Good evening. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 twenty 19 ServiceNow Earnings Conference Call. 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 Q2 financial results and discuss our financial guidance for the Q3 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 for 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 that 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 ks 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 lives 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 the routine tasks of everyday life at home more simple, easy and convenient. And now the same thing is 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 the digital transformation strategies. That is creating an exciting moment, an inflection point where ServiceNow is well positioned to help make life at work more 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 from the quarter. In the Q2, we closed 39 deals with ACV greater than $1,000,000 We now have 766 customers doing more than $1,000,000 in business with us annually, which represents 33% growth year over year.
And our renewal rate for the quarter continued to be strong at 98%. Our Q2 results continue to demonstrate our strong product portfolio. 17 of our top 20 deals involved 3 or more products and we landed several large deals in the financial services, technology and automotive industries 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 3 deals over $1,000,000 Our customer workflow products enhance 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're delivering easy intuitive out of the box mobile capabilities that enable consumer like experiences across the enterprise, making life at work more like life 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 our 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 Governments, 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 plan to jointly develop, coordinate and bring to 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 our new financial operations management product, which we announced at Knowledge in May. Our first application is finance close automation, a natural extension of ServiceNow's 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 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 8 years and most of you have gotten to know Mike very well during that time. And anyone who's 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 $100,000,000 in revenue.
He helped take ServiceNow public in 2012 and has helped create the very foundation for our success. Mike's made many ServiceNow friends over the years and we will definitely miss him. Personally, I'm deeply appreciative for Mike's partnership over the past two and a half years. He's been instrumental in our continued success and has helped set the stage for our next phase of growth. We have an active search underway for Mike's successor.
And Mike's size 16 feet means his successor has big shoes to fill, literally and figuratively. But in all seriousness, there's strong interest in the role and we will move as quickly as possible to land the right candidate. Meanwhile, Mike leaves a great finance team in place. In summary, I'm pleased with our continued progress and 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 Q1 were $781,000,000 representing 36% year over year adjusted growth, including $17,000,000 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 are 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 were self hosted contracts, which pushed more upfront revenue recognition into Q3. We are on track to close these contracts in Q3. Subscription billings were $817,000,000 representing 34% year over year adjusted growth, including $17,000,000 of foreign exchange headwind and a $6,000,000 duration tailwind, respectively. Our remaining performance obligations or RPO ended the 2nd quarter at approximately $5,400,000,000 representing 36% year over year adjusted growth, including $53,000,000 of foreign exchange headwind. Current RPO, which represents RPO that will be recognized as revenue in the next 12 months was approximately $2,700,000,000 representing 37% year over year adjusted growth, including $26,000,000 of foreign exchange headwind.
Moving on 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 onboarded a record 700 plus net new employees in Q2. Now let's turn to guidance for the Q3 and full year $835,000,000 representing 33% to 34% year over year adjusted growth, including approximately $6,000,000 of foreign exchange headwind.
We expect subscription billings between $848,000,000 $853,000,000 representing 27% to 28% year over year adjusted growth, including approximately $6,000,000 $3,000,000 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 and renewals quarter each year. We expect a 23% operating margin and 195,000,000 diluted weighted average shares outstanding. We are raising our full year 2019 subscription revenue guidance to between 3.245 dollars and $3,255,000,000 representing 36% year over year adjusted growth, including approximately $44,000,000 of foreign exchange headwind. We are also raising our full year 2019 subscription billings guidance to between $3,740,000,000 and $3,750,000,000 representing 32% year over year adjusted growth, including approximately $47,000,000 $17,000,000 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 194,000,000. Dollars Before we get to your questions, I'd like to say that I'm extremely proud of everything ServiceNow has accomplished over the last 8 years and especially the finance team that we have built. During the interim period before a new CFO joins ServiceNow, Faisyan Goon, our Chief Accounting Officer will assume the internal role of leading the 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 and A and Corporate Development, who you've all done to know over the last 5 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 $10,000,000,000 in revenue. With that operator, you can now open up the line for questions.
Thank Your first question comes from the line of Jennifer Lowe with UBS.
First, I just wanted 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. And on that note, I have a question about 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 the moving pieces there 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 renewals. There were early renewals that happened in 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 that 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 looks like sales and marketing growth kind of accelerated in Q2 versus the trend line 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 and marketing? And if so, where are those heads going?
So we had a very much a focus push on sales and marketing. 2 things were focused on pipeline generation in the marketing organization business sales. As we are getting into bigger and bigger accounts, we need to split territories and reallocate accounts to reps so they 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 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. It looks super interesting.
