Awesome. Thank you everybody for joining us, and most importantly, Gina, thank you for joining us today. I know that you have a very jam-packed schedule, and I appreciate you making time for it. So, you know, we're only a few weeks removed from the Analyst Day. You and the executive team did a great job providing us with a lot of new information. I'll give a shout-out to Darren and Alex and the IR team, putting together a lot of great content as well. I thought maybe we'd start there. What was the main message that you, as the CFO, wanted investors to walk away from the Analyst Day this year?
Yeah, thanks so much for the shout-out to my incredible IR leader and team. They are the best in the business, so thank you for that. We were really pleased with overall knowledge, Investor Day. You know, it was very well-received from a customer's perspective, from an investor perspective. We were really focused on a few key messages. So one, innovation continues to seed growth for us, first and foremost. GenAI is a tailwind for us. We are the platform that's the system of action across the enterprise, so infusing GenAI in that is a real opportunity for us, and I know we'll talk a lot about that, so I won't go into it, a ton of detail here.
But really seeing strong momentum coming out of Q1, you know, out of Q4 and into Q1, and really excited about the trajectory that that's showing. But make no mistake, we're a $10 billion business before we sell one SKU of GenAI, and so the core remains ever so strong and has real legs for continued growth as we think about the path to $15 billion plus. So, you know, Technology Workflows continues to be strong. We talked about the fact that Creator in Q3 and then Customer in Q4 both crossed the threshold for billion-dollar businesses. In fact, I talked about, at Investor Day, that Customer actually is on par now last year with Technology Workflows in the mix for all our new logos.
So that just tells you about the breadth of the product portfolio, and not only are we just a technology workflow company, but we really are that cross-enterprise workflow. Third, you know, go-to-market really focused on top-of-funnel and really driving pipeline across the board. Really feel great about that. And then last, and certainly not least, we updated some guidance metrics. Talked about $15 billion+, but also that we expect to be a 20%+ CAGR growth company through at least 2026, so that was new. We talked about 100 basis points margin accretion on op margin, 50 basis points on free cash flow, and that's even with the fact that we are starting to be a cash taxpayer. So we have, you know, 100-200 basis points of cash taxes impacting us.
We're still able to accrete those free cash flow margins by 50 basis points a year. Then we also talked about and updated our dilution target. So previously, we talked about keeping dilution lower than 1.5%. We brought that down to lower than 1%. So hopefully, clearly demonstrating a disciplined approach to capital allocation and investment.
There is, as you mentioned, a lot of great content there. I think the one that, that obviously ends up taking a lot of the oxygen ends up being the numbers. You mentioned the not moving the 15+ target, although you did Bill's move from a couple of years ago with the plus part this year, and you gave the 20%+ constant currency. How should we think about maybe the trajectory of that as we just think about the next few years based on this year's guidance and maybe the level or the durability of that CAGR?
Yeah, I mean, I think you can see by the consistency of our execution and the consistency of our results, we are, we are absolutely becoming the platform for action across the enterprise. And so GenAI certainly gave us confidence in increasing to that 20%+ over that time, and certainly when we talk about $15 billion+, we'll be a part of it. But make no mistake, that core trajectory remains extremely strong. And so if you think about continued opportunity within Technology Workflows, Risk, Security doing quite well. We talked about OT being an interesting new lever and the convergence of IT and OT. Then think about continued execution with respect to what we've been seeing with Customer, Employee, and Creator.
Continued innovation on the flywheel, but our core really remaining strong, gives us the confidence to be able to, increase that, that guide.
You mentioned AI. It's e verybody's focused on it. ServiceNow...
Really? No.
It's legally required by, for me. With Jefferies, they won't pay me my bonus if I don't bring it up, Gina. So please, please let me spend 15 of the next 17 minutes on it. So investors are obviously really, really focused on it. It's your fastest ramping product ever. Obviously, it's coming off of a small base. How are you thinking about the contribution and what you've maybe factored into the growth targets? I know you touched on it a little bit, but is that something that it's fairly modest in the growth contribution, or just how should we think about that?
Yeah, well, again, going back to the base, right? If we were a small $500 million-$1 billion company, the numbers for GenAI that we're seeing already would be meaningful, because it is our fastest ramping product category that we've seen in our history. But because we're at $10 billion, from a meaningful perspective, it'll take a little bit of time, but absolutely, we see great opportunity. We talked about the magnitude. If you just take our current customers who are on the Pro SKU going to the Pro Plus, which is our GenAI SKU, that's $1 billion of opportunity just from the 45%-ish that's currently on Pro going to Pro Plus.
