearly half of our top 20 new deals came from outside North America in the quarter, and our renewal rate remained consistently strong at above 98%. Increasingly, our pipeline of new customer deals is diversifying, coming from large public and private companies, as well as government agencies. We see significant growth in opportunities worldwide. For example, one of our largest deals in Q1 was with a $20 billion private company that has over 50,000 employees. And we landed two deals, one at $1.8 million and one at $2.2 million in Q1, with U.S. federal agencies. Our consistent performance underscores our strong product portfolio. We're focused on making work, work better for people. We believe that technology should enable people by creating simpler, faster, easier ways to get work done. That, in turn, creates great experiences for employees and customers and drives better business outcomes. Driving digital transformation and delivering a great employee and customer experience continues to be at the forefront of practically every customer conversation that I have worldwide. And ServiceNow has become a core strategic partner for CIOs and other C-suite executives on their transformation journey. We are uniquely positioned to be the connective tissue that streamlines and simplifies workflows across the enterprise, eliminating silos and creating more seamless interactions. Simply put, we make work, work better. For example, one of our large HR service delivery deals in Q1 was with a global 100 company with 145,000 employees. This is a great example of how companies are looking to partner with us to transform their end-to-end employee experience across their entire enterprise. Customer success is an important priority for us, and we're making great progress. As I've shared before, we've aligned all of our Customer Success teams, including Customer Success management, professional services, training and certification, and our partner ecosystem team into one group under the leadership of our Chief Revenue Officer, Dave Schneider. This integration will ensure that we optimize value for our customers. We're driving Customer Success to be a natural extension of our sales motion, and our focus is to continue to land new customers and expand existing customer relationships in a healthy and sustainable manner. Delivering world-class product experiences is also a priority for us, and we continue to invest in this area. For example, I'm pleased to share today our acquisition of Seattle-based VendorHawk, a leader in SaaS subscription management. This acquisition further strengthens our software asset management offering, giving customers a comprehensive view of all of their software assets on our single platform. That's critical to managing digital transformation. The all-cash transaction is expected to close this month. Before I close, I want to take a moment to acknowledge Frank Slootman's tremendous contributions to ServiceNow. As you know, Frank has decided to step down from our board and his role as chairman. I am personally deeply grateful for Frank's partnership and support during my first year at ServiceNow. And I know that everyone here will always appreciate his great leadership. As much as Frank will be missed, I'm also thrilled to announce that our Founder, Fred Luddy, will become our next board chair. Fred has also been a tremendous partner since I joined ServiceNow, and I look forward to working with him in this role. Finally, I'm delighted to announce a new board member, Dennis Woodside, Chief Operating Officer at Dropbox. Dennis' experience in scaling global technology companies and his focus on creating great customer and consumer experiences will be incredibly valuable for us in the months and years ahead. In closing, I'm very pleased with our strong start to 2018 and the progress we're making against our strategic priorities. We're focused on our purpose to make the world of work, work better for people. That was Fred's founding vision and it's our future aspiration. I'm also excited about sharing more of our journey at our upcoming Knowledge18 event in Las Vegas, the week of May 7. We expect over 18,000 registered attendees, our biggest Knowledge yet. I hope to see all of you there. And with that, I'd turn the call back over to Mike.

