ServiceNow Inc (NOW) — Q1 2019 Earnings Call Transcript

Good afternoon. Thank you for joining us. On the call with me today is John Donahoe, our Chief Executive Officer. During today’s call, we will review our first quarter financial results and discuss our financial guidance for the second quarter and full-year 2019. We’d 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 and revenue growth. To see the reconciliation between these non-GAAP and GAAP results, please refer to our press release filed earlier today. We may make forward-looking statements on this conference call, such as those using the words may, will, expects, believes, or similar phrases to convey that information is not historical fact. These statements 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. We delivered another strong quarter continuing the momentum from our outstanding 2018 performance. We are focused on driving customer success and we're expanding our footprint across almost 75% of the Fortune 500, enabling digital transformation as a strategic partner to the world's largest enterprises, and we're delivering digital workflows that create great experiences and unlock productivity. This is the future of work. Let's look at key Q1 results. In the first quarter, we closed 25 deals with ACV greater than $1 million. We now have 717 customers doing more than $1 million in business with us, which represents a 33% increase year-over-year. Our renewal rate for the quarter continued to be strong at 98%. This quarter, we saw a particular strength in the Americas region led by strong performance with U.S. federal agencies. Three of our top 10 largest net new ACV deals were with federal agencies, and we now have six federal customers doing more than $10 million in ACV with us. These results show how the public sector is embracing cloud-based solutions and it demonstrates our role as one of the core strategic partners to these government agencies helping them digitally transform how they operate serving their employees and citizens and delivering services. And our Q1 results also underscore our strong product portfolio. This quarter, our Customer Service Management product saw significant growth with 28 customers now spending more than $1 million. Our customer workflow products enhance customer operations management. That means that our customers are able to deliver better experiences and outcomes for their customers. In fact, Customer Service Management led to one of our largest deals during the quarter. This customer evaluated a number of competitors, including the legacy incumbent technology provider, and they chose ServiceNow because of our operations management capabilities. This is our sweet spot, managing inbound contacts to identify the root causes of customer issues, fixing those issues so that you can prevent future problems, and automating self-help solutions. In other areas, our IT and HR products led a large expansion deal with Humana, a Fortune 100 company. Humana is now expanding their use of the ServiceNow platform across IT and HR to enable an enterprise-wide focus on improving productivity and enhancing their employee experience. Across our customer base, we saw a positive response to the launch of our Madrid platform release in Q1. Early indications show that customers are adopting Madrid faster than previous releases. Madrid offers customers over 600 innovations such as new mobile-first experiences and digital workflows that unlock productivity for IT, for employees, and for customers. This customer response shows our progress in making upgrades simple and easy, ensuring customers can quickly take advantage of our latest platform and product innovations. I'm personally very excited about the mobile capabilities we're rolling out. We're delivering easy, intuitive, out-of-the-box mobile capabilities that enable consumer-like experiences across the enterprise. These are the kind of experiences that employees expect and demand today. We’ve also made significant strides in our product organization over the past year led by Chief Product Officer, CJ Desai. We have a great global product team and they're driving continuous quality enhancements and customer-focused innovation across our platform and product portfolio. This team is also focused on building a strong pipeline of product innovation as we look to meet a broader range of customer needs and leverage the power of our Now Platform across the entire enterprise. During the first quarter, I had an opportunity to visit Israel and spend time with our product teams there. As you recall, we acquired SkyGiraffe in late 2017 to enhance our mobile capabilities, and that Israeli-based team is fully integrated now. I met with this team and many other tech entrepreneurs throughout Israel. Israel has an incredible community of outstanding world-class technology talents and we're building a strong product and tech hub there with more than 125 employees to date. I left Israel so impressed with the quality and caliber of our team and with the innovation happening there. I also traveled during the quarter to Amsterdam, Tokyo, and Sydney spending time with our teams and customers. My customer interactions worldwide continue to validate the business imperative of digital transformation. Customers continually tell me that the strength of our product portfolio and the capabilities of our Now Platform position us as one of their core strategic partners enabling digital transformation. Our focus on the Now Platform and three core workflows, IT, employee, and customer is being well received by our customers, and it's empowering our product teams to focus on delivering even more integrated digital workflow solutions that drive great experiences and unlock productivity across the enterprise. A few weeks ago, we held our first CIO Advisory Board meeting, spending two days with roughly a dozen of the top CIOs in the world. We had a rich discussion, reaffirming that we are on the right path with our strategies, our product vision, and our focus on customer success. We've also been pleased with some of the positive feedback we've received throughout the quarter in response to our first-ever company brand campaign, which launched in January and continued through early June. As I've said before, this campaign is designed to increase awareness of ServiceNow more broadly with C-Suite executives. The campaign is resonating very well with our employees and enhancing our recruiting efforts from a talent brand perspective. We will continue to invest in company brand awareness to position ServiceNow as both a partner and employer of choice. In closing, I'm pleased with our strong start to 2019 and our continued progress against our priorities. We are committed to making the world of work work better for people, and we're focused on building key trust-based customer relationships to enable their digital transformation and create the future work. Now I know many of you are planning to join us in Las Vegas on the week of May 6 for our Financial Analyst Day and for Knowledge 2019, our seminal customer event. We expect this year's conference to be our largest-ever with 20,000 people registered to attend. Spending time with our customers is always my favorite activity, and Knowledge is one of the real highlights of the year. I'll look forward to seeing many of you there. With that, I'll turn the call back over to Mike.

