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Service Now (NYSE:NOW)
Q3 2020 Earnings Call
Oct 28, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2020 ServiceNow earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Ms. Lisa Banks, senior vice president of finance.

Thank you. Please go ahead, ma'am.

Lisa Banks -- Senior Vice President of Finance

Thank you. Good afternoon, and thank you for joining us for ServiceNow's third-quarter 2020 earnings conference call. Joining me are Bill McDermott, our president and chief executive officer; and Gina Mastantuono, our chief financial Officer. During today's call, we will review our third-quarter 2020 financial results and discuss our financial guidance for the fourth quarter of 2020 and full-year of 2020.

Before we get started, we want to emphasize that some of the information discussed on this call, particularly our guidance, is based on information as of October 28, 2020, and contains forward-looking statements that involve risks, uncertainties and assumptions, including those related to the continued impact of COVID-19 on our business and global economic conditions. The guidance we will provide today is based on our assumptions as to the macroeconomic environment in which we will be operating. Those assumptions are based on the facts we know today. Many of these assumptions relate to matters that are beyond our control and changing rapidly including, but no limited to, the time frames for and severity of social distancing and other mitigation requirements, the continued impact of COVID-19 on customers' purchasing decision and the length of our sales cycle particularly for customers in certain industries.

Please refer to the press release and risk factors and MD&A in our SEC filings, including our 2019 10-K and our 10-Q that will be filed for Q3 2020 for information regarding such risks, uncertainties and assumptions that may cause actual results to differ materially from those set forth in such forward-looking statements. We'd also like to point out that the company reports non-GAAP results in addition to and not as a substitute for financial measures calculated in accordance with GAAP. All financial figures we will discuss today are non-GAAP except for revenues, net income and remaining performance obligations. 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.

A replay of today's call will also be posted on the website. With that, I would now like to turn the call over to Bill.

Bill McDermott -- President and Chief Executive Officer

Thank you, Lisa, and good afternoon, everyone. Welcome to our Q3 earnings call. I hope you and your loved ones are healthy and safe. We continue to be ServiceNow strong in support of our employees and communities in these challenging times.

We also remain passionately focused on delivering for our customers, partners and shareholders. 2020 has brought unimaginable change to the world. Companies have to operate in new and faster ways, pivoting their business models. Everyone is adapting to new employee and customer expectations.

It's all about people. Getting teams to collaborate across the enterprise is now more important than ever. The workplace of the future will be distributed. Managing complex digital workflows will be critical.

Enterprises need innovation without disruption. It's clear that speed has become the differentiator. ServiceNow is leading this once-in-a-generation opportunity to make work, work better for people. And this is what we're seeing.

All value chains are being split apart. They are being reformed into modern digital workflows across the enterprise. More than $3 trillion have been invested in digital transformation initiatives. But as IDC research shows us, only 26% of the investments have delivered meaningful ROI.

Massive investment is simply not creating massive change. This is fueling the workflow revolution. The missing link is integration. Systems, silos, departments and processes must come together into holistic, cross-enterprise workloads.

The Now Platform unlocks this ROI by offering speed, agility and resilience. Companies need it now. It gives companies the ability to deliver at scale the experiences employees and customers demand. That's the power of the Now Platform, a single architecture and data model that serves as the enterprise platform for all other platforms.

In other words, it's the platform for digital business. As one CIO said to me, my goal with the Now Platform is to enable my colleagues to perform their top 50 tasks in a single environment that provides a consumer-like experience. The momentum of the workflow revolution is unstoppable. Despite the COVID operating environment, our team delivered outstanding Q3 results.

Gina will provide the details. Here are the headlines. We beat expectations across the board. We surpassed 1,000 customers with ACV over $1 million.

We landed our largest deal ever with our largest customer who has now crossed over $40 million in ACV. And we're raising full-year guidance today. We're driving sustainable growth well on our way to $10 billion and beyond. I'm incredibly proud of our team.

In the most challenging of times, we are focused, disciplined committed to helping our customers succeed above all other priorities. The speed at which we're innovating has never been faster. Our team is leading the future of work. We are releasing new innovations every two weeks with our Safe Workplace suite to help our customers safely return their employees back to the workplace.

Other new product introductions include Hardware Asset Management, Financial Services Operations, Telecom Service Management, Legal Service Delivery, Workplace Service Delivery and Connected Operations. I could go on. In addition, our platform innovations are differentiated for the direct-to-consumer industry where subscribers demand flawless customer service. One of the largest streaming services in the world seamlessly upgraded their ServiceNow environment this past weekend with 0 downtime.

There was no impact to any of their active subscribers. How's that for customer service. Such innovation demonstrates the power of the Now Platform. We were honored in Q3 to be named a leader in the 2020 Gartner Magic Quadrant for enterprise low-code application platforms.

We believe this is yet another example of the agility of the Now Platform to help customers quickly workflow any challenge. We think our Gartner recognition validates the breadth of our IT solutions, putting ServiceNow in a leader position in the two 2020 Magic Quadrants: IT risk management and IT vendor risk management tools. And of course, we remain the leader on both completeness of vision and highest in ability to execute for our ITSM core business. Amazing.

Now let's look at Q3 performance. Highlights across our portfolio, here we go. Our top 20 deals included three or more products. Our core remains ever strong.

ITSM was included in 17 of the top 20 deals with customers choosing ITSM Pro in 16 deals. The embedded AI and machine learning capabilities are helping IT organizations scale and automate, reduce complexity, cost and risk, while enabling people to work from anywhere. ITOM was included in 18 of the top 20 deals. We won deals with Mount Sinai and the Federal Defense Information Systems Agency.

Our customer workflows continue to be a growth driver. 13 of the top 20 deals included CSM. Eight of those deals were greater than $1 million. Our customer wins in Q3 demonstrate how ServiceNow is becoming the enterprise workflow standard.

