ServiceNow Inc (NOW) 2012 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter 2012 ServiceNow earnings conference call.

My name is Deanna and I will be the operator for today.

At this time all participants are in a listen-only mode.

Later we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today, Mr. Robert Specker, General Counsel.

Please go ahead.

Good afternoon, and thank you for joining us on today's conference call.

This call is also being broadcast live over the web and can be replayed at investors.servicenow.com for the next 30 days.

With me on today's call are Frank Slootman, Chief Executive Officer, and Michael Scarpelli, Chief Financial Officer.

After the market closed today, ServiceNow issued a press release with results for its third quarter ended September 30, 2012.

If you would like a copy of the release, you can access it online at our website.

We would like to remind you that statements made on this conference call that are not historical fact may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934.

These forward-looking statements include, among other things, information concerning our possible or assumed future results of operations, business strategies, financing plans, operating model, competitive position, industry environment, potential growth opportunities, potential market opportunities, and the effects of competition.

Words such as may, will, expects, intends, plans, believes, targets, estimates, and variations of these words are intended to identify forward-looking statements.

These forward-looking statements involve risks and uncertainties that could cause our results to differ materially from those expressed or implied by such forward-looking statements.

The risks and uncertainties include any weakening of general economic and market conditions and customer budgets for information technology spending, our ability to react to trends and challenges in our business and the markets in which we operate, our ability to anticipate market needs or develop new or enhanced products to meet those needs, our ability to scale our sales channels, our ability to recruit and retain personnel, our ability to compete in our industry and other risks and uncertainties described more fully in our documents filed with or furnished to the Securities and Exchange Commission.

All forward-looking statements are based on information available today and we assume no obligation to update these forward-looking statements.

Any future product feature or related specifications that may be referenced in today's call, are for information purposes only, and are not commitments to deliver any technology or enhancement.

ServiceNow reserves the right to modify future product plans at any time.

In addition, we will reference non-GAAP financial measures on this conference call.

The Company reports non-GAAP results for gross margins, operating margins, net income or loss, basic and diluted income or loss per share, free cash flow, and billings, in addition to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP.

Management believes that this supplemental non-GAAP information is useful to investors in analyzing and assessing the Company's past and future operating performance.

To see the reconciliation between these non-GAAP results and GAAP results please refer to our press release filed earlier today, and for prior quarters, previously filed press releases, all of which are posted on our website at investors.servicenow.com.

I would now like to turn the call over to ServiceNow CEO, Frank Slootman.

Thanks, Rob.

Good afternoon and thank you for joining us on today's call.

We are pleased to announce record revenues for the quarter.

Revenues grew year-on-year 88% to $64.3 million continuing a five-year trend with quarterly revenue grown by more than 80% year-on-year.

Both billings and deferred revenue were marked by strong performance with total billings up to $81.2 million, up 13% sequentially and 96% year-on-year.

And a deferred revenue balance up to $147.9 million, up 13% sequentially and 81% year-on-year.

During the quarter the company added a record 145 customers, the total roster of customers is now 1,346.

Some of the new logos we have permission to mention here are RepHeads, Kingfisher, Discovery Communications, KBC Global Services, Discover Financial, and Australia Post.

Our customer base is diverse in terms of revenue concentration, vertical industry, and geography, but with a focus on Global 2000 Enterprises as defined by Forbes Magazine.

We are now counting more than 240 Global 2000 Enterprises as ServiceNow customers, with 18 new Global 2000 additions to the roster during the quarter.

Also important, our 12 month trailing revenue per customer continued to grow sequentially and was up 90% year-on-year to approximately $181,000.

In terms of existing customer revenue performance our renewal rates continued to be strong during the quarter topping out north of 96%, a testament to customer dedication and commitment.

We also continue to see contribution from up sales, which represented 20% of our annual contract values signed during the quarter.

Our Professional Services business also continues to make good strides.

Our Services revenue grew at a greater rate than our total revenues year over year.

And Services profitability has improved every quarter this year.

It is important to note that a healthy Services segment is a critical enabler of our growth on the Software side of our business.

From a product standpoint, our focus continues to be on creating compelling online service experiences for end-users and automating the backend processes, minimizing manual interventions by IT staff.

At VMworld in August we announced and demonstrated our platform managing the lifecycle of virtual machines, meaning their inception, provisioning, and eventual disposition.