Thank you, John. In Q1, we delivered another good quarter with strong top line growth combined with margin expansion. After a strong 2018, it was very important that we start 2019 off on the right foot, let's dive into the highlights from the quarter. Subscription revenues for the first quarter were $740 million, representing 40% year-over-year adjusted growth, including $20 million of foreign exchange headwinds. Subscription billings were $810 million, representing 33% year-over-year adjusted growth, including $22 million and $18 million of foreign exchange and duration headwinds respectively. Our revenue and billings performance was driven by strong bookings in the Americas. In addition, accelerated revenue recognition from self-hosted deals related to our Federal business drove the revenue outperformance. We continued to see traction across the product portfolio with 17 of our top 20 deals purchasing through more products as customers realize the power of the platform in an enterprise-wide solution. We booked four Customer Service Management deals with more than $1 million of ACV, including a $3 million deal to a federal agency, our largest CSM deal ever. We also booked a $1 million HR Service Delivery deal with the federal agency to modernize our HR processes and employee experiences, with our user forum and mobile capabilities being a differentiator. Our U.S. federal business highlighted the quarter representing 15% of total net new ACV, up from 6% the prior year. We booked our largest Q1 deal ever with the federal agency, who is now doing more than $18 million in ACV. We expect the U.S. federal sector will continue to purchase throughout the year as they accelerate their use of modern technology to digitally transform how they operate. We saw strong profitability in Q1 with an operating margin at 19%, driven by our revenue performance in expenses that will be realized in Q2. Our free cash flow margin was 40% and benefits from a seasonally high amount of collections from our strong Q4 billings. Now, let's turn to guidance for the second quarter and full year 2019. For Q2, we expect subscription revenues between $778 million and $783 million, representing 35% to 36% year-over-year adjusted growth, including approximately $15 million of foreign exchange headwinds. We expect subscription billings between $798 million and $803 million, representing 32% to 33% year-over-year adjusted growth, including approximately $17 million of foreign exchange headwinds. We expect a 17% operating margin which is impacted by Q1 expenses moving to Q2 expenses related to our annual user conference Knowledge 2019. We expect 193 million diluted weighted average shares outstanding. Coming off our strong Q1, we are raising our full year 2019 subscription revenue guidance to between $3.235 billion and $3.250 billion, representing 35% to 36% year-over-year adjusted growth, including approximately $45 million of foreign exchange headwind. We are also raising our full year 2019 subscription billings guidance to between $3.725 billion and $3.740 billion, representing 32% year-over-year adjusted growth, including approximately $50 million and $22 million of foreign exchange and duration headwinds respectively. While we are increasing our top-line revenue guidance, we are also increasing our investments and maintaining full year 2019 margin guidance as follows; subscription gross margin of 86%; operating margin of 21%, which includes record hiring in Q1; and free cash flow margin of 28%, which includes the opening of a new pair of data centers in Japan expected for later this year. For the year, we expect diluted average weighted shares outstanding of 193 million. Before closing, please note our Financial Analyst Day will be held on Monday, May 6th in Las Vegas in conjunction with Knowledge 2019. For those who cannot join in person, we will hold a webcast to the event accessible at our IR website. With that operator, you can now open up the lines for questions.