Thanks, John. In Q1, we delivered another quarter of outstanding performance, including strong top-line growth combined with margin expansion. After ending 2017 with our strongest quarter ever, it was very important that we started 2018 off on the right foot, and I'm pleased we exceeded our internal expectations. Let's dive into the highlights from the quarter. Subscription revenues for the first quarter were $543 million, representing year-over-year growth of 40% and adjusted growth of 34%. Subscription billings were $638 million, representing year-over-year growth of 33% and adjusted growth of 28%. The subscription billings strength was driven by strong net new ACV performance, favorable foreign exchange fluctuations, and a handful of unexpected multi-year billings. Sometimes customers do ask to bill them for the entire contract upfront to utilize excess cash balances. While we will likely see more of this going forward, we don't expect it to be meaningful in future quarters. We saw strength across all of our products in the quarter, with 16 of our top 20 deals including three or more products. In the quarter, we booked three new Customer Service Management deals with more than $1 million of net new ACV and a record six new deals with more than $1 million of net new ACV with our HR Service Delivery product. Strong performance from our emerging products legitimizes the market opportunity in front of us and supports our need to further invest in these areas. Our continued strength in IT, coupled with the success of our emerging products, are yielding more strategic relationships with our customer base. Of the 21 net new deals with more than $1 million in ACV that John mentioned, 20 were upsells. Additionally, 52 customers now pay us more than $5 million per year, which is an increase of 108% year-over-year. Moving on to profitability. Our Q1 operating margin was 18%, the strength of which was driven by our revenue performance, foreign exchange fluctuations, and timing of expenses. Our free cash flow margin was 38% and benefited from a seasonally high amount of collections from our strong Q4 bookings. This quarter also represented the first time we were GAAP EPS profitable, driven by the adoption of two new accounting standards. The first now requires us to record the change in unrealized gains or losses from equity investments during the period on the income statement instead of the balance sheet. The second is related to the indirect tax effect related to the adoption of 606. The total impact of both accounting changes was $41.5 million, and we don't expect to be GAAP EPS profitable in Q2, as these aren't recurring gains. Now, let's turn to guidance for the second quarter and full year 2018. For Q2, we expect subscription revenues between $568 million and $573 million, representing 41% to 42% year-over-year growth and 36% to 37% adjusted growth. We expect subscription billings between $608 million and $612 million, representing 34% to 35% year-over-year growth, and 28% to 39% adjusted growth. And lastly for Q2, we expect a 16% operating margin, which is impacted by expenses related to our annual users' conference, Knowledge18, and 188 million diluted weighted average shares outstanding. Coming off our strong Q1, we are raising our full-year 2018 subscription revenue guidance to between $2.4 billion and $2.415 billion, representing 38% to 39% year-over-year growth and 34% to 35% adjusted growth. We're also raising our full-year 2018 subscription billings guidance to between $2.83 billion and $2.845 billion, representing 33% to 34% year-over-year growth and 30% adjusted growth. While we are increasing our top line guidance, we're also increasing our investments and maintaining full-year 2018 margin guidance as follows: subscription gross margin of 85%, operating margin of 20%, which includes record hiring in Q1, and free cash flow margin of 27%, which includes the opening of a new pair of data centers in Germany later this year. For the year, we expect diluted weighted average shares outstanding of 187 million. Before closing, please note our financial Analyst Day will be held on Monday, May 7 in Las Vegas at 1 PM local time. We will also hold a webcast of the event accessible on our website. We plan on updating our financial model beyond 2018 at that time. With that, operator, you can now open up the line for questions.

Thanks for taking my questions. Maybe the first question just around the incremental focus on Customer Success for John. Can you point to kind of what impact it's having on the upsell motion or the retention dynamics or the customer upgrade cycles? And maybe, Mike, if you can comment on what impact, if any, that's having on the way you think about leveraging the model. How big of an initiative multiyear is this program?

Yeah. Sure, Alex. So, I'd say we're still relatively early in this Customer Success journey. The areas we've first started on involve just capturing best practices. This is one of the most requested perspectives from both new and existing customers, which goes something like this, 'you guys now have 4,000 or 5,000 in growing customers, tell us best practice about how we implement the ServiceNow platform.' So, you'll see at Knowledge we're rolling out our entire Customer Success Center which just has more best practices that both prospective new and existing customers can use. And I think one of the ways we're seeing that is in some of the newer customers, as they implement, they're implementing in a more out-of-the-box way, focused on getting the CMDB robust and correct upfront which makes expansion to existing products down the road a lot easier. Another area we're focusing on early on is taking some of our customers that are on older versions or older instances, and working with them in many cases through our PS organization and third-party ecosystem to help them get on a more contemporary version of ServiceNow with less customization and more out-of-the-box functionality. So, I think just the dialogue itself is a filling part of what customers are looking for, as they think of us increasingly as a technology partner, which is, how do they get best value from our platform and where can they use our platform to drive even greater value going forward. So, I think that's partly reflective of the expansion we're seeing, but I think the opportunity is even greater to have that kind of positive impact.

