Ladies and gentlemen, thank you for standing by, and welcome to the ServiceNow, Inc. Q1 2023 Earnings Conference Call. I would now like to turn the call over to Darren Yip, Vice President of Investor Relations. Please go ahead..

Good afternoon, and thank you for joining ServiceNow's First Quarter 2023 Earnings Conference Call. Joining me are Bill McDermott, our Chairman and Chief Executive Officer; Gina Mastantuono, our Chief Financial Officer; and CJ Desai, our President and Chief Operating Officer.

During today's call, we will review our first quarter 2023 results and discuss our guidance for the second quarter and full year 2023.

Before we get started, we want to emphasize that the information discussed on this call, including 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 2022 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 revenue, 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 at investors.servicenow.com. 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 thank you, everyone, for joining us today. ServiceNow had an outstanding first quarter. Subscription revenue grew 27% in constant currency, which was 150 basis points above the high end of our guidance. The RPO grew 25% in constant currency, 100 basis points above our guidance.

Operating margin was 26%, 2 full points above our guidance. We have 66 deals greater than $1 million in net new ACV. We saw a strong, sustained demand to ServiceNow's platform. In January, we committed the company to performing beyond expectations. We said it, we did it. Our Q2 guidance reflects our strong conviction in the fundamentals of this business.

We remain laser-focused on net new innovation, new business growth and profitability. ServiceNow is a growth company that consistently executes in any environment, and we will continue to do exactly that, execute. Looking at the big picture, there's no question this remains a complicated macro environment.

C-level leaders are managing an endless array of headlines and mixed signals. When you filter all that noise, it comes down to one simple reality. There is an app for everything, but nobody wants every app. This consolidation is a tailwind for ServiceNow as the intelligent platform for end-to-end digital transformation.

We are now seeing conversations up level to business transformation. This is bringing CEOs directly into the process as principal executive sponsors. Nearly 40% of CEOs think their company will no longer be economically viable in a decade if they continue on the current path.

They aren't interested in turf battles between departments, a one enterprise level investment to drive business impact. This isn't merely an inspection of what historically has been a big cost center. This is CEOs engaging on a strategic level, insisting on a clear roster of technology partners to drive very specific business outcomes.

For example, when it comes to technology in the age of generative AI, it's a build-buy-operate conversation. They're looking for a single platform that can orchestrate the entire technology value chain. ServiceNow does just that. Businesses are also working hard to transform their customer experience.

The AI opportunity here is when you integrate the front, middle and back offices to better serve that customer. This is a ServiceNow core competency. On the internal side, it's about reducing the number of touch points for employees to get work done. People can't maximize their potential by juggling multiple systems with different user experiences.

Our customers use ServiceNow as the one-stop digital hub to create a consumer-grade experience at work. Whether it's efficiency, productivity, cost takeout or business model innovation, ServiceNow has never been more relevant. This is a message I hear directly from CEOs who know they need to shake things up, and they want our help to do it.

Once again, these secular trends are fueling ServiceNow. About 70% of global tech equity value comes from firms that rely on network effects, and we see growing platform adoption across all of our businesses. ITSM was at 18 of our top 20 deals with 3 deals over $1 million. ITOM was in 14 of the top 20 with 5 deals over $1 million.

With increased focus on cost takeout, ITAM had a very strong quarter in 14 of our top 20 with 3 deals over $1 million. Security and risk were in 12 of the top 20 with 3 deals over $1 million. Customer workflows was hot in Q1 in 18 of the top 20 with 9 deals over $1 million.

And this is worth emphasizing because ServiceNow is more relevant than ever as businesses invest in a differentiated experience for their end consumers. Very exciting indeed what we're doing with customer service management. Employee workflows was in 10 of the top 20 with 4 deals over $1 million.

Creative workflows was in 18 of the top 20 with 3 deals over $1 million. Major global brands continue to accelerate their own transformation by working with ServiceNow. Marriott, Group Bimbo, Navy Federal Credit Union, Travelers, the U.S. Air Force and Schneider Electric, just to name a few. Look at banking as one example.

PNC works with ServiceNow to modernize the way it manages disputes, which will reduce losses and improve case closures. We also saw major co-innovation milestones in the quarter. For example, ServiceNow and AT&T have created a global telecom product to help communication service providers manage 5G and fiber network in majority.

Q1 was also the latest step forward for our organic innovation machine. The ServiceNow Utah release was engineered to drive faster business outcomes for our customers.

The release includes AI-powered process mining, with robotic process automation capabilities, additional search enhancements, expanded workforce optimization and health and safety incident management. These are all designed to help increase automation, simplify experiences and offer greater organizational agility.

It bears repeating that while customers are aware of market excitement for individual technologies like generative AI, they expect a platform strategy to integrate the various tools. ServiceNow has AI, process mining, RPA, low-code and many other technologies built natively into a single workflow automation platform.

