ServiceNow Inc (NOW) — Q1 2020 Earnings Call Transcript

Good afternoon. And thank you for joining us for ServiceNow’s first quarter 2020 earnings conference call. Consistent with how we are operating globally, our call today is work-from-home. Joining me are Bill McDermott, our President and Chief Executive Officer; and Gina Mastantuono, our Chief Financial Officer. During today’s call, we will review our first quarter 2020 results and discuss our financial guidance for the second quarter of 2020 and full year 2020. Before we get started, we want to emphasize that some of the information discussed on this conference call, particularly our guidance, is based on information as of April 29, 2020, and contains forward-looking statements that involve risks, uncertainties, and assumptions, including those related to the impacts of COVID-19 on our business and global economic conditions. The forward-looking guidance we will provide today is based on our assumptions as to the macroeconomic environment in which we will be operating. Those assumptions are based on the facts as we know them today. Many of these assumptions relate to matters that are beyond our control and changing rapidly, including, but not limited to the timeframes for and severity of social distancing and other mitigation requirements, the impact of COVID-19 on our customers’ purchasing ability, and the length of our sales cycles, particularly for customers in certain industries. Significant changes in the future could cause us to modify our guidance higher or lower. Please refer to the press release and risk factors and MD&A in our SEC filings, including our most recent 10-K and our 10-Q that will be filed for Q1 2020 for information regarding such risks, uncertainties, and assumptions that may cause actual results to differ materially from those set forth in such forward-looking statements. We’d also like to point out that the Company reports non-GAAP results in addition to and not as a substitute for or superior to financial measures calculated in accordance with GAAP. All financial figures we will discuss today are non-GAAP except for revenues, net income, and remaining performance obligations. To see the reconciliation between these non-GAAP and GAAP results, please refer to our press release filed earlier today, our investor presentation, and for prior quarters, previously filed press releases, all of which are posted at investors.servicenow.com. A replay of today’s call will also be posted on the website. Please note that due to the short-term uncertainty of the ongoing COVID-19 crisis, we have decided to postpone our financial Analyst Day for a future date. We expect it will occur in the second half of the year, so we can provide more visibility into 2021 and the longer-term operating environment. With that, I would now like to turn the call over to Bill.

