ServiceNow Inc (NOW) — Q3 2022 Earnings Call Transcript

Thank you. Good afternoon, and thank you for joining ServiceNow's third quarter 2022 earnings conference call. Joining me are Bill McDermott, Chairman, President and Chief Executive Officer; and Gina Mastantuono, our Chief Financial Officer. During today's call, we will review our third quarter 2022 results and discuss our guidance for the fourth quarter and full year 2022. 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. We undertake no duty or obligation to update such statements as a result of new information or future events. Please refer to today's earnings press release and our SEC filings, including our most recent 10-Q and 2021 10-K for factors that may cause actual results to differ materially from our 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 and related growth rates we discuss today are non-GAAP except for revenues, remaining performance obligations, or RPO, current RPO, and cash and investments. To see the reconciliation between these non-GAAP and GAAP measures, please refer to today's earnings press release and investor presentation, which are both posted on our website. A replay of today's call will also be posted on our website. With that, I'll turn the call over to Bill.

Thank you very much, Darren, and I'll add my welcome to everyone joining today's call. ServiceNow had an outstanding third quarter. Looking at the top line results in constant currency, subscription revenue was 28.5% growth. cRPO growth was 25%. On profitability, operating margin was 26%. All three metrics are above our guidance, beating expectations once again. ServiceNow had 69 Q3 deals greater than $1 million. Our U.S. federal business had its best quarter ever in Q3. We saw strength across industries and business segments. Our performance was consistent globally with Europe executing especially well this quarter. Our renewal rate remains best-in-class at 98%. We are the largest organically grown enterprise software company. We have an unmatched combination of organic growth and profitability at scale. As these Q3 results demonstrate, we fully intend to maintain this leadership position. Regarding the operating environment, in recent quarters, we said that secular tailwinds were stronger than macro crosswinds. They are. Nothing we saw in Q3 changes this core thesis. Digital technology is a deflationary force. The enterprise digital transformation market is validated. The investment thesis is stronger than ever. Hybrid multi-cloud deployments, the adoption of a modern data infrastructure stack, cybersecurity and risk management, AI and data analytics, remote work and collaboration; these trends are not only durable, their relevance is expanding. There'll be 750 million new applications built by 2025. In the U.S. alone, nearly 100 million workers will remain in hybrid environments. 27 billion connected devices will drive more data in the cloud over the next three years. And ServiceNow's platform directly addresses all these challenges, which translates to numerous growth vectors for our business. I hear one thing from CEOs consistently: Anything we prioritize must generate results in weeks or months. This is the essence of the great reprioritization. In past decades, waves of enterprise systems were introduced to meet market challenges of those times – operating systems, databases, applications. What we see now is a generational shift from architectures built in the last century to platforms engineered for this one. If you look at the ERP market, we see customers at various stages of their move to the cloud. Some of the world's largest manufacturers, for example, are consolidating hundreds of old procurement processes into a modern workflow experience. This declutters the legacy environment, driving more than $1 billion in cost efficiencies for just one of our many ERP wins this quarter. We could do it because ServiceNow was born in the cloud. We integrate with everyone. We meet our customers wherever they are, any environment, any organizational structure, any operating model. Where there is complexity, we simplify. We are fast to deploy, fast to generate ROI. In this need for speed environment, the ServiceNow Platform is becoming the strategic center of gravity for our customers. In light of this, today we're announcing a new initiative: RiseUp with ServiceNow to skill 1 million ServiceNow certified professionals by 2024. Our customers, partners, and ServiceNow itself are all growing as ServiceNow workforces. We see opportunity everywhere. With RiseUp with ServiceNow, we'll give people the knowledge to seize it. Overall, the demand environment is strong. The market opportunity is growing. The ecosystem is expanding. ServiceNow is a growth company on every level. We see the growth across multiple buyer personas as customers consume more of our expanding solution portfolio. In