ServiceNow Inc (NOW) — Q3 2021 Earnings Call Transcript

Good afternoon. And thank you for joining us for ServiceNow's third quarter 2021 earnings conference call. 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 third quarter 2021 financial results and discuss our financial guidance for the fourth quarter of 2021 and full-year 2021. Before we get started, we want to emphasize that some of the information discussed on this call, such as our guidance, is based on information as of today and contains forward-looking statements that involve risks, uncertainties, and assumptions. Including those related to the continued impact of COVID-19 on our business and global economic conditions. We undertake no duty or obligation to update such forward-looking statements as a result of new information or future events. Please refer to today's earnings press release in our SEC filings, including our most recent 10-Q and 10-K for the factors 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 we present non-GAAP measures in addition to and not as a substitute for financial measures calculated in accordance with GAAP, unless otherwise noted. All financial measures we will discuss today are non-GAAP except for revenues, remitting performance obligations, or RPO and current RPO, or the RPO. To see the reconciliation between the non-GAAP and GAAP measures, please refer to today's earnings press release and accompanying investor presentation, which are both posted on our website at investors.servicenow.com. A replay of today's call will also be posted on our website. With that, I would now like to turn the call over to Bill.

Thank you very much, Lisa. Good afternoon, everyone, and welcome to our Q3 earnings call. While seeing ServiceNow deliver strong results is something we're accustomed to, it remains remarkable. Our team had another exceptional quarter, significantly surpassing the high end of our guidance across all metrics. Subscription revenues grew 31% organically, which is unprecedented in our industry. CRPO increased by 32%, and subscription billings rose by 28%. Our operating margin was 26%. We have once again raised our full-year guidance, reinforcing our clear trajectory towards exceeding $15 billion in revenue by 2026. I was introduced to ServiceNow over two years ago, and we've witnessed an incredible journey since then. The consistent innovation and execution at a global scale we've achieved is unmatched. Thanks to our customers, employees, and partners, we're on track to become the defining enterprise software company of the 21st century, and we are just getting started. Before Gina provides a detailed report, let's discuss the significant structural momentum at ServiceNow. The pace of digital investment is accelerating, with IDC consistently estimating this opportunity at $7.8 trillion over four years. ServiceNow is positioned at the intersection of two transformative opportunities. First, the demand for a new technology foundation is enhancing our close partnership with key technology players. A recent report from the Wall Street Journal emphasized the role of these technology leaders in shaping digital business. Ongoing advancements in public cloud and machine learning are creating a new era of software innovation. Technology teams are seeking a fully integrated software cycle that encompasses planning, development, deployment, operations, and service. ServiceNow is spearheading this transition from the 20th to the 21st century for our clients. The Now Platform, with its extensive versatility and scaling capabilities, has become the central hub for digital transformation. The second factor driving ServiceNow is the reshaping of enterprise application platforms for hyper-automation. Today's leaders understand that their technology architecture must mirror their business architecture. Over the years, enterprises have invested trillions in on-premise and first-generation SaaS solutions that addressed the business processes of the past. Modern business models call for a fully connected value chain, and legacy environments are inadequate for this shift. As pioneers of contemporary digital workflows, ServiceNow is leading the renaissance. The Now platform integrates diverse applications and data sources to create user-friendly, mobile experiences considered to be of consumer-grade quality. We do not require businesses to commit entirely to a single system or collaboration tool; instead, we provide various options that unlock value from our platform as well as other investments. ServiceNow also empowers users to develop applications on our platform. In its report on low-code development technologies, Gartner anticipates that 70% of new applications created by 2025 will utilize low-code or no-code technologies. Gartner has also recognized ServiceNow as a leader in its Magic Quadrant. These