Excellent. Thank you, everyone, for joining us this afternoon. I'm Keith Weiss. I run the U.S. software research franchise here at Morgan Stanley, and very pleased to have with us from ServiceNow, CFO Gina Mastantuono. Gina, thank you for joining us.
Thanks, Keith. Great to be here.
Excellent. A brief research disclosure for important disclosures: please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales reps. I'm sure ServiceNow has lots of disclosures on your IR website as well.
Sure, exactly.
Excellent. So, Gina, thank you for coming back to the TMT Conference. You were here two years ago, which was shortly after you had become CFO at ServiceNow. And at that time, you and Bill were talking about this vision of creating the 21st century or the defining 21st century software company. Maybe just to start out, can you talk to us about sort of the progress you guys have made on that vision thus far? And has that evolved at all, your thought of what's going to make that defining software company?
Yeah, thanks for the question. So actually, Bill and I just both had a four-year anniversary when we were here first. We were here a couple of years ago again, but absolutely excited to talk about the strategy of becoming the defining enterprise software company of the 21st century. I'd say that the strategy has evolved, but it has been very consistent. And if you think about what's changed in the last couple of years, a few things: we just guided to over $10 billion in revenue, which was a big goal of ours when we started four years ago. Excited about that. We have both Customer and Creator Workflows that recently crossed the $1 billion in ACV threshold. So now we have three workflows over $1 billion.
We have over 12 products with $250 million or more in ACV, which really demonstrates the breadth of the product portfolio. If you think about what the strategy is then, first and foremost, it's about innovation, right, and continuing that flywheel of innovation across the platform and across the products, as well as really leaning into our go-to-market strategy, which has been all around building bigger deals, bigger customers, expanding with our existing customers. More than 85% of our net new ACV is now with existing customers, which shows you, I think, the resilience of the platform, how much the customers are really gaining and benefiting, as well as 98%, 99% renewal rates. Talks about the stickiness of that platform. So I think a lot has evolved in two years, but we're hitting those milestones. We're hitting those goals.
I couldn't be prouder of the 23,000 employees who work tirelessly every day to really make sure that they are leaning into helping our customers in every single thing that they're trying to accomplish on the technology roadmaps.
Right. And I guess you could even argue that over the past four years, the industry's kind of come to you, right, in terms of that single platform, having all of the data in one platform, having the broader workflows to automate. Those are what people are putting forward as the key factors in a valuable generative AI solution. You have to have all of the data. You have to have a deep data set. You have to have broad connected workflows. ServiceNow has been bringing that to the table since inception, basically.
That's exactly right. So it's just more of the same strategy. We get the question about AI a lot. We've been building continuous innovation into that platform. It's one platform, one data model, one architecture that holds all of the data that really allows us to have enormous quantities of information that really drives productivity, efficiencies. It's one of the reasons why I think we've been able to be first to market in our AI solutions is because we have been innovating and investing behind those areas for years and years. We had our first AI SKUs launched in 2018. So this is an area that we've been fundamentally driving. It's about innovation first, innovation first, innovation first.
Got it. So you mentioned the $10 billion target you guys had put up a while ago, right? I think it was four years ago. No, two years ago at Analyst Day, that you guys first put out the $10 billion target. And this year you guided for actually above that. You're talking $10.6 billion, roughly, in terms of subscription revenues. There's been some difficult spending environment between when you first gave that target and now. And a lot of your peers I mean, we were talking with Carl from Workday. They had to pull back on their targets, right? Snowflake last week had to pull back on their targets. You guys didn't.
You guys actually exceeded your targets. What's the difference there? What is it that's enabled ServiceNow to have that durability of growth through this difficult spending period that other enterprise software vendors have not been able to enjoy?
Well, I think first of all, it's the breadth of the product portfolio, right? And so because we're invested in IT, Customer, HR, as well as Creator, there gives a broader bandwidth for customers to play in. I think the other thing is, once customers were trenched and looked at their spending and prioritized where they were going to spend their money, very, very clearly it came out that they are looking for platforms that they're able to lean into strategically and not have so many point solutions. And because our platform really can go so broad across the enterprise, I think it's enabled us to continue to see demand that remains strong. And so if you think about IT and that's not just ITSM or core, but you have ITAM, you have Security and Risk. And we keep innovating in those products.