On the financial side, Alex, as we had said going into 2018, it was one of our key investment initiatives, Customer Success. We planned on $25 million in incremental spending in Customer Success. And that's all factored into the operating margin guidance for 2018. And based upon the results we see in 2018, we'll make a decision going beyond 2018 as to what we're going to invest in that organization.

Great. Thank you, guys. Congrats on a great quarter.

Excellent. Thank you guys for taking the question. A question on new customer adds. New G2K customers, you added 12 in the quarter. That's basically the lowest number I had in my model since 2012. I was wondering if there's any kind of extenuating circumstances that made it a lower new customer quarter add in terms of maybe there are sales changes or something that we should be aware of. Number one. Number two, are you still comfortable with sort of the pace of new G2K customers that we've seen in historical periods continuing into FY 2018? Or are we going to bounce back from these levels?

Sure. So, it's really just timing. As you saw, we've been exceeding our G2K ads for quite a few years now, and that was purely timing. The latter half of the year looks very good. But I can't stress enough, and as John was mentioning, G2Ks were really just a proxy that we gave everyone back in 2015 for how we get to the $4 billion. And we've shown that G2K continues to be north of 50% of our business, but large private companies and public sectors are becoming more and more important to us. They're now roughly 38% of our customers paying us more than $1 million per year, and we see that as a number that will continue to grow. So, I think you'll see us moving away from G2K after 2018, because that was really just to prove to people how we can get to that $4 billion, which we feel very comfortable with.

Got it. It makes sense.

Thanks very much. And congrats on a good first quarter. John, I was wondering if you could just talk about how some of your discussions with customers are changing just in terms of now being viewed as an enterprise platform. Are you speaking to more people in the C-suite? And when you're able to have those discussions that go beyond just the IT department, what kind of impact can that have on the scope and size of those types of deals? Thanks.

Yeah, Kirk. I spent a lot of time in Q1, as well as last year, with customers. And I must say, there is remarkable consistency in what I'm seeing and hearing. The first thing I'd note is, I don't think I've visited, I probably had 600 to 700 customer meetings. I don't think I've had one yet where the company is not doing a digital transformation in some form or the other. And as part of that, there's no doubt that the role of IT is shifting and expanding. I've said this before. It reminds me of the role of finance over the last 20 years. Twenty years ago, the CFO was sort of a green eyeshade person, finance was kind of an internal function that didn't have maybe all the respect in the world. They kind of kept track of costs. And over the last 20 years, finance and the CFO are increasingly playing a cross-organization role focused on business value, not just costs, and are far more strategic. The more I engage with CIOs and see these digital transformations, where CEOs need their most technically literate leader to help lead the digital transformation, the CIO and IT are right on the cusp of being in the same place that the CFO and finance were 20 years ago, where they're being asked to drive cross-functional change. And as part of that, the CIO has to partner with the other C-suite executives. So, if you're going to drive end-to-end employee experience, that's not just an HR issue, any more than it's just an IT issue, any more than it's just a legal or facilities issue. Employees just want a great experience, and they want all the functions inside the company to work effectively together. So, we're seeing more and more examples of CIOs partnering effectively with CHROs, with Chief Marketing Officers, with CISOs. Obviously, some CISOs report to CIOs. As part, I think that cross-functional issue, where IT is at the table, not just for vertical functions, but for cross-functional or horizontal functions, is very clear. That has a very positive impact for us. Because CIOs see the power of our platform and see how it can help automate and transform not just IT processes, but processes that cut across other functions, whether it's customer support, whether it's HR, whether it's security. I think that trend is increasing, and I think it's going to continue.