Of course, we will have much more to say about all of this at our Knowledge event in Las Vegas on May 16. I hope you can join us. I'd also like to extend a warm welcome to Deborah Black, Vice President, Engineering at Netflix, who is the newest member of ServiceNow's Board of Directors.

We're so proud to have Debbie's leadership on our journey to be the defining enterprise software company of the 21st century. In closing, I'll simply reiterate things we've said consistently. First, businesses need ServiceNow. Enterprise software is mission-critical. The demand environment is robust.

Second, ServiceNow is a unique company performing at a very high level. We are delivering strong growth, aggressively managing costs and creating immense shareholder value. The company has momentum everywhere. We're performing very well across the best places to work scorecards, including Glassdoor.

Our brand recognition is increasing as we rise on lists like Fortune's Most Admired Companies. Our market opportunity is expanding, and this is the early days of a truly generational growth story. Finally, we know the trust is the ultimate human currency. What we have here is a platform, a culture and a company that is built entirely on trust.

The results tell that story. We just eclipsed the $2 billion threshold in a single quarter, and we were the fastest ever to do that on an organic basis. This is about a fast growth, durable, predictable cloud business model. This will be the red thread at our Financial Analyst Day in a few weeks. We look forward to seeing you all there.

Businesses work with ServiceNow. People work with ServiceNow. The world works with ServiceNow, and we're only getting started. I'd like to thank you very much for your time today. I'm looking forward to your questions. And for now, I'll hand things over to Gina..

Thank you, Bill. Q1 was a tremendous quarter with strong beats across our top line and profitability guidance metrics. We saw resilient demand as the Now Platform continues to deliver the productivity improvements and our prices are looking for in the current macro environment. The quarter was yet another example of consistent execution from our team.

In Q1, subscription revenues were $2.02 billion, going 27% year-over-year in constant currency, exceeding the high end of our guidance range by 150 basis points. RPO ended the quarter at approximately $14 billion, representing 24% year-over-year constant currency growth.

Current RPO was approximately $7.01 billion, representing 25% year-over-year constant currency growth, a 100 basis point beat versus our guidance. From an industry perspective, energy and utilities, government and transportation and logistics led the way, followed by strong growth in education.

Financial services net new ACV also continued to grow despite a tough comp and volatility in the banking sector. New customer ACV growth remained an area of strength, and the average deal size was up significantly year-over-year.

Our renewal rate was a best-in-class 98% in Q1, continuing to demonstrate the stickiness of our business as the Now Platform remains a mission-critical part of our customers' operations. Our customer cohorts have also continued to show solid expansion. We ended the quarter with 1,682 customers paying us over $1 million in ACV, up 20% year-over-year.

We're continuing to see healthy customer engagement with enterprise buying patterns demonstrating the extensibility of the Now Platform. We closed 66 deals greater than $1 million in net new ACV in the quarter, up from 52 a year ago.

In Q1, 18 of our top 20 deals contained 5 or more products, showcasing how ServiceNow is providing customers the single platform they need to orchestrate their technology value chain. Turning to profitability. Non-GAAP operating margin was 26%, 200 basis points above our guidance, driven by continued disciplined spend management.

Our free cash flow margin was 35%. We ended the quarter with a robust balance sheet, including $7.2 billion in cash and investments. Together, these results continue to demonstrate our ability to drive a strong balance of world-class growth and profitability. Moving to our outlook.

Our pipeline continues to look robust for the remainder of the year, and we're excited about what the Utah release and Knowledge 2023 can further contribute to those opportunities. While we've seen market resiliency, we continue to prudently factor in the evolving macro cost with each of our guidance.

As Bill mentioned, we remain laser-focused on balancing net new innovation and new business growth with cost management and profitability. With that in mind, let's turn to our 2023 guidance.

We are raising our subscription revenue outlook by $25 million at the midpoint to a range of $8.47 billion and $8.52 billion, representing 23% to 23.5% year-over-year growth on both a reported and constant currency basis. We expect subscription gross margin of 84%, operating margin of 26%, a free cash flow of 30%.

And we continue to expect GAAP diluted weighted average outstanding shares of $206 million. For Q2, we expect subscription revenues between $2.04 billion and $2.045 billion, representing 23.5% to 24% year-over-year growth on a constant currency basis, excluding a 50 basis point FX headwind.

We expect CRPO growth of 22.5% on a constant currency basis, excluding a 50 basis point FX tailwind or 23% on a reported basis. We expect an operating margin of 23%, and we expect $205 million GAAP diluted weighted average outstanding shares for the quarter. In summary, Q1 was a very strong quarter.

