ServiceNow Inc (NOW) — Q3 2019 Earnings Call Transcript

Thank you. Good afternoon and thank you for joining us for ServiceNow's Third Quarter 2019 Earnings Conference Call. On the call with me today are John Donahoe, our President and Chief Executive Officer, and Bill McDermott, our incoming President and Chief Executive Officer. During today's call, we will review our third quarter financial results and discuss our financial guidance for the 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 remaining performance obligation. 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 including a replay of today's call are posted at investors.servicenow.com. We may make forward-looking statements on this conference call, which are subject to risks, uncertainties, and assumptions. Please refer to the press release and risk factors in our SEC filings, including our most recent Annual Report on Form 10-K and quarterly report on Form 10-Q 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, Lisa. Good afternoon everyone and thank you for joining us in today's call. Given our announcement yesterday, here's how we're approaching our call today. First, I'll give a brief overview of Q3 results and our 2019 annual guidance. Second, I'll provide a little more insight into my decision to leave ServiceNow and accept an opportunity to lead a company that I have been associated with and admired for a very long time. Finally, before taking questions, you'll hear from Bill who will provide a little more context on why he chose ServiceNow and the opportunities he sees ahead. So let's start first with our third quarter results. We delivered another strong quarter, continuing our focus on driving customer success. Subscription revenues were $835 million, representing 35% year-over-year adjusted growth. This exceeded the midpoint of our previous guidance by $9 million, including the impact of FX. Subscription billings were $864 million, representing 29% year-over-year adjusted growth, this exceeded the midpoint of our previous guidance by $10 million, excluding the impacts of FX and duration. Our remaining performance obligations ended the third quarter at approximately $5.6 billion, representing 36% year-over-year adjusted growth. Current RPO was approximately $2.8 billion, once again representing 36% year-over-year adjusted growth. Our operating margin in Q3 was 26%, driven by hiring linearity and a shift in expenses that will be realized in Q4, and our free cash flow margin was 14%. Now for a peek under the hood, we closed 46 deals in the third quarter with ACV greater than $1 million, representing 84% year-over-year growth. We know of more than 800 customers doing more than $1 million in business with us annually, which represents 32% growth year-over-year, and our renewal rate for the quarter remained strong at 99%. Our IT portfolio continues to have strong momentum. This quarter we again saw 18 of our top 20 deals include three or more products. As you recall, we launched ITSM Pro late last fall and we're seeing strong traction. Customers are upgrading from ITSM to ITSM Pro, and we're landing new customers who see the value in starting with ITSM Pro. Simply put, customers who are pursuing digital transformation are investing in ServiceNow's full suite of IT products. They see the value of better together and are leveraging our entire product suite and unique platform. This is a clear trend. A leading company in financial services is one example; they enabled world-class IT, security, and risk via automated workflows, natively on our single strategic platform. The HR business also had a strong quarter, and we closed one of our largest employee experience deals ever with a global distribution company. ServiceNow employee service delivery solutions hide the complexity across functional work, making it easy for employees to get the services they need. This is making work better for people. In Q3, our New York release became generally available. New York extends new desktop and native mobile capabilities across the workplace at scale. This enables companies to make their employees' lives at work as simple, easy, and mobile-friendly as their lives at home. The New York release features more than 650 innovations across IT employee and customer workflows. As you know, I am personally very excited about the native out-of-the-box mobile capabilities. For the first time, we have created consumer-grade mobile experiences for the enterprise, removing friction in everyday work. Employees can now easily find answers and seamlessly get things done across IT, HR, facilities, legal, and other departments, and they can do so from a modern mobile app powered by the Now Platform. As a reminder, you can download a demo of this great mobile app from the App Store. Mobile technology was at the epicenter of digital transformation in our lives at home, and we believe mobile technology will be at the very center of great experiences at work. Now, let me turn to full year 2019 guidance. As a reminder, for several years we've used a very consistent methodology to manage FX. We simply take FX rates on the last day of the quarter and use those rates for the subsequent quarter. So for example, the guidance we provided in our Q2 earnings call was based on FX rates as of June 30, 2019. Now during this quarter, those rates changed, impacting our Q2 results and annual guidance. The guidance on today's call is based on FX rates as of September 30, 2019. We provide complete transparency regarding the impact of FX in our Q3 results and 2019 annual guidance in the Investor Relations presentation. For the full year 2019, we're carrying forward the $9 million in subscription revenue and $10 million in subscription billings that exceed our previous midpoint guidance for the third quarter. So for the full year 2019, we expect subscription revenues between $3.240 billion and $3.245 billion, representing 36% to 37% year-over-year adjusted growth. We expect subscription billings between $3.740 billion and $3.745 billion, representing 32% to 33% year-over-year adjusted growth. We're maintaining our full year 2019 margin guidance as follows: subscription gross margins of 86%, operating margin of 21%, and free cash flow margin of 28%. Now, before closing out our review of the quarter, let me just take a moment to update you on our CFO search. As you know, over the past several months, we've conducted a global search for a world-class CFO, and I'm delighted to say we've narrowed that search to a small group of exceptional finalist candidates. Now obviously, because of our CEO succession, I slowed the final interviewing process to enable Bill to be able to pick his preferred candidate. The good news is what Bill's doing now is meeting those candidates, and he expects to name our next CFO shortly. Now I'd like to just take a couple of minutes to explain my decision. Let me just say upfront that I believe deeply in ServiceNow and I believe deeply in ServiceNow's opportunity. As I've said before, there is a clear cloud tailwind. This is a beautiful, as Bill calls it, clean strategic technology platform. Customers are leaning in and want to partner with our platform, and we have the ability to extend and expand across the enterprise. I believe as much today as any time I've been here that we're very well positioned to get to $10 billion and move on our way to becoming a great enduring company. To be honest, I fully intend to be part of that journey. However, our unique situation with what is a unique company for me has emerged. Some of you may know that I have a 20-year history with Nike. I met Phil Knight and Mark Parker 20 years ago. Over the last five years, I've had the privilege of serving on their Board. I deeply resonate with Nike's purpose. Everyone at ServiceNow knows I regularly use them as the gold standard of what a great company looks like, and I love sports. When the Nike Board reached out to ask me to become their next CEO, I felt I had to pursue it. But I will say it again, it has not changed my belief in ServiceNow and the opportunity ahead. The Board and I have spent the last couple of months identifying the best successor in the world for ServiceNow. Let me review the criteria we used; these are criteria that will enable us to get to $10 billion and beyond. We need to continue to elevate our relationships into the C-suite. We need to expand from IT across the enterprise. We need to continue to expand globally and build more industry relevance as we expand the number of industries we serve. We need to expand our go-to-market function and scale our entire organization. Most importantly, ServiceNow needs an authentic leader who is purpose-based, values-driven, and experienced. I think you will share my enthusiasm and excitement that the Board and I have that Bill McDermott has agreed to join as our next CEO. I consider him the most excellent CEO that I've learned from and a good friend.