Hey, thanks for taking my question. Two quick questions. First, can you talk a little bit about the platform strengths this quarter? Obviously, you mentioned federal, but the 17% you got from platform still kind of seems to be like a step-up from what we've seen before.

Yes. Well, included in that group, platform was strong, but you also have Performance Analytics in there, Raimo, as well and Performance Analytics had a very strong quarter, but platform was strong as well and we're seeing that in many of our customers.

Can you elaborate on the record hiring in Q2 that you mentioned, Mike, while also addressing the Q1 expenses that carried over into Q2? What was happening there and how significant was it? Thank you.

So there was record hiring in Q1, and the impact of that is flowing through Q2. It was very back-end loaded, a lot of that hiring that skews as well. There were some other expenses that we were expecting to incur in Q1 that got pushed into Q2 because of timing, and we weren't ready to spend the money efficiently, so we pushed into Q2.

Perfect. Well done. Congratulations.

Excellent. Thanks so much, and congrats on a great start to the year. My first question is for John. John, the momentum you're seeing in U.S. federal is really impressive and Mike's comments suggest you're seeing a lot more demand in this market throughout the year. Can you help us understand the size of the opportunity in context of 15% of your ACV mix today and where can it go? And how do you think about this translating to other governments around the world, looking to transform the citizen engagement in the way government employees work?

Well, Brad, I think the way you put the question is exactly the right way to think about it. Because as I just step back, let me describe this as the public sector, and included in the public sector will be federal, state, regional, and local governments. And in the first quarter, I think in my global travel, I met with all flavors of that. Simply put, those institutions are under more pressure than ever to deliver better experiences for their employees and their citizens and to drive real productivity in a time of economic challenge. The key thing is that they are now realizing that cloud is a great way to do this. By and large, they’ve largely overcome their security concerns around the cloud. So whether it's the U.S. federal government, other federal government, state, regional, or local, we see a pretty aggressive appetite to both understand and embrace cloud. Let me just zoom in on the U.S. federal a little bit. We, over the last several years, have built a dedicated U.S. federal team. So we've been focused on both orienting and packaging and ensuring that our platform and our products conform to the requirements of the U.S. federal agencies. Then in 2018, that was roughly 10% of our ACV, and as Mike mentioned in Q1 this year it was roughly 15%. And over time, it's hard to gauge any given piece. But I think Mike and I both say that overall public sector when you add not just the U.S. federal government, but other federal government, state, and local could be up to 20% of our business over time.

I would agree. There’s no reason why it can't be 20% for us from what we're seeing right now.