Companies are really leaning into that platform consolidation during this time. I think what you're seeing also is ServiceNow is a deflationary force. Everyone is looking at productivity and efficiencies and cost savings. The ServiceNow platform can really help enable that. So I think the value proposition for our customers is pretty strong across the enterprise and across the platform, which is allowing us to have continued success despite still a very uncertain macro environment.
Got it. So it sounds like for the past 18 months, we've been focusing a lot on cloud optimizations. And customers are looking to save money. But it sounds like ServiceNow is part of that answer rather than part of the problem in terms of where are you going to find additional dollars.
That's exactly what we're seeing in our customer base. I get the question a lot about what does 2024 IT spending look like? It's certainly increasing. We see that. Gartner's talking about increased spending across the board, especially in software. So we're absolutely benefiting from, I think, that reprioritization and really where folks are looking to optimize and put money into areas that are really going to drive that efficiency and productivity across the enterprise.
Got it. So it's always like we have to look at it through two lenses, right? How is ServiceNow doing in the environment, and then how is the environment doing? It sounds like you are seeing at least some loosening up of the overall environment. So how would you characterize 2024 versus 2023, just from not how ServiceNow is doing, but just how your customers are doing?
Yeah, it's a great question. We were talking backstage about how much time I spend with customers. It's growing exponentially these days, which is a great thing. It means that customers are really leaning into their digital strategies. CFOs are leaning into those digital strategies. But the fact that CFOs are in those conversations more and more does tell you something about the environment, right, that cost is still a key variable and that folks are really cost-conscious about where they're making their technology investments. So they're really looking for quick time to value, quick ROI. I think that's also why ServiceNow has been performing so well. So I would say cautiously optimistic. It's still super early, Keith, in what 2024 holds. But it definitely feels a little bit better than same time last year, for sure.
Got it, got it. One of the things that's been I think one of the defining parts of the ServiceNow story is the ability to find kind of those next acts to expand, sort of what solutions you guys are building on top of the portfolio, whether it's going from ITSM to IT Operations Management to Customer Service Management to HR Management. Have you found that in this spending environment, are certain parts of the portfolio hitting better than others? And is there particular areas of strength within that portfolio, given what you're seeing in terms of customer behavior?
Yeah, well, the first thing I'll tell you is one of the reasons when I got this question the other day in a different environment, but I think one of the reasons why we've been so successful in the investments kind of cross-platform was because we went where the customers were pulling, right? The customers were saying, hey, this platform is great for IT, but you could use it in HR if you did this. This platform is great for customers. And so we've been really leaning into customer needs. And we'll continue to do that as we think about next-generation products. But in this environment, I would say we're seeing success really cross-product and cross-platform. But I'll call out a couple of specifics. Customer had a phenomenal Q4. We talked about it crossing $1 billion in ACV threshold, which is a milestone for us that we're really excited about.
We're continuing to see our industry vertical solutions, which are all within the customer purview, doing extremely well as well. Field Service Management, where our customers are using the platform to really help drive work in the field, is resonating extremely well. Creator also continues to do well. Risk and Security in this environment, again, another area of great success. I'll even call out HR, right? With all of the focus on productivity and efficiencies, employee engagement is as important and relevant as ever and the efficiency of the employee today. So HRSD has been doing extremely well as well. But our core remains strong. We talked about our Pro adoption continues to grow. Pro Plus was just launched. I'm sure we're going to be talking about AI in a minute or two, no doubt. But that one quarter in was the most successful product launch that we've had.
And so it's really been resonating across the board, especially if you look at trends over a multi-quarter as opposed to just one quarter.
Got it . This is going a little bit off piece, but just a question that I've been curious about. The buyer for the Creator Workflows, is that fundamentally different than the buyer is going to go out for a particular solution, like the CFO who's looking for GRC? Is it a different type of buyer, or is Creator just like an adjunct to what everybody else is doing?