For example, Q3 was our largest federal quarter ever. We now have nine federal customers over $10 million in ACV. Deals included the U.S. Air Force, U.S.

Army and the U.S. Department of Veteran Affairs. And we had new customer wins with agencies such as the U.S. Senate and Federal Claims Court.

In our largest deal ever, the Department of Veteran Affairs is modernizing its enterprise service management and IT capabilities. They are using the Now Platform to have real-time visibility into the health, availability and costs of their critical business services. This will deliver significant benefits to our heroic veterans. With ITSM Pro, VA will automate its manual workflows with AI and machine learning capabilities to free up employees to better serve veterans.

As the U.S. Air Force has publicly described, they are deploying the Now Platform as part of their digital Air Force of the Future vision. We are helping them deliver Genius Bar-like self-help services to the women and men serving our country around the globe. In addition to federal, state governments also are leveraging the Now Platform.

Tennessee's Department of Human Services expanded its relationship with ServiceNow. They are using CSM to reopen state offices for public services, while keeping health and safety a priority. They quickly adopted our latest Now Platform Paris release, utilizing a new feature that enables the public to self-schedule appointments and digitally check in when arriving for appointments. The state of Alaska's governor issued a directive to protect workers and ensure that the state can continue operating in a pandemic environment.

Their existing systems, manual processes and dispersed population created numerous issues to work effectively. The HR department is transitioning to a centralized operating model, and ServiceNow will solve their manual onboarding issues and enable employee workflows to be digitally transformed. Outside of federal and state and customers across industries, the Now Platform is the standard for driving enterprise digital transformation. 2020 has brought significant changes to Dell's work-from-home model.

Our HR product will support this new way of working by providing enterprise onboarding and transitions. And the Now Platform is helping Dell in its mission to provide the best customer experience in the markets they serve. Leading managed services provider, TPx, became the first customer of our new telecom industry-specific product. ServiceNow is going to run TPx' customer portal, enabling, onboarding, project management, customer servicing and IT support.

A major Indian financial institution chose ServiceNow to give them complete visibility to better control enterprise risks, replacing legacy solutions that were stitched together. This is another example of the movement we are seeing in the industry to replace legacy solutions and consolidate on the Now Platform. Huge savings. In Q3, we continued to see strong momentum with our Safe Workplace suite of apps.

This quarter, we added two new apps into the Safe Workplace suite: Employee Travel Safety and Health and Safety Testing. Our Safe Workplace apps demonstrate our ability to innovate quickly and deliver fast time to value in weeks, not months and years. We've seen nearly 800 downloads of our Safe Workplace apps. Customers include Standard & Poor's, Raymond James and Rutgers University.

At Rutgers, our Safe Workplace apps are being used for health screening, contact tracing and room reservations to ensure a safe environment for all students and faculty. Here's my favorite customer win. I'm a huge basketball fan. As many of you know, my grandfather, Bobby McDermott, was a Hall of Famer.

So I couldn't be more proud of how ServiceNow helped pro basketball have a successful restart season. The NBA and WNBA were able to implement ServiceNow's employee workflows in under a week to manage the complex manual processes associated with restarting. ServiceNow helped the league facilitate screening for more than 2,600 league staff, vendors and guests who entered the NBA and WNBA bubble in Florida and successfully processed more than 13,000 essential documents. Using ServiceNow technology, the league demonstrated that a safe, careful return to professional sports was possible with the right tools and protocols in place.

We are very proud to become the official workflow partner of the NBA and WNBA, and we look forward to helping the league continue to drive digital transformation to deliver great employee player and fan experiences. As we drive great customer wins, our partner ecosystem is growing even stronger. We are grateful for the investments our partners are making to grow their ServiceNow businesses and to serve our customers. We recently announced a go-to-market partnership between IBM and ServiceNow.

This new business opportunity combines ServiceNow's ITSM and ITOM capabilities with IBM's Watson AI ops to help customers automate IT and scale, reducing cost and risk. Last week, we announced an expanded partnership with Accenture. The new Accenture ServiceNow business group will accelerate digital transformation programs for customers in telecom, government, financial services, manufacturing, healthcare and life sciences. Hey, in summary, Q3 was another great outperform quarter.

ServiceNow is accelerating. We are confident in our ability to succeed in this environment. We are bullish on our long-term outlook and our path to $10 billion and beyond. Our leadership is expanding our reach and opportunities with marquee partnerships, such as the NBA and WNBA, IBM and Accenture.

There are many more. Our brand is resonating. We are becoming an essential C-suite strategic partner. Our ecosystem is growing fast.

Our go-to-market capabilities are stronger than ever. Our product innovation is second to none. We are deeply committed to attracting, retaining and developing the best talent in this industry. We are a big tent company dedicated to diversity, inclusion and belonging.

Diversity makes us stronger, making ServiceNow the destination company where the best talent belongs and thrives. And this is what's going to make us unstoppable. Our new board member and new chief global talent officer were announced today, and it demonstrates the caliber of people we are attracting. I could not be more thrilled to have Larry Jackson joining our board and Gaby Toledano joining our leadership team.

Both are exceptional leaders. Larry is leading the music industry revolution for Apple Music. His experience using technology to create innovative, market-leading consumer experiences will be invaluable as we drive innovative employee and customer experiences for the global marketplace. Likewise, Gaby brings deep tech industry and talent leadership experience, building world-class organizations at scale for some of the best-known companies in the world.

We were humbled to recently be recognized as the company with the best leadership team in an anonymous survey of more than 10,000 employees across the industry. Gaby is a great addition who will only make us stronger. In so many ways, we are just getting started. This year's unprecedented headwinds have only strengthened our digital transformation tailwinds.

We have the platform businesses need to workflow standard for enterprise transformation, the missing link for integration of existing technology investments and the creation of modern enterprise workflows. Remember, behind every great experience is a great workflow. Whatever challenge a business is facing, we workflow it. We will make workflow a verb.