Thank you, Lisa. And good afternoon, everyone. Welcome to our Q1 earnings call. Let me begin by extending my hope that you and your loved ones are healthy and safe. We wish a speedy recovery for anyone affected by COVID-19, and of course, our hearts go out to those who tragically lost a loved one. For the millions of people economically impacted, we’re doing our part to support those in need and to get the world working again. We are truly in this together. Here are the key takeaways I’ll reinforce in today’s remarks. First, ServiceNow is a unique platform, a very strong company. We are well-positioned in this seminal moment. Next, digital transformation was a business imperative pre-COVID with $7.4 trillion of projected spend over the next three years. Post-COVID, digital transformation will accelerate, and ServiceNow is the workflow standard for digital transformation. And most important, the Now Platform, the platform of platforms has become the standard for workflow design experiences. As the COVID-19 pandemic spread around the world in Q1, ServiceNow focused on protecting the health and safety of our employees, serving our customers, and supporting our communities. Leadership, by example, has never been more important. We never stopped pushing. We will not slow down. You’ve seen our earnings release. We delivered a strong Q1, beating guidance and consensus. We have shown we can deliver. In March, as the pandemic was being felt everywhere in the world, our more than 11,000 employees seamlessly transitioned to a work-from-home environment. I’m so incredibly proud of how ServiceNow employees adjusted. Our team focused, executed, and delivered. Employees feel motivated, inspired, and proud. After shifting to work-from-home, we held our biggest all-hands company meeting ever, a live global digital event, where we laid out our plans to support each other and serve our customers. Feedback from our recent employee satisfaction survey is also very encouraging. 99% are excited about our future, 95% feel more inspired by our purpose than ever, 98% feel confident in our crisis response. ServiceNow employees are ready to lead. We’re strengthening the amazing purpose culture and character of our company. Our seamless transition to work-from-home is a powerful demonstration of the Now Platform. Our cloud native Now on Now solutions enabled our employees to maintain and often improve productivity. Our Virtual Agent technology, our Now Mobile app, and our digitized workflows on the Now Platform allowed employees to easily self-manage their work requirements. We didn’t miss a beat supporting our customers. Our cloud uptime numbers remained world class. Cloud consumption stayed high as customers relied on the Now Platform as a workflow workhorse. Around the world, we see the customers who are farthest along in their digital transformation are better equipped to manage this crisis. Companies lagging behind are realizing that they now have a burning platform. Accelerating digital transformation has become a business imperative. Behind every great experience is a great workflow. Today that matters more than ever. The power of the Now Platform has become self-evident to customers in this pandemic. They’re leveraging the Now Platform to quickly deploy workflow apps that enable better crisis management and business outcomes. Our COVID-19 emergency response apps are a great example. These four apps, one developed in partnership with the Washington State Department of Health, and three developed by our team, were released at no charge at the end of March. More than 5,000 installations have taken place. Washington State, San Francisco, and Los Angeles are just a few examples of how we are helping government agencies respond. CIOs are telling us that their teams are using the Now Platform to deliver workflow-designed experiences that their companies need now. For example, the Lowe’s Corporation was facing a surge of emergency paid leave requests due to COVID-19. Within 96 hours, they built a mobile leave request app on the Now Platform and deployed it to 330,000 employees. This is what Q1 was all about—leading, helping our customers deal with reality, helping them do what needs to be done. Let’s look at some of the results now. We had 37 deals greater than $1 million this quarter. That is up 48% year-over-year. In fact, most deals closed in the final weeks of March, consistent with normal linearity. Our renewal rate remained best-in-class at 97%. We saw strength in the Americas, our largest region. We also saw strong growth in APJ, despite the impact of COVID-19 throughout the quarter. Our Now Cloud went live in Seoul, South Korea in March, where we signed two new customers, representing major brands. We also saw strong deals completed in EMEA, despite the challenging environment. Q1 results reinforced the strength of our portfolio. Here this: 18 of our top 20 deals with companies such as Merck, Humana, and Siemens included three or more products. This included our second-largest new customer transaction ever, which was signed with a Fortune 50 leading U.S. insurance company. We saw great momentum with ITSM Pro, which delivers increased automation and operational resiliency for our customers. Our business continuity and integrated risk management products continued this strong momentum. 