Thank you, John, and hello everyone. First, I want to congratulate John Donahoe on becoming the CEO of Nike, an iconic brand. No one deserves it more than you, John, and I’m honored to follow in your footsteps. I’ve decided to move on to the next chapter of my career with ServiceNow. For background, I spent 17 years at SAP, serving as CEO for 10 years, during which we grew the market cap from $39 billion to $163 billion, and significantly increased our revenue and customer base. I'm proud of the leadership I passed on to the new co-CEOs of SAP, and I wish them continued success. Now, regarding ServiceNow, I believe it's the culture that makes it truly special. John Donahoe’s accomplishments and the legacy of Fred Luddy have built a team dedicated to serving customers in the best way possible. ServiceNow's mission to improve work for people is critical in today's marketplace, where customers seek partners that genuinely care. I'm excited to join John in continuing that tradition, and I appreciate the support from Jeff Miller and the Board of Directors. I've met with the management team and I'm optimistic about the ongoing search for a CFO, which is attracting outstanding candidates. If I were in your position, I would want to know about the $10 billion path discussed by John and the management team. I fully support this goal and am committed to meeting our financial targets for revenue and margin expansion. The future of ServiceNow and our commitments to our customers are my top priorities. I have already made significant personal changes to fully dedicate myself to this role. We aim to set the standard in the business software industry, and I'm eager to get started. Thank you, John.