End-users can initiate these service requests without having to touch VMware directly, or having to bother administrative staff that specialize in the environment.

Automation is a central theme.

As an industry, we will not make it to the cloud if we don't disintermediate key IT processes from manual involvement and intervention.

In October, we made a major software refresh that included a more comprehensive asset management solution.

Asset management functions are already broadly in use on our platform, but this release further supports the uptake of that feature set across all kinds of IT assets.

For example, the application helps manage utilization of software assets as well as compliance with license terms and maintenance contracts.

We also introduced support in this refresh for agile software development processes, which is part of the system development lifecycle, or SDLC application.

The IT service management applications with the heaviest uptake in our customer base, meaning more than 50% penetration, are incident management, request management, change management, and the configuration management database or CMDB.

In terms of the latter, 80% of our customers' production instances record more than 1,000 service assets in the CMDB, an indication of adoption of this capability.

In terms of platform use, we continue to see broad use of our platform capabilities to both extend our applications, as well as stand up other service-oriented applications, often in adjacent service areas like human resources, facilities, legal, travel, and sometimes farther afield in the line of business.

One leading indicator suggests that as much as 85% of our production instances have custom objects defined, which is a proxy for platform usage outside of our standard applications.

These custom objects change and extend the standard database model we provide with our applications, and goes beyond normal tailoring and configuring of our applications.

A Fortune 100 global diversified infrastructure finance and media leader is using the ServiceNow platform to replace their case management system, which is a multi-P&L initiative designed to service all post sales activities, including customer responsiveness, warranty claims processing, and technical responsiveness.

ServiceNow will be used as a single face to their end customers.

This initiative is geared towards building a knowledge base of all known technical issues, escalations, proposed resolution, and documentation of site activity.

The case management initiative is also geared to capture and process warranty claims for units under an insulation or under warranty.

The system is at the core of enabling the company to better understand the cost of quality and cost of failure and take necessary corrective actions.

During the quarter, we continued to separate out the platform from a licensing standpoint with new customers as well as testing the pricing strategy for the platform as a stand-alone offering.

We plan to launch the standalone platform pricing to our worldwide field organizations early next year.

Our growth formula consists of three variables; new customer additions, renewals of existing contracts, and up sells, which are expansions of existing contract value.

In order to grow, we must staff to keep up with and stay ahead of the demand.

During the quarter, we added 81 employees, ending the quarter with 963 employees, representing growth of 9% sequentially and 96% year-on-year.

As we enter the final quarter of 2012, we believe we are well-positioned to take advantage of the opportunities ahead.

With that, I will turn the call over to Mike Scarpelli, our CFO, to go over the numbers in more detail.

Thank you, Frank.

Before I began reviewing the numbers, I would like to point out that all financial figures I will discuss today are non-GAAP unless I state otherwise.

With the exception of revenue numbers, which are GAAP.

You can find a reconciliation of GAAP to non-GAAP results in our press releases on our website.

With that let me take you through some of the numbers.

Total revenues for the third quarter were $64.3 million, representing 88% year over year growth and 13% sequential growth over second-quarter revenues of $56.8 million.

Revenue was above our outlook for the quarter, primarily due to strength in new business and renewal bookings.

Subscription revenues for the quarter were $55.3 million representing 82% year over year growth and 18% sequential growth.

Subscription revenue growth was driven by strong bookings in prior quarters, coupled with a retention rate of 96% in the current quarter.

As Frank mentioned, 20% of our annual contract values signed in the quarter came from up sells in our existing customer base.

This is down from 36% last quarter, primarily due to a shift in our overall bookings mix with three new customer transactions greater than $1 million in annual contract value.

A record 145 net new customer wins, and larger renewal opportunities than previous quarters.

Professional Services and Other revenues were $9.1 million for the quarter, growing 135% year over year.

On a sequential basis, excluding registration and sponsorship revenue of $2 million recorded in the second quarter from Knowledge, our annual users conference, Professional Services and Other revenues increased 14%.

Professional Services and Other revenues are generated primarily from fees related to the implementation and configuration of our subscription service, as well as training fees.

Total revenues based on geography were $45.5 million in North America, $16.1 million in EMEA, and $2.7 million in the rest of the world, representing 71%, 25% and 4% of total revenues respectively.