favorable trends are driving robust organic growth throughout our solution offerings. The number of deals exceeding one million dollars grew by 50% year-over-year to 63, indicating strong adoption of our platform strategy. In Q3, IT workflows demonstrated strong performance, with ITSM involved in 18 of our 20 top deals and IT operations management achieving ten deals over a million. For instance, the U.S. Internal Revenue Service is undergoing a multi-year digital transformation and chose ServiceNow in Q3 to consolidate 12 complex systems into a single platform to support its critical operations. There is strong demand for our full IT portfolio. The launch of Lightstep incident response in Q3 is unlocking new opportunities for growth in application monitoring and observability. Employee workflows also performed exceptionally well, with HR involved in 13 of our top 20 deals. In Q3, NTT Data utilized the Now platform to develop an employee experience portal that enhances productivity for hybrid work and manages vaccine administration for its workforce. Customer workflows maintained momentum, with CSM in 12 of our top 20 deals and eight deals exceeding one million. Our industry-specific solutions are gaining traction with major clients. Verizon is implementing our Telco Solution, American Century is utilizing our financial services solutions, and Sunbelt Health is adopting our healthcare solutions. Creator workflows, which enable businesses to develop their applications, were outstanding in Q3 as well, featuring in 18 of our top 20 deals. We are collaborating with Stanley Black & Decker to introduce a new manufacturing vertical solution with App Engine to transform how they serve customers. Together, we aim to maximize facility uptime and provide exceptional experiences for distributors, dealers, and end users. Fujitsu will also expand its use of the Now platform to further its digital transformation. We are thrilled that companies like Uber, Honeywell, Trulia, and many others chose ServiceNow in Q3. The Company has demonstrated strong performance across the Americas, EMEA, and Asia-Pacific Japan. Looking ahead to a strong finish in 2021 and beyond, several factors instill great confidence in our business. First, despite a competitive talent market, we are encouraged by the record number of colleagues choosing to join ServiceNow. Our new team members, together with our incredible global workforce, are fostering a uniquely inclusive, motivated, and positive culture. Additionally, we are witnessing significant developments in our partner ecosystem. Just three weeks ago, we announced a new partnership with Celonis, which will provide process mining insights while ServiceNow enhances workflows; our customers will benefit from this collaboration. We are also reinforcing our long-standing partnership with Microsoft. ServiceNow's employee center can now be directly integrated into Microsoft Teams, reaching 250 million monthly users. Together with our expanding partner network, we aim to simplify processes to enhance the working experience for individuals. Finally, maintaining innovation without disruption is a cornerstone of our top-tier engineering tradition. By 'without disruption,' we mean it should be seamless, offering customers a smooth upgrade experience. In our recent Now platform roam release, we introduced numerous new features for customers, including a mobile app builder, an automation discovery tool, employee journey management, and new customer service playbooks. Every business leader today is contemplating the future of work, and these new features provide the Now platform with even greater capabilities to support that hybrid future. As industry analyst Josh Passon remarked, 'This company seems to be able to build and deploy enterprise software faster than almost any I've ever seen, and that's why they are a juggernaut.' I wholeheartedly agree with Josh. In conclusion, the Company is performing exceptionally well; the quarter's results speak volumes. We have once again exceeded our expectations and raised our forecasts. The favorable conditions are propelling us forward. Our customer base continues to expand alongside improving customer NPS. Our partner ecosystem is invigorated. We have accelerated our timeline towards achieving net-zero emissions. We assist businesses in driving their ESG initiatives on our platform, backed by a significant release. The list of accomplishments is extensive. Overall, our message to the market is unequivocal. Regardless of the systems, challenges, or opportunities you face, and however quickly you need to adapt, you have a reliable innovator in ServiceNow. Our goal is to enhance the world for everyone, and we remain steadfast in our commitment to making sure, 'The world works with ServiceNow.' I look forward to your questions. Gina, it's your turn.