Thank you.

Yeah. Thanks. Hi, guys. Looking at the guidance for the year, it looks like you raised billings by kind of the magnitude of the beat normalizing for FX and duration. Given the momentum you had in the quarter, the number of million-dollar deals and the further penetration of G2K, why not take that up at least a little bit to reflect the momentum you have going?

You know we're still very early on in the year, and a lot of those deals were a function of deals we were thinking were going to happen later. The deal that happened in Q1 doesn't really change our billings guidance for the full year. We'll see as we exit the first half of the year what it looks like in the second half, and we'll look at it then.

But I'd say, our confidence in our momentum is not any different than it was. The momentum is fairly consistent, I would say, over the last several quarters as we see the opportunities and, frankly, the underlying tailwinds I was talking about in my previous answer. Just as there's increasing pull in demand for our platform and our products.

It's fair enough. And then just maybe one follow-up on the securities side. We're seeing Splunk buying Phantom, etc. Just kind of curious what you think the roadmap from here around cyber-security for the platform looks like for ServiceNow.

We're going to do where we're world-class at, which is workflow. So, we're focused on the workflow around security. Security operations, right, which is – there's an explosion of inbound signals, inbound contacts, inbound incidents. CISOs are struggling with how to vet all that inbound data and identify which ones are most important and need human attention, which ones can be dealt with by an automated function or an automated way. That's exactly what our workflow engine does. We'll continue to ensure that we are best-in-class at the portion of security we do. We're going to continue to be Switzerland in the sense that our advantage is we partner with many endpoint detection vendors. We'll never be in the business of actually identifying the threats or vulnerabilities; that's for others to do. But the workflow around it to help remediate those threats, we believe we're best-in-class and we'll continue to be best-in-class. I think CISOs can increasingly count on us to connect in and integrate with multiple endpoint solutions that they are using.

Sounds good. Thank you.

Hi, guys. Congrats on a great start to the year. My first question's around upsell and product attach. You had a really nice quarter-on-quarter increase in upsell. You're obviously doing well in diversity of product areas. Do you have any way of measuring your penetration for your larger customers or what the white space opportunity is now that you're in so many different markets at your install base?

It's a great question, Adam, and it's one we talk about internally in the following sense. The aspiration we have is to be, as I've said repeatedly, a trusted strategic technology partner to companies. Every company has a few top-of-the-house trusted strategic partners. My customer interactions indicate that, increasingly, CIOs are looking to us to be one of those strategic platforms that's a trusted technology partner. That's kind of step one. Our land motions often start with ITSM, and it's great to get a robust ITSM implementation with a strong CMDB. Then it's a matter of just expanding out to the other use cases. That path of expansion differs by customer. For some, it starts with ITSM and includes ITOM early on; others, employee experience narratives are getting a lot of focus and attention. What we're focused on, if there has been an evolution over the last year, is what's the quality of our customer relationships, from both qualitative and quantitative standpoints? Are we delivering good value for them? Do we have access to the right decision-makers? Are they aware of what our products and platform can do? Do we have a shared perspective on the value creation that's occurring with it? In terms of the upside, what's interesting is that a lot of our growth comes from situations where they're using software that hasn't been used before. So, it's often an unstructured workflow we're replacing, and in most cases, HR case management software hasn't been used today. The security use case I talked about in my previous answer also hasn't been used today. We think it's an enormous opportunity because there's huge potential to automate unstructured workflows and have software drive better experiences and greater productivity. So, we're less focused on measuring the pure TAM or pure maximum potential of each customer because we think that's huge. We're more focused on building quality implementations, quality relationships, which leads to a healthy and natural, and, I believe, very sustainable expansion.

