The operator welcomes everyone to the Third Quarter 2023 ServiceNow Earnings Call, where the company's third quarter results and guidance for the fourth quarter and full year 2023 will be discussed. The call includes forward-looking statements and non-GAAP measures, and the company will not update these statements based on new information. The company's financial measures are calculated in accordance with GAAP, except for a few specific measures. The reconciliation between non-GAAP and GAAP measures can be found on the company's website.

In the second paragraph of the article, the speaker mentions that a replay of the call will be posted on the company's website and then proceeds to discuss recent events, including the murder of a colleague at a music festival and the ongoing crisis in Israel and Gaza. The speaker then shifts focus to the company's Q3 results, highlighting their strong performance with subscription revenue, cRPO, and operating margin all exceeding expectations. They also mention an increase in large new logo growth and success in various workflow businesses. The security and risk sector had a particularly strong quarter with multiple deals over 1 million.

ServiceNow had a successful quarter with seven deals over 1 million and one over 10 million in the employee workflows sector. The company also saw a significant increase in NNACV and had 19 federal deals over 1 million, including three over 10 million. The company's top deal with the United States Air Force was the third largest in its history. ServiceNow is confident in a strong Q4 and has increased its full-year guidance. The company is well-positioned in the market for enterprise software, with high growth and a strong rule of 50 plus. ServiceNow is also investing in AI, which is a growing market with significant potential impact on global GDP. The company's strategy is focused on execution and they have made significant investments in talent, resources, and technology.

The investment in AI is driving growth for ServiceNow, with over 300 customers in the pipeline and high demand for their GenAI SKU. Several notable companies, including a US government agency and real estate leader CBRE, have already adopted GenAI. Other customers, such as FedEx and a major automaker, have also chosen ServiceNow for their IT and business needs. The company expects to see continued success with generative AI in the future.

ServiceNow's pipeline is growing rapidly and their ability to execute is well established. They have a goal to increase the percentage of revenue sourced by partners and have recently announced partnerships with Trane Technologies, Deloitte, and ANSR. They are also expanding their product development roadmap to include industries such as telecommunications, financial services, retail, and the public sector. Additionally, the rise of business networks is creating new opportunities for workflow automation. This growth also highlights the importance of their training and skills initiative, RiseUp with ServiceNow.

The paragraph discusses the success of ServiceNow, a digital skilling initiative of the Indian government, in training learners in new digital skills. The company's focus on customer value has led to immense shareholder value and a goal to be the defining enterprise software company of the 21st Century. The company has a strong culture and high employee engagement and retention rates. The CFO, Gina Mastantuono, highlights the company's strong execution and resilience in the current macroenvironment.

In Q3, the company saw strong growth in subscription revenues and RPO, with Federal, transportation and logistics, education, and manufacturing industries driving the growth. Creator Workflows crossed 1 billion in ACV and the Employee Pro SKU saw over 100% growth. Retention remained high with a 98% renewal rate and customer cohorts showed solid expansion. The company closed 83 deals greater than 1 million in net new ACV, with 18 of the top 20 deals including eight or more products. Four GenAI-related enterprise deals were closed and there is a strong pipeline for plus SKUs.

In the third quarter, the company saw a strong performance in both profitability and free cash flow, with a 30% non-GAAP operating margin and 9% free cash flow margin. They also ended the quarter with a strong balance sheet and have already repurchased 0.5 million shares as part of their share repurchase program. The company is raising their full-year outlook to reflect the strength of the third quarter, taking into account macro cross-winds and a strengthening US dollar. They are also raising their subscription revenues outlook and operating margin target. For the fourth quarter, they expect subscription revenues and cRPO growth to continue to grow, but the higher mix of 12-month contracts in their federal business will create a one point headwind to cRPO growth.

In the paragraph, the speaker discusses their expectations for contract renewals in 2024 and the company's strong performance in the current quarter. They attribute this success to their focus on customer success and the demand for a platform like ServiceNow that can drive digital transformation. The speaker also mentions the recent release of Vancouver and the capabilities of GenAI, which have expanded the company's opportunities. They thank their employees for their dedication and commitment and express their ambition to become the defining enterprise software company of the 21st century. The speaker then opens up for questions from the audience.

CJ Desai and Bill McDermott discuss the strong performance of ITSM and ITOM at ServiceNow, with new logo business and expansion rates continuing to drive growth. The company is also executing on its AIOps strategy and leveraging innovations for visibility and health in the digital space. Analyst Kash Rangan asks about the company's growth prospects in light of a potential soft landing and AI being a tailwind, to which McDermott responds that they have great confidence in the core business, as evidenced by the raised guidance for the future.

The CEO of ServiceNow discusses the current focus of CEOs on increasing productivity and reducing costs, as well as the added challenge of new business model innovation. ServiceNow's digital transformation can help with these challenges by streamlining processes and increasing productivity. The company's strong results and outlook are attributed to its ability to provide a consumer-grade user experience and integrate with legacy systems. There was a significant beat on constant-currency current RPO, which may have been driven by federal contracts. The Q4 outlook includes a one point headwind, which may have also impacted Q3 results due to the large federal contracts booked.

The speaker expresses excitement about the recent Q3 results, which showed strong net new ACV growth and better federal early renewals. They also mention a one point headwind in Q4 due to Federal contracts rolling off, but overall the underlying health of the business remains strong. A question is then asked about the impact of Q4 cRPO, to which the speaker responds that the business is in good shape and the team should be congratulated on the 24% constant RPO growth.