In the third quarter 2011, we recorded revenues of $24.5 million in North America, $8.6 million in EMEA, and $1.1 million in the rest of the world, representing 72%, 25% and 3% total revenues respectively.

As Frank mentioned earlier, our total billings were $81.2 million for the third quarter compared to $41.4 million in the third quarter 2011 and $72.1 million in the prior quarter, representing 96% year over year growth and 13% sequential growth.

Additionally, approximately 12% of our billings in the quarter were for periods greater than one year compared to 10% in the third quarter of 2011 and 17% in the prior quarter.

Before we turn to expenses, I would like to point out that we ended the quarter with 963 employees, an increase of 472 employees from the same period in the prior year and an increase of 81 employees from the prior quarter.

I would also like to note that we recorded a pretax amount of $8.2 million related to stock -based compensation expense.

This impacted our earnings per share in the third quarter by a tax adjusted amount of $0.05 per diluted and basic share.

Our Subscription gross profit was $38.6 million, representing a gross margin of 70%, which, as we had planned, is down compared to 80% in the same period last year, and 71% in the prior quarter.

The year over year decrease is primarily attributable to the migration of customers to our new generation of data centers and an investment in our cloud infrastructure team which grew 124% year over year.

As of today, I am happy to report we are nearing the completion of the migrations with four customers with production instances in previous generation data centers.

During fourth quarter, we will continue to incur double rent as we wind down our contractual obligations and accelerate depreciation for certain assets.

Starting in 2013, we will know longer incur costs related to our previous generation data centers.

Our Professional Services and Other gross profit was negative $0.1 million, representing a gross margin of negative 1% compared to negative 43% in the third quarter of 2011, and positive 16% in the prior quarter.

It is important to note that the prior quarter Professional Services and Other revenues included $2 million from our Knowledge event, with all expenses related to the event running through sales and marketing, providing a boost to gross margins that we will see once a year in the quarter we hold the event.

Excluding Knowledge, our Professional Services margin in the prior quarter was negative 6%.

Professional Services and Other gross margin improvement was driven by a more robust focus on scoping projects, and resource utilization, along with a transition to time and material contracts compared to our historical fixed fee contracts, and a reduction in the amount of work we subcontracted out to our partners.

As we continue this transition, we expect to see continued improvement in Professional Services margins.

Our total gross profit was $38.5 million representing a gross margin of 60%, compared to 66% in the prior year, and 60% in the prior quarter, excluding the $2 million in revenue from our Knowledge event.

Moving to operating expenses for the third quarter.

Sales and marketing expenses were $25.2 million, or 39% of revenues compared to $13.2 million or 39% of revenues in the third quarter 2011, and $24.4 million or 43% of revenues in the prior quarter.

Our third-quarter sales and marketing expenses included $1.5 million related to our sales kickoff event for the second half of 2012.

Beginning in 2013, our comp plan will follow a calendar year, in the future we will incur this cost in the first quarter only.

In the second quarter sales and marketing expenses included $3.6 million related to our Knowledge event.

Research and development expenses were $8.9 million or 14% of revenues, compared to $2.5 million or 7% of revenues in the third quarter of 2011, and $7 million or 12% of revenues in the prior quarter.

We expect research and development expenses to increase in future quarters as we continue to make significant investments in our services.

General and administrative expenses were $9.6 million or 15% of revenues, compared to $3.5 million or 10% of revenues in the third quarter of 2011 and $5.4 million or 9% of revenues in the prior quarter.

During the quarter we transitioned to a new office facility in San Diego and recorded a one-time abandonment cost of $2.9 million related to the exit from our existing lease which runs through January of 2019.

This cost was included in general and administrative expenses.

In addition to the abandonment cost, the increase in general and administrative expenses was driven by costs associated with our first full quarter as a public company.

We expect general and administrative expenses, less the abandonment charge, will continue to increase as our business continues to grow, but we expect these costs to decrease as a percentage of revenue.

Our operating loss in the third quarter was $5.1 million compared to operating income of $3.4 million in the third quarter of 2011, and an operating loss of $1.9 million in the prior quarter.

This equates to an operating margin of negative 8% compared to positive 10% margin in the third quarter of 2011 and an operating margin of negative 3.4% in the prior quarter.

During the quarter, we reported a tax expense of $2.5 million.

We expect net operating losses for the year to offset taxable income.