Q3, both ITSM and ITOM were in 17 of our top 20 deals, with six deals each over $1 million. Security and risk were in 15 of the top 20 with five deals over $1 million. Customer and Employee Workflows were each in 12 of the top 20. Once again, we saw Creator Workflows in all the top 20 deals with nine deals over $1 million. Customers view ServiceNow as mission-critical. The Defense Logistics Agency works with ServiceNow to support the global defense supply chain with automated workflows. Faced with the crisis of Hurricane Ian, the State of Florida worked with ServiceNow to deploy a mission-critical application to manage requests from people searching for their loved ones. In crisis situations, weeks to deploy isn't an option, which is why the State did it on ServiceNow in a few hours. Deutsche Telekom provided KPN works with ServiceNow to reduce their order management process from three days to under a minute, saving millions. These stories are everywhere. In fact, one CEO chose ServiceNow for the first time said it best to me personally, 'It's always easier to make a strategic partner decision when you trust the people on the other side of it.' In late September, we announced the ServiceNow Tokyo release. We delivered AI-powered task intelligence, which is all about making the customer service agents more productive, reducing manual effort, speeding time to resolution and improving the customer experience. On the revenue-facing side, we delivered enhancements to order management, including support for bundling, configurable products, and pricing models. We delivered major advances in field service operations and dispatch with scheduled optimization and territory planning. These capabilities help our customers better manage their costs but also their ESG footprint. At a moment when customer service is at the very top of the C-level agenda, ServiceNow's net new innovation is driving and transforming the front office. The technology leaders, we released a new service operations workspace which will deliver faster incident resolutions to keep people highly productive. And given the ongoing migration to the cloud, we released a new licensed cloud cost simulator so leaders can model the cost benefits by moving from on-premise to cloud deployments. The Tokyo release contains many more new features across each of our major workflow businesses: technology, customer, employee, and creator. It is the latest demonstration that ServiceNow's products and engineering machine is the best in the world, the best in class, like no other. And speaking of best-in-class, I've been lucky enough to learn from one of the greatest innovators of the 21st century. Fred Luddy and I have been on a multiyear journey together, one built on love and mutual respect. At this week's Board meeting, I was honored to take on the role of Chairman, with Fred remaining an active member of our Board for the long term. Fred remains the soul and inspiration of ServiceNow, and I'm honored to call him our founder and my personal friend. In conclusion, we again delivered on our promise in Q3. We said the company would continue its SaaS growth in any operating environment. We did. We said that cRPO growth would accelerate during H2. As our Q4 guidance reflects, it is. We said that we preserved the benchmark near the Rule of 60 for the full year in constant currency. We are on track. ServiceNow has a revenue growth, predictability of growth, and a sustainable business model. While others are managing the past, our engineers are innovating for the future. The fundamental question facing enterprises today is this: can modernization wait? With the robust demand environment we see, the answer is a compelling no, it cannot. The stated ambition of ServiceNow remains. We will be the defining enterprise software company of the 21st century. We are firmly committed to that journey. We are focused on value creation for our customers, our partners, our colleagues, and our shareholders. Our confidence in Q4 extends to 2023 and beyond. Sales capacity and pipeline coverage are higher today than at any point this year. We have best-in-class sales and marketing efficiency. We have a highly differentiated platform. We have a business model that will be managed by design for net new innovation, growth, and profitability you can count on. With this growth and margin profile, operating near the Rule of 60, ServiceNow is a unique asset and a premier company. We are hiring with an absolute focus on people who can innovate through code and who can sell solutions and who can help customers realize success. The bottom line is this: When our customers work, the world works better for everyone. That's why the world works with ServiceNow. If we didn't do what we do, it wouldn't get done. The hallmark for ServiceNow is net new innovation. And with that in mind, I thank you so much, and I'll hand things over to Gina.