If you then think about, well, 60% plus are still on my Standard SKU, if they go to Pro Plus, that's an incremental, you know, in totality, that's $2.5 billion, and that's just on, ITSM, HRSD, and customer service. That's not even factoring in the fact that GenAI is being infused into the platform across all of our product portfolio. And so the opportunity, across the enterprise on really driving GenAI, and if you, if you listen to, and think about really what, what, what the opportunity for GenAI is, it's not just about productivity, which is a big part of it, and that's certainly where we're capturing value and where customers are leaning towards value right now.
But if you just think about every workflow across the enterprise, in every company, in every industry, GenAI really has the ability to recreate that workflow. And so I love the example of, you know, some of these incredible drug companies, right? And so the average for clinical trials is 6.6 years. If GenAI is able to help these companies reduce that by just three months, and by the way, it can probably reduce it significantly more, that's billions of dollars in top line. That's hundreds of millions of lives saved, as well as lower costs. So that's just one example of where if you really think about the opportunity of GenAI and why drug trials take so long, well, patients don't get answers to their questions quickly enough, so they drop out.
There's reams and reams of paperwork that can be automated. So GenAI can help workflows across the enterprise, and it's not only about productivity, it's really about reimagining what the enterprise is going to look like. And so I'm really excited. We've been investing in GenAI for a long, long time. We're not jumping on the bandwagon. One of the first acquisitions I greenlit when I joined in 2020 was the acquisition of Element AI, where we brought in some of the best AI talent in the world into the company. And so if you really think about the opportunity of AI more broadly, I think it's really, really exciting, and ServiceNow is very well positioned to help our customers really drive that reimagination of business process and business process optimization.
I definitely agree about ServiceNow's positioning and the opportunity, but I have to ask the question that we get from investors a lot, which is: What is the potential negative impact of AI on seats, potentially? I know that's something that was keenly focused in on the model. You guys have addressed it multiple times, but let's just take a crack at that, now that you've had a full year of GenAI out there. How should we think about the potential seat compression side of the story?
Yeah, we're not. So again, it's interesting that you're getting a lot of those questions. We're not getting as many anymore on that. I think we've addressed it quite well. Certainly, what we're seeing so far is no seat compression. So that's number one. Number two, remember, we launched our Pro SKUs back in 2018, so we have really good data showing the fact that the more customers lean into the Pro SKU, the more they lean into the platform, we actually saw seat expansion more broadly across the enterprise. And again, because we're infusing GenAI into the platform across all of our product portfolio, my expectation right now is that we will continue to see the same with the Pro Plus SKUs.
Now, all of that being said, in our Pro SKUs, we're also giving a finite number of tokens. And so, if there were potential seat compression, and to the point that customers are utilizing this much more broadly than the initial amount of tokens allow, we have the ability to really drive incremental pricing with respect to how we think about usage, if that makes sense. So we're trying to address it from all angles, but what we're seeing to date doesn't give me any cause for concern around the seat compression issue. Obviously, we'll stay close to it, and it's clearly an area where we're very focused on.
We're very focused on value add for customers, and we expect to take some of that value, give the bulk of it to customers, but we're gonna make sure that we're also seeing the value internally.
I think the token part is a really important point because it shows that you're aligning with value added to customers, right?
That's exactly right. And we've always, like, that's not unique and new to our GenAI SKUs. That's one of the reasons I believe we've been so successful in general, the value-based portion of how we go to market.
I wanna pick your brain on something that CJ mentioned more recently, which is about customers potentially thinking about skipping from Standard straight to Pro Plus, right? You have this big base, about 40%'s moved over to Pro. How should we think about i s there a bridge that you can create there, and how are you guys thinking about maybe monetizing customers that have that interest to make that leap?
Yeah, we actually do have some customers who are interested and are making the leap. The issue is that from going from Standard to Pro, there's a lot of work that's required to get the data, the infrastructure all ready, and so that work has got to be done regardless. Going from Pro to Pro Plus is a much easier lift, and so right now, I'd say the bulk of the customers really buying GenAI Pro Plus today have Pro, because they've done all of the heavy lifting work, but there's tons that are seeing where the future is going, and they want to get there faster. They can't get there without doing the work. And so while they're doing that work and going to Pro.
And remember, Pro is a pretty amazing SKU to start with, so we don't wanna cannibalize, and so we're thinking through quite strategically, how we're gonna help our customers get from Standard to Pro Plus as quickly as possible.