Thank you, Bill. Q3 was another strong quarter with continued success across all of our growth and profitability metrics. Demand remained robust globally across all three of our regions. The consistency of our results highlights the strength of our product offerings and our commitment to fostering deep customer relationships. In Q3, subscription revenues reached $1.43 billion, exceeding the high end of our guidance by $22 million and growing 31% year-over-year, factoring in a 100 basis point boost from foreign exchange. RPO at the end of the quarter stood at approximately $9.7 billion, reflecting a 34% year-over-year increase. Current RPO was around $5 billion, which marked a 32% increase year-over-year and a 2-point outperformance against our guidance. Currency did not affect year-over-year growth. Subscription billings for Q3 totaled $1.38 billion, representing a 28% increase year-over-year and surpassing the high end of our guidance by $55 million. Our assets and duration positively contributed 150 basis points year-over-year. We observed strong performance across the industries we serve, with significant growth in net new ACV from transportation, logistics, and business services. Our renewal rate was a solid 98% in Q3, showcasing the value ServiceNow provides to our clients. We view our customer relationships as long-term partnerships and continuously innovate to meet their evolving business requirements. The land and expand strategy has resulted in a base of 1,266 customers who pay us over $1 million in ACV, a 25% year-over-year growth. As our portfolio broadens and opportunities increase, so do our deal sizes. We closed 63 deals worth more than $1 million in net new ACV in the quarter, reflecting over a 50% increase year-over-year. Notably, all of our top 20 deals in Q3 included four or more products. Regarding profitability, our operating margin was 26%, three points higher than our guidance, mainly driven by the strong revenue performance. We also realized savings from a delayed return to work and reduced travel expenses. Our free cash flow margin stands at 15%. These results highlight the strength of our business model and our capability to achieve both growth and profitability. We're delivering exceptional experiences that foster strong employee engagement, deep customer loyalty, and substantial opportunities. By providing intelligent automation for enhanced experiences, we position ourselves as the workflow standard on our path to becoming a revenue company exceeding $15 billion. Looking ahead, we are raising our guidance for the full year. We have increased our outlook for subscription revenues by $32 million at the midpoint, bringing it to a range of $5.565 billion to $5.57 billion, which represents a 30% year-over-year growth, including a 200 basis point benefit from foreign exchange. We're adjusting our subscription billings outlook upwards by $61 million at the midpoint, now ranging from $6.379 billion to $6.384 billion, correlating to a 28% year-over-year growth. Excluding early customer payments in 2020, our normalized subscription billings growth forecast would be 32% year-over-year at the midpoint. This growth includes a net tailwind from duration of 200 basis points. We continue to expect an 85% subscription gross margin for 2021, and we are increasing our full-year operating margins from 24.5% to 25%, reflecting top-line growth and savings from delayed return to work and reduced travel. We're also raising our full-year free cash flow margin by 50 basis points from 31% to 31.5%. Lastly, we expect diluted weighted average outstanding shares of 202 million. For Q4, we anticipate subscription revenues between $1.515 billion and $1.52 billion, indicating a 28% year-over-year growth, with a negligible impact from foreign exchange. We project RPO growth of 27% year-over-year, accounting for a 150 basis points FX headwind due to recent fluctuations in the euro and pound. On a constant currency basis, we expect RPO growth of 28.5%. We project subscription billings of $2.305 billion to $2.301 billion, which signifies a 26% year-over-year growth. Excluding early customer payments from Q4 2020, our normalized subscription billings growth forecast would be 32% year-over-year at the midpoint. This growth includes a net headwind from foreign exchange and duration of 50 basis points. We expect an operating margin of 22%, incorporating increased demand generation spending in the quarter to prepare for a strong start to 2022, along with an expected 203 million diluted weighted outstanding shares for the quarter. In summary, the pace of digital investment is growing, and ServiceNow is ready to capitalize on the opportunities ahead. Our team has never been more engaged and committed to addressing our customers' vast needs. As ServiceNow emerges as the leading enterprise software company of the 21st century, we also remain dedicated to making a positive impact in the world. I'm pleased to announce that in September we committed to achieving our net zero emissions goal by 2030, two decades ahead of our previous target. We are immensely proud of our employees and their unwavering focus on serving our customers, partners, and community. They not only make work better but also contribute to making the world a better place. Our dedicated and humble culture is stronger than ever, and we are incredibly grateful for our employees' hard work and commitment. Now, I'll turn it over for Q&A.