We're extremely proud of our team's performance, and we can't thank our employees enough for their continued hard work and dedication. It's their collective commitment to our culture that has enabled us to be named one of Fortune 100 Best Companies to Work For, yet again in 2023.

The consistency of our results exemplifies the strength of our platform and our people. We're delivering great experiences that drive powerful employee engagement, fierce customer loyalty and significant productivity gains.

ServiceNow's intelligent automation is a deflationary force that helps enterprises retool their business to get more done with less. And since we use the Now Platform ourselves extensively, we continue to see the benefit from those efficiencies, generating incremental opportunities for further operational leverage.

That's why ServiceNow is so well positioned to become the defining enterprise software company of the 21st century. You can hear more about that momentum in our new products and long-term opportunities at our upcoming Investor Day on May 16 in Las Vegas. We look forward to seeing you there. And with that, I'll open it up for Q&A..

[Operator Instructions] Our first question comes from the line of Mark Murphy from JPMorgan..

Congratulations on another excellent quarter. So I wanted to ask CJ or Bill. You seem to be in a great position to embed AI into your Pro SKUs and try to unlock new efficiencies.

Can you speak to how you see that opportunity playing out? And as chatbots become more powerful, do you see that affecting the headcount or seat count of a typical IT help desk or a contact center if you try to project that forward a few years down the road?.

Mark, first of all, thanks for the question. Here is what I would say. When we started the ITSM Pro journey in 2018 Q4, the exact question was asked because we embedded machine learning and AI into ITSM Pro, and that was a game changer both for our customers and our shareholders.

When I look at specifically generative AI, we absolutely believe that besides our core machine learning and AI features that are in platform today, it is a clear and. And this particular and versus an or provides more productivity not only for the employees of our customers, but for the customer service agent or IT agents as you asked.

And wherever we can capture that additional value, we will monetize that further via additional SKUs that we offer on top of our current offerings. So overall, I feel very good about generative AI and what it does for our business.

And we have learned a lot through our ITSM Pro traction over last 4 years now, 4-plus years, and I feel very optimistic for next 3 to 5 years related to it is an accretive to our top line..

Our next question comes from the line of Brad Sills from Bank of America..

Wonderful, and great to see a nice start to the fiscal year here. I wanted to ask a question around the non-IT mix. If you take customer and employee, plus creator combined, it's 43% of new ACV this quarter, which is the highest I can remember.

The question is, what is it about Now that you're seeing success kind of taking ServiceNow outside of the IT department? Obviously, you have these great products to address more workflow automation.

But is there something about the go-to-market, whether it's direct or in the channel, that you'd call out here where you're seeing that real traction outside of IT?.

Yes. Thank you very much for the question, Brad. And I think it underscores the importance of ServiceNow becoming the intelligent platform for end-to-end digital transformation.

As I said, the C-level decision-makers now, CEO, the CFO, obviously, the head of technology, along with the head of HR and the various other departments in the company, are aligning their business strategy on technology platforms that truly matter and can impact business results.

And they're moving away from the apple of the day and platforms that don't matter. They're also taking antiquated platforms and building our innovation on top of them. So if you want to think about our unfair advantage, we actually started in IT and have extended that beautifully into HR, into the customer service management and into creator.

Think about the importance of creator. 75% of the app development that will take place in the next 2 years will be done by the customers themselves on a low-code platform like ServiceNow. We feel we have a pole position.

Customer service management, everybody is trying to align the front, mid and back office to give a seamless, self-service, direct-to-consumer experience on the mobile. It's our core competency.

And when you think about the employee experience, there's wonderful systems of record out there that do what they're supposed to do, but our expertise is really taking a technology view of recruiting, hiring, onboarding, providing all the services and with generative AI actually giving the employee next best action and fundamentally changing the game on the productivity curve.

All of this is aligning the executive team around platform strategy, and our teammates here at ServiceNow are proud and confident in that platform. They can tell the story by industry, by persona, and they can bring countless examples to the first meeting now, and they are aligning the executives.

One of the biggest requests we get is, "Hey, can we have an off-site with our entire management team with your team so we can figure out the best next step for the relationship?" That's a very different outcome than we were doing 4 years ago, where it was a more land-and-expand kind of approach..

Our next question comes from the line of Keith Weiss from Morgan Stanley..

Congratulations on a really nice start of the year. I want to dig in a little bit on the thread that Mark Murphy started pulling out in terms of the impacts of generative AI.

And the question that I get a lot from investors is, does it necessitate that ServiceNow has to change their pricing model? And is there an ability to do that? So maybe if you could kind of walk us through, like as this functionality creates more automation and it's more just the workflows in the platform, the data in the platform that's driving the value, is there a necessity or a potential of changing the pricing model to be more consumption- or volume-oriented versus like a seat-based model?.

Yes. So Keith, this is CJ, and I'll address it. We think in multiple buckets. So when we look at technology workflows, as you know, that CMDB is the core foundation.