Net losses for the third quarter was $7.1 million, or a net loss of $0.06 per basic and diluted share, compared to net income of $1.6 million, or net income of $0.05 per diluted share in the third quarter of 2011, and a net loss of $3.1 million, or a net loss of $0.12 per basic and diluted share in the prior quarter.

Our net loss was driven by significant investments we are making in our business.

One of our key management priorities is having the ability to scale and sustain growth.

We continue to invest in all areas of our business to ensure we are well positioned to execute on the growth opportunities we foresee in the future.

This includes continued hiring, in investments in systems, infrastructure, sales, and marketing and other resources.

During the quarter, we generated $9.2 million in cash flows from operations, we used approximately $11.9 million for capital expenditures resulting in negative $2.9 million in free cash flow.

This compares to $7.1 million of free cash flow in the third quarter of 2011, and negative $4.7 million in the prior quarter.

The year over year decrease in free cash flows is mainly attributable to the significant investments we are making in our business, including investments in our data centers, and our office facilities to accommodate our headcount growth.

We ended the quarter with approximately $256 million in cash and short-term investments and no debt.

Our total GAAP deferred revenue balance was $147.9 million at the end of the third quarter, up 13% over the $131.1 million reported at the end of the prior quarter.

Overall, we were very pleased by our performance in the third quarter.

Let's turn to guidance for the fourth quarter and the full-year 2012.

Please note that our margin and EPS guidance is on a non-GAAP basis which excludes stock -based compensation expense and the related tax impact.

For the fourth quarter 2012, we now expect total revenues between $69 million and $71 million, representing year over year growth between 76% and 81%.

The revenues are expected to consist of Subscription revenues between $60 million and $61 million and Professional Services and Other revenues between $9 million and $10 million.

We expect Subscription gross margin between 68% and 69%, Professional Services and Other gross margin between negative 1% and negative 5%, and overall gross margins between 58% and 59%.

We expect an operating margin between negative 5% and negative 7% and a net loss per basic and diluted share between $0.05 and $0.06, with weighted average shares outstanding of approximately 123.5 million.

For the full year 2012, we expect revenues to fall within the range of $237.5 million to $239.5 million, representing year over year growth between 85% and 87%.

Our total annual revenue estimate consists of Subscription revenues between $201.6 million and $202.6 million, and Professional Services and Other revenues between $35.9 million and $36.9 million.

With that, operator you can now open up the line for questions.

(Operator Instructions)

Walter Pritchard, Citigroup

Hey guys.

Congratulations on a great quarter.

This is Robert for Walter.

First question is just around your current thinking on sales capacity.

Do you guys think you are where you need to be or do you potentially see an acceleration of sales hiring?

This is Frank.

We are where we think we need to be at the current time, and we were able to hire during the quarter at the targets that we had set.

And we think we will continue to do that going forward in Q4.

Obviously, those numbers in relative terms will not accelerate because the numbers are getting bigger with every subsequent quarter.

But we are continuing to stick to our plan as we've laid it out.

Great.

And a question for Mike.

On the guidance.

It seems like you guys are benefiting from an FX tailwind here, and the billings were quite strong in Q3, just wondering why the guidance perhaps was not raised as much as it could've been.

Is it potentially a reflection of caution in the macro environment?

I think we looked at kind of what we booked last quarter and we feel this is appropriate guidance based upon how we see the business today.

I don't think there's that much caution in terms of the macro environment.

I think as Frank as said before, we're too small to really feel the impact of the macro environment and I think it's appropriate guidance that we gave.

Great, thanks so much.

Tom Ernst, Deutsche Bank.

Tom, I think you have us in another conference call.

Operator, can you cut off Tom Ernst and take someone else.

Rob Owens, Pacific Crest Securities.

Hi, thanks for taking my call, this is actually Ben sitting in for Rob.

My first question was just, did you see any change in the average length of contract during the quarter?

The average length of contract during the quarter, when you look at it on a -- so this most recent quarter, we did 31.4 million, or 31.4 months versus 33.6 months last quarter is what we saw.

And that's on a weighted dollar amount basis.

Okay, great.

And also, going back to sales headcount, are you seeing any meaningful changes in sales productivity?

Has it, has headcount growth paced with new logo growth?