16 of our top deals included multiple IT products. Chevron for example, is realizing the power of the Now Platform by using multiple ServiceNow products across their business to drive productivity. They are now using our suite of IT products and they deployed our HR products to their entire 44,000-person workforce. We saw continued traction in HR and customer service management. Customers such as the U.S. Department of Health and Human Services are leveraging HR Service Delivery to respond to COVID-19. Half of our top 20 deals included HR. We now have more than 50 CSM customers greater than $1 million, including one of the fastest-growing digital streaming services. This company launched an innovative game-changing digital business. They did it with ServiceNow. Our customer service management technology is foundational to helping them scale faster than anyone imagined possible. In Q1, we also landed our largest CSM deal ever in APJ. Japanese-based Murata Manufacturing purchased CSM to enhance their customer support, reduce time to resolution, and increase customer satisfaction. We also launched Orlando in March, our most innovative Now Platform release ever. Our day one adoption was ServiceNow’s highest ever. Orlando features Now Intelligence, which gives customers unmatched AI, analytics, and mobile capabilities across the Now Platform to support any workflow-designed experience. Driving new levels of enterprise productivity is what Orlando is all about. The Office of Information Technology at Princeton University, for example, successfully upgraded to Orlando and went live with CSM. CIO Jay Dominick says they moved fast to implement CSM functionality to serve current and prospective graduate students, staff, faculty, and other stakeholders. I’m talking to many CEOs and C-suite leaders worldwide. Here’s what they’re telling me: in crisis, they are focused on protecting revenue, ensuring business continuity, and driving productivity. They want an enterprise workflow platform that delivers ROI in 12 months or less. The good news is fast time to value is a ServiceNow core strength. The ServiceNow advantage is one architecture, one data model, one platform. This gives us strategic authority to be the clear choice for all customers across IT, employee, and customer workflows across all geographies, industries, and personas. Our partner ecosystem sees this clearly. And they’re doubling down on ServiceNow. We value how our partners such as Accenture, Deloitte, KPMG, and many others have stepped up to support our shared customers. Our Q2 fast start playbook is focused on the priorities that matter most to our customers. We’re engaging our customers like never before. Our Q2 fast start playbook includes five key messages: digitally scale operations quickly and efficiently; reduce technology debt; ensure resilience for critical business operations; deliver employees the right digital experience from anywhere; and create new workflows fast. Each one of these priorities drives great employee and customer experiences. Last week, we engaged current and potential customers with these solutions in a global company-wide prospecting day. The results were simply outstanding. Our teams delivered three times greater pipeline than any previous prospecting day ever. Our messages and solutions are resonating in every sector and every geography around the world. We’re also engaging customers and building pipeline through our Digital Knowledge event. This launches on May 5th. I encourage everyone to join us. We have six weeks of incredible content and digital experiences for our ServiceNow community. Knowledge already has more than twice the number of registered attendees that we had anticipated in the physical event we planned in Orlando. We expect the audience to keep growing throughout the next six weeks. It is going to be one heck of an experience. And this is a great example of how we have pivoted. We remain focused on delivering our customers and partners the connection, inspiration, and education that makes Knowledge such a special event every year. Most importantly, it keeps the ServiceNow community strong. I’ve covered a lot here. So let me recap. We seamlessly transitioned to a work-from-home environment and drove very strong Q1 performance. Our customers are innovating on the Now Platform to meet their crisis management, business continuity, and productivity needs. ServiceNow is enabling customers to do what they must do to get the job done. Our pipeline is really strong. Our solutions are resonating. Our customers are asking for more. These are the actions and insights that have informed our outlook. Gina will provide more details on our guidance. She has led an exceptional analysis and thorough bottoms-up effort on all possible scenarios. Our guidance reflects a slightly broader range considering the well-known uncertainties our customers face as a result of COVID-19 in the marketplace. Even as I say that, please keep in mind that ServiceNow is strong in all industries across the Fortune 500, and we are confident in our opportunities, our ongoing customer demand, and our solutions, and in the strong pipeline we see in our business. We are aware of the hard work ahead. We are taking nothing for granted. This is an innovation-led company with an incredible team. We have a proven track record and an unwavering commitment to customer success. Ladies and gentlemen, if it can be done, ServiceNow will do it. We are on the move. I’d like to thank you very much for your time and attention. And I’ll now turn over the call to Gina.