Thank you, Bill. Q3 was a fantastic quarter of execution. The team delivered strong results, beating all of our constant currency growth and operating margin guidance metrics, an outstanding performance across the board. Investments in digital transformation are a necessity, and ServiceNow remains a strategic priority. CEOs recognize that the Now Platform can deliver the workflow needs for their digital-first initiative while driving quick time to value and hard dollar savings. These outcomes are imperative in the current macro environment and while we continue to see robust demand for our products. In Q3, subscription revenues were $1.742 billion, growing 28.5% year-over-year in constant currency, exceeding the high end of our guidance range by 100 basis points. RPO ended the quarter at approximately $11.4 billion, representing 24.5% year-over-year constant currency growth. Current RPO was approximately $5.87 billion, representing 25% year-over-year constant currency growth, a 150 basis points beat versus our FX-adjusted guidance. 50 basis points of the beat was driven by early renewals from Q4 as the team looks to get ahead of our large renewal cohort. Our renewal rate was a best-in-class 98%, continuing to demonstrate the stickiness of our business as the Now Platform remains a mission-critical part of our customers' operations. We finished the quarter with 1,530 customers paying us over $1 million in ACV, up 22% year-over-year. The number of customers paying us over $10 million in ACV grew 60% year-over-year as our cohort expansion remained healthy. From an industry perspective, net new ACV growth was led by retail and hospitality, up nearly 50%, followed by strength in education. Manufacturing had a good quarter as well, led by a large 8-digit deal, and technology, media, and telecom continue to show durability. Federal had its best quarter ever, including an over $20 million net new ACV win. We closed 69 deals greater than $1 million in net new ACV in the quarter, including five with new logos. What's more, each of those five deals were led by a different product. That diversification showcases the breadth of our product portfolio and increasing customer awareness of ServiceNow's capabilities as a platform, which includes 11 organic businesses with over $200 million in ACV. In fact, 18 of our top 20 deals contained five or more products. Turning to profitability. Operating margin was 26%, 1 point above our guidance, driven by our top line beat and operating efficiencies. Our free cash flow margin was 6%. We ended the quarter with a healthy balance sheet, including $5.5 billion in cash and investments. Together, these results continue to demonstrate our ability to drive a strong balance of world-class growth and profitability. Before I move to guidance, I want to give a brief update on the macro. Our ability to outperform in Q3 is a testament to the strong execution of the ServiceNow teams. Account executives are staying close to the customer, constantly checking in and proactively assembling the necessary materials to get deals across the line. We will operate with the same rigor in Q4 and are confident that we're factoring in the macro trends into our guidance. Consistent with the market on a year-over-year basis, the strengthening of the U.S. dollar also resulted in incremental FX headwind. We now expect a $290 million headwind to 2022 subscription revenue, a $330 million headwind to Q4 cRPO, 100 basis points headwind to operating margin, and an approximate $160 million or 100 basis point headwind to free cash flow margin for 2022. With that in mind, let's turn to our 2022 outlook. We're revising our subscription revenues range to between $6.865 billion and $6.870 billion, representing a raise to our year-over-year constant currency growth outlook to 28.5% excluding a 550 basis point FX headwind. We continue to expect subscription gross margin of 86%, up 100 basis points year-over-year. We continue to expect an operating margin of 25%, consistent with our original guidance at the beginning of the year as we are offsetting incremental FX headwinds with operational efficiencies and disciplined spend management. We now expect free cash flow margin of 29%, reflecting the incremental FX headwinds I previously noted. Despite the $160 million impact of FX, we will generate over $2.1 billion of free cash flow, demonstrating the incredible resilience of our business model. Finally, we expect GAAP diluted weighted average outstanding shares of 203 million. For Q4, we expect subscription revenues between $1.834 billion and $1.839 billion, representing 26% to 27% year-over-year growth on a constant currency basis, excluding a 600 basis point FX headwind. We expect cRPO growth of 26% on a constant currency basis, excluding 600 basis points of FX headwind. We expect an operating margin of 26%, and we expect 204 million GAAP diluted weighted average outstanding shares for the quarter. In summary, we had a fantastic Q3. I'm so proud of our people for being focused, disciplined, and committed to helping our customers succeed. Bill and I would like to thank all of our employees around the globe for their continued hard work and dedication. Our business is resilient, our teams are delivering, and we're as confident as ever about the future. We have the platform enterprises need to reinvent their business models and adapt to the new economy so they can innovate to win and come out of this moment stronger than ever. We continue to see a robust pipeline and are maintaining our investments in growth hires as the opportunity in front of us remains large. We're well on our way to becoming the defining enterprise software company of the 21st century. With that, I'll open it up for Q&A.

Great to see strong results. Bill, maybe I'll start with you. You've been telling us, as you noted on the call that ServiceNow is going to grow durably regardless of the environment. I'm just wondering if maybe either the shape or the nature of the conversation that you're having with executives has changed in this type of environment, and how that's ultimately still allowing you to close all of these large deals and making this momentum?