It's an adjunct to what everyone else is doing. So if you think about Creator, it's about building applications. So that CFO who's interested in GRC, our risk product, by the way, those finance folks are really looking at modernization of their systems. I have a finance team that's leaning into citizen development like no one else. And they're building applications on the ServiceNow platform each and every day to really automate their routine and mundane processes. Not only do you gain optimization and efficiency, but now I have finance teams that are learning a new skill set and that are super engaged and really excited to be part of the ServiceNow finance org. So it's an adjunct, really. Anyone who's buying the platform can lean into Creator to build more applications to help drive more productivity.
Got it. And, then sort of round trip, you talked about we go where customers are pulling us. Does that give you some kind of signal of, like, here's the type of solutions that they're building out? And I'm sure partners are working with them to build out those solutions on Creator Workflows. And that could potentially become packaged applications that ServiceNow brings over time.
Absolutely. And you've seen us do that in many instances with many of our partners.
Got it, got it, got it. All right, so I made it a full 13 minutes before we talked about generative AI.
Well done, Keith. Well done.
Excellent. So a big area of focus last year coming into this year. I think what investors are really looking for at this conference versus last conference. I think last conference of last year was more of a proving out. Is this a real thing, right? Is this something that we should be excited about? And I'll ask you that question. But I think the answer is yes for most customers. I think what we're trying to understand now is the timing, right? How should we be thinking about where we are in these adoption cycles and how fast they're likely to progress? Because while exciting innovation, this is still enterprise software. There's still change management. There's still security concerns. So maybe if we could talk about sort of one, sort of the product you guys are bringing to the equation.
And two, what's the initial customer reception to that product?
Yeah, I mean, I think we've proven out that AI is real. It's coming to the enterprise. It's coming fast. Good question on how fast. I'll talk about that a little bit in a minute. But as we think about it from the Now Platform, it's building human-like conversational interfaces to really drive much stronger productivity and efficiency, and getting to results quicker. So it's super exciting. We have beta- tested it internally. We've got about 20 use cases using it internally ourselves and are really seeing strong productivity metrics. Our customers, obviously, I talked about we launched our first AI SKUs on September 30th. So one quarter in, again, the fastest growing of the new products. But it's still new. It's still small. And a $10 billion base. When is it going to start to make a meaningful contribution?
I know that's what everyone keeps asking. What I keep saying is, we will keep you updated as to the progress. We're seeing very good traction. Our customers are really leaning in. I think Gartner's talking about $3 trillion being spent on AI over the next three years. And so I absolutely think it's going to make a meaningful contribution over the next two to three years. How fast that adoption curve is going to be, I think it's one quarter. And it's a little early to tell. But I do think if I go back, and by the way, most of what we're doing with our Gen AI SKUs, we're mimicking what we did with our initial AI SKUs and our Pro adoption back in 2018. And so if you think about that Pro adoption versus the Pro Plus adoption, we're not building in accelerated adoption curves just yet.
But if you think about the excitement, the understanding of the productivity gains that Gen AI can drive in 2024 versus what we knew and understood and what customers knew and understood back in 2018, there's an argument for sure that that adoption curve will be faster. Exactly how fast, given what you talked about, change management, implementation roadmaps. The great thing is that people who are already on our Pro SKU, it's pretty easy lift to upgrade to Pro Plus. Those who are on Standard, the heavy lifting is to go to Pro. I actually think this will be a flywheel to get Standard onto Pro as well as people going to the AI SKUs. We'll keep you updated as to progression. But one quarter out, it's a bit too early to say. But I think that the top line opportunity is clear.
Got it. And then in terms of the early customer reception, any parts of that Pro Plus portfolio, any areas that customers are coming back and saying, hey, listen, this is where we're really seeing the big productivity gains?
So we launched our AI SKUs across the product portfolio IT, HRSD, and Creator. The one quarter out, we saw a pretty balanced adoption or sale cycle. I'll give you a couple of examples, though. Siemens, for example, is using our AI SKUs. Their plan is to really automate the HR experience and really drive productivity for those HR agents to resolve issues with employees. We've got another very large American fast food chain that's planning on using it to really drive all end-to-end employee engagement with AI. Then we've got another U.S.-based industrial company that's using it for low-code and no-code to build, to test the code to really make their developers more effective and efficient. So it's really across the platform. We're using it internally across the board. So we're actually using it not only in finance and in IT.