I guess I'm wondering if you could provide a bit more detail on that and 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 actually started in some ways last year when we announced 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 IL5 or FedRAMP high, which has enabled us to build a tremendous federal business. Microsoft has the absolute highest security clearance of IL6. And so we just determined that would have made sense instead of us building that data center capacity for that market as well as for a few other federal markets for federal government markets that we take advantage of Azure and as part of that. So that's we're taking advantage of their capability and then that's led to a broader conversation around how we can work together and combine 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's sort of related. I guess, Mike, you called out some of the self held federal deals in the quarter. That'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 and 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 are doing business with governments around the world and that's a key part of that Azure strategy that a number of those governments around the world have data sovereignty requirements where we don't have data centers and that's the other thing that we're going leverage out of Azure as well.
Great. Thanks, Scott.
And I misspoke. We have IL-four.
Your next question comes from the line of Chris Merwin with Goldman Sachs. Your line is open. I
I want to start
actually asking about ITSM Pro. Anything you can say about where you are with renewals for that? We saw ITSM revenue step up in Q2 in terms of new ACV. Just curious like what percentage of your customers have gone through this renewal cycle and 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 3 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.
Great. 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 decelerate. So just curious if we should think about that picking up again in light of what we saw with new ACV?
So as we said a
lot quite often is the ITOM deals tend to be big and lumpy. Yes, Q2 was a very strong ICOM quarter. And we do think with a lot of the investments we've been making in ICOM that will continue, but you will see some lumpiness there given the deal sizes.
Okay. Thank you.
I mean, I may 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 conversation is 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. A 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 has benefited a lot from is the transparency and financial disclosure and things like the slide deck given a slide 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. So, Walter, Mike's a great CFO because he's 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, a I almost 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 without 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 give that transparency and I don't see any changes in those people there and we will continue or I expect the company will continue with that same level of transparency. Well, they're sitting right around the
table. In other words, they make you look good, Mike, right?
They make
you and me both look good. Correct. Let me just add one more thing that we're looking for, Walter, that Mike does 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 outstanding CFO and I'm confident we're going to get a no one will replace his size 16 shoes, 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 Faye CN and the entire finance team, we have a very strong team that will continue the high level performance in the interim.
Got it. Great for the 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 business 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 about in terms of the strength in the federal business in Q3 given how strong that was as a 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 they'll sign contracts that will start in their next fiscal year, which is October 1. That's that whole gross down that we've talked to you about in the past. And what I would say too 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 a while, Q4 is 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 1 year to co especially the upsells to co turn to get on 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 CFOs 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're leaving, how do you feel about the state of the company? And what's been the most surprising change today versus 8 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's set up from a product perspective, 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 had 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 2 years ago was really to scale the company to that next level. And I think he's been doing a great job.
As we shown you, we just had record hiring. So I feel very, very good about where I'm leaving the company right now. And as I mentioned 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, 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 innovation to your customer base, how important is that single platform and 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 has always had to make it one platform. Every time we do an acquisition, a 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 our organic innovation will be off our core now platform.
But I also think over time, this is not a religion. And so I could see on our path to $10,000,000,000 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 2 platforms can connect interchangeably. So it won't be a impediment from continuing to build and scale our organization. And I will tell you customers say to us that they 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 and but over time over a 3, 5 year time horizon, we could you could easily see us adding another platform or 2 through M and 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.
Excellent.
I wanted to talk to kind of 2 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 $1,000,000 point. 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 1. And number 2, just checking in on the commercial business, doing really well growing, really big customers. What's the competitive environment sort of the look like in the commercial business?
And how have you guys been faring 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 into 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 too, 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 them in the cohort analysis and there's 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 last year and I know a lot of investors talk about last year and they tend to be in lower end of the market. Share wealth 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 for some smaller companies, they're driving their entire business off service now. So it's also playing a role. Yes, it's participation in that market, but it also helps feed our innovation pipeline because we get to see a COO of a 4,000 person organization drive a lot of their operations, be CSM, employee experience and IT off the NOW platform. And so I almost think there's a little bit of a product development or 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 just wondering if you could shed some light on how you guys saw activity progress 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 I'm going to there's nothing that indicates that macro is a concern. We're not hearing that from our customers. I'm not seeing it in terms of usually when you have macro concerns, customers start to slow down 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. 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, Derek, to be honest, it's to some extent blocking and tackling. But here's what's happening. For our customer base and certainly our largest customers, for them to get maximum value out of the ServiceNow platform, they need to reengineer their processes and redesign them. That's how you get the maximum impact of automating your processes, right, automating your workflows. And so the 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, culture change. And so the Accentures, the Deloitte, the KPMGs, the DXCs, the IBMs as well as the next tier as well. And we're just doing fundamental blocking and tackling. Many of these partners say that we're the fastest growing practice in their organization. We're now Dave Parsons has brought this mindset of let's build $1,000,000,000 plans with our top partners.