Yes. I think Gina said it very well, Samad, when she said we're mission-critical and the Now Platform has really become the standard for digital transformation in a modern enterprise today. And we're solving so many challenges. Our customers need to drive automation and productivity. As you know, they're either not hiring, they're laying people off and they have to do more with less. We're built for that. They need the computers and the platforms to do the work so that people have a more pleasant experience on the employee side, and they require an experience no matter where they're working from, that's world-class. We take care of that. The customer service management has evolved from just the engagement layer of how I market to you, sell you, cross-sell you. It's really moved into the mid-office and the back office and back into the supply chain on how I can streamline with great efficiency, giving you the right product and the right form factor and price on time just as you expected it. And that end-to-end is all about the ServiceNow platform. And finally, you're seeing a breakthrough here on building net new innovation. Customers are going to have to do that for themselves and with partners. And we are also going into a co-creation mode with our partners in every industry and geo around the world. That's pretty stunning, and there's lots of use cases and examples. The big thing, Samad, is that C-level executives are looking to ServiceNow. They are calling us. They want to work with us. They see that we're the defining one. And that took some time to build and I think we're there now.

Well, the growth is incredibly impressive. And Gina, maybe just a quick follow-up for you. On the comment around factoring macro, and can you maybe just help us understand, last quarter, you called out slightly longer deal cycles. Any change, can you just dimensionalize what you factored in from a macro perspective as it relates to maybe deal cycles or close rates?

Yes, that's a great question. We are certainly aware of the broader economic environment, but our ability to perform despite these challenges is remarkable. I want to acknowledge our exceptional sales team worldwide. We are maintaining closer connections with our customers than ever, checking in with them to understand the necessary approvals and requirements to finalize deals. We will continue to apply the same diligence that we demonstrated in Q3. While there is increased scrutiny on deal closures, we are successfully finalizing them, and our close rates are strong. We are confident in how we've integrated this into our guidance. The macro situation is changing, but our sales team remains closely engaged with our customers, driving excellent execution.

Congrats on just an awesome quarter. Bill, one of the things that you mentioned during your comments was sales capacity has never been higher and never has, and the coverage ratio for the year has not been higher. This is even on the context of growing sales and marketing headcount 30%. My question to you is, this is one of the biggest net add quarters in terms of employees in sales and marketing this year and over the past couple of years. You usually don't see a lot of salespeople moving to a new company in Q3 but they're doing that to ServiceNow. When you talk to these new employees and your management team, what are they saying about why they're coming to ServiceNow? And then Gina, you talked about continuing to invest in go-to-market there. You obviously hit 30% growth in Q3. How should we think about the exit rate for this year?

Well, Phil, thank you very much for your kind remarks and also the question. If you think about the first quarter of the year, the economies of the world really weren't shaking. Everything was going very well. And especially a tech company like ServiceNow, people were very desirous of having our people, too. But we still weathered that and we continued to hire. And obviously, the people that you hired in the second and the third quarter, the beauty of that is they're now becoming truly productive and certified to execute at a level that we would consider statistically relevant for moving the needle. And that's where I come with my max capacity. It's not just based on the number of people, but it's based upon their readiness to enter into the customer relationship with a level of proficiency so they can execute at a high level. That's what I'm talking about. And we're there now. And we're there stronger than we were all year long, Phil. So it's in absolute numbers. But it's also on readiness and it's in the pipeline, and the coverage in the pipeline is better. So all those dials look great. In terms of why people come here, they come here for the culture. They know that this is all about net new innovation. It's all about customer centricity and brilliant execution, and it's a politically fat-free environment. We just want to win, and people want to be a part of a winning organization.

And then on your question on actual sales and marketing hire, Phil, yes. ServiceNow is hiring and will continue to hire and are investing for growth. So we are absolutely committed to continuing to build up our world-class go-to-market organization and it's all about driving long-term growth and ensuring that we also are continuing to drive ramp rep productivity. It's really about ensuring that the opportunity that we see in front of us, that our sales and go-to-market teams are ready to drive that growth that we continue to see. So you'll see us continue to grow our sales, quota-bearing especially. We'll also be hiring our critical engineering heads. We're very much open for hiring these critical growth hires.