ServiceNow is incredibly well positioned to become the defining enterprise software company in the 21st century. We will not slow down in pursuit of this goal. We couldn't be more fired up to finish this year very strong. And now I'll turn the call over to our outstanding CFO and my friend, Gina.

Gina Mastantuono -- Chief Financial Officer

Thank you, Bill. Q3 was a fantastic quarter for ServiceNow as the team continued to execute very well despite the challenges created by COVID-19. We exceeded the high end of our subscription revenues and subscription billings guidance, and that top line beat carried through to our robust operating margin and strong free cash flow generation. Q3 subscription revenues were $1.091 billion, representing 29% year-over-year constant currency growth.

Q3 subscription billings were $1.081 billion, representing 24% year-over-year adjusted growth driven by the great execution from our sales team. Remaining performance obligations, or RPO, ended the quarter at approximately $7.3 billion, representing 28% year-over-year constant currency growth. And current RPO was approximately $3.8 billion, representing 30% year-over-year constant currency growth. Our top line strength demonstrates the power of our product portfolio and our ability to meet the evolving needs of our customers.

The Now Platform is uniquely positioned to deliver exceptional time to value and provide workflows that create great experiences for customers, employees and partners. We are solving customers' challenges and playing a key role in accelerating their digital transformation. The Now Platform enables the missing integrations that link together systems, silos, departments and processes into unified workflows. Our best-in-class renewal rate improved quarter-over-quarter to 98%, demonstrating the resilience of our business as the Now Platform remains a mission-critical part of our customers' operations.

As Bill highlighted, our sales teams continued to win bigger deals in Q3, including our largest ever $13 million ACV deal. We closed 41 deals greater than $1 million in ACV in the quarter, and what's more, nine of those were with net new customers. Our ability to land new logos despite the macro uncertainty that COVID has introduced is a testament to our amazing products and our brand that continues to resonate with the C-suite. We now have over 1,000 customers paying us more than $1 million of ACV.

Turning to profitability. Q3 operating margin was 26%, a 400 basis point beat versus our guidance driven by our strong top line outperformance, lower T&E expenses as a result of COVID and about 150 basis points of marketing spend that shifted from Q3 into Q4. Year over year, our Q3 operating margin was consistent with last year as lower T&E expenses were offset by planned incremental investments in R&D and marketing spend of pipeline generation. Our free cash flow margin was 19%, up 500 basis points year over year driven by lower T&E spend in capex in the quarter as well as strong collections.

Together, these results demonstrate the strength of our business model and our ability to drive a balance of growth and profitability. Before I move to guidance, I want to give a brief update on the trends we are seeing in our business. Overall, we see strong momentum heading into the last quarter of the year. The highly affected industries we outlined earlier in the year, which represented about 20% of our business and include areas such as transportation, hospitality, retail and energy, continue to see macro headwinds but remain steady customers of ServiceNow.

We closed six new deals over $1 million in these affected industries. And while we do expect some headwinds in severely impacted industries like airlines, renewals of existing customers have remained very strong. Furthermore, we've also seen very healthy payment terms and DSOs. Collections have been strong, helping drive free cash flow upside in Q3, and we expect that trend to continue into Q4.

Enterprises are realizing that they need to quickly adapt to the workplace of the future, and ServiceNow is providing a smarter and faster way to workflow. Our pipeline generation has remained robust, and our pipeline coverage ratio for the remainder of the year gives us confidence in our ability to deliver a strong finish to 2020. As a result, we are raising guidance for the full year. We're raising our subscription revenues range to between $4.257 billion and $4.262billion, representing 31% year-over-year constant currency growth.

We are raising our subscription billings range to between $4.78 billion and $4.8 billion, representing 26% to 27% year-over-year adjusted growth. We continue to expect 2020 subscription gross margin of 86%, and we are raising our full-year 2020 operating margin from 24% to 24.5%. This reflects additional savings from lower T&E expenses related to COVID. Let me note that while we expect many of these expenses to return at some point in the future, we're taking our learnings from the current environment and leaning into the future of work.

These learnings will have lasting effects on our overall efficiency, giving us the ability to redeploy savings elsewhere. We plan to take advantage of the incremental leverage and make disciplined investments for growth. We're reinvesting in R&D and quota-bearing resources to drive innovation and pipeline to fill our tremendous organic growth engine, ensuring that we maintain our market leadership and are well positioned to take advantage of the digital acceleration heading into 2021 and beyond. Turning to free cash flow.

We're raising our full-year 2020 free cash flow margin 200 basis points from 29.5% to 31.5%, reflecting the increase in our operating margin. And our expectations for better than originally forecasted collections for the year. Turning to Q4. We expect subscription revenues between $1.155 billion and $1.160 billion, representing 27% year-over-year constant currency growth.

We expect subscription billings between $1.625 billion and $1.645 billion, representing 24% to 26% year-over-year adjusted growth. Moving on to profitability. For Q4, we expect a 21% operating margin, which includes about 150 basis points of marketing spend that shifted from Q3 into Q4 and some incremental investment into pipeline-generating activities to set us up for a strong and successful 2021. Finally, we expect fourth quarter and full-year 2020 diluted weighted average outstanding shares of 201 million and 199 million, respectively.

In summary, ServiceNow is the strategic workflow authority. As enterprises are adapting to the workplace of the future, CXOs are using the Now Platform to create new workflows for new value chains, transforming experiences across siloed systems and functions across the enterprise. The Now platform is the missing integration layer that multiplies the power of enterprises' existing technology investments and delivers exceptional time to value. I'm extremely proud of our team's performance as we focus on addressing these needs for our customers.

Our ecosystem partners are efficiently expanding our capabilities and our reach. And more and more enterprises are recognizing the strength of our one architecture model and its ability to deliver great, scalable experiences with speed and efficiency. We are the platform company for digital business. I'm very excited about the traction we are seeing in our journey toward becoming a $10 billion revenue company and the defining enterprise software company of the 21st century.