Great, Bill. Thank you. So let's just, I need to say one more thing before we turn it over to questions. Bill and I want to be crystal clear. We get that it's Q4. We want a strong end to the year. We are both fully committed to ensuring a high-quality and smooth transition. I don't start my new role until mid-January, so I am committed to being fully accountable in this role at ServiceNow until Bill completes his transition at SAP and is fully in the job. In the meantime, you can assure that both of us have a deeper sense of responsibility and accountability on behalf of our customers, partners, and employees to ensure a smooth hand-off and a strong Q4.

Okay. Great, thank you for taking my question. And John, thank you for all of your time and service. And Bill, I'm really looking forward to working with you. And by the way, I think we all really appreciate the depth of color you gave us around your decisions and your views on how important Q4 is. So thank you for that as well. One thing I think would be really great to hear from you guys about is how you're feeling and thinking about the general global macro environment, especially in light of some of the issues that are going on in Europe, and I think it would be helpful for us to just hear how you feel about your positioning in the global economy overall and any color you can give us around what you're seeing out there outside of the really strong large deal activity?

Yes, Sarah. Thank you. Maybe what we'll do is, Bill, I'll give from this, and you can give your perspective from SAP's viewpoint, or even broader. So, Sarah, let me just tell you what I see. I was actually in Europe all last week; we had our Now Forum in Amsterdam where we had 1,500 customers. A few days later, we had a network forum in London where we had I think it was close to 3,000 customers, highly engaged at several customer meetings, several partner meetings. I will tell you on the front lines, with customers and partners, I hear no conversation around macroeconomic issues. Frankly, I didn’t even care about Brexit last week. What they want to talk about is digital transformation and how to use technology to drive productivity and better user experience. I hear them leaning in. So we can't predict; at least I can't predict what the macroeconomic outlook is. But we are very focused on ensuring that under any macroeconomic scenario, number one in that investment queue is an investment in the ServiceNow platform because it drives productivity, user experience, and digital transformation. Bill, what are you seeing from an SAP standpoint?

John, I see exactly the same thing as you're seeing, and you're absolutely right. The tailwind behind digital transformation and the cloud, in particular, is evident in strong companies. If there was going to be any step back, it would be for commodity hardware players or commodity players in tech. The high-value digital transformation companies that are adding real business value will continue to prosper, because without the digital transformation card, it's a little hard to compete and win in this digital economy. If I look at the pipelines, they look strong, and they look consistent, which is why we strongly reiterated our guidance today.

Thank you both very much, and congratulations to you both on your moves.

Thank you very much. Thank you, Sarah.

Hey everyone, I appreciate you taking my questions. I wholeheartedly agree with Sarah's congratulations and am looking forward to the future. I'm interested in the strategic direction towards the $10 billion target. It seems you have both organic and inorganic avenues to accelerate progress. When considering the inorganic aspect, how should we approach expanding buying centers and enhancing ServiceNow's strategic proposition, whether in IT or beyond? Additionally, I'd like to follow up on sales execution in the EMEA region. We discussed some challenges last quarter, and I'm curious if there have been any updates on that front.

Bill, I think it's appropriate for you to comment on the first.