And one thing, Phil, I just don't want to fall between the cracks, is the 1 million in the RiseUp with ServiceNow campaign, where we're going to hire them. Some of them will end up getting hired here, of course, but we're going to train them for our customers, for our partners and to ServiceNow. So there's a bold move for 1 million ServiceNow-trained professionals to put them into the growth engine of ServiceNow. And that will be done on a global basis. We see bold moves that need to be taken in India, Japan, Korea, and continued expansion in Europe. We just have a tireless appetite for growth.

My question is, when you look at the large deal activity in the quarter and the pipeline, how much of that is actually replacing legacy architectures to save money in this tough budget environment we're heading into? And how much of it is about that automation to drive increased productivity?

Thank you, Sterling. It's an interesting question. It's always important to reinforce that the 20th-century architectures were heavily invested in by our customers. And our desire is not to replace them. Our desire is to make them more relevant so they deliver modern value and a highly agile and experience-oriented way for employees, customers, and partners. So those underlying systems, some of them that are point solutions, and they never should have been there in the first place, they do disappear. The core large, well-known brand systems, they remain, but with the agility of the ServiceNow Platform above them and our ability to automate the workflows and completely change the experience set, we're now reinventing the way supply chains run for the biggest auto manufacturers in the world. We're now taking procurement management to an entirely new level for procurement and finance organizations for the biggest retailers, manufacturers, freight companies around the world. They were double-digit wins, doing this for some of the largest companies in the world. So they're taking out huge costs. They are getting rid of point solutions. They're keeping the main ones and then they're automating for speed and agility and value on the ServiceNow Platform. The business cases are unbelievable. It makes one ask, why are we so generous with our pricing? If they can get $1 billion, can't we get a little more? That's the situation we're in here.

Bill, congratulations on the new Chairman position, and congratulations on a great quarter in a difficult environment. My question is actually for Gina. You guys did a tremendous job in driving operating margins. At the same time, you're hiring to plan, right? And you're still aggressively hiring. Can you, one, talk to us a little bit about where you're seeing the efficiencies and sort of where you're able to kind of drive that incremental productivity out of the entire ServiceNow? And two, I was wondering if you could touch on free cash flow a little bit. It has been getting more seasonal over the years. This is the lowest free cash flow margin we've seen in quite some time. Were there FX impacts? Was there increased seasonality? If you could just give us any kind of visibility in terms of what happened on that side of the equation.

Yes, absolutely. Great question. So really proud of the fact that despite about 100 basis points of FX impact on our operating margins, we're able to hold them flat with our original guidance at the beginning of the year, while at the same time, still hiring for quota-bearing go-to-market fingers-on-keyboard engineers. And the efficiencies that we're seeing are across the board. So if you think about leverage in mid and back office G&A, leverage on the marketing side of things, if you think about really what our incredible cloud infrastructure team is able to drive with respect to efficiencies even in this macro environment, it's pretty remarkable. And so the other thing is that our platform drives efficiency for ourselves. We are the customer-zero for all of our new product innovation, so our platform enables those efficiencies across the board. So feel really great about the fact that we've been able to drive those efficiencies even through this current macro environment. With respect to free cash flow, absolutely. So Q3, in general, is a lower free cash flow period. We have our midyear bonus payout. We have bond interest payout. But we also have seen a pretty big FX impact in the quarter and for the remainder of the year. So we talked about 100 basis points impact on free cash flow margin that we're not able to absorb this year because truly the impact on collection happens all at once, whether the FX impact on your P&L because of the ratable way that we recognize revenue happens over a period of time. And so underlying health of free cash flow remains great. We're obviously, as we talked about, staying close to our customers and giving them some leeway on payment terms if they need it. But what I can tell you is that it's days as opposed to weeks. And so we are really staying close to the customers. The trajectory of free cash flow accretion over time remains the same.

Got it. So it sounds like much more linearity and FX headwinds than any significant change in invoicing terms or payment terms?

Exactly, exactly.

Great quarter. Bill, I had a question for you. You've made some previous advances in observability of Lightstep. In this quarter, you acquired Era Software, which looks like a great addition to the platform. Can you talk about sort of what the integration plans are there and sort of maybe refresh what this means for your broader observability efforts?