Hi, thank you very much, Bill and Gina. It was an outstanding quarter. Bill, I wanted to hear your overall thoughts following a remarkable quarter. Yesterday on the call, we discussed how technology's share of global GDP is expected to rise from 5 to 10%. I believe I've mentioned this before, leading us to the unavoidable conclusion that enterprise tech density is consistently increasing. It's not the same world as it was a decade ago. Now there are thousands of SaaS applications. How does that position ServiceNow in terms of business opportunities for expanding horizontally and vertically with your ITOM, ITSM, and Workflow Engine, considering this upward trend in enterprise tech density? Additionally, Gina, this year has been quite interesting. Net new business has been accelerating for several quarters. I realize you're not providing guidance for 2022 yet, but how do you feel qualitatively as we approach 2022 with such a solid renewal base and improving net new business trends? I'm eager to hear your insights. Thank you.

Thank you, Kash, for your kind remarks. You accurately predicted the progress of our share price earlier this year. When examining the global markets, every region not only met but greatly surpassed our expectations. All regions are experiencing significant growth with ServiceNow at an impressive rate. In terms of industry expansion, we witnessed growth across all categories this quarter. Industries affected by COVID, such as transportation, logistics, business services, telecom, media, technology, financial services, government, and education, all had remarkable success this quarter. We also made substantial advancements in sectors like manufacturing, healthcare, life sciences, telecommunications, and banking, among others. It's important to consider geography, industry, and also the employee experience. Our employee workflow business is thriving, especially in a labor market focused on attracting talent. As you highlighted, the growth of technology's GDP is undeniable since it is crucial for managing competitive companies in a hybrid world, particularly when it comes to attracting talent and providing a great experience. For instance, we are enhancing the onboarding experience by connecting various training tools and helping new hires integrate into the culture, even if they're not physically on-site. Our customer workflows are partnering with Twilio, utilizing WhatsApp and various messaging methods as traditional approaches quickly become outdated. The experiences we are offering through CSM and employee workflows are truly remarkable. Additionally, creator workflows are projected to generate 500 million new applications over the next two years, developed by companies, and there aren't enough engineers globally to meet this demand. The Now Platform is witnessing tremendous growth with all these factors converging. This is why I am extremely confident in the positive outlook for ServiceNow, both in the short and long term. We operate with clear messaging and factual data, and we can see our pipeline extending well into 2022 and beyond. Currently, the situation looks fantastic, Kash. Regarding your inquiry about 2022, it's still a bit early to discuss guidance, but you are absolutely correct that our renewal base is strong. We have experienced significant net new ACV growth throughout the year, leading us to feel optimistic about the future opportunities in 2022. However, I should mention that foreign exchange rates have posed a slight challenge as we enter 2022, particularly with the euro and dollar fluctuations. Thus, we anticipate a bit of headwind from FX. Nonetheless, we feel confident about the business's overall health, our renewals, and our net new ACV, positioning us for a strong 2022. Thank you very much.

Well, thank you. Hi, Gina. Three months ago on the 2Q call, you prepped us in terms of the back-half seasonality with the expectation that Q3 would be a little sub-seasonal, and Q4 stronger as you were seeing that deal skew. In fact, you put up numbers where the Q3 actual and the Q4 billings guide of 26% are roughly even. So I'm just curious whether since you made that call, that seasonality of Q3 and Q4 has changed and whether it played out in the way that you expected. Thank you.

Thanks for the question. I really appreciate it. Listen, I think we are really proud of the Q3 beat that we saw. Bill talked about all GEOS operating on all cylinders. And that’s true across the geographies and across all of the product portfolios. We were really pleased with the beat that we saw in Q3. We absolutely continue to see more business back-half-weighted to Q4. That is going to be a trend that we continue to see. When you look at our Q4 results and our Q4 guidance, you have to remember last year in Q4, we had that $80 million of early payment that were brought forward, and that really drove a higher growth number in Q4. If you normalize for that — it’s why I called out pretty transparently in the script that if you normalized for that, we're seeing 32% growth in Q4 billing. So, very strong guidance given our scale and our base.

Got it. That's clear. Thanks, Gina.

Great. Thank you.

Yes. Thanks very much, and congrats on the quarter. Bill, could you discuss the Federal business this quarter in terms of opportunities going into the fourth quarter and next year? And then Gina, just one follow-up to Karl's question on the fourth-quarter guide. I realize that seasonality tends to compound; there's a lot of co-term activity that goes on around the fourth quarter. I guess people are wondering why maybe the guidance wasn't upsized a little bit, relative to where it was implied going into it. So I was just kind of curious. I realize there's a lot of permutations that go under the fourth quarter given the size of it. But was there anything else that maybe is making it be a little bit more conservative just in terms of visibility into add-on deals and things like that? Thanks.

Kirk, thank you very much for your question. We had a very, very strong federal quarter, with 15 deals over a million, and 14 federal agencies are now paying us more than $10 million. Key strategic wins included the IRS, which I talked about already, but it's certainly not limited to that. It's pretty amazing how the government is rethinking strategies in terms of communication and providing digital services to citizens, which is incredible, because, as you know, that's all about the user experience and it's a workflow challenge. For example, look at how difficult it was for the government to get money out to small businesses during COVID. There also were some big opportunities with new initiatives in the administration, including resiliency, business continuity, outages, terrorism, COVID, and cybersecurity are top of many lists. The White House actually put out an executive order on improving the nation's cybersecurity after recent ransom attacks. So that's all workflow-related, leveraging existing systems that don't communicate very well with each other. You're certainly not going to rip and replace them, so that's where the Now platform comes in. Think about vaccine management; it remains one of the greatest workflow challenges the government faces. Boosters will likely need to be re-administered regularly. This again is a workflow challenge to distribute, administer, and monitor vaccines. We're involved in all of that. What we're seeing is the connection of federal, state, and local governments. They're all implementing the Now platform to engage with citizens. They're using products like Customer Service Management to help digitize these workflows that can no longer be processed in person because the offices are still closed during the pandemic. This is an aggressive bullish stance—the public sector is embracing the Now platform as its transformational opportunity across federal, state, local, university, and all public entities.