Finally, before moving on to Q&A, I just want to thank all of our employees around the world for your dedication during these trying times. We know everyone has a lot going on in their lives, juggling work and caring for your families at home. And we just want to express how appreciative we are of your contributions. ServiceNow wouldn't be in the position of strength it is without each and every one of you.

You make us ServiceNow strong. With that, operator, we'd like to now turn over the call for questions.

Questions & Answers:


Operator

[Operator instructions] And your first question is from Raimo Lenschow of Barclays.

Raimo Lenschow -- Barclays -- Analyst

Congratulations from my side. Bill, a slightly bigger picture question. Now that we are living in this normal environment of kind of working from home, demand generation in a different way than we had before, what lessons have you learned so far in terms of like how this new world is going to function now in terms of you planning for the coming years in terms of sales hiring, lead generation, etc.? Thank you.

Bill McDermott -- President and Chief Executive Officer

Thank you very much. Appreciate it, Raimo. First of all, we're learning that digital transformation is actually accelerating in the COVID environment. It is, however, a platform thing.

So you need to have the platform that can truly make the difference. And we see workflow as the new productivity unlock. When you look at IDC talking about $3 trillion invested and system of record kind of change, you see system of action taking on a whole new meaning now in the information technology industry, which puts us in a very nice position in any environment. So I think what happened here is COVID accelerated digital transformation.

Now that people are into it, they've got to keep going as fast as they possibly can. Our direct sales force is everything as relevant as ever before, and we are continuing to make sure the coverage model expands geographically by industry and also persona. You can also complement this very nicely with an inside selling motion to both support existing accounts and pursue net new logos. You're going to be in an environment where you can do events.

These events do not have to be done in big stadiums with thousands of people. You can do them digitally and have techniques where you bring live experiences into the event. That also gives a growth company like ServiceNow the ability to take some of that T&E and put it into revenue strategies for future growth. So we're super excited, super confident about our ability to execute in this environment because as you know, Raimo, the future of work is now totally different than it was eight months ago.

And thank goodness we leaned into that when we did in March and started a revolution.

Raimo Lenschow -- Barclays -- Analyst

Yes. Well done. Congratulations.

Bill McDermott -- President and Chief Executive Officer

Thank you very much.

Operator

Your next question is from Samad Samana.

Samad Samana -- Jefferies -- Analyst

Good evening and thanks for taking my questions. Congrats on a great quarter. Bill, I wanted to maybe touch on the federal strength and even the state and local government. It seems like you're seeing an acceleration in transformation there as well.

And I'm curious, how much of the strength there was driven by modernizing existing processes or old processes versus kind of near-term, pandemic-driven spend on dealing with like monitoring PP&E or contact tracing, etc.?

Bill McDermott -- President and Chief Executive Officer

Yes. I believe, as I said, what happened with digital transformation might have been accelerated by COVID, but the fact is I think it brought everything to light. When people had to work in a distributed way, work from home, all of the technology needs that they have, the communications need that they have, the self-service needs that they have, all these things became extremely clear in a COVID environment. And now that, that environment is clear, if you read the research, clearly, we're never going to go back to the way things were even after the pandemic is resolved.

So the future of work is changing. The millennial generation is changing. The way people work will change. And as it relates to the federal government, it's a big opportunity because the information that's required to get across the country to citizens is very slow.

So the government is rethinking strategies in terms of communication and providing digital services. So these workflow services are going to be here for a long time because there's a lot of things to fix. So we are in an environment now where I think the genie is out of its bottle, is never going back in and digital transformation is going to continue to accelerate. And yes, we do have return to work, but that hasn't been the major source of the revenue drive in federal, state and local.

It's really been more automating and rethinking work processes and automating everything in a much more human-friendly way.

Samad Samana -- Jefferies -- Analyst

Great. Thanks for taking my question and congrats again. Great to see you guys doing well.

Bill McDermott -- President and Chief Executive Officer

Thank you very much.

Operator

Your next question is from Kirk Materne of Evercore ISI.

Kirk Materne -- Evercore ISI -- Analyst

Yes. Thanks very much for taking the question and congrats on the quarter. Bill, I was just wondering if you could give us some idea of when you're going into these big deals, obviously, the economic backdrop is still choppy. So your customers are having to make decisions about maybe bringing budgets from other areas and sort of giving it to you or allowing you to earn it, I guess.

What's going on in those conversations? Are you taking budgets from other area, from other vendors? Are these dollars that used to be spent on more antiquated business processes that you're now able to sort of pull together? Yes, I'm just trying to get a sense because if you take a larger view of what's going on, obviously, this is still a difficult economic backdrop, but you all are clearly taking wallet share and just would love some more color on that. Thanks.

Bill McDermott -- President and Chief Executive Officer

It's my pleasure. So the bottom line, Kirk, if you think about it, the future of work in terms of the employee experience, it's clear now that one portal that can provide all the services that employees need, from onboarding an employee to self-serving all of their cases, to training them and creating a segment of one learning journey for them, to managing issues that might resolve — that might come up and need to be resolved across multiple functions, all of these things are workflow related. So I think the future of work has truly accelerated the consumer strength of our application because it's so easy to use. It's so beautiful to use.

People love it, and we hide all the complexity of what's been created over the last half century. In terms of the customer experience, the customers today, especially in the digital world, expect companies to give them great service. And the kind of the SFA of the past, how do I upsell you and cross-sell you, they're not in a good mood for that. What they really want is they want you to give them a great service in terms of whatever they signed up for and then make all the self-help tools available to them and use AI to automate the experience.

And then if you do need human intervention, the workflow process itself should initiate a call order to a bot or to a human to resolve something. So the customer gets what they want, and they get it digitally. And Netflix taught us this. Disney+ taught us this.