IT, obviously, is a big area where we're using it. But in our sales organization, SalesA ssist. So how do we make one place for our sales associates to go where everything about their customer is on their phone? They can understand when the last conversation was, what their pipe is, what the next best activity is, really having an end-to-end solution for sales to help drive productivity. I love that because it's efficient. And by the way, if they're spending less time with admin, they're spending more time with customers.
OK, got it. I want to talk a little bit about pricing. Correct me for a moment. The list price on the Pro Plus SKUs is a 60% uplift on the Pro SKUs. We've had this discussion before. I think it's an interesting topic of, how does ServiceNow think about setting that price? What are the dynamics that you're thinking about in terms of, like, that's the right level of uplift for this type of productivity gains?
Yeah, so we do the math, right? And again, we did it very similar to how we priced our Pro SKUs. So when we launched Pro back in 2018, we had a 50% price uplift on the list price. And we did the same exact math, right? We looked at the productivity expectations, the efficiencies by task by task. We looked at employee salaries. And what we do is we give 90% of that value to customers. And we keep 10%. That value equation seems to work extremely well with customers. And based on our initial kind of one quarter out, feels like we're in the right place.
Got it. So you're automating the task for somebody in IT Operations Management. They make $100,000 a year. You're finding 30% productivity gains. There's $30,000 in value. You'll take 10% of that. They'll get the 90% value.
That's rough math. Now, I don't think that 30% of one person's job is going away immediately, right? It's specific tasks, right? And so how does that math work? How many of the tasks that they do are going to be automated? Now, I feel really strongly as well that it doesn't mean I think companies are going to really have to lean into reskilling some employees because it does mean that they have more time. I don't think that full jobs go away. But how do we make them much more productive and really drive reskilling in areas where I think there's more value add?
Ok. And it's a good segue into what I think is one of the longer-term key investor debates that software investors have been having, which is fundamentally about CS-based models. And it's fundamentally asking the question, are we optimizing away what we're pricing to, right? So if you think about you guys sell to the IT help desk, right? And if everyone in the IT help desk is going to become 20% more productive, are we going to have 20% less IT help desk reps or take it into infinity, right? And maybe it's 30% or 40% or 50% over time. Is that an issue that we're pricing against something we're trying to minimize on a go-forward basis? So I guess the question to you is, are we going to need to be flexible with pricing on a go-forward basis?
Or could we just take price higher and higher over time?
I think it depends, right? So a couple of things there. So number one, we saw productivity with our Pro SKUs. And we actually saw seat expansion, right? Because people were seeing so much productivity on the platform that they wanted to utilize it more and more and expand throughout the organization, right? So that's number one. Number two, I think that while we are absolutely a seat-based model today, in the Pro SKUs especially, we have allowed some sort of consumption in that. When we sell the Pro SKU, they get a standard amount of tokens, which should be plenty for them to utilize the large language models to the extent that they need. But if they find more use and they're using more, we have the ability to monitor that and ask and get more money.
So if things move to a usage-based model, we're building the capabilities to be able to do that. I truly don't believe that we're going there any time soon. And I actually think that, and we went through this conversation many times a lot of times before. But I actually think that with platform consolidation, with the ability to really use ServiceNow broadly across the platform and with those AI capabilities, the more data you have, the more you're using the platform, the more benefits you get, I actually think seats will continue to expand.
Got it. That's this thing of a ServiceNow answer as well, though, because you have the ability to monetize more broadly across the organization, something that favors a broad platform like ServiceNow versus individual point solutions. They're going to have a much harder time on pricing.
I think that's right.
But even when I think about even within the ITSM realm, right, the value proposition that you're giving to the end customer isn't necessarily automating IT service desk representative, right? It's more so, can you guys help them resolve their IT issues, right? It's about the resolution, not about the individual person. So is that something of a consumption indicator or consumption unit that at some point you could expand pricing onto?