And on your follow-up question regarding Q4, I talked a bit about the normalized billings. So that's 32% for Q4. We have a 50 basis point FX headwind in Q4 of this year, while we had a 150 basis point tailwind in Q3. So we are really moving in the right direction. Last year, Q4 saw tremendous growth, even when you normalize for those $80 million in collections. We are basically at a 32% growth in Q4 this year, normalized from a 32% growth last year. It's strong growth upon strong growth. I will say also, not only did we raise the guide for Q4 based on our Q3 beat, but we increased it by another $13 million in billings. We are experiencing headwinds in Q4 due to FX, but excluding that, constant currency and duration growth is really strong.

Thank you.

Thank you.

Great. Thanks, guys, for taking my question here. I wanted to ask about the Celonis partnership. It seems interesting; natural interplay with some of the AI features in the enterprise editions. Where do you see that partnership providing the biggest boost when you look across the stack at ServiceNow?

Yeah. Brad, thank you very much. The quick answer is the creator workflow platform. What you're seeing is many businesses have not maximized the value of their digital investments because they lack insight into the inefficiency of their processes. That's what is holding back their business operations. To move the needle, organizations are going to need to understand how work is done across people, processes, and systems. ServiceNow and Celonis will help customers map those elements in real-time, and then build digital workflows to more efficiently automate work. Therefore, we're creating a seamless product experience for customers that will make it easy and simple for them to gain insight into their processes across multiple enterprise systems. You'll be able to use Celonis's EMS platform and convert that insight, the X-ray, into action, automation, and remediation on the Now Workflow platform. So, think about bringing process mining, automation, machine learning, RPA, and low-code app development into a seamless combined product experience that customers will be able to use to quickly and continuously improve the flow of work. The shorter answer would be the creator workflow platform; but what occurs is Celonis provides the X-ray for non-ServiceNow environments, and we take all the power of the Now platform, including process mining in the ServiceNow environment, to provide a fast automation platform for customers to drive business process improvements and really optimize business outcomes. I think this will be an exciting development, and I extend my gratitude to my good partners Alex, Bastian, and Martin. I know our engineers are committed to collaborating effectively, and we're going to execute well together.

That's great to hear. Thanks so much, Bill. One more, if I may, just on that same topic regarding the creator workflows. I'm curious about any patterns you're seeing emerge in terms of common applications that are perhaps repeatable through the SI channel or just any color on where you're seeing traction there on the application side? Thank you so much.

Yeah. It's amazing. We literally had a review of this business just yesterday, and our outstanding leader presented it to us. What you're observing is that the Now platform is integrated with all systems of record. Customers can build applications quickly, and we are positioning ourselves as the platform of all the other platforms. I've been referring to various platforms for a long time. I want to emphasize that we respect these platforms and excellent brands; our role is to enhance their effectiveness by operating in the action layer or the hyper-automation layer on the Now platform. We're seeing a trend where younger employees are less inclined to submit tickets—they expect action instead. Thus, enterprises are creating these centers of excellence, allowing employees and developers to create solutions to solve their business challenges. I believe hyper-automation is a key differentiator because we deliver a single platform that encompasses RPA, low-code, and process mining, all while now leveraging Celonis for non-ServiceNow environments to unify everything so customers can rethink their business models. The example I provided in the script involves Stanley Black & Decker, which is combining their new manufacturing vertical solution with the App Engine to build over 70 custom applications. This is happening on our low-code application platform. Fujitsu is also utilizing the App Engine to drive digital transformation and sustainability across the company, impacting both the green and traditional lines.

That's great to hear, Bill. Thanks so much.

Thank you very much for the question. I appreciate it.

Hi, good evening to you. Congratulations on the great quarter. Bill, maybe one for you. You've discussed hiring and sustaining growth. I've noticed that your professional services department has already added more people in 2021 than you did in the last two years combined. I'm curious, should we view this as a leading indicator of projects that are firing up or that ServiceNow is taking a more active role in assisting customers with new implementations? How should we interpret this?