This is the new way that customers want to work, and they're not in the mood for an upsell or a cross-sell when they're calling in to have a problem resolved or they're trying to get a service initiated. And similarly, big companies have a direct-to-consumer heads-up right now. It's kind of like, "Hey, the middle people I used to work through, the wholesalers, retailers, etc., aren't open. So I've got to go direct to my consumer with my brand and my product and create a great experience." All of this is workflow.

So the changes in the future of work are going to be there. But then you could take a large bank. I had a CIO extraordinaire in with our Board and she talked about retiring 283 legacy applications and converging them all on the Now Platform, and then a list of another 100. And she basically told a great story about literally thousands of people working from everywhere and getting them all their tools and procedures and allowing them to navigate in this world on their own in a way that's highly pleasing to them because they want to drive productivity with their workforce.

They also want to mitigate risk and have controls in place, so the places run well and everything now is just running so much better. They took out all these 283 systems, and they delivered like hundreds and hundreds of thousands of dollars by application that they retired. And when you add it all up, it's in the triple-digit millions. So they're saving huge money.

Kirk Materne -- Evercore ISI -- Analyst

Thank you.

Bill McDermott -- President and Chief Executive Officer

You're welcome.

Operator

And your next question is from Karl Keirstead of UBS.

Karl Keirstead -- UBS -- Analyst

Yes. Thank you. Maybe I'll direct this one to Gina. Gina, on the margin improvement trajectory, it seems like there's a band we should be thinking about.

Maybe at the low end, the pre-COVID rate at which ServiceNow was improving margins at about 100 basis points a year, and perhaps at the high end, the roughly 300 basis points that you're going to put up in 2020, which is probably somewhat unsustainable. I wanted to ask whether your comments about upticking investments was intended to perhaps push us to one end of that spectrum. I'm not asking for a firm guidance. I know that will probably come later.

But just directionally, maybe how this experience with COVID and the cost structure has changed, if at all, your view of ServiceNow as a margin improvement story?

Gina Mastantuono -- Chief Financial Officer

Yes. So thanks for the question, Karl. It's a great question, and I was trying to give some — I was trying to elaborate here, right? So the 300 basis point of margin improvement that you're seeing this year, as you said, is not sustainable, right? Some of these costs will return, and what we wanted to say is that not all of them will at the same level, right? And so we absolutely will be leaning into the future of work and what that means from a cost perspective. But we don't plan because we don't rest on our laurels.

And as Bill talked about, this acceleration in digital transformation, really being at the forefront and really making sure that we are well positioned to take advantage of that growth and really remain market leader, we will absolutely continue to invest to ensure that we are well positioned in the view of that acceleration happening. And so more will come on the absolute margin side, but I wanted to make clear that the 300 basis points is not sustainable. And that certainly, some of the learnings and efficiencies that we'll see in a post-pandemic world will be redeployed in areas such as R&D and in quota-bearing resources to really kick-start growth.

Karl Keirstead -- UBS -- Analyst

OK. That's helpful. And if I could ask a follow-up to Bill. Bill, it's now been pretty well a year since you were announced as new CEO of ServiceNow.

Congrats, by the way, on that anniversary. And I'm just wondering, now that you're getting comfortable in the seat, the execution has been strong, perhaps it's time that M&A becomes a bigger lever to move ServiceNow in the direction you'd like. I'd love your thoughts on that. Thank you very much.

Bill McDermott -- President and Chief Executive Officer

Well, Karl, thank you very much. It's been a year. It's been amazing, a lot of you. And the workforce, the partners, the customers, the satisfaction, the loyalty, the excitement on Net Promoter Score, everything is just so positive.

And the culture here is so committed, and I think that has really gelled very well with my DNA. So I'm just honored to be here and having the time on my life. As it relates to M&A, we have a situation here where the core business, and the core business has so much potential in and of itself and the platform has so much potential in and of itself, and when you extend that to the employee experience and some of the items I mentioned today and then you also think about the workforce and the workforce of the future and all the experience layers that go along with that and what ServiceNow will do for people and we're going to make people and their lives some much better in the enterprise, then you think about customer service maintenance and the enormous success we're having with customer service management and the huge TAM of customer service management, we just have so much opportunity organically that you have to think about geographies, you have to think about industries, you have to think about the personas we're going to serve. And when you put it all together, I mean, depending on what research you look at, Morgan Stanley, when I first came in here, had just taking paper-based processes and enterprises and automating them into workflow.

So it's $228 billion in the U.S. So if you extrapolate that to the world, you could easily get to $400 billion, just the math. You think about the employee experience, the CSM, the core business now with [Inaudible] and AI and mobi operational efficiencies, so much organic growth. So I think the tuck-in strategy has worked well for us because we've been able to replatform all of that code to the Now Platform.

We have no tech debt. Many companies sort of expanding through acquisition now have a mess on their hands, that they're spending engineering time reintegrating all the time instead of building that through innovation. So we're very thoughtful about what we're doing here and why we're doing it in service to the customers. So long and short of it is it's an organic growth story.

There's plenty of room to grow. The TAM is big. And if we did something on a more sizable scale, we would have very clear guardrails on doing them for the customers' interests and the large expansion opportunity. But we would never take away the experience benefits they're getting from the Now Platform.

Karl Keirstead -- UBS -- Analyst

Got it. Thank you very much, both of you.

Bill McDermott -- President and Chief Executive Officer

Thank you very much.

Operator

Your next question is from Keith Weiss of Morgan Stanley.

Keith Weiss -- Morgan Stanley -- Analyst

Thank you, guys, for taking the question. Very nice quarter. Bill, a question for you and then one for Gina. Definitely feel your excitement about the kind of workflow space.

But it does seem like there's a lot of other vendors that are trying to converge on this opportunity as well and trying to automate people's workflows and perhaps sort of different competitive set or environment that ServiceNow have seen historically. Can you give us your perspective on sort of who are the main competitors for the big vision of ServiceNow, who are the guys that you really are going out there and looking to that to get those big deals done?