Yes, absolutely. Thank you very much for the question, Matt. Basically, if you look at what we're trying to do here, we are bringing a scalable, cloud-native log management solution and database that complements Lightstep's existing solutions to the world. And this is really exemplifying and accelerating our vision, which is essentially to unify telemetry, logs, metrics, and traces and now deliver that truly unified observability workflow on one platform. And this is going to take huge costs out of the equation, and it's going to bring a much greater experience to all users involved because they'll avoid the confusing context switches they have to do now. So all the integration work that is necessary is being done. It is all integrated back onto the Now Platform and there's a roadmap to do that. But right now, we're extremely happy with the way Ben is leading. Era Software just makes us stronger, and we're super excited about the future of this business and what it can be. It's going to be interesting to watch this thing play out.

Bill, I don't think we've heard you say the words procurement and supply chain more often than you have on this earnings call. And I guess I want to dive into that because after seeing SAP's results, after what Oracle was talking about, it does feel like there's a deferred amount of activity that's getting done in the back office. And I just want to see your take on kind of participating in that activity as you're talking about that driving, it seems like, some pretty material wins in the quarter. And then I guess maybe a follow-up for Gina is around linearity in the quarter. And also if there's a way to quantify the federal business it seems like it, again, had the best quarter ever. Just how much of that was upfront or kind of self-hosted revenue recognition?

Alex, first of all, let me thank you for your question. You're right. There's quite a bit that has to be done in the back office to automate business processes for a new world order of things in the macro. So you're 100% right. It's still early days, but I see a massive opportunity, given how much enterprises spend on ERP today. And if you look at procurement and supplier lifecycle management solutions that make it possible for customers to unify these transactional systems and enable them through workflow capabilities that truly drive efficiency. And the user experience and the consumer-grade aspect of ServiceNow is really coming front and center because these transactional systems, they all work fine if you're a power user or a super user. But when you start to get more people collaboratively involved in a process, there's a demand now for consumer-grade UX. And there's nothing that works better than workflow automation to solve some of these problems. So we are providing a collaborative platform for all the stakeholders in an enterprise, and that consistent user experience is our superpower. And I do want to underscore, we are not interested or trying to replace the transactional systems of the brands that you mentioned. Those are wonderful companies, and they do something that's very important. What we're responding to is the agility of the supply chain and how you can reorient it in record speed because that's what this world order is asking for, how you can rethink suppliers to manage different labor issues, whether it's in arbitrage or just buying from the people you should be based on your ESG efforts or your MWBE spend and many other things that many customers care a lot about. ESG is a big thing. They're doing that all on the workflow automation context of ServiceNow. And they love the fact that we integrate with everybody, and we're not at war with anybody because we're on the side of the customer and that's what we should all be doing.

In response to your question about linearity in the quarter, we experienced exceptional linearity in Q3, our best performance to date. I'm very pleased with how our sales team is closely engaging with customers. Our federal business achieved its best quarter ever in Q3, surpassing expectations. We secured 16 deals valued over $1 million, including one that closed with over $20 million in net new annual contract value. The federal sector also exhibited strong linearity this quarter, primarily due to the platform delivering substantial returns on investment, which has streamlined the approval process. We are witnessing a growing number of federal agencies considering their collaboration with ServiceNow from a comprehensive enterprise perspective. Consequently, these deals are becoming larger, more strategic, and spanning multiple years. We are also seeing cabinet-level agencies working to consolidate contracts at an enterprise level with us and standardizing their spending on the Now Platform. The federal team has done an exceptional job with their clients. Regarding hosted services, we registered about 3% this quarter, which remains consistent compared to the previous quarter but represents a 1% decline from Q3 last year. Overall, we are seeing great linearity across the board.

Congratulations, and what a change from the Microsoft earnings conference call yesterday. Bill, I wanted to get your perspective. You talked about the great reprioritization. Microsoft talked about how some new cloud workloads are being paused by the customers and they're optimizing existing workloads. So I just wanted to see, what is it that is different about the prioritization of ServiceNow in the face of other headwinds that we're starting to hear about in the public cloud? And how does this position the company for '23 looking into a more uncertain time? We all thought we're going to have a recession in '22. We sort of escaped it. Maybe it happens in '23 or maybe it doesn't. The great reprioritization that you talked about, Bill, how are customers viewing the value proposition, return on investment on ServiceNow relative to the cost of capital? And Gina, if you could care, how would you be approaching calendar '23 guidance? Are you going to be more conservative than usual, given the rising environment that we all appreciate?