And one of the interesting things, Brad, is that federal agencies and many of the state and regional in Australia, U.K. and other markets think platform first and see the power of our platform to adopt their ability to deliver better experiences. Let me give you an example. The Veterans Affairs, U.S. agency is adopting a ServiceNow-first philosophy for both their employees and their customers who are veterans. For instance, they've got a global service desk for over 550,000 Veterans Affairs employees, powered by ServiceNow, and they're using ServiceNow to allow their customers, that is the veterans, to help schedule some of their procedures in their respective hospitals. Our assets are in the Veterans Affairs CMDB; if a veteran has to schedule an MRI, ServiceNow’s platform can help that Veteran figure out which hospitals have which openings with which equipment and actually schedule their appointment. I find it very energizing to spend time with whether it's defense-oriented, federal agencies or other federal agencies because they are some of the most creative and innovative users of our platform.

Thanks very much for that color. And Mike, just a competitive question for you, but more in the context of pricing especially in HR and customer service clouds where you're seeing large players stepping up investments, can you talk a bit about pricing trends and average discount specifically in those clouds? Thank you.

Yeah. We haven't seen anything noticeable from a — if you're talking specifically about HR, as we like to say, our employee experience. We really take a different approach to those other vendors. Those other vendors are more specific around HR more and more around enterprise service delivery for our employees, and we're still seeing adoption by our customers jointly with whether it's a Workday, SuccessFactors, or even extending the life of the PeopleSoft implementation. So, no change there.

Thanks very much. And thanks for taking the question. I guess, John, just to start off with, given the success you've had in the federal government and related to someone unique how are you thinking just about the broader virtualization of your sales organization as you go deeper into big enterprises sort of being able to speak the language of industry and be able to serve help them solve their biggest problems? I guess, how are you thinking about that evolving as you look out maybe over the next 12 to 24 months?

Kirk, it's an area that we're leading into. Federal was the first area where we really focused on it and that is both a go-to-market motion where you have dedicated people who speak the language, but also tailoring the product to ensure that we meet the federal security and other requirements. The second area, I think you know, as we have a dedicated team around the healthcare market. Again, both to meet the go-to-market expectations of those customers that we understand their deep needs and to ensure that our product complies with the regulatory compliance requirements and the healthcare sector broadly defined, obviously there are several subsectors within healthcare. The third area where we have a quasi-formal vertical is financial services. Now, this is just by virtue that a large portion of the financial services world is either in New York or London. If you were to look at our New York and London teams, you see many dedicated resources toward the financial services sector, obviously within that you've got banking, insurance, and other subsectors. Their response to go-to-market motions requires some focus on the encryption and other security requirements required for compliance and regulatory capabilities. Those three, I would say are further along and we're increasing our investments in those and making sure that they're becoming more globally oriented in our ability to share experience and our ability to ensure that we are tying our roadmaps to them. We have a set of next verticals, telecom is one area where again the needs are common globally whether you're Telstra in Australia or AT&T or Verizon in the U.S. or Softbank in Japan. So, that's an area where I would say is next on our stage to building out a global vertical focus.

Great. Thanks very much.

Sure. I'll just finish up, Kirk, there are a couple of other varieties that will be more packaging and communicating that we understand industry, we speak their language, we can share best practices, and those would be further down the road.

All right, great. Thank you so much and thank you for taking my questions and congrats. I'll add my congratulations on a really nice start to the year. My first is for you, John. John, as you're looking at digital workflows, how are you thinking about the next near adjacencies for you guys? And maybe you could give us an update on how you're thinking about your M&A strategy as well at this time? Then Mike, I have a follow-up for you. It would be great if you could give us a little bit of incremental color on what you're seeing in terms of new logo addition, I think in particular, in the international market? Thanks, guys.