Sure. I mean, I think first and foremost, Alex, you have a great organic growth story here. The pristine nature of this platform and the revenue that this platform alone can begin to drive is a real growth story in and of itself. When you think about the solution set that ServiceNow has, there's plenty of room within the context of these solutions to grow them in different geographies; obviously, same account revenue growth as you get more and more customers to buy the complete solution set. Putting an industry flavor to things will also be quite helpful. That flavor can then be personalized to different buying centers, and you can use different channels to get at that in the marketplace. So lots of room to grow organically. I really believe that I said this to John many times. I believe ServiceNow is in the privileged position of being a platform of platforms. When you look at the business process and the workflow that goes on in enterprises today, everybody has this deep need to aggregate the data in a workflow that creates simplicity for the users. The more we can reinvent business processes in the image of the users themselves, the more we can become the defining platform of the platform for the modern enterprise. I think the organic growth story here is just amazing, and it's only just begun. I've learned a lot and I've seen a lot of different business models, and the company I worked for very hard had a very different business model than ServiceNow. Now this is a pure-play cloud, and if you do a tuck-in, if that's necessary and it has extreme value to the customer. Then you would certainly make sure that it's integrated beautifully into the Now Platform to ensure it stays very simple and extremely easy to use, enabling more extensibility for the developer community, the customers themselves, and our great engineers. One of the things that I've been blown away by is just how strong the engineering talent and leadership business is at ServiceNow. When I see that kind of talent, I feel really strong about organic growth. I also want to underscore that the go-to-market machine is equally up to the task. This is an outstanding leadership team here, and I’m really impressed.

I'll try just to add to that; you asked about Europe specifically. It's so funny because we have to remind ourselves every now and then that we have the challenge everyone else would want to have: scaling 30% a year while growing. So you've got to scale and grow a go-to-market team that has a growing number of account reps, product line specialists, solution architects, and consultants. So as I said, I was in Europe last week and that team is really, really coming together and humming. We have a new leader in the U.K. who is quite strong, coming from VMWare across Europe. I think our team is really coming together. We had a lot of changes in the first half of the year just as we layered in a lot of new people. But those teams are coming together, and on several customer calls, those teammates are working seamlessly on behalf of our customers.

Thanks, guys, that's awesome. Good luck in Q4, and looking forward to seeing you again soon.

Thank you.

Excellent, thank you very much. John, congratulations to you. It seems like your next chapter is perfectly in line with your destiny. Many people spend their entire lives without having an opportunity like that. I genuinely wish you all the best. But regarding ServiceNow,

Thanks, Brad.

You're quite welcome. As it relates to ServiceNow, you may see my question as a bit shortsighted, but it's a conversation I've been having with several investors. Just trying to get comparable with what's ahead of us. We are now seeing significant changes with some strong leaders exiting, some really strong executives entering, and what sounds like at least some mid-level folks being hired away, or at a minimum distracted by all the excitement. Bill, I appreciate your commentary earlier today and the kind of following you have, but is there anything perhaps that you've experienced in the past that can serve as a guide for the potential disruption that we might be in for during this transition? And perhaps even, and I know it’s early days; you aren’t really even in the seat just yet, but how you're thinking about it relative to the company's own internal model as you look out to next year?

So Bill, why don't I give a quick context because Brad, I think there have been a couple of things written recently that are a little misleading. It is actually true that Mike start probably delays. The only member of our senior leadership team, our overall attrition rate as a company is, I think, an industry low, and it is the same this year as it was last year. On sales leadership, we have had three of our top 100 sales leaders leave. Yes, three sales leaders have left to go to Snowflake. Ninety-seven have not, and we have a strong deep sales bench. It was not the Head of North America; it was some who were running our commercial business and another North American role. So we have a strong team. There's not a lot of departures. By the way, some are saying all the others that joined Salt Lake; they all left ServiceNow well before 18 months ago. We are very focused, as a lot of people are very excited here about the momentum, the prospects, and the opportunity. I think that's the starting point, and then Bill you can talk about scaling and adding to that.

Sure, John. I think the disruption is obviously very well in hand. Thank you, John. Regarding the internal models and the things that have been built here, they're doing things very well. When I look at the org chart or how the sales force is set up or how the channel management's strategy is done, it's very good. The question becomes can we do more, and can we make it even better? The answer is of course. That's why I'm here, because I see a great opportunity. But I see innovation without disruption. I see a way that we can layer in some added focus to give the solutions a richer context around the buying centers or around the scientific methodology to deliver the value. We can have even new hires look like they've been on the job for a long time. This is systemic; it’s something that's been done before and we’ll do it the ServiceNow way. All-in-all, I am very, very pleased with everything I've seen from the management team, and it's just about a continuous evolution. We do not need to disrupt this place. We do not need to revamp territory coverage. We do not need to break customer relationships. This is going to be a very smooth transition. John and I are very similar in terms of how we look at the world, the value set we have, the way we treat people, how we value customers, and how we think about running companies. You're not going to see a big change here; you're going to see a continuous evolution of a great thing.

