ServiceNow, Inc. (NOW) Q2 2019 Earnings Report, Transcript and Summary

Good evening. My name is Chris, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Q2 2019 ServiceNow Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Michael Scarpelli, Chief Financial Officer you may begin your conference.

Good afternoon, and thank you for joining us. On the call with me today is John Donahoe, our President and Chief Executive Officer. During today’s call, we will review our second quarter financial results and discuss our financial guidance for the third quarter and full-year 2019. We’d like to point out that the company reports non-GAAP results in addition to, and not as a substitute for or superior to, financial measures calculated in accordance with GAAP. All financial figures we will discuss today are non-GAAP, except from revenues and remaining performance obligation. To see the reconciliation between these non-GAAP and GAAP results, please refer to our press release filed earlier today, our investor presentation and for prior quarters, previously filed press releases, all of which are posted at investors.servicenow.com. We may make forward-looking statements on this conference call, such as those using the words may, will, expects, believes, or similar phrases to convey this information is not historical fact. These statements are subject to risks, uncertainties, and assumptions. Please refer to the press release and risk factors and documents filed with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K, and Quarterly Report on Form 10-Q for information on risks and uncertainties that may cause actual results to differ materially from those set forth in such forward-looking statements. I would now like to turn the call over to John.

Thanks, Mike. Good afternoon, everyone, and thank you for joining us on today’s call. We delivered another strong quarter continuing our focus on driving customer success and enabling digital transformation as a strategic partner to the world’s largest enterprises. We make work, work better for people, that’s our purpose. People want technology to make their life at work simple, easy and convenient, and that’s exactly what’s happened over the past decade in our lives at home. Cloud-based consumer apps and platforms have made their routine task of everyday life at home more simply the inconvenient, and now the same things happening at work. Digital transformation has become an essential business imperative for companies and governments all over the world, and C-Suite leaders are embracing cloud-based platforms as a critical component of their digital transformation strategies. That is creating an exciting moment, an inflection point where ServiceNow is well positioned to help make life at work more or like our lives at home, simple, easy and convenient. I’ll take more about this in a minute. But first, let’s take a look at the highlights in the quarter. In the second quarter, we closed 39 deals with ACV greater than $1 million. We now have 766 customers doing more than $1 million in business with us annually, which represents 33% growth year-over-year, and a renewal rate for the quarter continue to be strong at 98%. Our Q2 results continue to demonstrate our strong product portfolio, 17 of our top 20 deals involved three or more products. And we landed several large deals in the financial services, technology and automotive industry that involved multiple IT products. In fact, we signed one of our largest new customer deals ever with a major financial institution, which purchased most of our IT portfolio. We also had significant wins in CSM with three deals over $1 million. Our customer workflow products enhanced customer operations management. We help customers manage better their inbound contacts, identifying the root causes of customer issues, working to fix those issues to prevent future problems and automating self-help solutions that creates great experiences and better outcomes. Our Knowledge 2019 customer event in May was our biggest ever, and product innovation took center stage, which brings me back to the inflection point, I mentioned at the beginning of my remarks. Our Chief Product Officer, CJ Desai and his global product team continue to do an incredible job delivering product innovations to make work, work better for people. And that was evident at Knowledge, as we unveiled native mobile capabilities rolling out in our upcoming New York release. I’m personally very excited about our Now Mobile and mobile onboarding capabilities. We are delivering easy intuitive out of the box mobile capabilities that enable consumer like experiences across the enterprise, making like at work, more like lives at home. These are the kinds of experiences that employees expect and demand today. Now Mobile is designed to easily help employees get work done, solve problems and search for information on the go, and are Now Mobile Onboarding app is purpose built to do one thing very well, make it simple and easy for a new employee to get up to speed fast and get productive quickly. Mobile technology was at the epicenter of the digital transformation in our lives at home, and we believe mobile technology will be at the very center of great experiences at work. Our recently announced partnership with Microsoft illustrates our focus on accelerating digital transformation for enterprise and government customers. This partnership will enable us to more fully leverage and integrate our platform and products with Microsoft’s leading enterprise technology and capabilities. And using Microsoft Azure for workloads in highly regulated industries will help accelerate digital transformation for enterprise and public sector customers. With ServiceNow available through Azure government, U.S. government agencies will be able to leverage the compliance coverage across regulatory standards available through Azure. The U.S. federal government continues to look to ServiceNow as an important strategic partner as it modernizes its IT infrastructure and accelerates the use of modern technology to digitally transform how they operate. We’ll also be partnering with Microsoft in Australia followed by additional markets in the future. The Microsoft partnership is just one example of how we are enhancing our alliances and partner ecosystem. For example, we also announced in the quarter a strategic agreement with Deloitte. Deloitte and ServiceNow planned jointly develop, coordinate and bring the market new products, assets and solutions built on the Now Platform. This will help deliver seamless digital experiences across the enterprise, improve workflows and enhance productivity. Deloitte will also serve as the lead launch partner for a new financial operations management product, which we announced at Knowledge in May. Our first application is Finance Close Automation, a natural extension of ServiceNows’ workflows and platform capabilities. Finance Close Automation will help finance and accounting teams digitize their workflows to reduce finance close risk, improve team satisfaction and accelerate the finance close process. At Knowledge, we also announced a number of enhancements to our partner strategy. This includes more intuitive segmentation of our global partner portfolio, better differentiating levels of expertise for our partners and customers. We’re also implementing a more consistent, proactive and predictable joint go-to-market engagement framework with our partners. Following Knowledge, we held a very successful partner executive summit in early June with 16 of our top global partners. The shared energy and enthusiasm for the opportunities we have to jointly serve our customers was infectious. Creating a robust partner ecosystem is a priority for us and we’re off to a great start. David Parsons, who joined us last year is doing a terrific job of leading this effort. Before closing, I want to take a moment to express my deep thanks and appreciation to Mike. As previously announced, Mike is leaving ServiceNow in August. Mike has been with ServiceNow for eight years and most of you have gotten to know Mike very well during that time. And anyone who has worked with Mike knows what an exceptional CFO and customer focused leader he has been for our company. Mike joined ServiceNow in 2011, when the company had only 400 employees and was roughly $100 million in revenue. He helped take ServiceNow public in 2012 and has helped create the very foundation for our success. Mike has made many ServiceNow friends over the years, and we will definitely miss him. Personally, I am deeply appreciative for Mike’s partnership over the past 2.5 years. He’s been instrumental in our continued success and has helped set the stage for a next phase of growth. We have an active search underway for Mike successor. And Mike’s size 16 feet means his successor has big shoes to fill, literally and figuratively. But in all seriousness, there is strong interest in the role and we will move as quickly as possible to land the right candidate. Meanwhile Mike leads a great finance team in place. In summary, I’m pleased with our continued progress in our focus and commitment on our customers and our teams. It was gratifying to see our momentum recognized during the quarter, when Gartner gave us a positive vendor rating in its first ever review of our full company strategy and vision. We’re committed to making the world of work, work better for people, and we’re focused on building deep customer relationships to enable their digital transformations. Technology should make life at work as easy as our lives at home. That’s the future of work and we intend to help make it happen. Now, I’ll turn it back over to Mike.