And all the ITSM processes or ITOM or our security and fast-growing products like risk and asset management, they are all driven through our CMDB for a single end-to-end platform for transformation from a technology standpoint. So when I look at that for the most part, as you know, Keith, we have good, better, best packages.

And we are pretty consistent in how we drive the go-to-market, as Bill described, overall at a platform level. The same thing is true for customer service management and HR as an employee workflow.

And then when I look at creator workflow, we also have opportunity to expand ServiceNow ecosystem significantly, where anybody could be a ServiceNow developer by using text to code or text to workflow or, someday, text to app that they can create.

So overall, when I look at the 4 buckets, the good, better, best mechanism that we have put in place is working beautifully. The traction is great. We are getting the uplift as we have shared with you and will share more at the Financial Analyst Day.

Now in terms of additional pricing because now with generative AI, what I told Mark, is an and, as in you can get higher productivity for specific use cases. Whether it's incident deflection or whether it's related to the agent productivity, we believe that we can absolutely monetize that.

We are fairly early, I'll share more with you at the Financial Analyst Day, on what that pricing model will look like, whether it's an add-on, whether it's a bundle. And we are working through the details, but we are only going to charge where we provide value for our customers, and that is the first principle we are looking at..

Got it. I will stay tuned for Analyst Day for more details. Appreciate the color..

Keith, you would have been very impressed if you saw CJ and his engineering team in yesterday's Board meeting. We're actually dealing with real technology, real-time demos, real customer references, which you're going to get to see, and you're going to get to see examples and business cases that we're already working on at Financial Analyst Day.

He's a little bit modest, and he deserves to be because he's got the best team in the business, but wait until you see Financial Analyst Day. It's really going to knock your socks off..

Our next question comes from the line of Samad Samana from Jefferies..

So Bill, I wanted to ask you, ServiceNow is one of the few tech companies that we focus on that's still growing headcount, and you guys added more employees in 1Q than you did the last couple of quarters of last year.

I'm curious, what's underlying that confidence in adding talent in what appears to be maybe a little bit of a slowing world? And how should we think about that strengthening your position in a world where maybe your competitors are actually going to have to go back and rehire when we come back on the other side of this?.

Yes. Samad, thank you very much for the question. And first of all, everybody is entitled to their strategy, and there's lots of great companies out there that have taken a different approach to managing headcount and the people packed.

We have been highly intentional throughout the last 4-year journey that I can personally speak to on hiring in the first place.

And we have been very biased towards great engineering, especially fingers on keyboards, and go-to-market folks that actually carry a quota and keeping the company extremely lean on G&A, where most of our investments have been in F. So we started into this macro scenario that the world is in right now in a thoughtful position to begin with.

And therefore, we're still managing our headcount tightly. It's not like we're boldly hiring, and especially now we've doubled down on exactly that, quota bearing and fingers on keyboards.

And the good news, and I really believe, we have a new dimension here where our culture is actually attracting people in the marketplace, and we're hiring truly best-in-class talent. We call it 9s and 10s here. If you're an 8.5, you don't get in the door now. So I would like you to take away from this answer, they're being very thoughtful about hiring.

The numbers are commensurate with the new business they're bringing in the door, not the existing business. And they'll continue to do that in a way that manages the margin profile in importance with what shareholder value expectations are in the marketplace.

And I honestly believe we'll look back at this moment and how we're managing the people part of the business and putting people first as something that created a very special, highly differentiated company as it relates to people's desire to work here. It's pretty interesting..

And Samad, I would just add, we're remaining extremely flexible and agile with how we're adding heads, and so we're being very cautious in the current environment.

And you could absolutely expect that we will continue to be cautious and disciplined with how we're thinking about our hiring vis-à-vis our growth for the remainder of the year and really always..

Yes. I mean we -- internally, we call it a checkbook approach..

Thanks to both of you, and we see it in the great margins, and look forward to seeing the team at the Analyst Day in a few weeks..

Our next question comes from the line of Matt Hedberg from RBC Capital Markets..

Great. I'll offer my congrats as well. Gina, you talked about a strong pipeline exiting 4Q and obviously delivered a strong quarter here. How do you feel about the pipeline as we enter the quarter? And obviously, there's been some additional volatility in financial services, and it sounds like that was fairly stable for you guys this quarter.

But maybe talk about the visibility you have entering the quarter..

Yes, absolutely, Matt. Thanks for the question. So pipeline remains robust. We feel really good about pipeline moving into Q2 and beyond. From a metrics perspective versus same time last year across the board, we're in better shape.

As you talk about the direct exposure to financial services, we actually saw growth and had some great customer wins in the quarter despite the macro headwinds. And so really feel great about where we're currently landing pipe, our Knowledge event, our Utah release.