Thank you very much. And I am glad I asked the question very directly, John, so we can get the facts straight. Bill, I have to imagine you've had your pick of the litter of just about any software company that you'd want to run, and we see a phenomenal opportunity as well here at ServiceNow. Thank you so much for the comments.

Brad, I just want to underscore how smart you are to say that. I look at quite a few different things in various sectors. This was by far the most interesting signing opportunity of a lifetime. I'm glad to see we're on the same sheet of music and I look forward to being great friends moving forward.

Thanks very much, and I'll add my congrats to you both, pretty phenomenal opportunities for both of you. Best wishes, John, and Bill, nice to see you again. I guess just first, John, a big quarter for your government business; I wonder if you could just give us an update on that. Then Bill, one of the things I think John has done really well over the last couple of years has been lifting ServiceNow's profile with CEOs, not just CIOs. I was wondering if you might have some thoughts on how you'd continue to make ServiceNow your brand that's not only trusted and well-respected by the CEO suite but really take it up to be a key platform for CEOs as they undergo digital transformations? Thanks.

I'm going to answer your first question. In fact, I have to say I will let Bill comment on the second, but I've said repeatedly internally in the last few days, Bill McDermott makes my role look lousy in terms of his relationship with CEOs all over the world. But I'll let him comment on that in a minute. Regarding federal, look, federal is a very strong business for us, and we had a very strong third quarter. What's driving it? Governments are embracing the cloud because they're under pressure to deliver better experiences for their citizens and employees and drive productivity. We're seeing that in the U.S. federal business, and we're also seeing that in other public sector markets around the world. In Q3, we had 13 deals in U.S. federal over $1 million compared with five in Q3 of last year. We had a nice mix of federal and civilian agencies. We have a milestone in Q3 that will give us good prospects going forward as we have received our FedRAMP High and IL4 certifications. Federal is starting to behave as it has embraced the cloud; it's beginning to look a little more like the enterprise and it's less just a Q3 scenario and more a continuous one. Year-to-date, we've closed 22 deals greater than $1 million compared to 14 in all of 2018. So we had a good federal first quarter, second quarter, and third quarter, and our pipeline looks strong in Q4 as well. Bill brings a lot of experience in this area; do you want to talk about the CEO stuff?

Sure, John. As John said, I am like-minded with John. We're very similar executives in the sense that we recognize the power of power. Last year, we had something like 34 heads of state types of meetings around the world. On the CEO front, one of the things that brought John and I together over the years is the CEO meetings that I host. I was fortunate enough to have John join me. For instance, we have one coming up in November where there will be 100 CEOs from around the world and some of the biggest business cards in the world. We do this not only in the United States but also in Europe and Asia. The rolodex is really strong, and I believe that John and I had kind of executives that work our heart out to help hard-working CEOs solve mission-critical business problems so they can help their customers be successful. That's the attitude we bring to those relationships. When we make promises, we keep them. It has really been an honor to operate at that level. The altitude we run at is nice and clear, and it helps the conversations down below happen faster, better, and bigger.

Thanks a lot.

This is Matt on for Sterling. Thanks for taking my question. I know you guys talked about on the macro side, but specifically have you seen any impacts on Brexit or any impact on demand from the FX changes that you guys were talking about previously?

Yes. Short answer is no.

Thank you. And congrats to you both. Maybe my question to you John: You mentioned that you want a strong fourth quarter. We all do too. So maybe I'll press you a little bit there because as you're well aware, the implied growth rate for your subscription billings is much stronger in Q4 than in the quarter you just put up. So I'm just wondering if you could help us get comfortable with that expected fourth quarter acceleration, and what gives you that confidence? That would be helpful. Thanks a lot.