You should regard ServiceNow as a growth company. A company that is firing on all cylinders and attracting the best talent in the industry. An example is Erica Volini, who joined from Deloitte; she had a fantastic career there and wanted to come in to help us transform the service experience for our customers. We are merging the pre and post-sale conversations. It's all about business impact, and we are rethinking the whole services model. Consequently, our customer satisfaction and net promoter score are soaring. Not only is our retention strong, but we’re also focused on enhancing in-process metrics. This is why Jon Ziglar transitioned to us after a remarkable career at Apple, Microsoft, and Salesforce; he believed the Now platform was the future of business. We've successfully hired thousands even during a pandemic, because the Now platform enables us to create seamless hiring, onboarding, training, and management of employees in a hybrid world, enhancing their experience. The word about our culture is spreading quickly. Our screening process is as tough as getting into Stanford statistically, even with thousands joining. We are not limited by opportunity—that is the core of my message. We are organically growing, maintaining our commitment to engineering, and ensuring market leadership because we can be. This platform is for the current generation, and we are principally investing in top-tier engineers and go-to-market roles that can deliver for our shareholders, customers, and partners. I also want to emphasize that our ecosystem is expanding. As we hire more, the ecosystem around it encompasses many thousands more contributing to this Now platform and participating in our success across geographies, industries, and personas—this is a compelling growth narrative.

Not only do we see it as a growth story, but one of the best growth stories.

Thanks.

Just a quick follow-up for you if I can squeeze it in— as I think about some of the new customers signed in Q4 of last year, there's still a lot of uncertainty in the market. Are you seeing those customers expand at a higher rate or maybe being easier to upsell as we get more certainty, looking forward to a stronger macro-environment? Yes. We're really pleased with our new logos, both from Q4 of last year and throughout 2021. We're seeing strong growth even in Q3, with six new customers exceeding $1 million, spanning industries including banking, retail, manufacturing, and energy, just to name a few. We're definitely observing new customers expand with larger average deal sizes quarter-on-quarter and year-over-year. We're also seeing healthy growth abroad in EMEA and APJ, and so we’re focusing on matching the right new customers with potential. IT continues to comprise a high percent of those new logos. We're also seeing a larger percentage of land occurring with CSM, App Engine, and HR, and those cohorts are performing well. Our expansion rate is robust, and we're firing on all cylinders across all three of our geographies.

Great. Thank you for taking my questions.

Thank you for taking the question. Gina, I’m trying to understand the very varying trajectories of what you're describing in terms of billings growth. It sounds like it's accelerating into Q4, and granted there's a lot of normalizations here, I think that's right where the answer is. To get to that 32% normalized billings growth in Q4 versus the current RPO growth, which you guided to a deceleration—going from 32% growth to 28.5% on a constant-currency basis. Are there any factors we should be aware of in terms of adjustments or changing contract dynamics that would cause that variance in the trajectories?

That's a great question and so rightfully so. You took into account the FX affecting our CRPO. Most of the remaining CRPO growth I described is due to seasonality in our renewal cohort. As you're aware, our typical customer contracts span around 36 months on average, and we have a substantial cohort coming up for renewal in 2022 that will flow out of Q4 this year. This is primarily due to the renewal timing; we're including future renewals in our pipeline sales, which accounts for the deceleration. Once that cohort renews in 2022, coupled with our 98% renewal rates across the board, we feel confident that we will witness stabilizing RPO growth into 2022.

Got it. That makes a ton of sense. Thanks so much.

Awesome.

Thanks so much, guys, and congratulations again. Bill, maybe just the first one for you around your approach towards organic versus inorganic growth. Obviously, the organic growth and profile of the company have been second to none to date. How are you thinking about the road to $15 billion plus as you sit here today, within that construct? And I have a quick follow-up for Gina.

Alex, it's a great question. I couldn't be more confident in our ability to achieve the $15 billion plus on an organic basis by 2026, as stated at the Investor Day. Additionally, we recognize that our balance sheet is exceptionally strong and will strengthen further as we progress. We are consistently sourcing, examining, and contemplating all options that would benefit shareholder value creation without ever incurring any tech debt for customers, unlike many others in the industry. So, rest assured, everything is on the table; however, at this time, there are no substantial acquisitions being considered, not a single one. I could not be more confident in our organic growth. In fact, that's where we're focusing our investments as we’re certainly not opportunity-constrained, and the company is in fantastic shape.

That's awesome. And Gina, maybe one for you. We've discussed growth and confidence in growth both into Q4 and even beyond. I wanted to ask you a question about margins; some of your peers have discussed models post-pandemic that have become more efficient, implying that not every sales rep needs to hop on a plane and that there's more productivity to be captured in a remote sales style. Others have noted a greater need to invest aggressively for growth, seeing some of the pandemic savings potentially reverse next year. Where does ServiceNow fit into that margin narrative as we start to think about a more normalized environment?