We're really excited about how we can continue to increase the opportunities in the back half of the year as a result. And so from that perspective, we feel really good about where we are. And as always, because 85% of our net new comes from existing customers, the visibility to our pipe for Q2 and the back half remains strong as well..

And one thing you may find interesting, Matt -- one thing you may find interesting is financial services, as Gina said, continued to perform. And in EMEA, 2 of our top 5 deals were in financial services, including one with one of Europe's largest banks..

See you in a couple of weeks..

Our next question comes from the line of Kirk Materne from Evercore ISI..

I'll add my congrats on the quarter. Bill, I was kind of curious on your impressions on just consolidation in this kind of macro environment. I think for a while, you've always said no one has to lose for you to win.

I'm just wondering if that's changing a little bit in terms of your opportunity to go and maybe replace systems that have just gotten either antiquated or go after more greenfield that's adjacent to where you're selling. So just kind of curious if the consolidation wave is picking up, I guess, from your point of view..

Yes. Thank you very much for the question, Kirk. We stand by. No one has to lose for us to win, and I really do believe the systems of record that team up with ServiceNow would see dramatic increases in their win rates. That's obviously up to them, but there's no question that, that would happen.

Because the power of the ServiceNow platform versus point solution is pretty clear. C-level decision-makers want an enterprise-wide workflow capability to drive their performance, and it's just that simple.

And when you have a lot of point solutions that optimize the department but don't tie into the greater workflow across the domains or the functions, it doesn't really help at the corporate level. And I think that's the coherence that we bring to the enterprise productivity story.

And frankly, the one thing I would say is that customers aren't interested in forced marches with upgrades to technology that's not delivering business impact.

It's kind of like thinking about why would I do a heart transplant when I can do a simple bypass and gain massive, new productivity with a platform that drives a great user experience, empowers my employees, [ statisticize ] my customers and enables my creators? In fact, on the banking case, in particular, what you were seeing is some serious focus on risk management across the whole bank and using us to consolidate all the point solutions so there would be one dashboard or one version of the truth to protect that house.

So you're seeing more and more of a platform approach to decision-making in the market..

Our next question comes from the line of Kash Rangan from Goldman Sachs..

Great start to the year, Bill and team. But curious, the strategy to expanding the base of customers, you've done a great job. You've got 7,700 customers, a lot of million dollar wins.

But if you look at enterprise software beyond $10 billion to $15 billion, $20 billion in revenue, those companies have always had a base of the pyramid that has a big chunk of commercial customers, SMB customers. I'm curious how you think about ServiceNow's strategy to expand the base of the pyramid going forward..

Thank you very much, Kash. I mean think of it this way. We are very focused, and I mentioned this as 1 of the 3 things that we're focused. We're very focused on net new business. And this is going to come from upper mid-market in particular, lots of new logos there.

There's a lot of individual companies that talk a lot about their climb into the enterprise. We might just meet them where they live right now in smaller establishments. We'll see how that goes. But I can also tell you, we have a great focus on the Fortune 2000.

And in particular, we have an amazing focus on the Marquee 250 with a true build-out of a go-to-market machine. And we're doing that by industry, and we're doing that with all the assets across the company.

And we've collectively put that together in a way with the full power of the platform, the content, the thought leadership and obviously the solution power where the customer gets everything from ServiceNow.

So I would like you to think about the top of the pyramid, the larger part or the big part of the pyramid and obviously the mid-market up as areas in which we are getting stronger by the minute and extremely focused..

I'll just add one thing, Kash, that from a product strategy perspective, as Gina shared, we are very focused on top of the house of the pyramid, as you call it, in terms of expansion strategy, whether it's just additional products that we continue to deliver release after release or creating vertical-specific solutions for those industries where we can get higher ASP uplift vis-à-vis selling horizontal solution.

And as Bill mentioned, whether you call that commercial segment, mid-market segment, we are absolutely focused on that as well from a new logo perspective.

We have commercial go-to-market selling motion that allows us to move up, and those customers sometimes become massive customers, and that is an area of focus for new logos or new business in addition to the existing one..

And I would just add on new logo piece that our net new customer ACV growth remains an area of strength for us. I talked about this in my script that the average deal size is up significantly year-over-year, and that really is demonstrating the durable demand and the mission-critical nature of our platform in this environment.

We actually landed our largest net new logo deal in EMEA this quarter with ITZBund. And we've evolved our focus to really make sure that we're going after those right new logos, those right new customers, those that offer us the best ROI and have the greatest opportunity to continue to expand with us.

Not all logos are created equal, and we're really targeting those logos that can grow with us over time. And so it's easier to expand an existing customer. The fact that our new logo ACV continues to grow and do well is a continued area of strength for us that we're very proud of..