How do we get to $1,000,000,000 for them over the next 3 to 4 years and that then forces us to 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 then we're jointly innovating with them. And so that systematic blocking and tackling, I can tell you is just even in the two and a half 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, the Vice Chair of 1 of the top 5.
He's personally sponsoring the ServiceNow relationship and alliance and partnership because he says we view it as very strategic to our success and our client success. And I said we feel the same way. And so David Parsons and his alliance teams have said in my remarks have just done a very nice job of allowing us to be more focused, more strategic and more disciplined in how we're going after it. We're also trying to grow new partners. 1 of the biggest issues we have is there is a shortage of trained certified ServiceNow professional resources in the market.
So we're even doing things like going to universities and trying to grow the number of the pool of trained and certified ServiceNow professionals that then enter these partners and serve our customers. So it's an important part of our success and I think over time you also get some go to market benefits as well.
Great. Thanks for the color.
Your next question comes from the line of Brad Zelnick with Credit Suisse. Your line is open.
Excellent. Thanks so much and 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 mega deal you signed 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 mega deals in the future?
I think what 5 years, Mike? Yes.
5 years.
5 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, maybe our remedy customers or others. They see when their renewals their next renewal is going to be and they begin to reach out to us a year or 2 years, sometimes 3 years before that's coming. So we then work with them so that when that major renewal point for them hit, they migrate over to ServiceNow
and we're
prepared to do so. And that was the case here. I will say, I was on a call with this organization's CIO and I think it was 300 to 400 of their organization And literally out of the gate, this has been planned for 6 to 12 months. The deal was signed in the quarter and they are mobilizing for we And I think we're seeing that with more and more of our new customers where 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 presale conversation is around implementation approach. It's not just, oh, buy this great product. It's how can I be sure we're going to get the business value? How can I tap ServiceNow your best practices? How can I make sure we're working with your best third party partners?
By the way, on this call, I talked about 3rd party partners, it was us, the partner and the client all on the same call, all focused on the outcomes that they wanted to achieve. And so the conversation is less around product A, product B, it's more around business outcome A and business outcome B 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 on products, but the more our customers are confident that we deliver strong return on investment and help them achieve their business outcomes, the more sustainable our growth will be and the more our pricing will hold up over time.
It's clearly working. Thanks, John. And for 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 wanted a little 1 year under our belt before we started doing that.
Your next question comes from the line of Raimo Lenschow from Barclays. Your line is open.
Hey, thanks. And Mike, all the best. Actually, can I stay on that topic because and since your last call, maybe I asked a more theoretical question? If I you use current RPO to calculate a bookings number and bookings was on that calculation 41%, So even like really, really strong. Can you just kind of conceptually, I mean that should be the cleaner number in theory.
So that's why we kind of all looking at that. And why at your scale to grow 41% bookings is like a crazy good number. Can you just kind of give us the puts and takes there a little bit?
Yes. Well, you got to remember a big chunk of that growth is the renewals we signed as well too. And renewals is getting a big we've mentioned to you before, we've crossed over where our renewals number on an annual basis is bigger than our net new ACV from customers. So I don't know what else to tell you. It is what it is.
It grew very nicely and we did you're very close in what you've said on that bookings growth.
And then maybe one follow-up, 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, etcetera, where Q4 is getting bigger and you get basically every year like a compounding effect. Are you kind of thinking of breaking that out at some point with the team when you're talking with the team?
What do you mean breaking out? Like
the compounding effect that we get there?
Well, I'm not going to be here in Q4, so I don't think that's fair enough to hit the company on that. But I think that's a good question for Lisa and the next CFO in December.
Okay, perfect. We'll ask again. Thanks. Good luck.
Your next question comes from the line of Tom Roderick with Stifel. Your line is open.
Hey, guys. Thanks for taking my question. Mike, I'll echo the sentiments here and say congratulations on your next gig. It's been great working with you. So one of the metrics just from the presentation that I wanted to sort of call out and see if I can get better understanding of, it looks like even despite the currency headwinds, Europe was up a tick on a percentage of revenue basis.
So it 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?
Let me 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 several deals got pulled in. Q1, as Mike said, was a little lighter. I've been in Europe a 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. 1 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 around the security of cloud, privacy of data and things. Now the German market is embracing cloud and accelerating rate. And so we think given the size of that market and it's still younger in that cloud adoption curve, it's a real important area of investment and opportunity for us. The German business had a very strong Q2 and we are going to continue to invest in Germany and think it offers a large opportunity.
So I would say there was nothing discontinuous in frankly any of the quarters over the last 4 or 5 quarters with Europe. It's 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've got to have local data sovereignty or you've got to have comply with local data regulations and that's where the Azure partnership and potentially future partnerships like that will help us accelerate our ability to serve that part of the European business.