Yes, Karl. We have consistently indicated that we are experiencing significant seasonality in our business, making the fourth quarter increasingly important. We have been aware for some time that the Q4 pipeline appears strong. This is partly because as we adopt a more strategic approach and engage in larger deals, customers are often inclined to finalize these larger agreements in the last quarter when they are confident in their funding. I want to emphasize that 50% of Q4 billings come from contracted backlog. Another key factor is our renewals; we have excellent visibility into the renewals scheduled for Q4, and our high renewal rate enhances our confidence. In fact, the smallest portion of our Q4 pipeline is net new annual contract value. We do have a solid pipeline and anticipate a strong quarter for net new ACV, but it's important to remember the foundation provided by contracted backlog and renewals. We have good visibility as we approach the quarter. That said, in every quarter, we remain focused and dedicated to working with our customers.

Okay. Thank you, John. That's helpful.

Hi, thanks for taking my question. This is Rakesh Kumar sitting in for Jen Lowe. My question is for Bill. SAP has very well served large enterprises as well as mid and small businesses, whereas ServiceNow has largely focused on large enterprises so far. Do you see an opportunity to move down market, and what should we expect there?

Yes. First of all, it's really a privilege position to focus on large enterprises and still have so much room to grow. There's nothing wrong with being very focused and segmented on large when you're putting up these kind of numbers. So let me first in high respect say good for to ServiceNow and good for the engineers making products that those big companies need to complete their digital transformation. I really mean that. It's a focused company and it’s a really good thing. Now, can you take this down market? Absolutely. The question then becomes between spreading your wings in the large space and taking it down a little bit in the channel strategy that you approach that with and the cost of sales that you work with, are all items that we'll be discussing in the coming weeks. We’ll talk about this at the annual guidance as we go into next year. But theoretically, it looks like another big opportunity for ServiceNow.

Thank you.

You're welcome.

Great, thanks. Bill, it’s great to have you back. I'm curious about two markets related to CSM and HCM. I suppose this question is for John. Are you noticing any signs of competition becoming more aware of the opportunities you’re pursuing? I’m wondering if there’s been any change in the competitive landscape and how you’re adapting your product strategy in light of developments in CSM and HCM.

Yes, I believe you're correct that we're witnessing a validation of both the need and the demand in the market. Recently, I met with one of our top SI partners, and employee service delivery has become a priority for all three partners. Companies recognize the necessity of enhancing employee experiences while fostering automation and productivity. An all-encompassing, cross-functional employee service delivery approach is essential, as both customers and employees prefer resolution regardless of whether the issue pertains to HR, IT, finance, or facilities. Our platform is uniquely designed to facilitate cross-functional workflows, setting us apart from others that rely on a functional platform and hope to manage workflows around it. From day one, our architecture has been focused on meeting this market requirement, alongside various other platforms. We do not act as a system of record in many functions; instead, our strength lies in our ability to integrate with other systems. Bill mentioned the idea of a platform of platforms regarding enterprise or employee service delivery, which some refer to as enterprise service delivery. Our role is to link multiple systems of record so that the complexity remains invisible to the employee, ensuring a seamless experience without imposing our brand on them. Customers prefer their own branding on their mobile applications or desktops. In the CSM space, which is a $20 billion market with various segments, some focus on CRM integration for customer service agents, while another segment aligns with our expertise, connecting customer service representatives to the core operations of the business. Instead of merely acknowledging a customer's long tenure with us, we strive to understand the root cause of their issues and provide regular real-time updates on their resolution. We’re also working to automate responses for future occurrences. Our understanding of cross-functional workflows and root causes enables us to resolve issues efficiently and prevent their recurrence. This is the foundation of our platform's capabilities. We're observing significant success in this segment, particularly in B2B scenarios where services and technology present high-value opportunities. For instance, I met with leaders from two major telecom companies in Europe last week, and they emphasized their focus on delivering software-as-a-service solutions to their clients. When those customers reach out, they require clear visibility into their networks, which is something ServiceNow excels at. The CSM market will have multiple successful players; it's not a zero-sum scenario. Rather, it's an opportunity to leverage technology in innovative ways, and we see this as a significant chance for growth. Bill?