Our next question comes from the line of Gregg Moskowitz from Mizuho..

Okay. Congratulations on the strong start to the year. The last time that ServiceNow had grown CRPO sequentially into Q1, we'd have to go back to 2019, but you just did it and you did it in a really challenging environment.

So aside from what sounded like good sales execution, clearly, would you attribute the CRPO outperformance to the fact that you had fewer early renewals into Q4? Or is there another reason that you would highlight?.

Yes. I would say that our beat versus the guide was fully due to higher net new ACV in the quarter. So great results from our incredible sales execution team across the board..

Our next question comes from the line of Arjun Bhatia from William Blair..

Gina, maybe just a follow-up on that, on the expansion fulfillment. One of the things that we've been hearing out in the sector is that there are seat headwinds as headcount growth is moderating at end customers.

What are you seeing in your growth algorithm from a seat expansion versus upsell/cross-sell dynamic? And how has that changed at all?.

Yes. It's a great question, and we got that question a lot if you remember back in 2020. We're not really seeing any compression, right, where we're continuing to see expansion across the enterprise expansion geographically within a company and a customer and really as an upsell on the other workflows.

And so seat compression has not been an issue that we've been seeing. Obviously, keeping a close eye on it given the macro, but not something that's been an issue for us thus far..

Our next question comes from the line of Alex Zukin from Wolfe Research..

Congrats on a solid quarter.

Maybe, Bill, can you talk a little bit about the macro from 2 different respects? One being, are you starting to kind of settle into this new longer sales cycle, customers making you pitch ROI every time, everywhere? And you're getting ready to kind of anniversary this in June, meaning it's a sense of like a stabilization or a new normal? And then maybe just comment on the demand environment vis-à-vis U.S.

versus international because it does feel a little bit different depending on which geo you're in..

Thank you very much for the question, Alex, and it's a really good question. It is absolutely clear to everybody that our customers are operating in a complex environment. And the environment they're operating differs by industry, but all of them have a set of challenges that they're dealing with.

So we have completely retooled the go-to-market machine in acknowledgment of our customers' challenges. So we're able to go in with content and thought leadership that's very specific to their industry. We have tremendous insight and depth in what's going on specifically with their business.

We have excellent outside-in protocols and real detailed account plans and relationship plans. And obviously, at the end of the day, all of the sales that happen in this environment has to be backed by an unbreakable business case, not just a business case, an unbreakable one.

And we have built that resilience into the go-to-market machine, and I'm extremely proud of our sales leadership in this company, and that goes for all the executives that report to me on the P4, but also the regional leaders and our feet on the street, I believe, to be the best in the business. So that's one thing.

The demand environment, there is no shortage of demand. The whole idea here is to educate our customers on the art of the possible and make sure that we align business and IT.

So the business executives are participating in this conversation because leaving them out shrinks the size of the deal, and that's why Gina is telling you the ACV is growing, including a new business, gives you a good signal that we are really educated and know what we're doing.

But also by aligning the entire executive team, you derisk the last-minute surprise or the last-minute push because you have multiple executives pushing for the ServiceNow brand as an answer to their problems. So I would say the demand environment, there's no shortage of it, you just have to understand how to manage it.

But our coverage today, and we manage all this on ServiceNow on a CEO dashboard, is better than ever..

And I would just add from a geo perspective, demand, pretty strong across the board. Americas had a strong quarter in Q1 with particular strength in health care and life sciences and state, local and education. We've focused verticalization strategy. That's really driven some strong momentum there.

So we feel really good about results in Americas as well as demand. The number of million-dollar deals increased over 30% year-over-year, so that's great news. EMEA had a really strong Q1 as well. [ U.K.I. ], strong demand, great momentum. Central Europe continued to outperform. Renewal rates continue to be strong at 99% in EMEA despite the macro.

So again, strong durable demand across the board. And then from an Asia Pac perspective, selling into the C-suite has been working well and really helping to drive larger transformational deals. We landed 7 $1 million-plus deals in APAC in Q1. So really strong demand across the board from a geography perspective as well, Alex..

Your unfair advantage is very clear..

Our next question comes from the line of Michael Turrin from Wells Fargo..

Great. I appreciate the strong set of results for Q1. The 2Q guide for CRPO suggests growth down a bit from what you just delivered, Gina. You've talked about prudence over the past several quarters.

Can you maybe step through what you're factoring into Q2 for CRPO? How much is seasonality versus anything more specific to this year? And any update you can provide just around the change in early renewal dynamics you saw last quarter, I think, is also a useful context..

Yes. Great question. So from an overarching perspective, as I said before, the durable demand that we're seeing has really kept our business resilient, so strong Q1 CRPO. The Q2 guide, if you remember, beginning in Q2 of last year is when the macro headwinds really started to hit us.