Sarah, on the first part of your question in terms of organic product innovation, at the beginning of last year, we formed something we call NowX, which is a dedicated team focused on defining and building products that will launch one to three years out. What's interesting is we have an abundance of ideas. Ideas come from our customers, from developers, from our people. Many of these ideas come from occasions where customers have built an automated workflow on our platform and they come to us and say, hey, we built this for our own use, but we would love it if you built it out-of-the-box. The NowX team, which is now up to well over 100 people, takes all of these ideas on top of the funnel, prioritizes, works their way down to build-out working prototypes and get some early alpha customers to see if they resonate, then get beta customers to see if they have the value we think they do. Our goal is to announce one to two new products at each Knowledge event. So you will see a series of incremental new capabilities and new products that come out of us each year building that organic innovation muscle is really important. In terms of M&A, it has largely been focused on what I would call aqua hires—acquiring technologies and teams to help build out and accelerate the platform. We'll continue to do those, but if and when we see opportunities to acquire adjacent capabilities, acquire new growth engines, obviously, we've got the resources to do it, we will act on it. One of the luxuries we have is to have the luxury of choice and time because we have such a strong organic innovation agenda.

And then, Sarah, on your question with regards to new logo acquisitions. I remind you that roughly 80% plus of our net new ACV comes from existing customers. So the new logos don't contribute a big piece of net new ACV at any point in the quarter, but that is the future for those upsells. Regarding new logos, we added about 200 new logos in the quarter, which compares with all of 2018, where we had about 1,000. It was about 50% North America and 50% rest of the world. I will say North America was driven by our federal as we said earlier; it was the one that really outperformed in our net new ACV. I would say EMEA and APJ were a little light, but that's because they came off such a fabulous 2018. We knew Q1 going into that was going to be a tiger quarter.

Hey, guys. Thanks for taking my questions. Congrats from me as well. I guess for either of you ITSM was included I believe in 15 of the top 20 deals this quarter. And I think you talked last year about how ITSM reaccelerated. I'm wondering, did you see that same trend this quarter? Can you put a finer point on maybe what's driving such strong results in your core?

I would say, there was no reacceleration in ITSM in Q1. But ITSM and IT products in general were extremely strong for us and continue to be the big driver of our net new ACV and we expect that to continue throughout the year, especially when we're landing new logos. But there's still a lot of room for expansion with our existing customers within ITSM.

Just building on that, Matt, here's what I think can be a little misleading. We as an organization really brought us aggressively last year and maybe late 2017, but throughout last year. We may have an ITSM presence in a large global bank, but it may be in the private wealth business and not yet enterprise-wide. Or it may be in Europe but not in the other regions. When we look at, we have a strong ITSM presence in, as I said earlier, 75% of the Fortune 500 as our customers. In many of those cases we landed in a division, or a geography, or a certain part of the organization. Customers want to drive platform adoption across the enterprise. Some reasonable portion of the ITSM growth for the 'reacceleration' is simply existing customers saying we've got great results in division A, let’s drive this enterprise-wide; we got great results in geography A, let’s extend that to be a more global rollout. That’s why I don’t think you can consider it a 'mature product.' I think that’s a significant opportunity for me.

That's great. Maybe just one more quick one about GSI momentum. I know we've talked about it in the past regarding how significant GSIs can become for you guys. I'm wondering if there's any update, was that some of the strengths in platform sales this quarter?

Interesting, I was with Mike Lawrie from DXC yesterday. We had our quarterly top-to-top. I was with Janet, the Chairman of Deloitte last month. We have a half-day top-to-top policy and Wilson from Accenture next week at Financial Analyst Day. In each of these conversations, they have said they see the same digital transformation opportunity. They see ServiceNow as one of the fastest growing portions of their practice. We've gotten significantly better over the last 12 to 18 months in basically calling on selling to and serving customers in a coordinated way with these GSIs. That’s healthy for customers because in many cases to get full value out of the ServiceNow Platform, you need to reengineer your processes. It's one thing to lift and shift historical processes and put it on the ServiceNow Platform. You get some benefits of that, but the real power is when you take the time to also reengineer how you operate. Our platform is increasingly at the epicenter of that not just in IT but across various products and services. Some of the GSIs, I'm talking with my, yesterday they have platform GFC, right? They are building their own platform, of which ServiceNow is a core component along with some of the cloud providers and others. We sell both with the GSI directly to the customers where there’s direct ServiceNow instances. In other situations, the customer buys the platform, if you will, from the side of which ServiceNow is a piece. Frankly we are indifferent; whatever allows the customer to get the best results. They’re a critical part, not just of our future but a critical determinant of whether digital transformation actually transforms customers’ businesses and drives significant improvement and results. It requires us working closely with the GSIs and I think they see that; we see that. I'm also delighted, I forgot if I mentioned this last quarter, we hired David Parsons to run our partner ecosystem. He's just a fabulous leader in this area. I'm really pleased with the progress that our teams are making in this area.