That's super-helpful. If I could just get a quick clarification from Mike, on the quarter-on-quarter margin guidance for Q2, it's obviously down quarter-on-quarter. You mentioned the user conference; is that the entire reason that margins are down quarter-on-quarter, or is there any impact from VendorHawk in that number, or anything else we should be thinking about? Thanks.

So, the user conference adds roughly a net $21 million in expenses to the quarter. The other thing is, Q1, even though we overachieved in the bottom line, we did have a record quarter because we're investing a little heavier in the year, and the full impact of that is going to flow through. The VendorHawk is immaterial from a P&L perspective and will be for the balance of this year.

Great. Thanks so much.

Great. Thank you. Maybe going back a bit to just sort of the digital transformation discussions that you've been having, John. Do you find that customers have a very firm sense of what the ROI they expect from these types of transactions is, or is it more sort of big picture, it seems like a good idea type thing, but less specific on the ROI? And how does the perception of that ROI influence the amount that they're willing to spend with ServiceNow?

Jennifer, I think it's in transition, to be honest. I would say that the state of play varies today. But in general, the evolution's been, oh, my goodness, software's disrupting my industry, my company. We've got to fight back. Digital, we got to digitally connect with our customers, be they consumer customers or business customers. We've got to provide a better digital experience for our employees and a recognition that digital technology can help drive productivity. So, sort of across the board, people are embracing digital transformation. I'd say, currently, maybe a quarter of them have tied that to clear cost and productivity goals. Most start with some customer goals and some employee goals and, I think, are getting to the cost and productivity goals third. But that number's growing. We are encouraging that to grow because I think the best transformations come when you reengineer your processes. If you just take your old processes and put them on our platform, it's better than it used to be, but you're only scratching the surface of the value. It's only when you re-design or re-engineer or streamline a process and then automate it that you get leapfrogged improvements in user experience, significant productivity savings. We're very clear with our customers that what our platform does is automate workflow, which, by definition, drives productivity. You’ll see in our website, we’ve put an economic value creator where we're trying to help, train and encourage CIOs to be able to have that dialogue with CFOs. We're trying to ensure that we have an economic value statement with every customer because it's not only good for the customer, but we think it's good for us; our platform has a very strong positive return on investment.

Great. Thank you.

Hi. Great. Thank you. Congrats on the quarter, guys. John, a question for you and one for Mike. John, as you're going to market with customer service, HR and more services really outside of the core product, how have you seen your sales process evolve in terms of cross-sell potential? I'm wondering how much capacity your salespeople have for incremental solutions. And then, Mike, for you, in addition to Q1, I guess there's a slow point in the year in software; you say it's a good quarter, but it did feel a bit seasonal to me. The G2K ad was a bit wider than I've seen in quite a long time. Your Q2 guidance implies reacceleration. You sound very confident about the business momentum. I just want to make sure I'm not missing anything here, and if that's a fair way to classify the financial momentum.

Yeah, Sarah. What we're seeing inside the customers, the way this demand evolves is that every case is a little bit different, but on average people are using ServiceNow initially for an ITSM or an ITOM integration. The CIOs are talking with CHRO or the CISO or the head of customer service, and then we get an opportunity with one of them. In some cases, those opportunities start with customer support or customer service. I think we had several deals in the first quarter that our first sale to them was customer service; the same thing with HR. But usually, it's in partnership with the CIO. Now, the sales motion that you see is we have added product line specialists, which we're finding to be highly effective. You may have an account rep for a large global multinational combined with a solutions consultant, but for the dialogue with the CHRO, they may bring in a product line specialist around HR service delivery. For the dialogue with the head of customer support or customer service, we'll bring in a product line specialist with customer service management. Having that credibility on the product and credibility with that decision maker, we find to be very effective. But we're not trying to freeze IT out, which I think is a really important point. IT is playing a growing cross-functional role and a more important role. A growing number of CIOs are not direct reports to CEOs and are at the C-suite table. The best solutions come when IT partners with their functional counterparts. We're trying to make sure that our coverage model covers both. So far, so good. I think the area we probably grew our sales force the most this year is in the product line specialists area, and that's where we continue to see really strong demand. In some certain verticals in government a little bit in MED/SLED, we're also augmenting that with more vertically focused sales teams. Where vertical expertise is more important than product expertise, we're trying to make sure we have that available as well.