And so we've seen muted growth in the past couple of quarters as a result, which is driving a little bit of a decel in Q2. The other thing, as you rightly recall, on absolutely continuing to remain prudent in our guided assumptions given the uncertainty in the macro environment. And so again, feel really good about the guide.

It's a strong guide given the current uncertainty. But those are kind of a couple of the things that are going into the number. With respect to early renewals, what I'll say is that early renewals actually exceeded our forecast slightly this quarter.

And so as I talked about at the end of Q4, we really factored in some prudent assumptions with respect to early renewals given the current macro. And basically, they are lining up as expected..

Our next question comes from the line of Derrick Wood from Cowen..

Great. I'll add my congrats. Bill, I wanted to ask about the Microsoft partnership and the co-sell agreement. I think you guys announced that a year ago. I imagine you've been laying some groundwork.

Can you just give an update as to how that partnership is trending, what kind of dividends you see in 2023 and what you may be looking to do around generative AI with them?.

Yes, absolutely. Those conversations, Derrick, are very active. As you know, we're very proud of our relationship with Microsoft. Also, a big tip of the cap to Microsoft and Satya and his team for an outstanding quarter. I was very, very happy to see that for them.

And at the end of the day, we continue to help accelerate Azure adoption for our mutual customers, which is opening additional addressable market for ServiceNow, particularly with ITOM and ITAM.

I agree with you 100% that CJ can give you an update on what we're doing in the area of generative AI, but I think that, that work is in flight and in progress, and we think that's a big opportunity for both companies to work closely together.

CJ?.

Absolutely. So here's what I would say, Derrick, is at the highest level, when we think about our partnership with Microsoft, certain products such as our ITOM product, which gives you visibility into Azure, and overall our product set that allows you to consume public cloud services, is going in the right direction.

Our footprint of ITOM with Azure cloud continues to expand. So that's number one. From a go-to-market standpoint, whether it's in U.S.

federal cloud with our IL5 certification just going live on Microsoft Azure cloud or the Australian government certification, we have had some recent wins in Australia and a few other geographies, where our go-to-market teams are working really well together.

We will share more on generative AI with Microsoft, but we absolutely plan to leverage OpenAI as well as Microsoft Azure capabilities when it comes to how ServiceNow use cases will work in conjunction with OpenAI and Microsoft Azure..

Great. Look forward to Knowledge..

Our next question comes from the line of Sterling Auty from MoffettNathanson..

You touched a little bit on my question in the last answer, but I just want to dive deeper and better understand the traction.

What's driving the traction you're seeing in your observability solutions? How much of it is maturation in the Lightstep functionality and what you've built on top of it? How much of it might just be price and what you're able to bundle together as a platform?.

Yes. So I would say, overall, I put, including observability, all that in the ITOM umbrella, right? You can point out a cloud observability that our Lightstep team has done well, and they had an amazing win with a very large fintech company, where we are going to actually displace an incumbent that does metrics and tracing.

And we beat all the top competitors to win that deal in Q1. This is an example.

But overall, when I look at ITOM, and that deals with the cloud estate, whether it's private or public cloud, and as customers, our joint customers with hyperscalers are trying to optimize their cloud spend or expand, we are the right workflow platform when it comes to the workloads that are running in those clouds.

And with ITOM specifically, we saw that our grow and enterprise adoption has actually increased, including higher selling volume in Q1 of this year. In addition to that, our cloud discovery that happens via ITOM with Azure, AWS, GCP is also on the rise with a number of customers using those capabilities..

And Sterling, the one build I would give on this, just for you to know, Microsoft and ServiceNow understand each other and have like-minded ways of going to market and including not just geographically but in industry. So as CJ said, this Australian government agency we're referring to is one example.

But then you can go to South Africa, and you would see us doing something very interesting for an insurance provider, where we also displaced an aging legacy system. So we're on the front end of innovation by industry and geo, and we really have common goals and shared values around making these customers successful, and we both know how to do it..

Our next question comes from the line of Tyler Radke from Citi..

Gina, just as we look at the updated guidance for the full year, I'm wondering if you could just walk us through some of the assumptions both on the subscription revenue side and margin side. It looked like you did beat by more than -- you're raising the full year guide if you account for currency.

So just wondering if there's any extra conservatism or moving pieces. And then the same thing on margins, there was strong outperformance this quarter..

Yes. Tyler, thanks for the question. So we did raise the full year revenue guide by FX, and we did raise it slightly about $4 million for [ our fees ]. But given the current macro uncertainty and given that we're only at the end of Q1, we wanted to remain prudent in our guide for the full year, which shouldn't be surprising to you.

There's many, many years that we haven't really raised in Q1 with such a big portion of the year still to go. So it's really about being prudent in the current uncertainty more so than anything else. We feel really good about the beat in Q1.