Bill McDermott -- President and Chief Executive Officer

Keith, that's the amazing thing. We don't need anyone to lose for us to win. So if you think about the large system of record providers out there, we have no quarrel with them. Most of the CEOs and technology leaders out there have invested heavily in those platforms.

And the last thing they're interested in doing right now is switching out those platforms, especially in the COVID environment where speed, acceleration, resiliency and serving customer and employees are at the top of their to-do list. So that's not a problem for us. And then if you think about the point solution providers, of course, there's always going to be point solution providers running around. But we became the platform standard for workflow automation.

And now we've extended the perimeter into the employee and the customer service management areas, which are huge TAMs. Also, as Gartner indicated, we're really gaining tremendous traction on the platform itself where people are building innovation onto the platform. So what I see happening is large companies in the Fortune 2000 are basically taking legacy and they're putting it on to Now. They're basically saying, "How can I fire my legacy? Because I can go to ServiceNow to give the consumer a great experience.

I can automate my workflows across domains, systems, silos and give my employees and their customers a great experience." And that's so important to them, they don't even ask about price as much as they ask about how quickly can you get it done. And then when we tell them how quickly we can get it done, they're literally in awe because we're talking weeks. We don't talk in years, and that's a very different language for most large-scale companies. So I would really tell you, there's no competitor that we go into these large deals are worried about.

We just focus on the customer, getting their business to run and do it well. And then obviously, we have all the tools, processes and people in place to show them the value. And we not only show them what's possible, but we manage the value through the life cycle of the relationship at an odd form level. And these are plays that have been put into the ServiceNow playbook in the last year that is scaling very, very nicely, and the customer can see what they're getting out of the platform and they like it.

Keith Weiss -- Morgan Stanley -- Analyst

Got it, got it. And then for Gina, the confidence you guys have in the business, you guys are definitely expressing on the conference call, but also in hiring. If I got my math right, I think head count is up something in the order of like 27% on a year-on-year basis. So definitely investing behind this opportunity.

Two questions for you. One, is that level of growth sustainable for ServiceNow on a going-forward basis? Or should we expect that to moderate? And two, just given the dynamics of the subscription model where revenues kind of follow the trend of subscription billings and billings overall, are there some margin implications to that type of growth that we should be keeping in mind as we think about 2021?

Gina Mastantuono -- Chief Financial Officer

Great question, Keith, so I appreciate it. So yes, you're right in your numbers. Head count is up significantly. We made the pledge that we were not going to lay off this year in the COVID environment, and not only that, that we were actually going to continue to grow our head count pretty aggressively year over year especially in R&D and in sales.

And so we have done just that, and we'll continue to do that. With respect to trends, we are really focused on hiring 9s and 10s in this organization. And the announcements that we've made on new leadership have been fantastic, and we're really getting high-quality, high-caliber talent. People want to come work with ServiceNow, and we are just so thrilled about that.

And so yes, I absolutely believe that the trend will continue, that we will grow head count. From a margin perspective, I said earlier, it's a bit too early to comment on '21. Certainly, the 300 basis points that we're seeing this year is not sustainable. And we absolutely will be very focused and disciplined in all our investments, including head count, to ensure that we're driving the right level of ROI, but at the same time, really investing behind growth and innovation.

Bill McDermott -- President and Chief Executive Officer

Yes. And Keith, one of the things to build on what Gina is saying, we pretty much have so many people trying to work with ServiceNow, and we're very honored by that. But you got to really thread the needle to get in there. So what we're putting into the company is sustainable, and we'd rather have a job open for an extended period of time rather than settle on talent.

So we're going to build a great company here. The other thing I want to mention to you is the margin profile is also substantiated by revenue per employee. And if you look at our revenue per employee and how it's climbed and how it's climbed against any comparisons we've come up with in the enterprise, it's pretty impressive. And Gina and I study that very carefully, and we want to make sure that our shareholders have total visibility into all the things that we're doing.

And we also run the whole company on the Now Platform. So we're getting tremendous efficiencies out of that, that being reinvested into people. And I think that's a big thing. And we're really focused on the engineering pride of the company.

We make great, great products, and we provide great service with those products, and the brand obviously is resonating. But in addition to that, where we put the money is on things that will return for the shareholder, so in the form of revenue and sustained revenue in addition to the margins. So really, really focused on the whole P&L right now.

Keith Weiss -- Morgan Stanley -- Analyst

Yes. ServiceNow's unit economics are really best in class. So we definitely take notice of the efficiency with which you guys make those investments and the greater returns. So great job, guys.

Bill McDermott -- President and Chief Executive Officer

Thank you very much.

Operator

Your next question is from Phil Winslow of Wells Fargo.

Phil Winslow -- Wells Fargo Securities -- Analyst

Hi. Thanks for taking my questions and congrats on another great quarter. A question for you, Bill, then a follow-up for Gina. Bill, obviously, given your background scaling go-to-market with large application platform companies, now that you've been at ServiceNow for three-plus quarters, how do you think about the opportunity that ServiceNow has, not just simply to sell deeper into the organization, but as you mentioned, you acquired new customers? How do you think about sort of balancing that opportunity? And then Gina, sort of as a follow-up to that in terms of just go-to-market capacity, obviously, you've added a lot of go-to-market heads this year.

What are you seeing in terms of just ramp of those new heads, especially doing so in a virtual environment?

Bill McDermott -- President and Chief Executive Officer

Yes. So Phil, I'm really excited across the year here. We crossed that threshold, which is great. In terms of building the go-to-market machine here, it's an outstanding business because the business was built on Net Promoter Score, customer satisfaction and loyalty.

And when you have a baseline of very, very happy customers that love the product and are having a great experience, it's a lot easier to scale an organization. So I start with that in total respect of the great engineering and outstanding go-to-market folks that we have in the company that deeply care about customer satisfaction and loyalty. And that baseline has enabled us to focus. I'd say we're focusing very carefully, Phil, on the Global 2000.