So maybe rounding out on the AI discussion, if I think back to the Analyst Day, and even really over the course of several years, you've had a lot of key partnerships. You've talked about NVIDIA, Genesys is one that you guys have continued to expand, but I wanna focus in on Microsoft, who's also here at the conference. Your new agreement will allow in- you know, individuals to use Now Assist directly inside of Teams, and I think Microsoft Copilot, and eventually inside of ServiceNow's product.
That's right.
So how should we think about what that partnership gives you, and how does it expand your opportunity over time?
Yeah. It's so first and foremost, we've been partners with Microsoft for years, and really excited about the continuing growth and evolution of that partnership. And you're exactly right. If you think about being able to, within Teams, kick off any complex workflow in ServiceNow automatically, that enables, you know, significant productivity, significant benefit to the user, and vice versa. If they're in ServiceNow and wanna create a PowerPoint based on ServiceNow data, to be able to really invoke Copilot to be able to do that within ServiceNow, a real benefit to our joint customers, and we've been working on joint go-to-market with joint customers for several years.
So it's, I think, a very natural evolution, and it's all about, you know, allowing the user and the customer to really have flexibility in getting the best out of both products, whether it's Copilot or Now Assist. And so, you know, I think from a customer perspective, being able to toggle very easily between the systems and not have to switch and kind of swivel chair in and out, is a unique advantage. And so it's something that we're really excited about. And even further, I think there's more business outcomes and use cases that we can work on jointly that will be continuing to evolve, and so extremely excited about the partnership. It remains strong and ever-evolving.
The example that you guys showed about putting a message right into Teams to find laptops for onboarding, it really sang to me because I have 2 bricked laptops that Jefferies doesn't know about that they haven't collected, so I think there's at least $3,000 they can save.
There you go.
On ce our team integrates that into Teams.
There you go. That's just one example. There are so many, as you think about how ServiceNow is used across the enterprise to kick off these more complex and complicated workflows. But yes, Jefferies should come after you for your laptops.
So I wanna switch gears. I know we've spent a lot of time on AI, so let's move away from that. One of the things that really stood out to me at the Analyst Day was what seemed to be a very clear message about the front office, right? And I don't think a lot of investors associate the company with the front office. So how should we think about the front office opportunity, and where does ServiceNow play versus traditional vendors like a Salesforce.com?
Yeah. Well, if you think about the fact that our Customer Workflows just surpassed $1 billion in ACV in Q4, I think that shows you that we have a right to play in the customer side of things. And very similar to how we have leaned into HR and customer from, from our historical Technology Workflows, it's where customers are taking us. So we've been really strong in kind of evolving the mid and back office workflows within that customer space, while those industries, for example, that have leaned in heavily with us, technology, telco, manufacturing, for example, they're asking us, they're bringing us to the front office, right? How can we really have one unilateral front, mid, and back office platform really driving productivity and efficiency?
What I'm cautious to say is we're not jumping in and going head-to-head across the board, but where our customers are really bringing us is where we're going, and we've got a right to play here. We've been successful, and our Sales and Order Management product is a natural evolution from where we've been successful from fulfillment and automation, and so really excited about the opportunity here.
Another, you know, exciting focus area at the Analyst Day that multiple executives spoke about was the OT side. I know you mentioned IT and OT converging. I was curious, how do you think ServiceNow plays in that? I know there's a couple of other smaller companies in that space as well. How should you think about the ramp of these products? And I have a follow-up once you're done.
Yeah. So if you think about what's needed on the shop floor, it's very similar to what's needed within an IT organization. You need to understand the assets, you need to manage the assets, you need to troubleshoot, fix, security risk, very similar. We're already the trusted platform for IT. It's a very natural entryway for us into OT. What I love about it as well is that, while the deal cycles might be a little longer, because this is the nuts and bolts operation of the company, once you're in, the deal sizes are larger because it is so important. And so not only do deal sizes get larger, but ServiceNow becomes much more relevant in the C-suite when we're managing the core operations of a company. And so I'm really excited about the opportunity.
We conservatively booked it at a $5 billion opportunity. Investors I've been talking to already who really get it are like, "That's actually a conservative estimate," and I believe that as well, but ServiceNow always goes the conservative route. This is, I think, a really compelling area, another leg of growth for ServiceNow as you think about where in the enterprise ServiceNow really can play, and play strongly and play well.
So if I was thinking about maybe in terms of excitement, some of the new opportunities, whether it's OT, the Contract Lifecycle Management, I know last year's supply chain, and ERP workflows, what would you say you're most excited about from your perspective?