Thank you, John. I appreciate those kind words. Now let’s dive into the highlights from the quarter. Subscription revenues for the first quarter were $781 million, representing 36% year-over-year adjusted growth including $17 million of foreign exchange headwind. Our subscription revenues were negatively impacted by a few self-hosted renewals shifting from Q2 to Q3. The largest of which was a federal customer we’re working with to consolidate contracts and expand their customer relationship with us in Q3. While the nature of early and late renewals were similar in Q2 versus previous quarters. The late renewals in Q2 are self-hosted contracts, which pushed more upfront revenue recognition into Q3, we are on track to close these contracts in Q3. Subscription billings were $817 million representing 34% year-over-year adjusted growth including $17 million of foreign exchange headwind and a $6 million duration tailwind respectively. Our remaining performance obligations or RPO ended the second quarter at approximately $5.4 billion representing 36% year-over-year adjusted growth, including $53 million of foreign exchange headwind. Current RPO, which represents RPO that will be recognized as revenue in the next 12 months was approximately $2.7 billion representing 37% year-over-year adjusted growth, including $26 million of foreign exchange headwind. Moving out to profitability, our Q2 operating margin was 18% driven by a shift of expenses that will be realized in Q3, and our free cash flow margin was 23%. With talent being a top company priority, we continue to invest in our people and attract top talent, we successfully on-boarded a record 700 plus net new employees in Q2. Now let’s turn to guidance for the third quarter and full-year 2019. For Q3, we expect subscription revenues between $830 million and $835 million representing 33% to 34% year-over-year adjusted growth including approximately $6 million of foreign exchange headwind. We expect subscription billings between $848 million and $853 million representing 27% to 28% year-over-year adjusted growth including approximately $6 million and $3 million of foreign exchange and duration headwind respectively. As a reminder, we expect billings to continue to become seasonally stronger in Q4, as it is our largest new bookings in renewals quarter each year. We expect a 23% operating margin and 195 million diluted weighted average shares outstanding. We are raising our full year 2019 subscription revenue guidance to between $3.245 billion and $3.255 billion representing 36% year-over-year adjusted growth, including approximately $44 million of foreign exchange headwind. We are also raising our full year 2019 subscription billings guidance to between $3.74 billion and $3.75 billion representing 32% year-over-year adjusted growth, including approximately $47 million and $17 million of foreign exchange and duration headwind respectively. We are maintaining full-year 2019 margin guidance as follows. Subscription gross margins of 86%, operating margin of 21% and free cash flow margin of 28%. For the year, we expect diluted weighted average shares outstanding of 194 million. Before we get to your questions, I’d like to say that I’m extremely proud of everything ServiceNow is accomplished over the last eight years, especially the finance team that we have built. During the interim period, before a new CFO joins ServiceNow, Fay Sien Goon, our Chief Accounting Officer, will assume the internal role of leading the finance organization; and Lisa Banks, our VP of Investor Relations and Treasury will be your primary contact along with the support of Dominic Phillips, our VP of FP&A and corporate development, we’ve all got to know over the last five years. It has been a pleasure working with so many great people at the company and all of you on this call. I’m very confident ServiceNow will achieve its long-term aspiration of $10 billion in revenue. With that operator, you can now open up the line for questions.