Bill McDermott and CJ Desai discuss the recent success of ServiceNow's GenAI trials and the adoption of ITSM Pro Plus by four customers at the end of the quarter. They are optimistic about the potential for faster adoption of Pro Plus compared to the Pro version over the last five years. CJ Desai shares that there is a strong demand for Pro Plus from iconic companies and public sector customers, and the conversations have shifted from questioning the potential of generative AI to implementation timelines and data strategy. They are working closely with customers to ensure a smooth transition.

The ServiceNow federal business had a strong quarter with 75% year-over-year growth in new ACV and 19 deals over 1 million, including a 10 million deal with the US Air Force. The sustainability of this growth is being questioned, but the company remains confident in its federal business.

ServiceNow is seeing a trend of federal agencies consolidating contracts and standardizing on a platform with a core set of products. Their GenAI offerings are helping to accelerate this transformation journey and they have received positive feedback from early adopters, particularly in regards to security. The company's engineering and customer service are highly regarded by their federal customers, leading to strong references and potential for future growth in the public sector. The success in the federal sector is seen as durable demand and the company believes they can replicate this success globally. Analysts are interested in the potential for growth in this area.

Mark Murphy asks Bill McDermott about the traction of their Microsoft partnership and its impact on their growth. Bill explains that the partnership is focused on expanding their addressable market and streamlining migrations to Azure. They have seen success in government deals and are confident in the mutual benefits of the partnership, driven by the strong relationship between the two companies and their shared commitment to customer value.

CJ Desai and the engineering team at ServiceNow have brought 500 new innovations to the platform this year, with the help of partners like Microsoft. This deep technical integration has allowed them to serve customers at an unprecedented level. The engineering collaboration is necessary, but not sufficient, for their go-to-market partnership with Microsoft. This partnership has been noticed by their largest, mid-sized, and new customers. Karl Keirstead directs a question to Gina about the impact of strong Federal quarters on upfront revenue recognition.

The speaker is asked about the impact of the strong Fed quarter on reported subscription revenue and margins. They explain that the strength in revenue was due to excellent execution by the team and that on-prem revenue has remained consistent. The speaker then discusses four large deals that were signed on September 30th, following the availability of Vancouver and Now Assist. The GenAI Tech was a clear catalyst for these transactions and the customers purchased Pro Plus, Enterprise Plus, or utilized the new text-to-code functionality, depending on their specific needs.

The company has seen success with its Pro Plus product, and customers have expressed their satisfaction with the speed to value and the use of generative AI. The company plans to focus on core use cases that are applicable to all industries before moving into more vertical-specific solutions.

The company had a strong quarter, with a focus on ITSM customer service, HR, and Creator offerings. They are also looking to expand into financial services, healthcare, and government sectors. They recently delivered a solution for a public sector customer and plan to prioritize financial services and TMT moving forward. The company also saw strength in other industries and geographies, which contributed to their strong results.

The speaker explains that ServiceNow has seen significant growth in all four workflows, with a particular focus on employee productivity. They also mention that the Pro and Pro Plus SKUs are seen as productivity multipliers by customers, and that the number of large deals has significantly increased.

The company has seen significant growth in their 1 million plus deals in EMEA, particularly in government and manufacturing. They have upcoming world forums with a 1 billion plus pipeline registered. In APJ, 1 million plus deals increased 40% year-over-year, with Japan and Germany showing promising opportunities. The company has also seen an uptick in headcount, with a focus on investing in R&D and quota-bearing sales. This has been a continued trend for the company and is expected to continue in the future.

During the Q&A portion of the earnings call, an analyst asked about the company's 2024 mile-markers that were discussed at the Analyst Day earlier in the year. The analyst also asked if there were any new factors that could potentially impact the company's growth. The CFO responded by saying that while they do not provide formal guidance until the next quarter, they remain confident in their goals for 2024 and 2026. She also mentioned that the strength of their business and potential upside could impact their numbers for 2024. The analyst thanked her for her response and the call moved on to the next question.

At the Analyst Day, ServiceNow discussed their investment in AI and specifically mentioned the potential impact of their generative AI product, GenAI. The company is excited about the interest and excitement surrounding GenAI and believes it will contribute to their success. They will continue to update investors on the adoption rate and potential upside of GenAI. Additionally, the company has seen an increase in the velocity of conversations about AI since the announcement.

The CEO of ServiceNow, Bill McDermott, discusses the budget allocation for GenAI and how it is becoming a strategic imperative for companies. He believes that CEOs are now making decisions at the board level to invest in GenAI, and that the IT budget is expected to increase by 7% next year. McDermott suggests that G&A functions may need to be leveraged to further fuel this revolution, and that the IT strategy has become the business strategy due to the importance of digital transformation. He predicts a significant investment in GenAI in 2024, regardless of the macroeconomic situation.

The speaker expresses gratitude for the opportunity to answer questions and thanks the person asking. They then discuss their partnership with NVIDIA and Accenture in their AI Lighthouse program and the success they have had in implementing generative AI on the ServiceNow platform. The speaker acknowledges the contributions of their partners and mentions their plans to expand the use of generative AI with other customers.

The speaker expresses gratitude towards their partners and emphasizes the importance of trust in their relationships. They believe that their platform and generative AI will open up new possibilities for inter-enterprise business networks and the global economy. The collaboration between NVIDIA and ServiceNow's engineering teams is highlighted as a key aspect of their Lighthouse program, which aims to provide innovative solutions to customers. Other partners will also be trained to implement these solutions quickly.

The company has a holistic strategy for delivering value to customers through engineering and ecosystem collaboration. They recognize the high demands of customers and believe that their brands, technology, and system integrators will help them deliver the best results. In the observability market, they feel well-positioned to compete with their full-blown cloud observability solution, which includes metrics, traces, and logging capabilities. They are optimistic about their potential in this market and are ready to compete with other companies.

This summary was generated with AI and may contain some inaccuracies.