Hi, thanks. Question for John and question for Mike. John, on the CSM side you mentioned legacy incumbent replacement. Could you talk through the competitive landscape there, what you're seeing given the success this quarter? How much is the big sales force in the market versus legacy and then some of the small emerging players in that space?

Most of the CSM deals that we're doing is we're not replacing modern technology; we're replacing legacy technology. And that could be a legacy Oracle implementation or a Remedy implementation, or their own solution. That’s typically what we're seeing. There usually are modern technology competing at the table for the same business we're going after. It's really about our approach to CSM, why customers choose us, when they do choose us, is because they like the fact that we are all about understanding root cause analysis within our system, lot more collaborative with people in the organization to resolve the problem, so you never see that it's doing. That is just a very different approach to Customer Service Management from a CRM-centric approach.

CSM is clearly a huge segment, a huge market, a $20 billion market. Way too many people think that somehow it's all the same, and it's not. There are distinct segments in that market. Different providers align better with different segments. As Mike said, we're not focused on going after the full $20 billion. There are segments of the CRM customer service market that require strong CRM-based systems. We're not the best provider of that. Salesforce is the best provider of that. But there are other segments that want to take inbound contacts, identify root cause, which is a cross-functional workflow, fix what the problem was, which again requires cross-functional coordination workflow, so that that problem doesn't happen in the future. There are segments where you want the customer to be able to address their problems in a self-help or automated fashion, resolving their problems, understanding where they stand. Our platform is well-geared for that segment of the market. You see where we focus our go-to-market teams in CSM, it's not across the entire CSM market; it's against the sub-segment of the market where our product lines and development lead, tends to be B2B, technology companies, services businesses, and ones where there are, I would call it, sophisticated customer needs to be served.

And then, Mike, on the upfront business, you had a strong quarter there with the Fed. How should we think about what you're expecting as we move throughout the year? It seems like that was light in Q4, and then it was stronger this quarter. Any way for us to get an expectation there for the year, thinking about how it will vary quarter-to-quarter?

Unfortunately, it depends upon the new business that's happening. Renewal business, we know, for instance, I know in Q2 there's a pretty big renewal that will take place that's on-prem. We did suspect that this business was going to happen in the quarter, but we hedged that a little bit, because I just don't know if it doesn’t come in. It was driven by the federal government, and that portion of our federal business is roughly 50% self-help because they can't be in a public data center, and that would consider ours to be a public data center. Even our FedRAMP data center they're not comfortable being in, because of the security they require. It's hard to forecast. I will say that 6% to 7% of our revenue for the full year is associated with self-hosted deals.

Hi. Thanks. This is Rakesh Kumar sitting in for Jen Lowe. I wanted to talk about this Adobe partnership that you discussed a couple of weeks ago. What does this specifically mean for ServiceNow? What more can we expect in the future?

Well, Rakesh, this frankly came to Shantanu and my attention based on our respective customer visits. It wasn't something we thought of in isolation. We both came back from ongoing customer business and had a growing number of customers asking if you could connect some of the ServiceNow Platform with some of the Adobe capabilities. We're a big Adobe user internally. So, we got our platform team and to a lesser extent our CSM team together with the Adobe team about how we can ensure that a shared customer using Adobe and ServiceNow can get more value by linking the data. Adobe provides tremendous marketing analytics and other data; our platform has a lot of data. If you're going to give a 360 view to the customer, you're going to get kind of the actionability. Adobe generates the insights; we often are the system of action. Linking them together makes it easier for customers to get that value. Feedback from our customers has been strong and our teams are excited about it. We think it can offer incremental opportunity for both companies.