Thank you. [Operator Instructions] Your first question comes from the line of Jennifer Lowe with UBS. Your line is open.

Great. Thank you. First, I just want to start by Mike – saying Mike it’s been great getting to know you over these past few years since the IPO. And we look forward to bugging you at Snowflake shortly. So, thanks for all of your insights and we look forward to continuing the dialogue in your next role.

Thank you.

And on that note – I have a question on billings. Looking at the contracts that pushed out of Q2 into Q3, you mentioned revenue, but presumably that would have impacted billings as well. So, first is that correct. And then secondly, in the context of the broader billings guide, it looks like the full year increase was less than what we saw Q2 beat by, so sort of implicitly a guide down for H2 shouldn’t that push out potentially be an offset to that, I just wanted to understand moving pieces are a little better?

No. So your first question is, yes, those renewals that got pushed did negatively impact billings as well actually more than revenue, but that’s purely timing and that was already reflected in our billing guide for the full year as well remember there’s a number of things that go into billings, a big piece of billings is renewal. There were early renewals that happening Q2 as well too, which took from Q3, which really had no impact on the full year billings, because they were already being forecast in Q3, which got pulled into Q2. And as I said in my calls the normal push-outs and pull-ins of renewals was normal. The only difference was this quarter, a lot of the ones they’ve got pushed were self-hosted and it was principally with some of the government deals that we have.

Okay. Great. And you’d also mentioned that this was a record onboarding quarter, there was more than 700 employees added in Q2. And if I look at sort of the disclosures by – of headcount by role, it will take sales and marketing gross kind of accelerated in Q2 versus the trend line that that we’ve seen. So, I’m just curious, what’s going on there is it just normal fluctuations? Or is there a bit more of a push on the hiring front on sales or marketing and if so where are those heads going?

So, we had a very much of focus push on sales and marketing. Two things we’re focused on pipeline generation in the marketing organization business sales. As we’re getting into bigger and bigger accounts, we need to split territories and reallocate accounts to reps, so we can adequately cover those big accounts and that’s been part of our strategy for a while.

Great. Thank you.

Your next question comes from the line of Kirk Materne with Evercore. Your line is open. Your next question comes from the line of Matt Hedberg with RBC Capital Markets. Your line is open.

Hey, thanks guys. And I’ll offer Mike congrats as well. It’s been great working with you. John, you talked about the Azure partnership in your prepared remarks, which was super interesting. I guess, I’m wondering if you played a bit more detail on that maybe how should we think about the partnership in terms of sort of a dual go-to-market strategy between the two companies.

Well, Matt, this is actually started in some ways last year, when we announced an intent to work with Microsoft with particular focus on the federal business – U.S. federal business. And what that really led to was the realization that we could take advantage of the highest security clearance that Azure has in the federal business. There are certain data sovereignty and other security requirements we have what’s called IL-5 or FedRAMP High, which has enabled us to build a tremendous federal business. Microsoft has the absolute highest security clearance IL-6. And so, we just determined that it would have made sense to sort of us building that data center capacity for that market as well as for few other federal markets – for federal government markets that we take advantage of Azure and as part of that. So that we’re taking that into their capability and then that’s led to a broader conversation around how we can work together and combined our go-to-market efforts. Our product lines are very complementary with each other. In fact, we have over 20 integrations with Microsoft products that’s the largest of any partner, customers really look to us to work seamlessly together. And so, we’re coming together to try to make it easier for customers and easier for our go-to-market teams to support each other both in the federal market, but also, we think over time in the general marketplace. So, we’re excited about the partnership.

And then maybe just as a follow-up, and it sort of related. I guess, Mike, you call out some of the self-help federal deals in the quarter, it’s helpful to kind of think about the linearity here. But staying on the federal side, obviously it’s a huge opportunity it seems like Microsoft could be a multiyear catalyst maybe more next year in the year after. But could you talk about the federal opportunity just overall into what is a seasonally strong government quarter?