So, what I will say on the headcount, in terms of our overall sales and marketing organization, we pretty much hit our headcount hiring target.

One of the things this past quarter we really focused more on the sales operation headcount and the SEs versus the actual sales reps themselves.

In terms of productivity, we have hired so many new reps we do find that it is taking longer, as I've mentioned to some people before, in terms of getting people ramped up.

But with that, we are pleased with what we saw for the quarter, in terms of productivity overall.

Okay, great.

Thanks.

Certain areas are stronger than others.

Great, thanks.

Adam Holt, Morgan Stanley

Hey guys, how are you?

Looks like another very nice quarter.

Thank you.

My first question, or maybe it's a multi part question is about the platform.

It sounds like pricing is going to be in the market early next year, is there any way to talk about, either directly or anecdotally, where you think you're seeing the impact of the platform in terms of either usage or driving contracts?

And is there any way to sort of carve out or allocate revenue at this point from the platform.

This is Frank.

This has obviously been one of our challenges that we know there's a lot of activity on the platform, from our operational metrics, we can see it.

We said previously that we can see 85% of our production instances is up, a significant amount of custom objects defined in them.

We know that about 55% is actually representing distinct applications as opposed to extensions of existing applications that we provide.

So we know there's a lot going on.

The problem is how do you quantify that in a way that's meaningful for people like yourself to look at?

Obviously, we need to get a whole bunch of experience and data under our belt before we can start talking about that in meaningful terms.

Terrific.

If I could just shift gears.

I know that you've had an experience where a significant amount of your customers are using your products and services more actively than they first thought they would.

Can you talk a little bit about how you think about monetizing that opportunity going forward, and whether the mix of new versus existing billings this quarter changed at all.

I don't think that we have much change between new and existing.

That ratio is relatively persistent quarter-to-quarter.

We have a little bit of up and down in terms of, as you saw, the up sell numbers were lower this quarter from previous quarters, but there's a little bit of an ebb and flow to that part of the business.

In terms of the model, our principle source of up sell revenue comes from incremental users, right, as opposed to incremental applications.

We have about 12%, 13% penetration in the enterprises that we think are relevant to us, but within those enterprises, we're not fully penetrated.

In other words, we have a long ways to go in terms of usurping the potential of the enterprises where we already have considerable footprint.

So, driving user adoption is really the principle focus that we have.

We have some cross sell going on when people buy automation, run book automation, Discovery, and things of that sort.

So, there is some opportunity in that department as well, but the majority is focused on incremental user adoption.

And just lastly from me, you had another good quarter of new customer signings.

As you look at the new orders and the downstream potential of the new orders, are they roughly similar to what you have seen in the past or are you actually starting to moving into larger customers as well?

We are moving into larger customers.

As we said we have a pretty strong focus on Global 2000 Enterprises to make sure that we do not sort of avoid the tougher sells.

And go to a sub tier of enterprises as our marketplace.

So we very explicitly target them.

We report on them and so on.

So I think in terms of 145 it just represents a very hard focus that we have on new customers.

In the SaaS business it's very easy to start living off your customer base and obviously that is not the lifeblood of the business.

You have got to have a good contribution of new customers every quarter.

Terrific.

Thank you.

Welcome.

Jason Maynard, Wells Fargo.

Hey guys, congrats on the quarter.

I'm going to dig a little bit deeper on the, I think you talked about three deals over $1 million and that obviously looks like it's growing in conjunction with the new customer adds and I am curious (technical difficulty) -- just the core IT service management --

Jason, sorry, your line was cutting out and I think it is your line because I could hear everyone else.

Could you repeat that please?

Let me try this again.

I was asking about the $1 million transactions and was curious on some of the larger deals that you're signing if it was a similar mix of products that you'd seen in prior quarters.

And then the follow-up to that would be any update or progress you can share with us on ramping and integration practices, and things like that to help you guys scale deeper into organizations and obviously to bigger transactions in the future.

Thanks.

So in terms of the three $1 million transactions, all of those as you know, when you license our ITSM suite of products you get all of the applications.

As far as I know these three customers, they're all Global 2000 customers, are using it for our core apps that Frank talked about, the whole incident problem change, the CMDB.

Obviously they have not deployed yet.

So it is still yet to see exactly fully what applications they use.