And our guide, while prudent to reflect the current macro, I think still should send a strong signal to our investors on the durability and strength of the Now Platform..

Our next question comes from the line of Brad Zelnick from Deutsche Bank..

Great. And I'll echo my congrats on a strong start to the year. For Bill or Gina, I've been getting a lot of questions on your net new ACV growth for last year, which was disclosed in your proxy as 14%. And considering the backdrop and tough prior year compare, it seems very healthy to me.

But what factors should we consider in bridging to your $16 billion-plus target, which implies close to mid-20s compounded growth? And how would you characterize the company's net new ACV target for this year?.

Yes, Brad. Great question. So yes, net new ACV growth in 2022 given the current macro backdrop was very healthy given that environment. We've talked about the fact that the current macro as well as the FX movement would likely weigh on that guide for '24 and '26.

What I can tell you and what I'm excited about is to make sure you come to Financial Analyst Day in May, where we'll be really focused on the longer-term strategy as well as updating those relative numbers for you.

And so we don't guide for net new ACV, as you know, but we will give a lot of clarity as to what we're thinking for the mid- and longer term at FAD in just next month. So look forward to seeing you there..

Our next question comes from the line of Karl Keirstead from UBS..

Maybe this one for Gina. Gina, on the call 3 months ago, when you were asked about the shape of the CRPO trajectory throughout the year, you guided to a deceleration throughout calendar '23.

Just given that you outperformed in Q1, and conversely, the 2Q CRPO guide is a little bit below expectations, is that still the right framework to think about the second half?.

Yes. I mean, listen, Karl, I think that given the current macro, deceleration is very normal and expected, but you'll continue to see us really driving strong demand across the board. And so we absolutely think that demand remains robust and strong, and that we will continue to perform.

But yes, given the current macro vis-à-vis last year, we'll definitely see a little bit of deceleration throughout the year..

Our next question comes from the line of Raimo Lenschow from Barclays..

One quick question on the platform side. So that's the one product area that really kind of gained a relative share for you guys this quarter. What are you seeing in terms of adoption out there? Because there's obviously a lot of like system of record guys that have a platform. They have the stand-alone local guys that kind of want to be a platform.

And then you guys, you seem to be getting share.

Is that kind of a function of, in the downturn or in tougher times, you have a consolidation to the core strategic ventures that's playing out there? Or is this more a longer-term theme?.

Listen, we are, first of all, Raimo, super pleased with our creator workflow performance that has many aspects to it. But the key aspect to it is, of course, our low-code engine and our automation technologies.

This platform, as you described it, you're 100% right that there are many companies even with point solutions that market themselves as a platform company. We are truly a platform company. And when we sell creator workflows, that is sometimes used to extend our out-of-box applications.

And sometimes, as Bill mentioned, customers use to create many, many new applications to digitize their processes. That business in itself is a very nice business that has been growing significantly over the last 3 to 4 years, and I feel very optimistic on that.

And the reason I feel optimistic versus point solutions that you described or a system of record, because you cannot have all these applications being developed randomly without governance. Our key buyer tends to be IT organization. We serve IT organization. We have governance features on how you develop these apps.

Where does the data reside? And when we say that to our customers, they say, "We would rather use your platform to create new applications than a point solution or from a system of record that only has system of record data." And the second thing that's really working for our platform is we organically build our integration or automation engine that not only integrates with all the 600-, 700-plus applications out there in the world, but allows you to automate any processes via RPA, machine learning and many new AI technologies that we are going to deliver.

I am extremely optimistic and bullish on this aspect of our platform, AKA creator workforce..

Our final question comes from Michael Turits from KeyBanc..

Great quarter. You mentioned that you saw a strong demand across front, middle and back office, and you also mentioned that you saw a strong demand for customer workflows. So in a down market, one wonders about front office.

So I was wondering, how you were seeing that demand? And what specifically were the type of customer workflows that you were addressing and whether they were competitive or not with some of the systems of record?.

Yes. So Michael, first of all, I'll just address on customer workflow. Customer workflow, as Bill called it, was hot and shows a great quarter.

What we saw, Michael, what we shared last year at the Financial Analyst Day with you and the team is we have now created industry-specific solutions, whether that's for insurance, for state, local and federal government, whether it's for health care and life sciences.

All of those investments that we have made in the past few years are working really well in the context of customer service, and we are getting higher ASP. In addition, our field service management product is also resonating, and there are some of our competitors who have announced end of life or replatforming their field service management offering.

We are absolutely capturing that opportunity, being a single platform company to have field service management solution alongside of customer service management solution that is industry-specific.

I'm really proud of the product and engineering teams as well as our sales team on how they executed our horizontal and vertical capabilities for largest insurance companies, health care companies or state, local and federal government..

Thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation. You may now disconnect..