We expect Q3 will be a very strong federal quarter for us. But I can’t stress enough, it’s not just the U.S. federal government. We’re doing business with governments around the world and that’s a key part of that Azure strategy, a number of those governments around the world have data sovereignty requirements, so we don’t have data centers. And that’s the other thing that we’re going to leverage out of Azure as well.

All right. Thanks for that.

And I misspoke, we have IL-4, an IL-4. Yeah.

Your next question comes from the line of Chris Merwin with Goldman Sachs. Your line is open.

I appreciate you taking my questions. I want to start actually asking about ITSM Pro, and anything you can say about where you are with renewals for that? We saw ITSM revenue step up in the Q2 in terms of new ACV. I’m just curious at what percentage of your customers have gone through this renewal cycle? And then maybe what uptake you’ve seen so far there?

Yes. Remember, we just introduced ITSM Pro in the last kind of – it was in Q4 when we really came out with that. On average, we sell a three-year contract. So, we’re still very much in the early innings of the renewal cycle with our customers on that, but the uptick has been very good and we expect that will continue.

Okay. Maybe one quick follow-up on ITOM. I think, for new deals we saw customers taking a lot more ITOM this quarter relative to last. But in Q1, we saw that growth rate decelerates. Just curious, we should think about that picking up again in light of what we saw with new ACV?

So, as we said quite often as the ITOM deals tend to be big and lumpy. Yes, Q2 was a very strong ITOM quarter. And we do think with a lot of the investments we’ve been making in ITOM that will continue, but you will see some lumpiness there given the deal sizes.

Okay. Thank you.

I maybe just build on that just for a second, Chris, what I think, we’re beginning to see more and more is conversations with customers that’s not IT product by product by product, but rather it’s our IT suite or our IT portfolio. And the conversations going how do we help them go from legacy IT to modern IT. And so, you see more and more deals that have elements across our IT portfolio.

Okay. Great. Thank you.

Your next question comes from the line of Walter Pritchard from Citi. Your line is open.

Thank you. Question for John, and then a question for Mike. John, first on your end with the CFO transition here, I think, we’re all thinking one thing that the company’s benefited a lot from the transparency and financial disclosure and things like the slide deck given us lot of data here. I’m wondering as you go through the CFO search, how important is it to get someone that wants to maintain that level of transparency? And how do you think about that in terms of the way you manage the business?

Well, I think the top priority is to find a CFO that wants to hide everything. Walter, Mike is a great CFO, because he is very transparent. In my prior life, Bob Swan was a great CFO, because he was very transparent and shared data in a very consistent way. And so clearly that’s going to be a – I always consider that table stakes for a modern CFO and for the kind of people, we’re looking for. And so that I would call is kind of core capability. And then, we’re also looking for – and I’m also looking for someone that does, some of the other things Mike does, that maybe you don’t see. Mike is a very customer focused CFO; Mike is always talking to customers. He loves being with customers. And I think that’s really important in this business. You can’t be a CFO that just sits in the office. You got to be out there with customers.

The other thing I want to add to that too, Walter is you have to remember, there’s a team of people behind me that gives that transparency, and I don’t see any changes in those people. Therein, we will continue. I expect the company will continue with that same level of transparency.

Well, they are sitting right around the table. And they make you look good Mike, right. They make you and me both look good. Let me just add one more thing that we’re looking for, Walter that Mike does – it is Mike partners with our senior team to help both coach and mentor them, and help accelerate decision-making and help accelerate decisions. And so, I’m confident we’re going to get – Mike’s been an outstanding CFO, and I’m confident we’re going to get a – no one will replace his 16 feet shoe, but I’m confident we’ll get a strong successor. And we’re going to take our time to make sure it’s a good one and as Mike said between Lisa and Dom and Fay Sien, so that in the entire financing, we have a very strong team that will continue the high level performance in the interim.

Got it. Great. Thanks for the transparent answer to that. And then on, I guess for Mike, as we look at billings in Q3, I think one thing your businesses has played out a little bit different from a seasonal perspective this year than in past years and I think last few years, you’ve had a stronger uptick from Q2 to Q3 in terms of billings. I’m wondering, if you could walk us through how this year is different, and especially what you’re thinking about in terms of the strength in the federal business in Q3 given how strong that was the driver last year?

So, first of all, I think the federal business will be extremely strong for us. You have to remember, I think a lot of those Federal deals will actually have October 1 start date, that will have no impact on your billings, because those signed contracts that will start in the next fiscal year, which is October 1 that federal gross down that we’ve talked to you about in the past. And what I would say to is, I think people need to start really focusing on RPO, and especially when you look at our current RPO growth rate of 37% year-over-year. We’re very happy with how that has grown. And I just think as we’ve been talking about for well Q4, it’s just becoming such a seasonally strong order for us, because many of our contracts that we signed during the year, they will sign shorter than one year to quote especially the upsell, it will turn to get an annual billing cycle and a lot of those billings actually happen on December 31, even though the initial deal may have happened throughout the year.