In terms of your question on the integration partners, on one of these I know for sure, it was one of our integration partners who brought us into this account, and so you are correct, it is critical to us for our growth that we continue to develop relationships with large integration partners, and I'll let Frank maybe speak a bit more about that.

Yes, in terms of the integration partners it's often the case that we acceleration of relationships with customers as a function of those alliances, and that's most particularly true, as Mike indicated, in one of those top three transactions.

I think you asked, and by the way, we are expecting to have alliances of that sort expand for us in quarters to come here, we are very active and we find that the Global SI community is very focused on this sector.

You asked a question around the services side of the business.

As you know, we have aggressively developed our own services capability because that is what enables the growth of our business.

One of the challenges that we've had is really building enough infrastructure, both inside the Company, as well as in our ecosystem, to allow customers to successfully deploy these kind of engagements.

So we're happy with the progress we've made and we just reported that services actually grew faster than our software subscription site of our business, and they are writing really a good book of business, but at the same time, the ecosystem is developing very rapidly as well.

We get a much richer mix of ecosystem partners.

We have both the firms that do nothing other than ServiceNow business full-time, and then we get the Global SI community involved as well, and that is especially important when you're dealing with Global 2000 type enterprises that have prior relationships that we can invoke those kind of relationships for that class of business.

Great.

Thank you.

Your welcome.

Harris Heyer, Credit Suisse

Hi, this is Harris Heyer on behalf of Phil Winslow.

Thanks for taking the question.

Could you comment on the uptake of the platform as a service offering?

What are you seeing in terms of competition and feedback from clients?

Harris, this is Frank.

The thing to know about the way our platform business operates, it's very rare for us to be in an out and out contest or confrontation with another platform vendor.

It is just not the way we approach the business.

We don't lead with the platform.

We always lead with our ITSM application portfolio, and the platform itself obviously comes in the door right behind it, because you can't separate our applications from the platform.

The platform is learned and used in the process of deploying applications.

As soon as applications get deployed, it typically is not very long after that when customers are starting to looking at opportunities to extend existing applications, as well as standing out brand new applications.

So it is very much a Trojan horse in the sense that it does not come in through a procurement process, it comes in right behind the application sale.

So it's a very rare occurrence where we have sort of a frontal head-on confrontation with somebody like salesforce.com around platform, that is just not our model of going to market.

All right.

Thank you.

So in other words, the way to say that is, we win a lot of platform opportunities without firing a single shot, right, because it doesn't really become a procurement process in and of itself.

It is something that literally starts leading a life of it's own once the applications are deployed.

It is extremely viral in the sense that we don't necessarily have to actively sell it.

Great.

Thank you.

Brent Thill, UBS.

Thanks.

Mike, quick question for Frank as a follow-up.

Mike, just on the new verticals that you're seeing open up, maybe if you could talk about some of the traditional verticals that you had not seen open that seemed to be blossoming now, and you're seeing more promise, and I'll follow-up for a quick question for Frank.

Well we continue to see business from pretty much all of our verticals.

As you know, we are very vertically diverse, but the one thing that did stand out this quarter is we are starting to see the federal government pick up.

And we are very pleased with that,

Okay.

And Frank, as you think about the international build out, can you just help us understand how you are approaching the order of that build out?

It seems like there's a tremendous opportunity to leverage your success globally.

Can you give us a sense of how that is building?

Yes.

We have expanded our footprint quite a lot in the last year.

We used to be predominantly UK-based with some presence in Germany.

We have expanded Germany dramatically, and we have brand-new operations now in Benelux and Nordics, in France, Australia, that region has been very strong for us, and we are very carefully plotting our entry in markets that are incremental to that.

Because we are a SaaS company.

It's not always as straightforward as if you are a systems company or an enterprise software, on premise type company because sometimes due to data software issues, we are required to put data centers in country.

Those are really big decisions for us, the whole issue of routes to market, how we are actually going to enter, those are all questions.

So we have a lot of opportunities in the markets that we are already served, so we are very judicious about deciding to go after incremental markets, but we are doing a lot of testing and we are watching markets very closely to see whether we have low hanging fruit where we can get to productivity very quickly, as opposed to markets where we're concerned we might have sort of a concern around multiple false starts and things like that.

So, yes, we have expanded our footprint a lot internationally and there is more to come, but we are not super gung ho about planting the flag in as many places as we possibly can.

That's not the model that we are following.

Great.