Absolutely; that's a great question. First off, I acknowledge that many learnings from remote work will have a lasting effect on our overall efficiency. I've stated candidly throughout the year that it does grant us the ability and agility to redirect savings elsewhere, which aligns with Bill's emphasis on organic growth. We are at an inflection point where we find no lack of opportunity, and foremost we are a growth company, committed to investing behind that. That said, at our Financial Analysis Day in May, I committed to a 26.5% margin by 2024, and we remain dedicated to that trajectory. I don't anticipate a linear increase on that path. As offices reopen and travel grows more consistent along with in-person events, we believe that the slope to 26.5% won't follow a linear trajectory. I cannot provide guidance for 2022 at this moment. However, we are firmly committed to achieving that over a three-year period, as we foresee savings derived from pandemic learnings and efficiencies contributing to the growth opportunities we identify today.

Perfect. Thank you.

Yes. Thanks for taking my question. I noticed the million-dollar customers increased significantly year-over-year here in Q3. What were the drivers behind that? Was there a specific one-off, and should we expect that type of strength in customer additions heading into your seasonally strongest quarter?

Yes, you should expect it to continue, Tyler. The reality is we've become a platform company. I came in a couple of years ago, and we've witnessed a remarkable transformation of the company into a full-scale enterprise software provider. We recognized and leveraged our strength in IT as our hallmark, particularly evident as the world faces digital transformation; businesses clearly grasp that their technology architecture equals their business architecture. This presents a significant responsibility and an opportunity to expand our reach into employee experience, customer service management, field service management, and so forth—all part of creating a workflow business that ties together many disjointed processes and systems within enterprises today; thus, forming a market-leading approach from ServiceNow. Think of us as an enterprise player on an unstoppable platform.

Great, and Bill, you mentioned earlier that transportation and logistics are particularly strong on net new ACV. Given the supply chain constraints many industries are facing, are you finding that a catalyst for discussions around digitizing and creating more efficient workflows? Please help us understand how you balance this with any potential challenges in closing deals given supply chain constraints. Thanks.

Actually, that's a fantastic question, Tyler. While some industries are grappling with supply chain dilemmas, this situation has presented opportunities for us. Companies must rethink their business models while strategizing about their extended supply chains. They’re reevaluating their partners, determining who to work with, and building relationships with new partners, which is likely prompting a need for digital solutions. This has created substantial opportunities for the Now platform. For instance, we recently acquired Deep Brain, a small company in Denmark, as we’re involved in numerous ERP-related conversations, helping our ERP partners bypass lengthy customized consulting processes with our Now Platform in days rather than years. This affirms a strong ground swell of opportunity at the ERP, supply chain, finance, and procurement levels. I've never experienced an opportunity like this in my entire career.

All right. Thank you.

Thank you very much.

Yes. Thanks. Hi, guys. One question from my side. Bill, I was wondering if you could give us an update on the experience you saw this quarter around the customer service use case. And separately, regarding the observability progress you’re making, could you clarify your current position in moving into that market segment?

Yes. Thank you very much, Sterling. I appreciate it. Let me start with Lightstep, as I want to give a shout-out to Ben and his amazing team. We're continually impressed by the depth of engineering talent at Lightstep and their observability solution. We are still in the early stages of integrating the business, but we’ve had strong upsells from existing customers, a testament to how they value Lightstep's product, which is already delivering results for organizations. Currently, it’s being sold independently, but we expect to market it alongside ServiceNow at an enterprise level in 2022. We’re also engaging in some direct product sales with Lightstep through Internet channels, a potential new avenue that markets may not anticipate from ServiceNow. This represents a novel approach in our playbook, and we are quite excited about it. On CSM, I'm ecstatic about our position in that area. We have an outstanding leader in CSM with renowned industry experience, and we are winning in numerous verticals such as financial services, telecom, healthcare, and life sciences. You will see CSM rethinking direct-to-consumer approaches. We’re also reevaluating messaging via WhatsApp and Twilio and embedding these swift solutions for the customer experience. Field service management, for instance, benefits from a connected experience for the ultimate consumer. Other CRM companies may excel in engagement layers, but the customer experience doesn't end there; it begins. The operations layer and back-office IT must be aligned with engagement layers, providing us with net new opportunities including IoT with field service and fleets of equipment. You combine that with creator workflows where unique customizations can be made; customers can adjust their requests, and importantly, during ServiceNow upgrades, integrations don’t require extensive consulting efforts. With ServiceNow, it's invisible. It’s like driving a Tesla; you click a button, and the next day you’re applying features. That's the type of innovation ServiceNow is driving.