And Sarah, on your question for me, yeah, Q1 is typically one of the slowest quarters of the year, coming off our best quarter, Q4, from a bookings perspective and net new business. Q1 is also the quarter where we typically do most of our hiring. We like to get everyone in front of our sales kickoff. It's also our quarter when we're rolling out commissions and whatnot. It is a tough quarter. We did exceed our plan and are very pleased with that. Our pipeline going into Q2 is very strong. We gave you guidance for what we see for Q2 in the balance of the year right now, and I look forward to discussing it more, our actual results, next quarter.

Awesome. Thank you, Mike.

Sorry, you mentioned the G2K. I'll just say this: our sales team doesn't incent on new G2Ks. Dave Schneider and Kevin Haverty, that's not a top priority incentive for them because we want to ensure we're expanding our relationships as well as adding new ones. As Mike said, the quarter-to-quarter, how many G2Ks happen to land in a quarter is a little bit; it's not a goal we manage to. We're focusing on healthy, expanding relationships. We want to be adding a lot of new ones. We're adding government ones. We're adding large private companies. Increasingly, we're adding more smaller companies. It's a bit of a lumpy figure that doesn't necessarily indicate our overall business health.

Yeah. Thank you. And congrats, guys, on a great start to a year. So, Mike, as you move towards the service management around more automated workloads and some of the other areas outside of IT, can you speak to the evolution of your pricing model as you transition some of the things towards transaction-based pricing? What's that transaction-based pricing mix today, and how should we expect it? Thanks.

So, pricing is something where we're having a lot of discussions internally. By the way, we've been having discussions around pricing for the seven years I've been with the company. This is nothing new. Ultimately, we do believe that the pricing model has to be based on a transaction model, especially when you have AI and machine learning doing more and more because theoretically, you should reduce the number of users. I think that's still a little too early and very, very little of our business today is on a transaction level. I think that will be very different in three or four years from now, though, but we're still working on that.

Thank you.

Thanks. Question for Mike. Mike, the guide for 30% adjusted subscription billings growth for 2018 implies at least a modest second half growth acceleration. I'm just curious, what you're seeing in the pipeline that would cause that. As you look at the pipeline, where you might have a little bit more of the second half SKU on subscription billings relative to prior years. Thanks.

One of the things you need to remember is most of our billings actually come from contracted backlog and not from net new business. Q4 is always our biggest year. Q4 of 2017 was such a big year, and we have the second year billings that flow through in Q4 that give us the confidence, as well as the pipeline that we see for our net new business. But I can't stress enough, the majority of our billings is really coming from our backlog and renewals that we're doing versus net new business with customers. Net new is still very strong, but that contracted backlog is really what's driving that, and skewing it to Q4. I think you'll continue to see that skewing in future years.

Got it. Okay. That's helpful, Mike. Thanks.

Thank you. Question, I guess, for either of you. On the platform business, with respect to ISVs starting to drive traction there, can you update us on where that is? What areas do you see the most promising ISV efforts, and when do you think that will become a more meaningful driver in the platform business?