Thank you.

Laura Lederman, William Blair and Company.

Thank you for taking my question.

Can you talk a little bit about what you are seeing in terms of percentage of deals being influenced by partners.

You talked about one of those three $1 million deals, but in general, how much is being influenced by partners, maybe if you look at your pipeline, how much of it came in from partners?

And similarly what percentage of your business is being implemented by partners now and where do you hope to take that over the next let's say two years?

Hi Laura, it's Frank.

Influence is a broad term.

I mentioned specifically that one of our larger transactions this quarter was accelerated by a partner.

In other words it was already on the tracks, but it started moving a heck of a lot quicker as a function of the partner's involvement.

So I guess I need to count that as influence.

It's not a huge number of our business.

I don't know that I can put a precise number on it, but it's not large.

We're still driving and historically we have driven the vast majority of our business ourselves.

Obviously, in order to help our sales force out, we're really trying to engage some of these world class service providers to help that process along because it boosts productivity as well as ramp times for new people.

We expect that percentage of influenced deals to go up, and we really should think about maintaining more specific metrics around that.

Was your second question, Laura?

The second question was what percentage of the business is actually being implemented by third-party integrators?

Versus yourself --

We are the largest integrator in our space and that was not -- we have increased our share of the overall business that is done for service now, over the last couple of quarters.

But the vast majority of business is still done by people other than ServiceNow even though we are the largest player in the business.

So I think as time goes on we really try to maintain more of a steady-state share of business.

We are trying to create a really good pricing umbrella for our partners so they don't feel like they have to bump into us at every corner in order to do business, and also can maintain good healthy margins in the business as well.

I hate to ask the economic question, but I'm getting it constantly from investors.

Do see any indication at all in EMEA, I realize you're still relatively new and rolling out there, or any impact at all in terms of linearity in the quarter here in the states?

I realize you're relatively small, but any signs of it even remotely?

Are you asking are we seeing macroeconomic pressures developing in some markets?

Yes, I was trying to ask it a little bit too verbosely.

I'm sorry.

No, Mike said earlier, right.

We typically don't try to think in those terms, and oftentimes it is hard for us to know whether we are dealing with a macro economic issue or we're just dealing with something that is specific to a customer.

They don't necessarily call it out, what kind of friction they are facing.

On the whole I would say that we are not terribly concerned about the macro dynamic that we deal with.

Our issues are more specific to our market, our Company, our business.

That was helpful.

Thank you.

Abhey Lamba, Mizuho Securities.

Yes, thanks.

Just following up on Adam's question about platforms, when do you expect it to gain more momentum?

Can it happen over the next couple of years or could it take longer than that?

And also, Frank, you mentioned about go to market strategy for platform, that it kind of goes in behind other solutions, do you expect that to change over time and lead in sales with platform, or is that how you're going to continue to sell that?

The important, this is Frank, the important thing to notice is we think we have a ton of traction with the platform and that's why I was quoting some of the operational analytical data that we have, because we know there's a lot of use of our platform.

The issue has been that we cannot quantify financially the contribution of that part of our business to the overall mix.

We can't do it in an authoritative manner and so we refrain from doing that.

It is not something that is waiting to happen, it is something that's already happening.

Is just much more difficult when you don't price it and sell it separately to have an accurate fix on that.

So I think the platform is an incredibly important contributor to our business today and it has been historically.

It really, I often refer to it as the power behind the throne.

Now, that said, you are not going to see us any time soon leading with the platform, and the reason is, we are 12%, 13% penetrated in the enterprises that we think are relevant for us with the IT portfolio.

It's a go to market cadence that is working for us, it's very predictable, it's very productive, we would be crazy to take our eye off that ball and start another front in another place.

The platform market itself is very difficult.

I am not looking for out and out confrontations with other platform vendors when I can roll the platform in the door right behind ITSM application portfolio.

That is our strategy, and that's the one that is working for us, and that's the one that we are going to continue to follow.

We are going to have an iron discipline around making sure that we assert the opportunity that we are currently addressing because the platform is rolling right in the door right behind that opportunity.

So this is by far the best way for us to get the platform going in the enterprise.

Got it.

And can you comment a little bit on the competitive dynamics?

Are you seeing anyone being more aggressive in the market, and if any vendor has changed their aggressiveness in the market over the last six to nine months?