That sounds good. Thank you.

You're most welcome. Thank you for your inquiry.

Hey, thanks. Congratulations from me as well. Bill, in relation to our new areas and observability from the acquisitions a few months ago, what has been the customer feedback? Since you announced the Loehmann's initiative, how do you differentiate between partnerships and handling DIY, and how has that been progressing so far?

Yes. Thank you, Raimo. As I mentioned, ServiceNow’s platform includes process mining, RPA, machine learning, AI ops, and all predictive technologies essential to our strategic initiatives. However, non-ServiceNow environments, particularly large-scale ERP environments, still have fragmented business processes that involve multiple participants. Customers require insights into their operational efficiency. We merge knowledge of non-ServiceNow environments that need process mining x-ray with our capabilities to amplify the benefits. By partnering with others, we avoid duplicating efforts. We focus on the x-ray and on providing immediate value on the Now Platform. I believe this represents a solid demonstration of trust as the ultimate form of human currency. My relationships with Alex, Bastian, and Martin's exceptional teams are built on mutual respect, and I anticipate exceptional results from serving our customer base.

Super, thank you.

Thank you very much, Raimo.

Congratulations from me as well, guys. I guess, whether this could be for either Bill or Gina, you mentioned—early in your remarks—that we could get some thoughts around the future of work. I'm curious, what is ServiceNow's philosophy on the future of work? And, Bill, as sales reps get back out on the road and more in-person conferences occur, do you anticipate this could enhance pipelines beyond the remote selling process?

Yeah, Matt. There's no doubt it's all upside. What you're noticing now is the employment of a purely digital approach in the marketplace; most CEOs, executive teams, and leaders have accepted this new form of communication, which has expedited collaboration and decision-making markedly—instead of the cumbersome travel that’s unable to facilitate rapid engagement. This capability speeds up processes from weeks to mere minutes, especially in a global company, which is a blessing. However, nothing compares to face-to-face interactions, ideating, collaborating, and envisioning future opportunities while in the same room. Therefore, all indications favor us as we’re combining everything we’ve achieved with direct motions while leveraging the benefits of a hybrid world for ourselves and our partners. I genuinely believe the tailwind propelling us into an opening economy has probably been underestimated by everyone on this call today.

Great, super helpful. Looking forward to that as we look to 2022. Congrats, guys.

Thank you very much, Matt.

Perfect. Thank you. I'll add my congrats on the quarter. Bill, in your prepared remarks, you spoke about companies consolidating their legacy systems on ServiceNow. I wonder if you're reaching a point where, amid the systems you're replacing—are you beginning to notice more modern SaaS applications being eliminated and merged into the Now deployment? Or are we still in an era where much work remains to be done on legacy on-prem systems, and are we not seeing those newer applications integrated into your platform yet?

It's a compelling inquiry, Arjun. There remains a significant pool of customers managing legacy systems. Nevertheless, we're finding more modernization efforts being initiated. Many companies are realizing that while some have implemented modern alternatives, they haven’t unified these on a coherent architecture that ensures security and seamless operations. In fact, these modern systems often remain compact and disjointed through automation islands rather than consolidating. The pressing needs of today call for unified business operations and optimal architectures that integrate security, processes, and technology, and this is where the Now Platform comes into play. It's especially true for users transitioning from outdated architectures considered 20th century solutions; it focuses on the substantial costs, risks, and timing crucial for companies addressing critical moments today. Our platform's ability to simulate a perfect enterprise at accelerated speeds—with an impressive user experience—demonstrates a compelling business case. As a result, larger contracts are becoming the norm. We’ve transitioned into a platform company, and that reflects ServiceNow’s prominent market position. We're responsive to our customers' needs, and what stands out in our engineering culture is that our strategy aligns with our customers' strategies and intricate understanding of their challenges and opportunities. We're quick to innovate and disseminate new releases at a premier standard of quality. New features that weren’t included in releases can be handled with our creator workflow platform. Additionally, we have a division within ServiceNow called NowX, focused on on-deck organic innovations that will debut in the market, one major focus being supply chain solutions. There’s an extraordinary opportunity with legacy systems, but there’s also immense potential to unify enterprise operations on common platforms, and to leverage hyper-automation for what folks thought was already automated. I see no restraints on the growth strategy for ServiceNow.

Perfect. Thank you very much.

Thank you very much. I appreciate it.