Thank you, Bill. We had a strong Q1, continuing the momentum coming out of 2019. We exceeded the high end of our guidance for subscription revenues and subscription billings, and we delivered another strong quarter of operating profit and free cash flow. Q1 subscription revenues were $995 million, representing 36% year-over-year constant currency growth. Q1 subscription billings were $1.055 billion, representing 32% year-over-year adjusted growth. Remaining performance obligations, RPO, ended the quarter at approximately $6.6 billion, representing 32% year-over-year constant currency growth. Current RPO was approximately $3.3 billion, representing 33% year-over-year constant currency growth. Our renewal rate remained best-in-class at 97%. The strong top-line performance during this quarter is driven by continued expansion of our existing customers. We also continued to see strength in adding new customers. We closed three new customers that are paying greater than $1 million in ACV. Our cohort of customers paying us more than $1 million annually continues to grow significantly, up 30% year-over-year. We now have 933 customers paying us more than $1 million in ACV. We saw strong profitability in Q1 with an operating margin at 24%, driven by our strong revenue performance and less travel expenses due to the current work-from-home environment. Our free cash flow margin was 39%, benefiting from a seasonally high amount of collections from our strong Q4 billings. Our first quarter results demonstrate our position as a trusted innovator and partner to help our customers digitally transform. Before I move to guidance, I want to briefly discuss the impact of COVID-19 on our business. Many of our customers are now operating in some very challenging circumstances. In response, companies, especially those in highly affected industries such as transportation, hospitality, retail, may reevaluate how they’re spending their dollars. CIO surveys and our own conversations with customers suggest, though, that software spending will prove to be more durable. We’ve seen companies place a greater emphasis on return on investment and time to value. We remain well-positioned to weather the short-term challenges, and the Now Platform remains a mission-critical part of our customers’ operations. We have a strong customer base across almost every industry, and over 80% of our business is serving large enterprises globally. As a result, we expect to sustain our high renewal rate. In fact, we saw many of our customers in the highly affected industries renew their contract and expand their uses of the Now Platform in the quarter with a large portion of this occurring in March. As Bill mentioned, we entered Q2 with the fast start playbook. I’ve been thoroughly impressed with how quickly we pivoted our go-to-market motion in this work-from-home environment. We’ve seen early success as our pipeline continues to grow, and we have been successful in closing business with both new and existing customers in the first few weeks of April. With that said, the challenges our customers are facing, particularly in Q2, have been taken into account in our assumptions. While our customers value the Now Platform and we know they are prioritizing their investment in it, customers may delay new transformation initiatives until we have greater visibility into the future operations of their business. Given the current operating environment, we expect some variability. However, we believe this will be most acutely felt by our customer base in the highly affected industries we previously discussed, which represent approximately 20% of our business. The other 80% are industries that are less affected. We are very committed to helping our customers manage through this difficult time. When required, we’ve taken measures to provide our customers with greater flexibility and manage through the challenges. As Bill said, we are engaging our customers like never before. We have done a rigorous analysis to understand both the risks and opportunities ahead of us. Because of the potential short-term impacts to our business, we have made the following adjustments to our guidance methodology. First, our guidance assumes that the most significant headwinds will occur in Q2 and Q3. We’re also assuming these headwinds will ease and the economy will open more broadly by the end of the year. Second, we’ve increased the guidance range for subscription billings. This accounts for the increased uncertainty of new business, timing of renewals, and billing terms, particularly with customers in the highly affected industries. While our guidance is based on the current assumptions about the macro environment, we are confident in our updated guidance and believe that by making these adjustments, we are appropriately factoring the risks created by COVID-19. As a reminder, we have good visibility into our subscription billings. On average, 50% is driven by backlog, more than 25% by renewals, and the remaining portion comes from net new ACV. Subscription revenue is even more predictable. Approximately 80% of the revenue that will be recognized for the remainder of 2020 is already contracted and included in our backlog. Now, let’s turn to guidance for the second quarter and full year 2020, which reflects the impact of COVID-19 and the FX headwinds, as a result of declines in the British pound of 5%, the Euro of 1%, and the Australian dollar of 12% versus the U.S. dollar. For Q2, we expect subscription revenues between $995 million and $1 billion, representing 29% to 30% year-over-year constant currency growth. We expect subscription billings between $960 million and $980 million, representing 20% to 22% year-over-year adjusted growth. We expect a 23% operating margin, up 500 basis points year-over-year due to a reduction in travel expenses and the transition of Knowledge to a digital experience. For the full year 2020, we expect subscription revenues to be between $4.125 billion and $4.145 billion, representing 28% to 29% year-over-year constant currency growth. This guidance reflects a headwind of $52 million from foreign currency and a $43 million reduction driven by net new ACV compared to the midpoint of our previous guidance range. We expect subscription billings to be $4.60 billion and $4.66 billion, representing 23% to 25% year-over-year adjusted growth. This reflects a headwind of $52 million of foreign exchange and a $123 million reduction driven by the low net new ACV compared to the midpoint of our previous guidance range. We continue to expect 2020 subscription gross margin of 86%. We are raising our guidance for full year 2020 operating margins to 23%. This reflects savings from reduced travel, lower G&A hiring, and the transition of Knowledge '20 to digital experience. Looking into next year, we expect our investment in these areas to return to previous levels. Importantly, as we continue to feel confident about the long-term opportunity and path to $10 billion in revenue and beyond, we will continue to invest in strategic areas, such as R&D and sales. We expect to maintain a thoughtful pace of hiring throughout 2020. As always, we will continue to be disciplined as we evaluate our investments to ensure we generate the greatest ROI possible. We are maintaining full year 2020 free cash flow margin guidance of 29%, reflecting an increase in operating margin offset by decreasing collections due to the expected increase in DSOs. Finally, we expect second quarter and full year 2020 diluted weighted average outstanding shares of $196 million. In summary, as we navigate through this global pandemic, a few things have become clear. Digital transformation is accelerating as companies react to unexpected disruptions of their business. We will help companies transform the way work gets done. We have a world-class management and a right product portfolio to weather the short-term challenges. We will help our customers evolve and emerge from this crisis even stronger and better positioned companies. We’re in a very strong financial position exiting Q1 with $6.6 billion in RPO and a strong net cash position of $2.2 billion. We will continue to invest for long-term growth. We have never been prouder of our employees on their continued focus on serving our customers, partners, and communities. Our helping and humble culture is stronger than ever. We can’t thank our employees enough for their hard work and dedication. With that, operator, we’d like to now turn over the call for questions. Thank you.