Got it. Thank you.

Your next question comes from the line of Sarah Hindlian with Macquarie. Your line is open.

All right, great. Mike, few CFO’s will be as sorely missed and I hope this is goodbye for now, but certainly not forever. So, let me ask you, Mike. As you are leaving, how do you feel about the state of the company? And what’s been the most surprising change today versus eight years ago when you first joined? And I’ll buy you a second there to think of an answer for that one. I will – I do have a follow-up for you as well John.

I feel really good about the company, the way that it is set up from a product perspective, a go-to market. Obviously, we’ll continue to evolve, but the company today is very different from when the company I joined in 2011. I have more people in my finance organization underneath me than the whole company had at that time. So clearly, there’s been a lot of change. But I think with John coming on board, you got to remember the main purpose, John was brought on board over two years ago, was really to scale the company to that next level, and I think, he has been doing a great job. As we’ve shown you, we just had record hiring. So, I feel very, very good about where I’m leaving the company right now. And to the question before, you got to remember, I’m leaving, because I want to go back to a small company and build from scratch.

Thank you, Mike. A follow-up for you, John. I think one thing that stands out about ServiceNow is that you continue to be a single platform with a single code base and data model across all of your products where perhaps it would be fair to say that other scaled SaaS vendors have faltered. When I think about you and your ability to deliver ongoing product innovations to your customer base, how important is that single platform in code base? And how sustainable is it also?

Well, I think it’s one of the clear strengths of our model and of our platform, when customers say that our platform is easy to build on, it’s extensible, it’s fast. That’s because of the discipline the company’s always had to make it one platform. Every time we do an acquisition of technology tuck-in, we rebuild it into the code whether that’s machine learning or chatbot or other functionality. And I think that will continue to be the core of our core over time. And a lot of organic innovation will be off our core in our platform, but I also think over time, this is not a religion. And so, I could see on our path to $10 billion, we may do an acquisition or even a couple that would add a complementary platform. Nothing specific in mind, I’m making a more general statement, but it’s, and then we just want to make sure that the two platforms can connect interchangeably. So, it won’t be an impediment from continuing to build and scale our organization, and I will tell you customers say to us that they are – it’s not infrequent they say, hey, well, we’d really love it if you guys are also supporting us in this area. And often that would be with a complementary platform. So, I think most of our organic growth will be on the current platform, but over time over a three, five year time horizon, we could – you could easily see us adding another platform or two through M&A in a very complementary way.

That makes sense, great. Thank you so much, John. Appreciate it.

Your next question comes from the line of Keith Weiss with Morgan Stanley. Your line is open.

Thank you for taking the questions guys. And very nice quarter. I wanted to talk to you, kind of two elements that I think we’re talking to a little bit less in just kind of recent periods, just to check in and see how they’re doing. One being new customer growth, we see the metrics on sort of deal – sort of customers getting to that $1 million point. I just wanted to check in and see sort of how like the new customer pipeline is going and getting kind of new customers in the door for the broader platform, number one. Number two, just checking in on the commercial business doing really well, growing really big customers. What’s the competitive environment, sort of the outlook like in the commercial business and how you guys been fairing on that side of the equation?

So, the commercial business continues to do very well for us, but as we’ve said many times, most of our revenue comes from the larger enterprise business. And so clearly, we put more resources and dollars in the enterprise, because it’s 75% plus of our business, but the commercial is very key, especially that’s where you tend to keep the competition out on the bottom end of the market from moving up into the enterprise. And then new customer adds, we continue every quarter to add customers. We’re not disclosing customers on a quarterly basis. We – it was consistent with what we did last year, but we will disclose that annually. But as we said to, the bulk of our net new ACV in any quarter is coming from our existing installed base of customers. We generally land customers small, but then they quickly grow and you see that in a cohort analysis and there has been no change in that at all, those customers you can see we filed the presentation they continue to grow. And the second part of your question in terms of what we’re seeing in competition. It’s really no change down there. We continue to see, there is a [latsy] [ph], I know a lot of investors talk about [latsy] [ph] and they tend to be in the lower end of the market. Cherwell tends to be in the lower end of the market. They do try to get up into the smaller enterprise. But we – there’s really been no change there. Obviously, that’s in the core IT and the CSM is probably the most competitive market out there, but it’s the biggest market opportunity out there for us.

And some of our most, I think, interesting early CSM wins were in commercial. You see, I mean, what’s fascinating is or some smaller companies, they are driving their entire business off ServiceNow. So, it’s also playing a role. Yes, it’s participated in that market, but it also helps speed our innovation pipeline, because we get to see a COO of a 4,000 person organization drive a lot of their operations, the CSM employee experience and IT off the Now Platform. And so, I almost think there is a little bit of a product development through a product innovation input that we get out of the commercial business.