Well, the whole reason we're building those data centers is that we think it's going to drive business, and there are a lot of G2Ks in Japan specifically. Based upon our feedback to get into some of those larger entities, they require data centers to be in Japan because of the data sovereignty requirements.

Thank you. This is Sanjit Singh for Keith Weiss and congrats on a nice start to the year. I have two questions and maybe we can start off with a question on Madrid. John, you mentioned about 600 new features with this release. The highlight was the mobile application making it easier to build applications on top of the platform. Do you see any of these new features or capabilities sort of force multipliers for some of your core products? Or does that just fuel growth in the overall platform business?

Well, I'm very excited about mobile. In my prior life, I had a chance to have a front-row seat in the consumer mobile revolution and got to see first-hand how borne on the cloud application has transformed our lives at home by taking complex and personalized actions to make it simple, easy, and intuitive. That’s now going to happen in the enterprise. With Madrid, we launched the re-platforming of SkyGiraffe and native mobile capabilities in the ServiceNow Platform. Madrid started with the fulfiller experience. I see nice pick-up by our customers who are excited about that. New York, which comes this summer, has the employee experience. We’re using it internally now at ServiceNow. It's awesome. You see corporate companies that are realizing that employees don’t care if they have an IT problem, HR problem, a facilities problem, legal problem, or finance problem; they just want their problems addressed. You've got to allow employees to get their questions answered and their problems addressed through a shared services portal. We have that as a web product today. In New York, there will be a killer mobile app out-of-the-box with low code, no code requirement for the customer, allowing their employees to go one place to get their issues resolved. We see more and more companies taking shared services mindsets to drive to create an employee experience. I think mobile will be an accelerator of that.

That makes a ton of sense. Looking forward to hearing more at the Analyst Day in a couple of weeks. My second question is around sales and with so many big opportunities ahead of the company, whether it's ITOM, CSM, or HR from a sales perspective, were there any changes made this year to move to a more specialized sales force? Or do you feel that the current sales force can go to customers selling the entire platform, whatever use case the customer may be interested in?

The biggest change isn't just sales; it’s the full go-to-market motion, which includes post-sales coverage. I mentioned earlier that we met with the top CIOs in our CEO Advisory Council. Our best and largest customers are looking for dedicated ServiceNow resources who are solutions architects, onsite helping them architect their implementation of ServiceNow to get maximum value from the platform and advising them how to extend the platform. So, for our entire go-to-market motion, it’s not just the classic pre-sales discipline but also post-sales coverage that ensures we deliver an end-to-end coverage to expand customer relationships in a healthy manner. We are developing a seamless experience, bringing the full breadth of our capabilities to bear.

Got it. I appreciate the thoughts. Thanks.

Hi, good afternoon. Thanks for taking my questions. I wanted to ask about traction for the add-on products outside of the U.S. or maybe if you could give us a little bit more color around whether you're seeing more traction for CSM and HR Service Delivery in the U.S. or outside of the U.S.? And within the New York products, what's having more success with your international customers?

We're really not seeing any difference from a customer adoption of the emerging products; it's pretty much the same profile in the U.S., EMEA, and APJ. At the end of the day, these tend to be global, large enterprises that all have the same problems. So, I'm not seeing any noticeable difference.

Great. And then maybe just one follow-up. The ITSM pro SKU; I believe that's priced quite higher than the core SKU. I'm curious if that's having an impact on the size of new deals? As existing customers come up for renewal, can you comment on whether they're upgrading to the higher dollars if that's driving a positive impact on getting them to adopt additional products rather than eating up price increase? So, maybe it will be helpful if you could just walk us through that as well? Thanks.