Absolutely, John. I am 100% with you.

And Bill, by the way, brings a lot of experience in that space and will provide additional perspective and insight, and frankly can build almost uniquely because he has played for years in almost all the major buying standards inside of the company. I have been impressed during our conversations about how he knows the scenes in between the software and sees the unmet needs and opportunities because of his broader experience across all buying centers in these areas. I think ServiceNow is going to bring even more insight and energy to these new areas.

Thank you, John.

Okay, thanks very much. Let me add my congrats to John and Bill on the incredible opportunities ahead. Bill, when you look at the opportunity for ServiceNow, there's obviously an enormous TAM here, and it seems to be one that grows every year as the company keeps adding more and more new products. So when you think about how to go after that opportunity, can you maybe just talk to us about your philosophy on balancing investment and growth? More recently for ServiceNow, the commitment has been to 100 basis points of margin per year, and I’m sure you’ll hear more about this at Q4. But maybe you can just share your initial thoughts there. Thanks.

Yes, Chris, it's a great question, right? Because one of the power pieces of this whole equation is that this is a native born-in-the-cloud company. It’s a company with a great platform, enormously successful products, and very, very happy customers. The loyal employees are significant, as John mentioned. If you put all that together, this is an organic growth story. When you have organic growth and can evolve that over time, there’s plenty of growth from the core organically; you can grow the revenue at a rate that pleases the capital markets or evolve the margin expansion story. We can be discerning as to what tuck-in we may or may not choose to do because we want to do both. You should expect me to stay very in concert with John's strategy. A tremendous amount of continuity between everything John has told you should be expected. I believe in John and I believe in the management team on what they have been doing, and we will evolve that. I’ve learned a lot of lessons too, because other companies that don’t have such a pleasing business model may have to do more M&A that would harm operating margin expansion for some period of time. Here, I think we can balance this out quite nicely.

Okay, great. Thanks so much.

Thank you very much, John. You had this to do it. Congratulations. Bill, congratulations; an exciting chapter of a new journey. I'm curious to get your perspective from SAP. You had a tremendous playbook at SAP that drove significant organic growth rate coupled with innovation. What about that experience and what about that playbook can you bring to the ServiceNow chapter? Thanks, and congrats again. Thank you so much. I'm really excited about this.

Thank you very much. I am really, really excited. I’m also very excited for John, and I think it’s so nice that you all recognize what a great man he is and deserving of a role at such an iconic brand like Nike. What have I seen that might be transferable here? First of all, they are doing a lot of things extremely well; it's really more a matter of scale. Some of the things we had to do to scale there, for example, a value engineering methodology, where you could have a proven science around the value you create for an enterprise and the manner in which you personalize that to buying centers in a way that's compelling, highly repeatable, and differentiated by industry. So that's one clear example. Another clear example is the way you broaden the perimeter. Right now, I believe that the TAM of ServiceNow is limitless in the sense that if you think about how broken most enterprises are, how messed up the workflow and business processes are, and how unpleasant using these old systems are for the users, we could create a revolution where the business users in the enterprise demand ServiceNow get the story straight by aggregating the workflow of these various platforms. I'm not sure any work has actually been done on identifying the size of that TAM, but I believe it’s only limited by one's imagination. We heard also, earlier today, the thoughts of how we could expand in Europe. John talked about how many million-dollar deals are now happening in the European theater; perhaps there are a few places within Germany, France, and certain areas of Europe where the relationship plans can be appreciated positively for ServiceNow. That certainly isn't limited to Europe; you have Korea, you have other parts of Asia where we could be very interesting based on international business and global companies and previous history. I think the team has done a great job here of expanding the ecosystem. If you look at the ecosystem and the relationships that I have, there may be a value play, not just with the biggest ones, but also the mid-sized ones around the world. This is a dream opportunity of a lifetime, and my problem is that my feet just haven't touched the ground; I'm walking on air.