We are now geographically expanding in Asia. We also have several places within EMEA that we can expand, and we're on top of that. And we're also segmenting things much more by industry now because as you know, when you have an industry solution, it's easily replicated in other parts of the world and in other accounts. So we're very good with large customers getting success and then fast replication of that success.

And the value that, that delivers is something that's still a tailwind, and there's plenty of room to grow. Furthermore, I do believe that, that works especially well on a COVID environment on a same account revenue growth basis. And then there's a whole new motion that we have where the net new logo expands into the company, and that will nicely complement the direct sales force. So there are several indirect techniques that we're putting into place.

And just to let all shareholders know what we're thinking about this stuff and in our sleep, too, we want to make sure that things that we used to do, that perhaps because of COVID or we came up with a better idea even after COVID, is going to be invested in things that give us growth and do so with high efficiency. So we're covering the board geographically by industry, by persona. It's a direct game. The focus is on the 2000.

But we can also go down market with a lot of self-service techniques and in size techniques that we've yet to fully form. And they are in place, and we think they'll hit the ground running in '21 as well.

Gina Mastantuono -- Chief Financial Officer

And then on your second question with respect to sales efficiency and ramp rep, I've been extremely impressed still with the sales teams' ability to close large deals a la mode. As we mentioned, we closed 41 deals greater than $1 million in ACV this quarter. On a sequential basis, we actually saw an improvement in sales productivity with the most notable uptick coming from North America. Attrition rate remains low, almost at the lowest rates we've seen in quite a long time.

And so we're entering into '21 with this ramp rep significantly higher than at this time last year. So we feel really good about sales productivity, about the ramp rep. And of course, ramping new employees in a virtual environment, we use the Now Platform. And so onboarding platform and product has just been phenomenal.

And so the 27% growth that you've seen this year in total heads, we've been onboarding the bulk of those folks remotely in a COVID environment, and it's been solid. I actually had a couple of hires that were just so impressed with how easy it was to onboard. And so really, really proud of the entire team.

Phil Winslow -- Wells Fargo Securities -- Analyst

Great. Thank you.

Operator

Your next question is from Derrick Wood of Cowen and Company.

Derrick Wood -- Cowen and Company -- Analyst

Great. Thanks. I'll echo my congrats. I guess for Bill or Gina, I know you guys don't disclose net revenue retention rates.

But I'm just curious, if you look outside of the distressed verticals you talked about, how would you characterize how expansion rates have trended this year versus what you saw pre-COVID? And then as a follow-up, I mean, as you enter your strongest renewal quarter in Q4, can you talk about the focus and the demand for ITSM Pro and maybe give us a sense as to what inning you think we're in, in terms of penetrating the installed base? Thanks.

Gina Mastantuono -- Chief Financial Officer

Yes. Great. I'll take that. Listen, I think that our expansion rates have been really holding up well, similar to what we've seen pre-COVID.

So really strong, happy with what we're seeing, even with respect to the distressed verticals. I talked about those deals greater than $1 million in the year, sorry, in the quarter holding up really strong. And so we feel really good about expansion rates. We feel really good about even our significantly distressed verticals, right, we are seeing more upsell than down-sell.

And so again, feel really good about that. If you talk about the demand for ITSM Pro, well, it continues to be going well and really strong. We continue to have a strong quarter in Q3. We had great strength.

We saw increases in automation and operational resiliency within the product. As we've talked about before, there's a 25% price hike — uplift from ITSM Pro, and 15% of our customers are using it today. So there's significant runway still ahead of us with respect to the Pro SKU. And so again, in summary, really doing well.

Customers are resonating in the AI and ML capabilities that are incremental, and the Pro SKU are really resonating right now more than ever as you think about the future of work in this COVID environment. And so still early inning with a lot of runway to go.

Bill McDermott -- President and Chief Executive Officer

And Derrick, one thing to build on Gina's commentary, on the pipeline, if you look at our pipeline in a snapshot, this time last year, our pipeline is up this year versus last year. And even when — if you want to play the weigh up game in certain industries that are harder hit so you have enough coverage on this conversion side, we have more than enough. So we've already gone through all that, and the retention has been outstanding, including in the distressed industries. And the pipeline overall is substantially strong, and the loyalty actually went up this quarter versus last.

So the business is in really good shape.

Derrick Wood -- Cowen and Company -- Analyst

Great to hear. Thanks.

Bill McDermott -- President and Chief Executive Officer

Thank you.

Operator

Your next question is from Brad Zelnick.

Brad Zelnick -- Credit Suisse -- Analyst

Excellent. Thanks so much for fitting me in. I want to follow up on Keith's question around head count because I noticed the exception was in professional services. And Bill, I don't think anyone has the kind of experience and relationships with the global SIs as you do.

So can you give us an update on these relationships, the joint investments you're making and the kind of partner leverage that we should expect to see out of the business going forward?

Bill McDermott -- President and Chief Executive Officer

Yes. This is such a good question. If you think about a partner like EY as an example, if you talk to Carmine, ServiceNow, [Inaudible] a year ago on ServiceNow platform building his whole team. And we were one of the partners.

We were one of the companies. And now it's us and Microsoft as his two most strategic global partners. If you think about Accenture, I talked about [Inaudible] today, Accenture's now opened up a global practice dedicated with complete passion and investment. If you look at IBM, IBM had a very large on-premise, their version of ITSM on-premise legacy.

And they've entered into a big partnership with us to actually move that to the ServiceNow Cloud. We teamed up with them on their Watson AI ops. Everybody wins. But best of all, now IBM is committed to a large-scale ServiceNow practice.

And this is also true with all the other signature partners that you're well aware of. So what has happened? What has changed. There isn't a single partner out there that doesn't have at least a $1 billion, if not many more billion, vision for what they will do with ServiceNow in the very near future. They are all increasing their investment.