I can say the pro bundle was really a way to monetize the investments we've made in artificial intelligence and machine learning. We have definitely seen an uptick in that pricing that has been able to keep our pricing higher on customers who are likely to do that with new customers, and we are seeing success on renewals with customers, but it's still very early. Remember our renewals take over a number of years; typically a customer signs a three-year contract. I think it will take a little bit more time to see what the uptick is with our installed base of customers, but it's definitely getting traction with new logos.

Great. Thanks for taking my questions today. Congrats on the quarter.

Great, thanks. John, given the brand marketing you've invested in over the last few months. I know you mentioned its increased awareness with C-level executives. What I'm curious about is whether this has already helped in the field surface new conversations and engagement at the C-level? If we fast forward a year or two, is one of the hopes that it drives more executives to be buyers of ServiceNow? How do you think it could help transform high-level engagements?

Yes, Derrick. I think it's too early to point out that direct cause and effect. The number of people have said, 'Hey, I saw that ServiceNow ad; boy, that was funny, that was great,' which is what the point was. Alan Marks, our Chief Brand Creative Officer, was the real architect behind these commercials. A year from now when a CIO or CIO and CHRO are bringing a $10 million contract for ServiceNow, we want that CFO to say we’ve heard of ServiceNow. This provides air cover, legitimacy, and brand building that establishes us as a leading innovative company. The brand building is also important for attracting talent. If students at top universities prefer ServiceNow, it matters if a person says at home, 'I'm joining ServiceNow' and their mother knows who that is. That kind of stuff matters as we scale. We are absolutely focusing on attracting and retaining top talent. We are going to get data on aided, non-aided awareness which I'm sure has increased and we will continue to invest to build that over time.

Got it. Thanks. I was hoping to touch on the SecOps product; it doesn't seem to get as much attention as CSM or HR. Can you talk about how you see the opportunity shaping up over the next 12 to 18 months? What can you do to help drive more penetration in the security budget?

Well, I think interestingly one of the things we've done is by bundling our products into the three workflows and SecOps in the IT workflow, I think that’s a little bit more symptomatic or emblematic and aligns with how decision-making often happens. We thrive when a CSO and a CIO are jointly involved in our product decisions. We do vulnerability response, incident response, and as part of a healthy and natural ServiceNow bundle. I mentioned earlier that I was with Mike Lawrie from DXC and they had some attractive security offerings that they believe ServiceNow can be a key component of it. We have important components with our security, incident response, vulnerability response, and GRC capabilities.

Hey, Mike and John. I just want to talk about the mid-market and commercial market. Who are you seeing competitively down there? Are you adjusting your go-to-market in any way?

We tend to see in the lower market more service desks that will send us, can you have Freshworks. We’ve seen a number of those for years, but it’s a very small piece of our business. We tend to focus more on enterprise; the commercial segment now is around 20% of our business and even of that, that's really the high-end commercial. It's typically the 3,000 to 5,000 employees we focus on. It's still a direct selling model with more through the channel. At the end of the day, when you have customer data, they want to have a direct relationship with you. Channel partners are more involved in that segment, but we still have direct contracting relationships with those customers. There’s been really no change in that market for the last five or six years that I’ve seen. One exception is, we used to hear more of Cherwell. We don't hear of Cherwell nearly as much as we used to in that segment.

Building on what Mike said, my observation is we have a terrific leader there, John Sapone, with a really strong commercial sales team. Those businesses in that market are growing and understanding they need to have a fundamental platform that we offer. If that company is going to say they have 1,000 employees and be there three to five years now, they have to make a fundamental decision of which vendor they want to go with. But we are strong in that space.

Thanks, guys. Thank you.

Thank you, everyone. As a reminder, a replay of this call will be available as a webcast in the Investors section of our website. Thank you for joining us today.