I mean, I think there's a few different ways of thinking about potential pricing in the future. What I think is important about what you just said there is that part of the efficiency and productivity is not just about time. It's about better resolution. It's about getting those IT issues solved faster, which means the employee who's either with the customer or building code and driving innovation can be more productive to drive better top line, better innovation across the board. So I'm really excited about employee engagement and what employees will be able to do better and more of when the more menial kind of parts of their job and the admin stuff that takes a lot of time when things aren't working well to fix is resolved much, much faster.
Got it, got it. I want to shift gears and talk a little bit about margin impacts. One of the things on investors' minds is we see all these $ billions of the GPUs and NVIDIA's selling. We're assuming software companies are part of that demand equation. At some point, do we have to pay for it in terms of lower gross margins, higher COGS, or whatnot? How should investors think about that from the ServiceNow lens? Is there a high enough compute intensity of this generative AI functionality that we would see any real incremental pressure on gross margins?
So our strategy of using domain-specific large language models within our ServiceNow platform means that it's definitely less compute power. So from a cost perspective versus some of the other hyperscalers and those who are really calling out to OpenAI and the OpenAI kind of platforms, it's quite different. And so much smaller scale, much lower cost. That being said, we're certainly investing more. And we talked about our margin guide this year. We held it flat, our gross margins flat to last year. But we're investing. So we have a bit of pressure on gross margins that we're offsetting by an increase in the length of time we're using our data assets. So we've been able to offset the near term. The other piece is if there is a little bit of pressure more long term, what you'll be able to see is continued efficiencies in our OpEx, right?
If you think about the sales and marketing efficiencies, the R&D efficiencies by our model, we'll be able to offset any incremental pressure. So I feel very confident not only in our guide to continue margin expansion in 2024 but beyond as well.
Got it, got it. So it sounds like the models that today are powering the Pro Plus SKU and the models that are in place today, stuff that you develop, very domain-specific to the specific solutions that your customers need, a lot less computationally intensive than me just hitting on ChatGPT and asking anything in the world.
That's right.
So that's going to, but longer term, we'll see where it goes with the incremental investments. In terms of where we are in terms of the drinking your own champagne or utilizing these technologies internally, how far along that path have you guys gone? I'm sure you're deploying and testing and working through it. How far are we into garnering actual efficiency gains from the usage of these technologies internally?
Oh, we're definitely seeing efficiency gains already. And I haven't put it out there. But we're seeing millions of dollars of savings just this year by virtue of what we're doing internally. And so we've got about 15-20 use cases live. We drink our own champagne, as you say. We're customer zero across the board almost with every product that we launch. And our GenAI SKUs are no different. And so we're seeing great efficiencies within our IT organization. I talked about sales assist, where we're really leaning into GenAI for our sales teams, another use case, and then as well as the text-to-code in our developer community. Obviously, we're a very large R&D organization. So the more that we can use our own SKUs within our developer community, the more efficient we get. And we'll see some productivity there as well.
Got it. Just speaking more broadly about the broader investment posture, in 2023, ServiceNow never had that knee-jerk reaction to the spending environment that we saw in a lot of other companies. You guys never did a headcount reduction. You kept hiring. You kept investing throughout the downturn. What does that tell us about what does it tell investors about the position you're in into 2024 as the demand environment gets better? And does it moderate the need to sort of rebound investment because you never really brought it back?
Yeah, I mean, I think if you look at, we did the exact same thing in 2020 when a lot of people were laying off heads as a result of COVID. We continued to invest, especially in our quota-bearing headcount on the ground sales as well as R&D. So we did the exact same thing. While we might have moderated from our original plans, we absolutely kept spending for go-to-market and R&D. And so it does put us in a very good position as we enter 2024. We are entering the year with the largest increase in ramp reps that we've had in several years. And so I think it does mean that we're well positioned. But I do believe as well that we will be accelerating slightly in some areas to ensure that we're really leaning into the opportunity that GenAI is presenting.
Got i t. I want to shift gears a little bit and talk about you had mentioned verticalization efforts. I think this is a part of this ServiceNow story that goes a little bit underappreciated, if you will. It's not something that is part of the investor conversation. Can you talk to us a little bit about what efforts have been made thus far in terms of creating more vertical specificity in the solution? And why is that so important? How does that change the opportunity for ServiceNow?