Excellent. Great job on the quarter, guys.

Thank you.

Your next question comes from the line of Derrick Wood with Cowen and Company. Your line is open.

Great, thanks. Last quarter, you guys mentioned a bit softer activity out of Europe, and I think in general, there are more investor questions about the macro and how it’s impacting demand. So, I’m just wondering, if you could shed some light on how you guys saw activity progressed from Q1 to Q2 in Europe? And how you’re feeling about demand trends for the rest of the year?

What I would say is, we had a very aggressive plan for the year and Europe was slightly behind its plan for the first half, but I kind of see it making up that in the second half. But overall as a company, we’re kind of on track to where we need to be. I don’t think, there is nothing that indicates that macro with the concern, when I’m hearing that from our customers. I’m not seeing it in terms of, usually when you have the macro concerns, customer start to slowdown on their payments to us and stuff, we’re not seeing that at all in our cash flow. So, I’m just not seeing it from my perspective in the business now.

Okay. And John, I think you mentioned that you’re working on building a new framework with your channel and with your partner engagement process. Can you just give us a little more detail around some of the changes in the mechanics that you’re working on right now with your partners?

Well, Derrick, to be honest, it’s to some of the blocking and tackling. But here’s what’s happening for our customer base and certainly to our largest customers. For them to get maximum value out of the ServiceNow platform, they need to reengineer their processes and redesign, and that’s how you get the maximum impact of automating your processes, right automating workflows. And so, they are partnering with partners at customers is critically important. It’s not just implementation work, it’s often more value-added work around process redesign, change management, or culture change. And so, we’re now being far more strategic in our segmentation of our partners, because we work with the very largest ones, the Accentures, the Deloittes, the KPMGs, the DXCs, the IBMs as well as the next year as well, and we’re just doing fundamental blocking and tackling. Many of these partners say that we are the fastest growing practice in their organization. We are now Dave Parsons has brought this mindset of let’s build billion dollar plans with our top partners? How do we get to $1 billion over the – $1 billion for them over the next three to four years and to enforce that, that’s the focus with different partners on different industries, making sure that our go-to-market teams are aligned with their local go-to-market partners. And that systematic – and we’re jointly innovating with them. So that systematic blocking and tackling, I can tell you is just even in the 2.5 years, I’ve been here, we’re more coordinated and I think it’s more central to both us and them. I was on the phone this morning with the Vice Chair, Vice Chair of one of the Top 5, he’s personally sponsoring the search Now relationship and alliance and partnership because he says, we view it as very strategic to our success and client success, and I said we feel the same way. And so, David Parsons and his alliance team as I said in my remarks just a nice job of allowing us to be more focused, more strategic and more disciplined on how we’re going after it. We’re also trying to grow new partners. One of the biggest issues we have is that there’s a shortage of trained certified ServiceNow professional resources in the market. So, we’ve been doing things like going to universities and trying to grow the number of the pool of trained and certified ServiceNow professionals but then enter these partners and serve our customers. So that’s an important part of our success and I think over time we’ll also get some go-to-market benefits as well.

Your next question comes from the line of Brad Zelnick with Crédit Suisse.

Congrats as well. I’ve got one question for John and a follow-up for Mike. John, can you maybe expand a bit about the record megadeal you sign in financial services this quarter? What was the evolution of that transaction? And how are you being deployed at this institution and maybe even if you could talk about the pipeline for such megadeal’s in the future?

I think five years, Mike?

It’s [indiscernible] years.

And I mean that in a thoughtful way that in many cases what’s beginning to happen is clients that are not yet customers, may be a remedy customers or others, they see when their renewals was going to be and they begin to reach out to us a year, two years sometimes three years before that’s coming. So, we then worked with them so that when that major renewable point for them hits, they migrate over to ServiceNow and we’re prepared to do so. And now that’s the case here. I will say I was on our call with this organization’s CIO and I think it was 300 to 400 of their organization and literally obligate this has been planned for 6 to 12 months, the deal was signed in the quarter and they are mobilizing for a major transformation based on ServiceNow. And so that literally within 30 days of the deal being signed, they’re moving. And I think we’re seeing that with more and more of our new customers we’re entering in a more strategic way. It’s often they’re making investment in ServiceNow Platform not just a single product. And a lot of our free sale conversation is around implementation approach. It’s not just, buy this great product, it’s how can I be sure we’re going to get the business value, how can ITapp ServiceNow best practices? How can I make sure we’re working with your best third-party partners? But by the way, on this call, I talked about third party partners, it was us, the partner and the client all on same call, focus and outcomes that they wanted to achieve. And so, the conversations left around product, Product A to Product b, it’s more on business outcome and business outcome be that they want to achieve. And that I think consistent with us becoming more of a strategic business partner with our customers, which I think is the only way you build sustainable growth you have to continue to innovate new products but the more customers are confident we deliver strong return on investment and help them achieve their business outcomes, the more sustainable our growth will be and the more pricing will hold up over time.