Well, Walter, it was a record quarter for our ISV business. I would still say it's a record quarter and I still consider it a relatively small part of our business today. But we had 56 new applications and integrations that were launched in the store in Q1. We had a great example of where Nuvolo, who is a pure-play ServiceNow ISV enterprise software asset management vendor, actually closed the largest deal in our program's history with a $1.8 million deal to a Global 2000 customer. It was a great example where they had built, what I'm going to characterize is a tailored vertical solution to a vertical use case on top of our platform. Something that we never would have built out of the box, and it was very effective. I still consider our ISV efforts in the reasonably early days. I think we have good leadership there, we have increased focus. At Knowledge, we'll be having our CreatorCon day, which we're reaching out more to developers, both inside and outside the enterprise, reaching out more to third-parties, making it easier for them to build applications on top of our platform. To be honest, as we become more widespread and more global, I think you're going to see increased growth in this because they're the ones that can provide – I learned this in my prior life, in my eBay days. It was the very specific use cases, the vertical use cases, sometimes a geographic specific use case that you get a third-party partner to build on our platform and deliver a great solution. We'll continue to grow it, continue to focus on it, and I think it'll be an increasingly important part of our ability to both expand and to deliver great value for our customers.

Thank you.

Hey, guys. Thanks for taking my questions. Congrats on the quarter. John, when we talked to some of your biggest GSI partners, we continue to hear a lot of excitement in terms of the momentum within their ServiceNow practices that they're building. I was wondering if you can give us an example on how some of these GSIs are influencing deals today, and how do you think about that? I know you've talked about that from a services perspective, but how should that impact your growth longer term?

Well, I think it's a really important partnership for two reasons, Matt. One is to ensure that the product and platform get implemented effectively, which then tees up. The more effective and better implemented the ServiceNow platform is, the more expansion happens quickly and effectively. There's a shared incentive to ensure we're getting it right. That's sort of been the starting point. I've had top-level meetings in the first quarter with our partners. We start discussing how we ensure that collectively we're driving highly successful outcomes, highly successful results at our shared customers. Everyone's clear that when that happens, expansion happens in a more fast and robust manner. In terms of going to market together, we've now implemented shared account plans with each of those five strategic accounts. We're talking about which industry verticals or what geographies, or how the right people in our sales team talk to the right people in the GSI organizations so that we can go to market together in a way that's good for customers. I think we're ahead of where we were 12 months ago, and I think we can take a big step going forward. Over time, there's no doubt that our partner ecosystem plays an incredibly important role in our growth and Customer Success. We'll continue to see focus on that. The other thing we're doing is, we're raising the bar where if you don't have current certification on ServiceNow, we've gone from a very open partner ecosystem to one that's more if you're not trained and certified, then you're not part of our partner ecosystem. For those who are trained and certified, we're working with them to increase the number of ServiceNow trained consultants they have.

Got it. Thanks a lot, John.

Great. Thanks. John, as you expand the product portfolio and see more multiproduct engagements touching different constituents, different price structures, I suspect ultimately sales cycles could get a little longer. I mean, you guys have done a great job managing that so far. But how are you ensuring that sales cycles and close rates don't get too long? Do you envision, do you see linearity changing at all as you do more strategic engagements?

Derrick, I think this is – I can't say I have a deep understanding of the sales cycles of other enterprise software use cases. Those are major fundamental decisions to take out one existing software and put in another. What tends to happen, once we're in a customer with our platform, the decision's not so much to rip out old software and put it in ServiceNow. It's about whether to use ServiceNow where software is not currently being used. I think the decision cycles are not these big broad bake-off questions. They're, hey, on facilities management, should we be using ServiceNow to help extend and automate this workflow? Or should we add ServiceNow's Security Operations capability to automate the incident response in CISO, in addition to the other use cases or software endpoint solutions we're using? If you look at how we grow our relationships, it's often a lot of little pieces, rather than one great big fundamental decision. The initial decision of whether to use us for ITSM is, are they going to upgrade over a long-term remedy or HP or CA solution? Expansion tends to be almost workflow by workflow, which allows us to have more consistency and predictability around the expansion at a macro level.

In seven years, I really haven't seen a material change in the initial sales cycle. It is still very much, on average, a nine-plus month sales cycle for an enterprise customer. G2Ks on average are, believe it or not, two years. But once they're in, there tends to be more of a repeat buying pattern. It tends to be workflow by workflow, really not replacing software beyond that initial ITSM implementation.

