CJ Desai: Absolutely. So employee experience and employee productivity are two sides of the same coin. And with our HR service delivery product that is resonating really well, whether it’s in commercial markets, including we had a very strong public sector performance that Gina outlined, where that product is resonating. And during this macroeconomic times, when you think about customer service, you want to hold on to your customers and you want to serve them profitability. That’s what is driving business for our customer service management product. So we are seeing that despite the technology foundation where IT is the business, digital services other business which is what driving our ITSM and ITOM product lines and what we call service operations, picking the best of service management and operations management, but HR and our customer service management are also driving growth in very specific industries from telco to public sector and health care.
Raimo Lenschow: Okay. That was very clear. And then the Gina one for you quickly, on the margin and cash flow outperformance. Can you talk a little bit about factors that we should consider in terms of timing, et cetera, that might have impacted this more, will we kind of don’t want to extrapolate into next year, et cetera.
Gina Mastantuono: Yes. It’s a great question, Raimo. So I gave a good strong guide for operating margin as well as free cash flow margin for 2023. I think what you saw in Q4 from an operating margin perspective was continued discipline on the cost side, as you have seen us do and as you will consistently see us do. On the free cash flow side, obviously, that disciplined cost management flows through. But also, we did see some CapEx spend come through towards the tail end of Q4, which means that the payments are not due until Q1 of ’23. So that does drive a little bit of headwind on the free cash flow margin in ’23, which is why you see the guide that I gave. Hopefully, that’s helpful.
Operator: We go next now to Sterling Auty at MoffettNathanson.
Sterling Auty: Just want to circle back on the cRPO. Given the constant currency was 25.5%, is more of the issue that you described more happening internationally than in the U.S.? And how should we think about kind of the appetite to do renewals? And is there any concern about expansions from some of those international customers here in the first part of ’23?
Gina Mastantuono: Yes. Surely, it has nothing to do with the renewal dynamics internationally versus domestic. The difference between the constant currency growth and nominal growth really just has to do with FX rates that moved within the quarter. So no real differences internationally versus the Americas on the renewal side of things. With respect to the early renewals, what I would point to is the strong net new ACV growth in Q4 tells you. And by the way, very strong expansion rate in Q4 tells you that customers are not changing their behaviors with respect to renewals, on-time renewals or with net new expansion. What you’re just seeing is a little bit of the lack of meeting to do co-terms and bring things forward in the current macro. Again, with 98% renewal rates across the board, we remain as positive as ever that not only will we continue to expand in ’23, as you’ve seen us do in ’22, but also continue to renew those best-in-class renewal rates.
Operator: We’ll go next now to Karl at UBS.
Karl Keirstead: Sorry for asking you use your voice again. But how are you feeling about the 2024 targets? I think the consensus to you is that the $11 billion might be a little bit of a stretch given that you’ve had to absorb a pretty heavy FX headwind. The operating margin target of 27% seems doable. But when I look at your free cash flow target of 33%, that would be a 300 bps improvement in calendar ’25. So that one feels like a little bit of a push. Do you mind just commenting on those targets, much appreciated.
Gina Mastantuono: Yes. Great question, Karl. What I would say is, overall, the underlying growth that we’re seeing remains healthy. FX headwinds have eased slightly, but certainly are still material. And with the uncertain macro backdrop, we’re going to continue to monitor the market and provide an update on our long-term targets at our Analyst Day in May. So I’d say, again, underlying demand, really strong; operating margin, well on the trajectory to hit 27%; with respect to top line and free cash flow, with the impact of FX, and that keeps moving along, we’ll update those targets for you in May. But let’s go back to what Bill talked about earlier. We remain very well positioned given the current macro environment. We are the platform of choice for digital transformation. And that opportunity is — has not changed. If anything, it continues to grow.
Operator: We’ll hear next now from Mark Murphy of JP Morgan.
Mark Murphy: Bill, just given your comments on the pipeline coverage and also the maturity, would you say that the macro headwinds have actually dissipated somewhat if you compare it back to the summer? Or — are those wins still blowing fairly steadily, but you’re just able to kind of navigate through them through will power and execution rigor?
William McDermott: Yes, Mark, thank you very much for the question. I did call it out. I think maybe we were the first ones to call it out that there were some clouds on the horizon back then with the macro, and we all know the forces that were blowing between Ukraine, inflation, tightening monetary policies and supply chain dislocation, and everyone sees that to a pulp so we don’t need to go there. I think what happened back then is most businesses were not ready for that market. And we immediately revamped our go-to-market in the way we approached the customer because we knew the customer would have to do more with less, automate their business, take cost out and improve productivity per person. And the work wasn’t going to go away.
It still had to be done, and step ServiceNow’s platform. And then we also knew at the same time that CEOs, 98% of them, this is a fact have a digital-first strategy. Worried about the other 2%, but I’m good with the 98% because that makes a lot of sense. And we also knew that they weren’t going to give up on their digital business dreams and they would be investing to reorient business models, as Gina said and think differently about their enterprise, which CJ’s example underscored and growth would still remain on the agenda. It’s just a question of what equilibrium between growth and cost takeout would be necessary for them to achieve their goals. The good thing is, with ServiceNow’s platform, you could say yes to both. And you don’t have to make that choice.
So what I see in the market, I see commodity tech that was at the peak of the hype cycle during the pandemic being dialed down or eliminated. And I see that investment freeing up to platforms that actually matter. So I do think our circumstances are actually improving because of this particular macro, because it’s well known now that ServiceNow can take the cost down, if that’s what you need immediately. And given the layoffs that we’re seeing and the stories that we’re reading, I clearly see that our company is rising accordingly. And I see that in the pipeline. I see that in the maturity of the pipeline which is a really important fact. And this year, we came in with sales productivity at least 20% better than I had at the start of last year based on the feet on the street and the readiness of those feets because they’ve been well trained and certified to do their job.
All these forces are coming together in a way that gives me a feeling the market will be on our side, but our executional excellence will never have to rely on the weather conditions. We’re ready.
Mark Murphy: Very clear. And Gina, sorry again giving your voice. But just again, on the topic of the lower mix of early renewals from 2023, should we interpret it at all as customers may be a little hesitant to renew early just because of the cost of capital is higher. They want to hang on to cash a little longer? Or on the flip side, is there some element of maybe you actually enjoyed the luxury of not having to encourage as many early renewals because you did see so much strength on the new logo side?