It’s clearly working. And for Mike, Mike, as we retrain our sites to really hone in on RPO this quarter current RPO really strong up in adjusted 37%, I know it’s not a metric that you’re going to specifically guide us to quarterly, but how should we think about it going forward?

Not going to guide it for the rest of the year. We’re guiding billings for this year. I do expect that some companies have transitioned to RPO next year. That’s something the new CFO along with the team, I would encourage to consider doing that. We thought about doing this year but we want to 1 year under our belt before we started doing that.

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

Mike, all the best. Actually, can I stay on that topic because and since your last call may be ask more theoretical question. If I use current RPO to calculate bookings number and bookings were on that calculation 41% so even like really, really strong. Can you just kind of conceptually, I mean, that should be no cleaner number in CRE that’s why we kind of on looking at that and at your scale grow 41% bookings is like a good number can you just kind of give us puts and takes there a little bit?

Yes. Well, you got to remember a big chunk of that growth is the renewals we assigned possible and renal wells getting we mentioned to be before we crossover renewals number and an animal business bigger than new ACV from customers. So, I don’t know what else to tell you, it is what it is very nicely and we did very closely to what you said that, that bookings growth.

Maybe one follow-up you’re going back to earlier conversation on Q4 getting bigger. So, it seems like it’s the same kind of co terming we see on sales force et cetera work you first get bigger and you get blamed basically, every year like a compounding effect. Are you kind of thinking breaking that out at some point? With the team, when you’re talking to the team?

What do you break out?

Like the compounding effect that we get there?

Well, I’m not going to be here. It’s not company that but I think that’s a good question for Lisa and the next CFO in December.

Your next question comes from the line of Tom Roderick with Stifel.

Mike, I’ll let the sentiments here and say congratulations on your next gig. It’s been great working with you. So, a lot of the metrics in the presentation that I wanted to call out sort of follow-up and see if I get better looks like even despite the currency headwinds Europe was up a tick on a percentage of revenue basis. So, looks like Europe is accelerating on a reported basis even better than that on constant currency. Can you just talk a little bit about what you’re seeing in EMEA and speak to whatever drivers behind the strength you are seeing there?

I’ll step back because I think quarter-to-quarter is a little less in any given region like Q4 was really strong in Europe because got pulled in. Q1 as Mike said was a little better. I’ve been in couple of times this year and the fundamentals are very consistent where large multinationals and there are a lot of great large multinationals across Europe are embracing cloud, and we are increasingly a strategic partner in those relationships. One of the markets that we’re particularly focused on and excited about is Germany. Germany Was relative to other markets a little later in embracing cloud. German multinationals, the German government had more questions are around security of cloud, privacy of data and things. Now the German market is embracing cloud and rate and accelerating rate and so we think given the size of that market and still younger in that cloud adoption curve, it’s a real opportunity and an area of investment opportunity for us. The German business at a very strong Q2 and we are going to continue to invest in Germany and we think it offers a large opportunity. So I would say there was nothing discontinuous and frankly, any of the quarters over the last 4 or 5 quarters with Europe is strong and strong demand and our job is to build high-quality relationships with the leading enterprise companies and as Mike said earlier, governments, we’ve been having some of the European governments saying we want to do business with you but you got to have global data sovereignty or you got to have complied with local data regulations and that’s where the Azure partnership potentially future partnerships like that will help us accelerate our ability to serve that part of the European business.

Outstanding. Really helpful. Then quick follow-up for you, sort of widely related to the topic of Germany. But the financial product very interesting insofar as it’s a little bit more of a foray into the back-office and touching ERP than you really done before. Can you talk about some of the important partnerships and technology integrations that we have got to be thinking about with that product? And then who do you hope to compete more in that market for financial cost management?

Well, given that Mike’s team that built it for our or financial close, how much as they relate to the integration that I can talk about in the partnership?

Yes, so what I would say is we work with SAP and Oracle and the integrations and those are the two main ones that you have to be integrating. We actually closed our first, we got our first PO and I’ll tell you it’s a very nicely size deal. We’ve actually the largest first PO for alternate your business unit with them ServiceNow. And so that’s just how do the potential of this. And in terms of who will compete, arguably I don’t really want to get who cool we compete with right of the products more in the market out there but most of you know from conversations before, I don’t really want to name names companies but it’s not the ERP people, it’s more around workflow associated with the financial close process. But in general, we’re going after the white spaces being served in e-mail and Excel spreadsheets today is what we’re doing to offer a much better visibility into the financial close process for the office of the CFO and then I’ll let you by then.