Outstanding, really helpful. And then quick follow-up for you, sort of mildly related on the topic of Germany, but the Financial Close Management product, very interesting insofar as it's a little bit more of a foray into back office and touching ERP than you've really done before. Can you talk about some of the important partnerships and technology integrations that we ought to be thinking about with that product? And then who do you hope to compete with more in that market for Financial Close Management? Thank you guys.
Well, given that Mike's team was one that built it for our own financial close, how would you say you relate to it, the integrations that I can talk about the partnership?
Yes. So what I would say is, we work with SAP and Oracle in the integrations and those are the 2 main ones that you have to be integrated with. We actually closed our first we got our first PO and I'll tell you it was a very nice deal, size deal. It was actually the largest first PO ever out of any new business unit within ServiceNow. And so that just tells you the potential of this.
And in terms of who we compete with, I really don't want to get into who we compete with right now until the product is more in the market out there. But most of you know from conversations before, I don't really want to name names of 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 space that's being served in email 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
John It's been interesting. I'll just build on 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 that none of the ERP providers focus on that there's really no one else focusing on and
finance close the books is a classic case.
It was done by spread sheets, emails and other things. And then our platform is very well suited to help address those. And so this was the first what I think will be several we hope over time. We're also very we're very I think cognizant and humble that we're not going to develop an entirely new go to market motion calling on the CFO. That's why partnering with Deloitte was our early partner, partnering with literally the ERP providers, partnering with others that we view this as a way to piggyback on others that serving that market.
And in many ways, our product is a I'd almost consider it a feature on top of their products. And we think there's a good opportunity there over time, but we'll see. It's still early days. Very helpful. Thank you guys.
Nice job. Thank you.
Your next question comes from the line of Sterling Auty with JPMorgan. Your line is open.
Yes, thanks. Hi, guys. Mike, I just want to circle back to billings. I apologize for that, but just help me connect the dots. I think in the quarter, the $817,000,000 in the presentation, you outlined $12,000,000 of outperformance, but in the full year guide, $5,000,000 of outperformance is responsible for the increase.
You talked about the deal, the renewal 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 $12,000,000 to just the $5,000,000 of outperformance in the full year?
Well, because most of those renewals that were 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. And it's all about when were those deals renewing. By the way, sometimes when we do deals with people, we could early renew in more than a year in advance if a customer is doing a much bigger deal where they want to just redo 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 It's really only a $5,000,000 impact that flows through for the full year. That was the stuff that was not in there. That was really the ACV you should think about.
All right, got it. Thank you. I apologize for that.
And then just one follow-up. At Knowledge, there was 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 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 roadmap to roll out those other vertical industry solutions?
I mean, I'd say, Sterling, by and large, it is more go to market than it is product. Fundamentally, I think one of the great strengths of our platform is that's largely horizontal. IT help desk is the same in a bank as it is in a pharma company as it is in a retailer. And a lot of what we do is more consistent and different. Now the one place that there is product implications are around security compliance and regulatory.
And so whether it's banking or healthcare 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 relate 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 spend a lot of time in D. C, our federal sales team speaks the language of their customer and that really comes through whether it's calling on the military services the Veterans Administration or the various agencies. Our team speaks the language and that adds a certain amount of credibility.
Similarly in financial services, our team speaks the language of banks or insurance companies. And that gives a greater sense of confidence and I think more targeted focus on the business value I referred 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'd say 80% go to market, 20% product.
Correct. And I think we're still very much in the early innings on the product side. Yes.
Encryption data would be an example, different requirements for encryption and data. That's one that's very industry based at the moment.
Your final question comes from the line of Samad Samana from Jefferies. Your line is open.
Hi, thanks for taking my question. Mike, if I look through 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'm wondering, is there anything in particular that's driving this trend for the expansion deals and then the trend that happened in 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 a while, we're becoming more and more strategic with customers that hasn't really changed that much, but there are people are renewing on average for north of 2 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 multi year deals.
Okay, that's helpful. And I was just going to ask if that how the average contract term, how we should think about maybe that one time impact on the change in RPO in 2Q and maybe adjusted for that deal what RPO growth will look like?
So first of all, that average term length really does not impact current RPO and it's really current RPO because that's the next 12 months that would go into total RPO. The contract length would impact more.
Yes. So that's I was wondering if you could give us what the maybe the adjusted growth rate would have been since it was meaningful enough to impact the overall average?
Well, I'm only giving you the current RPO growth rate and that because I don't need to adjust its 12 months on 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.
Great. I appreciate the answers to the questions, guys. Thanks and congrats on the tenure and the next move.
Okay. As a reminder, a replay of this call will be available as a webcast in the Investors section of our website. Thank you for joining us today.
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