Yes, markets are very rational. Customers are currently highly focused on productivity. They care deeply about their customers, employees, and their bottom line. No platform in the enterprise software industry delivers what they need faster, especially when it comes to creating great experiences for their employees. You can't provide a top-tier experience for customers without first energizing your employees. This is one key aspect. Customers understand that having more productive and satisfied employees is crucial. The costs associated with employee turnover and workforce issues significantly impact the bottom line, often overlooked in calculations. Many of these issues stem from poor onboarding, inadequate systems, and subpar user experiences for their employees, regardless of where they work. Regarding customer service management, I believe what we are adding now with our complete vision is remarkable in terms of value creation and has surprised customers who previously didn't consider ServiceNow in that space. As for our core IT, we truly believe that our customers are very impressed with the San Diego release in March and the Tokyo release in October. They see a clear connection between their needs and how quickly we can engineer solutions and release them. Our existing customers appreciate the seamless experience with ServiceNow and recognize that innovation is consistent and high quality. Additionally, at a platform level, speed is essential. Delivering business cases effectively, getting customers up and running quickly, and showing immediate business value are crucial. I didn't provide a single example in the ERP sector where we didn't go live with customers in over 100 days. We're emphasizing the need for speed and our capability to deliver, resulting in great customer experiences. I challenge you to find a customer in the global economy who doesn't appreciate our platform; I can't seem to find one.

And Kash, on your question with respect to 2023, obviously, we'll provide more details on 2023 in January. Overall, as you're hearing from our tone, the demand that we're seeing for the Now Platform has remained resilient and strong. FX, as you know, has become a significant headwind, particularly over the last three months. Since the beginning of this year, we now see about a $400 million headwind related to FX in 2023. And we certainly don't think the macro environment is, all of a sudden, going to change as we enter into 2023. So when we think about guidance, we'll be taking all of these factors into account, as you would expect us to.

I wanted to ask about an update quickly on the SI channel. I think, Bill, in the past, you've said seven or eight of the top 10 global SIs with $1 billion-plus pipeline. That's just an astounding number when you think just a few years ago, that channel was almost non-existent. So just curious, how much of their productivity is contributing to your results here today? How do they give you that reach into these other departments that historically ServiceNow hasn't been and obviously, you're talking about ERP and back office, creator employee customer. You're seeing a ton of momentum there. Just wanted to get your thoughts on how important that channel is in bringing you into those types of opportunities and the traction you're seeing there.

Brad, that's an excellent question. In the early stages, it was fascinating to help people recognize the capabilities of the Now Platform. Our global partner ecosystem plays a vital role in facilitating successful implementations for our customers and customizing our products for various industries. The concept of co-creation, whether related to an industry, a sub-industry vertical, or even at a micro-vertical level, has so much potential that we've only just begun to explore with the ecosystem. We have a lot of room for growth ahead of us. Currently, eight of the top ten global advisory and systems integrators have committed to plans exceeding $1 billion with ServiceNow. I am very receptive to the ecosystem, which is why we are making a significant move today with RiseUp with ServiceNow to aim for scaling to 1 million. I might have underestimated that figure, but there is a strong demand for the platform, and I expect it could reach 2 million. I truly aspire for our partners to have a positive relationship with ServiceNow, just as we value our partnership with them because mutual goal-setting is crucial. We need clarity on responsibilities to avoid duplicated efforts and never let our partners down. Trust is everything in this relationship. They appreciate our straightforward approach as we aim for success together. Furthermore, they recognize, especially considering the changes in spending priorities, that business impact is paramount, particularly during these times. They are increasingly deepening their engagement with the ServiceNow relationship because customers are unwilling to commit to lengthy, costly, and time-consuming multiyear projects. If a project isn't approved within the same calendar year, the chances are very low. Remember, back in 2008, there was a shift from CapEx to OpEx, which gave a significant boost to cloud adoption. Now, with many already in the cloud, they're focusing on OpEx. The key question for them is which platform can deliver the most efficient results quickly and which one will remain a dominant player in their infrastructure over the next decade. ServiceNow appears to be meeting that need.