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

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

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

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

Bill, if I can. Can you elaborate on how you’re adapting your go-to-market strategy during these crazy times? Clearly, your value prop only becomes more appealing as the entire world pivots to digital. But, how have the field priorities changed, if at all, in relation to new logo versus expansion business?

One of the new logos, Brad, that I mentioned was Merck. And there were quite a few new logos in Q1. But here’s a big thing: it might be a little counterintuitive actually, but one of my goals, as I told you in the last earnings call, was to be the trusted innovator for the C-suite, and actually to elevate the level of contact that ServiceNow utilized in the marketplace. Right now, C-level executives and CEOs in particular are easier to get to than they ever have been, because they’re in their home office, and they’re looking for a good phone call or a good Zoom, and in ServiceNow, they’re finding one. So, what we’re doing is we’re aligning the presale, especially on the value drivers that are important to a customer in their specific industry, in their specific persona. On an outside-in basis, we’re studying very carefully, especially in the COVID environment, what we can do to help them. We schedule our team to essentially do—in a physical world we had what we called executive briefing center meetings. Now, we’re in a virtual world. We simply have the same executive briefing center meeting. Only, we can have many more of them because we don’t have the wear and tear or the difficulty of getting calendars aligned because people have time on their hands for things that are mission-critical and things that can give them immediate time to value and the priorities that they care about. As I said, Brad, they care a lot about protecting the revenue they already have. Obviously, everyone wants to grow, but job one is to protect what you have. And then, this business continuity thing, we can’t overstate it. For example, there is one very large consulting company out there with hundreds of thousands of people. Think about something like asset management and how you provide the toolset, whether it’s a phone, computer, or anything the workforce might need to work-from-home physically to them, trace and track it, and ensure that it’s executed well across the value chain. This platform of platforms is really resonating. So, I believe that it’s logical for people to be concerned to say, well, you’re primarily an enterprise direct sales go-to-market, but actually, it works even better in digital because the activity set increases and it’s just easier to do business with C-level executives now than it ever has been before. The other thing I would mention to you, and I said it in my opening remarks, is it’s all about value. The one thing about value that’s changed though is the fuse has to be really short, not dissimilar to 2008. It has to be very, very short. I told you a story about Lowe’s where we had them up and running on something with 330,000 employees in 96 hours. We have people installing ITSM Pro in a couple of weeks. Just compare that to the old system of record world and how long it takes to get the value. We’re so relevant. I want everybody to think about the old value chains and how they are splitting apart and being reassembled into these end-to-end mobile-first workflows on the Now Platform and how quickly you can get the value, and just how willing people are to engage digitally. Even the order agreements, it’s all digital. You don’t have to go out there and get things signed anymore. So, that’s pretty much the net of it.

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

Yes. I would say that what I talked about slowing hiring, and we talked consistently about G&A now and into the back half. We will continue to aggressively hire. In fact, we have really not seen a slowdown to date in our ability to hire and attract really strong talent, which is great. I think what we’re trying to do is be really thoughtful about hiring. We continue to hire for the critical areas. I want to ensure that we are well-positioned to weather this short-term storm here.