It’s been interesting, I’ll just echo what Mike said, in our product strategy meetings the last couple of years Mike has continually said, there are a lot of finance processes that are highly manual but not of the ERP providers focus on, there’s really no one else is focusing on and finance close the books classes my spreadsheet, e-mail and other things in our platform is very well suited to help addressing those. And so, this was the first of what I think will be several we hope over time. We’re also very I think cognizant and humble that we’re not going to do all internally go-to-market calling on the CFO. That’s why partnering with Deloitte was our early partner, partnering with really the ERP providers, partnering with others and that we view this as a way to piggyback on others that are serving in that market and in many ways our product is up. I almost consider it a feature on top of their products. And we think there is a good opportunity there over time but we’ll see, still early days.

Your next question comes from the line of Sterling Auty with JPMorgan.

Mike, I just want to circle back to billings. Apologize for that but just help me connect the dots. So, I think in the quarter the 8 17 in the presentation you outlined 12 million of outperformance but in the full year guide, 5 million of outperformance is responsible for the increase. You talked about the deal, the renewals shifting, which I would have thought would have benefited the second half. So, what’s the puts and takes, how do we get from the outperformance of 12 million to just to 5 million of outperformance in the full year?

Well, because most of renewals and that where the outperformance was early renewals that got pulled from Q3 or Q4 into Q2 and there were deals as I mentioned that got pushed from Q2 into Q3. That’s all about one where those deals doing. By the way, sometimes we do deals with people we could bring early renewal in more than a year in advance. If a customer is doing a much bigger deal where they want to just review the whole contract and renew early on. So, each deal is very different but that’s the way the math works. We’re not – it’s not going beyond that it’s really only a $5 million impact that flows through for the year. That was the stuff that was not in there. That’s what ACV should think about.

All right, got it. And then just one follow-up. Acknowledge, there’s the discussion of the vertical kind of a vertical strategy. Obviously, been so successful in government and then you kind of outlined some other verticals including the financial services that you’re looking to go after, how much of that is going to be people-focused in terms of just the go-to-market strategy versus the development of vertical-specific products and to the extent that it is, the technology and product focus, where are we on that road map to roll out those other vertical industry solutions?

I mean, I’d say, strongly, by and large, it is go-to-market than it is product. Fundamentally, I think one of the great strengths of our platform is it’s largely horizontal. IT helped this is the same as in the bank as it is in the pharma company as it is in a as it is in a retailer and a lot of what we do is more consistent than different. Now the one place that there is product implications are around security, compliance and regulatory. And so, whether it’s banking or health care or federal government, there we have to comply with industry-based regulations and standards. But the real value in our vertical motion is being able to speak the language of the industry and relay it what we do to business value in that industry. And so I think if you look at what we do in federal, our federal sales team, I spent a lot of time in D.C, our federal sales team speak the language of our customer and that really comes to whether it’s calling in the military services or the veteran’s administration, the agencies our teams speaks the language and that’s a certain amount of credibility, financial services, our teams speaks the language of banks or insurance companies. And that gives greater sense of confidence and I think more targeted focus on the business value you heard to earlier. So, we’ll continue to layer on thoughtfully, additional industry verticals, but it’s – I’d say, I don’t know, Mike, I said 80% go-to-market, 20% product?

Correct. I think we’re very much in the early innings on the product side.

Right. And [indiscernible] example that’s one that’s very interesting based on the moment.

Your final question comes from the line of Samad Samana from Jefferies.

Mike, if I look to the slide deck, it looks like the average contract term jumped quite a bit for new customers in the second quarter and that the average for renewals has also been moving up. I was wondering is there any particular that’s driving this trend for the expansion deals and then the trend that happened for 2Q for new customers and then I have a follow-up to that?

So, the new customer was really driven by that one record new financial institution that signed a long-term contract with us. That’s what drove that. And the renewals as we’ve been saying for, we’re becoming more and more strategic with customers that hasn’t really changed that much but people keep on renewing average more than two years. I would expect that in Q3, that new customer length will be shorter and the reason being is because of the federal government. Just want to remind you guys that the federal government typically do 1-year deals, they don’t do multiyear deals.

Okay. That’s helpful. And I’m just going to ask how the average contract term, how we should think about maybe that onetime impact on the change in RPO in 2Q, and made adjusting for that, what the RPO growth will look like?

So, first of all, that average term light really does not impact current RPO. That’s really current RPO because that’s the next 12 months. That’s going to total RPO, the contract length would impact more.

Yes, so I was wondering if you give us the adjusted growth or prevent meaningful enough payback of the overall average?

Well, I’m only giving you the current RPO growth rate because I don’t need to adjust its 12 months and 12 months. So, I haven’t – we haven’t calculated that adjusted for the total RPO. And I don’t think that’s something we will do.

Congrats on the tenure and the next move.

Okay, as a reminder, a replay of this call will be available at the webcast in the Investor Relations Section of our webcast. Thank you for joining us today.

This concludes today’s conference call. You may now disconnect.