That's helpful. Thank you.

Sorry about that, it was indeed on mute. Good call. First off, congrats on hiring Dennis Woodside to your board. A couple questions for you guys. One, with respect to the margin guidance being a little bit lower, is it fair to read into the tremendous outperformance in billings, and since you're raising the billings guidance, that obviously comes at the expense of operating leverage. But it's all good, because the faster the billings grow, you'll ultimately recover the profitability. So, we shouldn't be – it is a trade-off between outperforming and billings versus giving up some margins, right? Is that the right way to look at the trade-off? Then my follow-up...

We kept our margin guidance at 20% for the full year. We have not lowered it, and we're giving you higher revenue that that margin is after. We are contributing more on an operating profit basis. We mentioned Q1 was a record hiring quarter. A lot of that hiring was at the end of the year. The full impact of that is flowing through for the rest of the year, and we're still keeping our margin at 20% for the year.

Great. That sounds fantastic. A rather philosophical question, looking at successful SaaS companies, and one of the largest being Salesforce.com. They have a lot of adjacencies at scale, besides sales force automations. In your case, you've got ITSM. As you look at the company business five or six years out, how does the company look like? Your best estimate as to what those multiple adjacencies that are potentially multibillion-dollar businesses, so the growth doesn't have to necessarily slow down, because you're uncovering new TAMs. Philosophically, how does a company look like with respect to adjacencies in addition to ITSM at scale five or six years out? That's it for me. Thank you.

Yeah. Kash, again, I'll just echo on what I've touched on a couple times before. I think the reason software industry is growing so much and the reason SaaS is growing is that software is now being used in areas that it wasn't being used previously inside the enterprise. What I'm talking about is the need to do digital transformation is causing people to embrace cloud aggressively. That's causing structural growth in software. In our particular case, given our focus on workflow, we've done a couple analyses of the workflow TAM inside a company. If you were to take all of the unstructured workflows or all the non-automated workflows, the point is we have a big opportunity. What we're now focused on doing – and I'd tell you one other thing that I just love about our platform, which is very reminiscent of what I experienced at eBay, is we follow our customers. Our growth's following our customers. At eBay, when Pierre Omidyar created eBay, he created it for initially collectibles, Beanie Babies and collectibles in an auction format; he never envisioned there'd be 3 million cars sold on the eBay platform. Customers just started using the platform for multiple buying and selling. Our expansion is happening following the customers. That's consistent with what we see here, where customers are using our platform. They start using it in these use cases. It's not us saying we're going to create an HR service delivery use case; no, they started saying, 'you know this thing we're doing with the IT help desk? We can do it with HR help desk.' They start building their own solutions on our platform around HR help desk. They said, 'could you build that out of the box?' and we say, 'yes, we can.' Literally, one of our biggest challenges right now is the number of requests where our customers want us to build out-of-the-box applications for workflows that they had built their own use cases on our platform. Our Now X, which you've heard us talk about before, is focused on taking all those ideas from our customers, from our employees, from third-party developers, and saying how do we prioritize what our next applications are? We're going to try to address this in a very systematic way. Medium to long-term, we see just significant upside, significant expansion potential as we increasingly automate workflows inside an enterprise to deliver higher productivity, better employee experiences, and better customer experiences.

I can't stress enough, we are not a system of record. We're not trying to replace HCM. We're not trying to replace ERP. It's all about the work around these systems that we're doing to help people.

John and Mike, I feel 20 years younger.

Good. Tell me what you're doing because I'd like to feel 20 years younger too.

Just listening to you. I just listened to you, that's it. The last two minutes, that changes everything.

To be clear, and I've said this since I joined this company, guys, I'm reflecting what I'm hearing from customers. That's what's so exciting. I come back from these customer visits and just seeing the potential to transform how work's done.

Not many companies at your size have grown 40%, very few in history. So, congrats. Thank you.