Hey, Brad. I just want to give you and everyone else on the call a little color. To build on what Gina is saying, we’re hiring top talent. That’s the simple fact. This is a brand destination that’s super successful and talented people now know about. One example is our Chief AI Officer, Vijay Narayana. Keep in mind, this guy has 15 patents. He ran data science solutions at Microsoft and engineering at Pinterest. We have the ability to attract the very, very best people in the market. He was getting offers from everybody. He chose ServiceNow. As we bring in engineers and talented go-to-market people, we’re also making sure that they’re top talents. We’re not interested in anything less.

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

Absolutely. Sarah, first of all, thank you very much for the question. We really want everybody to know that this Company is all about driving long-term customer loyalty. The sustenance of these customer relationships is everything in the cloud economics sense, but even more, it’s everything in the sense of the ServiceNow culture. We have presale, sale, post-sale customer support, our consulting and partner ecosystem aligned in a value chain. We do this by industry and also segment it by persona. In the 20% of our customer installed base, most affected by COVID-19, we have a cross-functional team that includes legal, finance, presale, sale, and post-sale involved in the process. We do all we can to make our customers successful. We haven’t had a single down sell. We have been flexible on cash where we need it to be, which Gina stated. But we’re also looking at things that are win-win in orientation. Even if COVID were even worse than it is today, we expect it’ll get better. But even if it were worse, we find that customers realize that the Now Platform is a key technology in these companies, it is essential. Nobody has disputed whether or not they need to renew, it’s just about helping them get through this very difficult time. The loyalty effect is getting even stronger because customers are relying on the platform even more. In every engagement, even the ones where customers needed our help the most.

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

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

One thing I think everybody will be interested to know is kind of your question, but it’s probably on everyone’s mind. Why is it that we have such confidence? It’s really because the customers are telling us they have confidence in us. For example, take the Department of Home Affairs in Australia. They are integrating outdated, underperforming solutions into an integrated platform. That is helping them simplify their environment, drop down costs, and improve productivity. The State of California is a perfect example because they went for a cloud-first initiative. That’s all about getting stakeholders, vendors, and partner agencies to cooperate. That’s why they chose ServiceNow customer service management. What we see is our platform has a recognition that the integrated nature of the platform has so much power to help customers streamline their operations with modern technology. We feel good.

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

Yes, that’s actually a good question, Samad. I know initially, probably people had concerns as to how viable that was. But the reality is, it is very viable. Not only can ServiceNow virtually implement the system, but so too can the ServiceNow ecosystem. Initially, some training was required with certain partners on how to do that, but our substantial partners absolutely know how to do that. That’s the manner in which ServiceNow is being implemented. It’s done virtually by ServiceNow, as well as our ecosystem partners; it’s not an issue whatsoever.

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

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

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

Yes, sure. Kirk, I want to thank you very much for the question. It’s really, really smart because I start every meeting off with C-level executives or heads of government that we’re speaking with regularly, daily in fact, on this concept of behind every great experience is a great workflow. The Now Platform is a platform of platforms. Digital workflows are becoming essential assets within every company. What we see happening is that the great experiences that every CEO wants for their employees and customers include mobile web and conversational tools. The IT workflow is essential to enable employee workflow and customer workflow, and anything they want to uniquely customize, they can use the App Engine on our platform. Having this one platform with one data model and one architecture, with no debt because of how well ServiceNow engineering has been handled for the last 15 years, you’re able to streamline and eliminate waste. Companies are telling me, why would I want to double down on a system of record when I can take the data from the system of record and put it into a new workflow where they can apply machine learning and AI and get the real analytics to drive employee experiences and customer experiences. It’s such a great return on investment. I haven’t seen one scenario where I can’t go to a C-level executive and say you ordered this from me today at a 5x return ACV value this year. It’s like, why wouldn’t you do it? One customer in software asset management, said I have fully outdated solutions. I’m underutilizing my shelfware. I said we’ll analyze it for you. We haven’t found a case where we can’t take 20% of the cost out. And they say, really? Why don’t we have it? I said look, if anyone’s got any problem with it, I’ll just split the profits with you. No, no, I’ll order from you. That’s the environment we’re in. If you want to talk cost, we can take it out. If you want to talk experience, we’re the workflow behind it. It’s about executional excellence in a virtual world; this is the platform that crosses systems of record and enables all mobile, web, and conversational experiences to help employees do their jobs or inspire customers to be loyal. I truly believe our purpose is helping people and making work better for people, and that’s truly resonating at this critical time in the world's history.