Congratulations. Thank you very much.

Thank you.

Great, thanks, and congratulations. John, your finance operations product went GA in Q3. Could you just talk about the initial interest and what you're seeing in terms of pipeline building as you go into Q4 next year? Bill, I mean, you know the ERP space better than anyone, and this product integrates directly with ERP spaces. So it would be great to get your take on what you're hearing in terms of early interest and how big of an opportunity you see this market being for ServiceNow over the next several years?

Yes, Derrick, we're currently focused on the next-generation implementations for our existing customers, and progress is going well. There is significant initial interest from some of our system integrators. For example, our partnership with a financial entity shows that many of their clients need this capability. This reflects a broader trend as there is impressive software in the finance sector. Bill is well aware of this, and he has considerable knowledge in this area. From what we gather, they recognize how our service improves their workflows by streamlining the accounting processes, and our system integrators have indicated a strong desire to be involved in the go-to-market strategy. This is beneficial, especially since we currently don't have extensive relationships in the finance sector. Bill, your experience in this field is extensive.

Yes, John, you said that beautifully. The idea is within the context of these systems, be it financial systems, capital management systems, even if you think about supply chain systems and manufacturing systems, there are areas of the workflow that are not meeting the modern needs of the modern user. We are in a hold position to architect that workflow in a way that's highly pleasing to our lighthouse customers, and then that can be transferred from that lighthouse customer at the high end to other customers globally. You could certainly segment that by industry, and then think about that by buying center. If I learn anything along the journey, it's to put empathy into the initial meeting because it's preprogrammed. It's outside and manufactured, and it's choreographed so that even people that might be new or looking to up their game have the tools to do a great job for the customer. The more we can do that in a way that doesn't require someone of John's caliber but rather someone that's just carrying a bag, the more we can achieve mass scale. I also want to say, I have spoken with the co-CEOs of SAP, whom I'm working with in friendship by the way. It's a really beautiful situation where everybody genuinely cares about the other and has an affinity for SAP from ServiceNow's perspective, and ServiceNow has a strong relationship and affinity for SAP. They told me that. I spoke with Jennifer Morgan and Christian Klein. Christian Klein, as you may know, was the lead decision-maker in choosing ServiceNow to run SAP's IT operations, because it created tremendous value for SAP by doing that. We talked about this partnership and what could be done in the open market. You should truly take away that this is a significant area for development.

Great. Thanks for the color.

My pleasure.

Thank you for taking my questions. I'll echo the sentiments from others saying congratulations to you both. My question here is for Bill. Bill, you've answered a couple of questions already regarding the sentiment on M&A. I'm not going to ask you to share your playbook before you get in the seat, but as you yourself have scaled SAP over the past decade, would love to hear about your general philosophy towards M&A and particularly M&A at scale. How do you think about the risks, the opportunities of doing M&A at scale and what has worked for you and what hasn't as you look back at your past and apply it to the future with ServiceNow? Thank you.

Tom, thank you very much for the question. I’m really happy you asked it because you've given me an opportunity to set the record straight. ServiceNow is not SAP and SAP is not ServiceNow. These are entirely different companies at entirely different stages of their evolution with different business models. SAP did a great job taking the core and expanding the perimeter into the cloud through strategic M&A effectively. But as you know, when you do M&A, you also have to integrate, and you want to make sure that customer relationships are best-in-class. You have to walk and shoot a gun: Get revenue right, margin profiles right, and happy and loyal customers. I think SAP has done a good job with that. On the ServiceNow side, with the way we’re positioned and the immaculate nature of this platform, these solutions the world needs – and it’s a matter of expanding the solution set while attracting new customers, new geographies, new industries, and market profiles. All the pieces are there and the TAM for being the platform of platforms is there. We have developers that can build solutions, and customers can build their solutions on the platform. We can literally take those to scale with high precision. You're right to think there is a huge opportunity here. So, while we would be careful with M&A and it should be a tuck-in of value that keeps it pristine for customer satisfaction, we're going to proceed with caution.

Outstanding.

Okay.