Well, I think it goes back to the answer I said earlier, where we go where our customers are taking us. And because we have such a large breadth of customer base within specific industries, we've got tons of understanding of what the use cases are for these larger industries. So we have invested pretty heavily in a few telco, financial services, health care, public sector technology provider. And it allows us to really build these SKUs that fundamentally address the issues that almost every company within that industry faces from a technology perspective. And so we're really excited about those investments. We've been making them for years. Industry SKUs had a great Q4, revenues over 200% growth. We had 16 deals over $1 million in the quarter.
It's an area, as we talked about that strategy before of being the defining enterprise software company of the 21st century, the industry verticalization was absolutely a part of it and will continue to be.
Got it. It sounds like it'll also be a great hook for bringing partners to be more engaged in the solutions because they love bringing that domain expertise.
Exactly, absolutely. That's a key area where we've invested with our partners.
Got it. Recently, or yeah, a couple of weeks ago, you guys made an acquisition of NetACE, right, in the telco vertical. Is that part of that investment process as well in verticalization? There's certain areas that you're going to have to actually sort of acquire some technology. And maybe you could tell us a little bit about NetACE and exactly what it brings to the equation.
Yeah, I mean, if we have the ability to accelerate the roadmap by acquiring some technology, we'll do that, right? And it makes a lot of sense. Telco for us is super interesting because fundamentally, the business of telco is connecting IT and infrastructure to revenue, right? It's about really connecting your IT organization and the cell towers and the networks and all of the data to the field service and customer service to really resolve any issues much quicker. And so it's a natural place where we're extremely strong and doing well. So this acquisition was just an acceleration of the roadmap to really help bring to life that telco solution. So we'll replatform on the ServiceNow platform and have even more capabilities.
That's about end-to-end network lifecycle capabilities and really driving towards that Closed-Loop Automation where you can really see all of the assets and optimize real time, which for a telco is quite important, as you would imagine.
I got to admit, the telco vertical, it gives me a little bit of PTSD in that I totally understand the breadth of the market opportunity. I totally understand how this is an industry where sort of the IT is up front and center. And you guys are all about automating that IT. But there's spending cycles. They have these boom and bust spending cycles that can prove really difficult for a software company trying to sell into those.
Well, it's why we're not dependent on just one vertical, right? It's an area where we can lean in and optimize and drive value. But obviously, we are very entrenched in many different verticals so that if there's one that has a spending cycle that's a little lumpy, we'll manage through it.
Got it. The key is not making it outsized in proportion to anything else.
No, exactly. And we haven't.
Got it.
It's just the most recent one.
Excellent. A couple more questions to go. But I will open up for questions to the audience, so if the mic runners could get in place while I ask this next question. Partnerships is something that Bill has been talking a lot about and an area to kind of lean into. The most recent one that you guys were talking about was the expanded AWS relationship. Can you talk to us about how that partnership's evolved over time? And what's new in that recently announced expansion?
Yeah, it's a five-year deal with AWS. We're really excited about it because now our offerings will be offered on the AWS Marketplace. So it's another market by which customers have the ability to lean into the ServiceNow platform. And so it's new. We just announced it. But we'll be building an aligned go-to-market model really. And that's really about opening new markets and getting new customers onto our platform. So really excited, early days, but a lot of opportunity for sure.
Got it. Now, is that something that investors should expect, that new market opportunity takes you enables you to get into the mid-market and smaller customers better because it's on the Marketplace?
Some large, some commercial. I don't like to talk about SMB because SMB is not where we play. And it's not about trying to enable SMB but certainly our commercial. But other large customers are also asking us to be able to be on the AWS platform. So it's really about, again, going where customers are leading us.
Got it. Any questions for Gina from the audience? 500 people in the room and no questions.
You're asking all the right ones.
I'm asking all the right questions. We got them all right here. I want to talk about cRPO dynamics. cRPO, for better or worse, is a core metric that a lot of investors are looking to. I would argue maybe some inappropriately looking at it as an indicator of kind of near-term demand trends. When in actuality, it's an asset account. It has to do with the amount of contracts that you have that are going to be renewed. Anything in particular that we should be watching out for in terms of cRPO dynamics as we go through the next couple of quarters?