Yes. As I said earlier, we’ve made no significant adjustments to our cash flow guidance for the full year based on invoicing duration at this point. Only 20% of our business is associated with customers in the heavily impacted industries. We’re not seeing any real issues with respect to invoicing duration or timing.

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

So, basically, only 20% of our business is in the highly impacted industries. 80% of our business is in Fortune 500. We’re not exposed to smaller SMB type of business. Our guidance reflects some lower expectations from what we normally would see our growth on net new ACV. The bulk of that we believe will come from companies in the more affected sectors, but we are also taking account that some of these companies may delay some of their spending as they look for visibility into their growth.

Yes. As I said earlier, there’s potential upside if the economy opens up more broadly sooner. We think that we have talked about how we are well-positioned once the economy opens up. Digital transformation is more imperative than ever, and our customers are really engaging with us like never before. There would definitely be upside if the market opened up sooner. We’re very, very Q4 weighted, and we’re also within each quarter very last month weighted. As we look at the actual conversion of the pipeline, we talked about the pipeline being stronger than ever. Our current conversion rates are actually higher than normal. So, we’re very well positioned if the economy opens up more broadly to potentially be in a position to have more opportunity versus the current guidance.

Hey. Thanks for squeezing me in and hope you guys all stay healthy. Quick question, Bill, on digital transformation. That can mean a lot of things for many people, but also for ServiceNow. Can you talk a little bit about how you’re kind of tilting your sales approach here in terms of different subgroups, especially in the—when times are a bit tougher, people look for a quick ROI. How have you changed the sales approach over the last few weeks to kind of still do digital transformation, but take advantage of faster projects and faster time to money? And then, Gina, quickly on gross margins this quarter, they were at record levels for subscription. Was anything special in there, or what drove that?

Raimo, I’ll start this off. As you’ll remember from 2008, the world was feeling very good in September of 2008 about things until the crisis hit on the financial level. That was pretty substantial. Cloud solutions that offered OpEx first CapEx and fast time to value became the ultimate move for the enterprise. Because the power moved across managers who want to digitize their companies and to make sure that digital transformation is at the top of their to-do list because they know that if they aren’t digitally transformed while their competitors are, they’ll be wiped out. This is where the action is. We’re in the sweet spot. We don’t have to explain that. ServiceNow is hitting the main stage with the biggest companies in tech. And we have a prized position because the problem with systems of records and the technologies of the past is they do one thing well in one domain. It’s not unimportant, but those investments have been made. CEOs want us to help them make those investments work better. That’s where the platform of platforms comes in. With the integrated experience and having rapidly supporting mobile web and conversational tools, your ability to build any workflow is greater than ever before. And that’s what I see as our priority.

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

Hey. Thanks, guys, for taking my question, and congrats on a great quarter. Above all, glad to hear that all of you are healthy and I hope the same for your families and your team. Bill, question for you first. Obviously, as you mentioned, you’ve seen a lot of downturns like this in past over the course of your career. And frankly, you’ve sold a lot of different software products: HR, financial, CRM—obviously now ITOM and ITSM. Would you talk to your executives how you think the focus sort of within these segments has changed and priorities versus maybe past downturns? And then, I have one follow-up for you, Gina.

Phil, I think—first of all, thank you for your question and my best to your family. Executives today are very keen on digital transformation. You can’t go to any meeting where a CEO among CEOs isn’t trying to digitize their company and trying to make sure that digital transformation is at the top of their to-do list. If they’re not digitally transformed while competitors are, they will be wiped out. This is where the action is, we’re in a sweet spot, and ServiceNow is hitting the main stage with the biggest companies in tech. We’re also seeing the power of systems of record and how they enable your employees to engage customers and drive improved service. Digital workflows are becoming essential assets with every company, and that’s where we’re seeing our priority.

Overall, we are maintaining our guidance for the full year while remaining flexible in this environment. We anticipate good renewal rates across our customer base and a lot of activity coming in Q4. The investments we made in Q1, of course, are something we’re tracking very diligently.