You know it has been mostly the same.

We see the legacy vendors fighting hard with price and basically trying to do a lot of portfolio selling to try and slow down the attrition.

But you've seen our growth rates, it is not working all that well.

Now we've seen some new noises coming out of Citrix.

They acquired a small company in New Zealand.

We see no evidence of that showing up in our deal flow.

We saw HP make announcements on a product that we think is a makeover of the old Circle Center so there is some noise developing, some from the incumbency and some from newer players like Citrix.

But on the whole, the dynamic that we live with day in and day out is very consistent over the last six to nine months.

Thanks, and lastly, Mike, can you talk a little bit about operating cash flow, the decline year-over-year but you've had very strong growth in billings.

So, and as part of that, if you can give us some indication about how we should think about Q4 cash flows?

I know if you don't want to talk about specific numbers, some qualitative commentary would be helpful.

Yes, one of the big reasons why we historically have been cash flow positive and as we had talked about, we've had to invest quite a bit with our data center migrations, we've put well over $20 million into our data center migrations.

We're going to continue to do some more investments next quarter, Q4.

But also, with the headcount growth that we've had, we've had to build out a number of facilities.

With each employee it takes a new phone, a new chair, a new, that adds up quite a bit for the employees, and as well, we've been out of space and having to put leaseholds in various offices.

So we are expecting next quarter our cash flow is going to improve.

I haven't given anyone any guidance on the cash flow for next quarter, but I am expecting that it will be positive next quarter and then in 2013 when we've made most of the investments in our data center, we do expect our cash flows to improve quite a bit from where they obviously historically have been.

And we'll be talking about that on our January 2013 conference call.

Thank you.

Kirk Materne, Evercore Partners.

Thanks very much.

Frank, you sort of answered this a little bit on the last question, but I was just curious, as you guys price the platform individually, and you start to, it sounds like you're not going to go to market with that directly, I just wonder, are you going to build sort of an overly, sort of sales engineer team for that specifically if those deals lead to broader, bigger platform deals on their own?

I'm just trying to get a sense I guess of, does anything really change on the go to market as you sort of break that out?

It doesn't sound that way but I was just kind of curious.

Thanks.

You know, Kirk.

This is Frank.

We are going to market with it directly but not separately or independently.

Okay?

And the only nuance there is that we do talk about platform in new transactions, but it's always in the context of, hey, look at what you can do with the overall application portfolio and the application -- and the platform that supports it.

In terms of how rapidly applications can be modified, can be extended, and lo and behold if you want to stand up new apps you can do that too.

But it is a single go to market cadence.

It is not something that is going to be separate and distinct from what we are used to doing and what's been working for us.

So that's sort of the nuance there.

Okay.

And then just maybe a quick follow-up or quick -- another question.

Just in terms of your partners that you feel like are gaining traction, I realize you guys have a very large horizontal opportunity.

I guess for the partners, are they approaching this sort of generally horizontal, or are you starting to see people build sort of more direct go to market plays in certain verticals?

And for those that have done that, has it had any positive impact?

It might be just to early but I was just curious on that as well.

Thanks very much.

It is relatively early.

What we have seen sort of an interesting phenomena.

We have seen some people break out of our customers' organizations and start up ServiceNow businesses.

In other words, service organizations that do something in the ServiceNow ecosystem.

When I say something, we know of organizations that are very specific to IT.

Others that are very specific to building line of business applications, because they have done that, they have specific expertise in it, and they want to go out now and sell that to the broader customer base.

So we obviously, we are not encouraging our customers' people to sort of break out on their own, but it is kind of good to see that that kind of talent becomes more broadly available to our ecosystem.

The growth of talent in our market is super important to enable the growth, and when you produce the kind of growth that we have in recent years you can just imagine how many people need to be tooled up every year to keep up with the demand.

It is a lot.

Thanks, very much.

That concludes the question-and-answer portion for today's conference.

I'd like to turn the call back to Michael Scarpelli for closing remarks.

Thank you.

As a reminder, a replay of this call will be available as a webcast in the investor section of our website, as well as through the dial-in instructions contained in today's earnings release.

Thanks for joining us today.

This concludes our call and we look forward to our next update in January following the close of the fourth quarter.

Thank you again ladies and gentlemen for your participation.

This concludes today's conference.

You may now disconnect and have a great day.