Yeah, I think cRPO is probably the best metric we have to really what investors are trying to get to is what does revenue look like a year from now, right? I think the fact that we have a guide out there for full year 2024 and we have a guide out there for 2026 that I've reiterated, a $15 billion+, I think it makes cRPO a little less important because you kind of know what we're doing. But what I think it is important for and I don't know that it's right to understand demand trends. But if you're trying to gauge how we're doing against our plan, it's a good way to measure on a quarterly basis how we're trending. But there's going to be puts and takes in a cRPO number less so than billings. I know we've had that argument before.
Discussion.
Yes, discussion. But if you're really trying to look at the trends and see how we're doing against where we expect to be, that's probably the best way to think about cRPO, especially because you have a year-out and a three-year-out guide. If you didn't have that, a little bit different. But I think you've got what you need from a short term as well as a mid-term.
We look at the cRPO base as an indicator of how much coverage do we have in terms of what you're looking for over the next 12 months, three years out. We got to kind of take your word for it. You mentioned the big federal quarter pressuring some cRPO growth. That's something that we should be looking out for on a go-forward basis. That's just because of the nature of those federal contracts, correct?
Nature of the federal, so federal contracts are one year in length because of the budget cycle in the federal government. And so even when we have and some of these deals are actually three-year deals that you just have to renew. But you can only count it because it does have a it has an out clause after year one. So how cRPO works is it only ends up in your cRPO for the 12 months, which means that one quarter in, there's only nine months in there. Two quarters in, there's only six months in there. Three quarters in, there's only three months. Now, it's going to renew again in September. But it does mean that from a cRPO perspective, it's going to be a headwind, especially when our federal business has been doing so well.
Right, yeah. The other thing that I think catches investors off guard on cRPOs because it's an asset account, what's in the renewal base has a big impact on sort of how cRPO is going to be growing. At times, I think it leads to some disappointment with investors in terms of they're expecting that number to move faster than it could actually move. Anything we should be aware of in terms of what you guys have up for renewal and any renewal-based dynamics in terms of the forward year that can cause a stickier cRPO number than we'd imagine?
Well, I'd point to kind of the RPO growth in Q4, which was at about 27%. And RPO growth is kind of the total book, right? And so that means that while some of the federal is impacting that one year, the renewal and by the way, our 99% renewal rate, things are renewing as it should. Net new is growing in a strong way. And so I think that there's always going to be fundamental puts and takes in these numbers, especially when they're so big. But what I'll tell you is demand is strong. We feel really good about the 2024 guide. Pipeline coverage and metrics look good. And the demand is robust. And you'll continue to see us execute as we have over the past two, three, four years.
Excellent. All right, so one last question. I'm going to try to sneak in on margins. It's free cash flow margins versus operating margins. Operating margins have been steadily coming up. But there's pressures on free cash flow margins that you don't really see on the operating margin line. Cash tax is coming into play, working capital not being as big of a tailwind as it has been historically. How should investors think about the future potential for free cash flow margins to move higher versus what we're seeing in operating margins?
Yeah, we'll continue to accrete free cash flow margins. The business model allows for leverage across the board. Cash taxes are becoming an issue because as we become a U.S. cash tax payer, there's lots of regs up in the air. We'll continue to be transparent. But once the cash taxes just kind of hit and it's a steady state, you'll be able to see very similar leverage on free cash flow as you would see on operating.
Got it. And is that cliff any time in the near term? Salesforce just guided towards a 10-point headwind to free cash flow because they hit their cliff on U.S. taxes.
So we talked about there being a point issue in 2025. But there's lots of laws that if we pull back on the capitalization of R&D credits, that could flip. So what I'd say is we'll be updating at Analyst Day in a couple of months. And hopefully, we'll have a little bit more understanding about what's going to happen with the U.S. tax then.
Got it, perfect. Gina, thank you so much.
But it's only a point or two. It's not 10 points.
It's not going to be 10 points. That 10 point scared me a little bit.
Yeah, no, no. It's nothing like that.
Excellent. So, Gina, thank you so much for joining us. As always, a tremendous conversation.