They're all looking at ServiceNow as a standard for digital transformation. And they all see either ServiceNow as a cross-platform integration engine to straighten out the way companies run and also complement their auto practices, or they're looking at it as a pure net new workflow revolution practice on some of the dimensions that Gina and I discussed today. In all cases, it is really getting tremendous tailwind, and it's one of the network effects that I think is coming from building great products, having tremendous engineering pride and also lining up the company only with customer satisfaction. I mean that's really what we care about.

And the partners are really resonating with that because when you work with ServiceNow, you don't have situations where you're seeing a product misses, situations where ServiceNow complements their practice, it works, everybody is happy with it, how do we scale. That's the conversation.

Brad Zelnick -- Credit Suisse -- Analyst

Awesome, Bill. If I could just squeeze one in for Gina. I want to ask about the COVID assumptions that you have baked into the Q4 guide. Because if I look at what you were saying a quarter ago, you would assume that the most significant headwinds would occur in Q2 and Q3 and that — as it relates to COVID, and that into Q4, the economy would be opening up more broadly.

Now if I look at the safe harbor in the deck that you have out there today, it instead says that the assumptions are based on information available to us today. Can you just maybe talk a little bit about is this, in your mind, a headwind relative to what your assumptions were a few months ago? Because we're seeing — I know this is changing and evolving very rapidly. But even today with France shutting down, how are you thinking about this?

Gina Mastantuono -- Chief Financial Officer

Yes. It's a great question, as you know, right? So the uptick in cases and France closing down is certainly a key on all of our minds, right, not just from a business perspective. But what I will say is that as you saw the guide, we're actually raising our guide for Q4. And so we definitely took a cautious approach in all of our assumptions back at the end of March, and we continue to refine them as we go.

What gives me confidence right now in our current Q4 guide is our pipeline stack, right? The coverage is better than last year. Our close rates are strong. And so we continue to be able to evolve and close deals in this remote environment. And so if you think about where we were back in March, April, May, the whole world basically locked down.

We feel confident that we'll be able to really continue to hit our numbers and have a strong close to 2020 and Q4. The team is doing a phenomenal job. Execution is just top rate. And at the end of the day, back to the comments that Bill has made earlier, more and more companies are leaning in and not leaning out because they absolutely have to.

And the longer COVID exists, and let's be clear, no one thinks this is going away tomorrow, the more companies have to invest in exactly what ServiceNow is providing. And so again, pipeline looks strong. We feel really good about our Q4 guidance.

Brad Zelnick -- Credit Suisse -- Analyst

Thank you so much, Gina. Congrats on all the success.

Bill McDermott -- President and Chief Executive Officer

Thank you.

Operator

And your last question is from Zane Chrane of Bernstein Research.

Zane Chrane -- Bernstein Research -- Analyst

Hi. Thanks for filling in. A little bit of a conceptual question regarding your TAM. I know you've alluded to this in the past, but I get a lot of questions from investors regarding how much is your TAM when you add up the spend on HR versus customer service or IT management, etc.

And it seems like that's maybe not the best way to think about it. Increasingly, it seems like the TAM is a function of how much the employee time, the value of employee time tracking work about work is being wasted in aggregate around the world, compounded with the lost value and suboptimal business results. When you guys look at your opportunity in terms of those two variables, assuming that's the correct way to look at it, what do you see as being the size of the opportunity? And then which technologies or competitors do you view as being most concerning for as ones you would want to watch on the horizon as a potential threat? Thank you.

Gina Mastantuono -- Chief Financial Officer

Yes. I mean it's an interesting question. And if you ask 10 different people what the TAM is, you will absolutely get 10 different answers. If you look at what Gartner said when we IPO-ed about what the TAM was for ITSM, it was significantly lower than what it is.

I think most people would say the TAM is about $165 billion, but that's not including exactly what you talked about, right? The real opportunity to automate manual processes throughout every single organization, it's enormous. It's huge. And if we think about that, I think that — I'm not going to quantify it here, but you all can do your math. It's large.

And so we absolutely believe that the acceleration of digital transformation is happening today, and that we're going to continue to evolve and innovate to ensure that we remain the market leader. And so from a competition perspective, we talked about this often. We're a platform company and a platform company first. And so really with respect to competition, there's no one out there that can do what we do the way we do it, can automate complex workflows across the enterprise, across silos, across departments.

The benefit is really that we can provide the end-to-end functionality across IT, employee, customer throughout the organization. We're the only cross-functional platform that can sit on top of any of the systems of records to enable workflows across those systems of records, right? So as Bill said earlier, no one has to lose for us to continue to grow and thrive. And so our differentiation is that we're really the only software company at our size with one platform, one data model, one architecture. And so we're poised to take advantage of that incremental opportunity as it comes.

But you're absolutely right. The TAM is getting larger and larger as we really think about how companies really need to automate the back and middle office, for sure.

Zane Chrane -- Bernstein Research -- Analyst

Very helpful. And for what it's worth, I think ServiceNow is the only company that ever estimated a larger TAM than what management claims. So you guys have definitely executed well, and congrats on the success. Thank you very much.

Bill McDermott -- President and Chief Executive Officer

Thank you very much, Zane.

Operator

[Operator signoff]

Duration: 68 minutes

Call participants:

Lisa Banks -- Senior Vice President of Finance

Bill McDermott -- President and Chief Executive Officer

Gina Mastantuono -- Chief Financial Officer

Raimo Lenschow -- Barclays -- Analyst

Samad Samana -- Jefferies -- Analyst

Kirk Materne -- Evercore ISI -- Analyst

Karl Keirstead -- UBS -- Analyst

Keith Weiss -- Morgan Stanley -- Analyst

Phil Winslow -- Wells Fargo Securities -- Analyst

Derrick Wood -- Cowen and Company -- Analyst

Brad Zelnick -- Credit Suisse -- Analyst

Zane Chrane -- Bernstein Research -- Analyst

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