Oh, gosh! It's hard, it's hard to rank them, right? I think, I think, the opportunity on— So I group CLM kind of with Finance Supply Chain, like ERP, modernization. So I kind of group that all together. CLM by itself might be small, but when it seamlessly out of the box integrates with finance and supply chain and accounts payable and all of that other stuff, pretty compelling opportunity from a total addressable market perspective, as well as a pretty strong right to play and a lot of white space there. OT, I just talked about in detail. I think being really relevant to the operations of the company is super compelling, and I think that TAM is big. And then you go into customer, right, front, mid, and back office all together, opportunity really is large.
So it's hard for me to force rank which one I'm most excited about, but if you think about growth levers, not only from $10 billion to $15 billion, but to $20 billion, all three of those, I think, are gonna be a pretty impactful part of the answer, of the solution there.
One of the end markets where you've been doing really well is in U.S. Federal, and you disclosed for the first time a more precise number. You gave $1.5 billion of ACV, and I think that's probably bigger than a lot of software companies' federal businesses. And so I'm just curious, how should investors think about the runway there? You've had tremendous success. It's been growing faster than the rest of the business. What's the runway there look like?
It's still a super large opportunity for us, and so we're, while it's big, we're just scratching the surface of the needs of the U.S. Federal Government to digitize and to really help drive productivity and efficiency throughout the organizations and the agencies, whether it's citizens, whether it's veterans, whether it's, you know... It's really across the board. And so lots of opportunity remains, even within U.S. Fed. And then think about the same exact use cases are for State and Local, and just scratching the surface. And then think about everything we've done with the U.S. Fed that is absolutely replicable in State and Local, is 100% replicable outside of the U.S. in public sector. So we had some really key wins with governments of Singapore and Australia and Latin America as well.
So really early days, if you think about $1.5 billion total public sector, the TAM there also remains large, and we have such a great team on the ground across the board that, you know, everyone's like: "Are you done there?" No, we're still just scratching the surface.
Great. I wanna just, w e only have a couple of minutes left, unfortunately, but one of the most remarkable things is the growth has been so durable while margins have been, for lack of a better word, awesome. So just as I think about that and the recent kind of sales and marketing investments in R&D, just how should we think about maybe the margin side of it? I know you gave—you've given guidance, but just the philosophy there right now and maybe where are the most investments going into right now?
Yeah. So investments always, first and foremost, are gonna be on innovation, R&D. So you've seen R&D kind of stay relatively similar, and that's a lot of innovation and investment on GenAI, as you would imagine, on OT, all of these things that we've been talking about being, like, the next leg of growth. We don't rest on our laurels. We continue to hopefully out-innovate. And so that's first and foremost, and then secondly is always gonna be on feet on the street, quota-bearing, go-to-market. So sales and marketing headcount is a, it's a big pool, but we are, number one, first and foremost, always investing at the highest rate on those feet on the street, quota-bearing sales. And you'll continue to see us do that.
That being said, there's inherent leverage in our model on both sales and marketing and R&D, and so you'll see that leverage coming through, which is why we feel confident in accreting our margins even further from where they are today, which I believe is best in class.
And then maybe just last question, 'cause we get the, we get the M&A question a lot. You guys have been very smart about acquisitions. Just how should we think about that factoring in, particularly as you think about your AI, AI investments have been driving some of that M&A? So how should we think about that?
Yeah. I think you should continue to think of our M&A strategy the same as it's been, right? So we will continue to look for acquisitions that make a lot of sense from a customer value perspective, from a capabilities... You've seen us do a ton on tuck-ins, and it's around capabilities, right? Gen AI, process optimization, and how do we re-platform that and really make our platform better, as well as bringing incredible talent into the organization. So you'll continue to see us do that. We've always said, though, that we wouldn't be doing our jobs if we're not looking out for other opportunities that could drive customer and shareholder value. Hurdle rates are high when you're coming from such a position of strength in the organic growth that you've seen, and so none of that is changing.
I lied. I am a liar. I have one more question.
Okay.
I know you're a tennis fan.
Ah, yes.
Who are you rooting for in the French Open?
Well, we talked a bit about this earlier. I'm really bummed that Nadal is out so early. I was really hoping that we would see more of him. And so I don't have any one particular person. I just love the game of tennis and watching it, so I'm excited to be going to see the women's final after we do some investor stuff next week in Europe. So it'll be cool.
Awesome. Thank you so much, Gina for joining us.
Thank you.
Appreciate it.
Thanks, everyone.