I'll add my congrats on a fantastic quarter. So Bill, how broad are your ambitions in the Employee Workflows market? I believe you had crossed $500 million there. Some of your partners seem to have 20% or 30% of their pipeline in HR. And now you have this Hitch Works asset for talent intelligence and skills. So just curious how broad is that multiyear road map at this point.

Thank you for the question, Mark. It's really broad. In Employee Workflows, we have 12 of our top 20 deals, with seven exceeding $1 million. We're assisting customers in navigating the uncertainty they're facing and ensuring that their employees, regardless of where they work, have a great experience. This spans recruiting, hiring, onboarding, training, certifying, and providing all necessary services through one mobile app. It even includes off-boarding employees in a high-quality manner, which many companies overlook, affecting their brand image. We take all of this seriously. Additionally, customers are increasingly seeking our help as they're considering how to streamline their business processes and enhance automation, which they need to address quickly. Our ambitions consistently reach into the billions, and this is another area where we're also looking to achieve that. We're just beginning our journey in enhancing employee experience. Interestingly, none of our employees can point out a specific system of record in our cloud infrastructure. However, they are familiar with everything available through the mobile application on their phones, which is powered by ServiceNow, because we've fully automated the workflows across the organization. Feedback indicates that people want to join us because of the exceptional onboarding experience. We retain employees well, as many have left other companies shortly after joining due to poor onboarding experiences. We're focused on enhancing employee and management experiences. With our latest Tokyo release, we introduced a comprehensive manager solution that allows career management, training, and development for both managers and their employees on the Now Platform, all happening in real-time. We’re not interested in being a system of record; we have no issues with others in that space. Our focus is on creating a strong experience, as that’s where the financial opportunity lies.

Bill, we have put significant effort into the U.S. government opportunity. Both you and Gina highlighted the record results in this quarter. As you know, this marks the fiscal fourth quarter for the government and is likely their strongest spending period of the year. Can you discuss the potential for any spillover into the next quarter or even next year? Or is it more of a use-it-or-lose-it situation, meaning can we avoid this in the government sector so that it remains substantial like it does in the third quarter?

Yes, John, thank you for the question. We have always been really strong in Federal. And a lot of that is driven by productivity, efficiency, and government organizations. And I think we can all agree that that's a big opportunity. So that area of focus for us has always been a priority. The budget there is large, and there's a lot of demand for updating the technology environment for governments. What they love about ServiceNow is we integrate the things that they've already done. And we're not in a debate about whether the task was done properly or not. The customer can decide how they retire point solutions by the bundles, but we don't insist upon that. We are driving the experience. And I can tell you with great confidence, John, we have a very strong pipeline going into the fourth quarter with more multimillion-dollar deals, and I couldn't be prouder or more confident in our team.

I'll ask a quick one for Gina. Gina, did that pull-forward phenomenon that you cited in 3Q continue into the fourth quarter, such that it's shaping up to perhaps be a little bit more front-end loaded in terms of renewal timing than you would have expected?

So I talked about the fact that one of the reasons why our cRPO beat in Q3 was related to 50 basis points of pull-forwards of Q4 renewals into Q3. And if you remember, on prior calls, I talked about the fact that this Q4 was a large renewal cohort because the fact that we were able to get some of them done early absolutely helped drive the RPO but also ramped our revenue beat as well. Expectation is that our Q4 renewal will be on par. We had a 98% renewal rate in Q3. We expect similar levels in Q4, and so feel very good about the pace of renewals for the remainder of the year.

Congrats on a good job. So maybe to continue on that vein. My understanding is the expectation for the cRPO increase was primarily predicated on renewals and at par as opposed to expansion. So maybe can you comment on how the expansions have been going both on the early renewals and the prospects for those that you expect to renew in 4Q?

Yes. Great question, Michael. Expansion rates, you know we don't give expansion rates anymore on a quarterly basis, but we reported last year expansion rates of 125%. And we've seen very strong similar expansion rates throughout 2022.