ServiceNow Inc (NOW) 2013 Q3 法說會逐字稿

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

My name is Brie, and I will be your operator for today.

(Operator Instructions)

I would like to turn the conference over to Mr. Mike Scarpelli, CFO.

Please proceed, sir.

Good afternoon, and thanks you for joining us.

On the call with me today is Frank Slootman, our Chief Executive Officer.

Our press release and a simultaneous broadcast of this call can be accessed at our website at www.investors.servicenow.com.

We may make forward-looking statements on this conference call such as those using the words, may, will, expect, believe, or similar phrases to convey the information is not historical fact.

These statements are subject to risks, uncertainties and assumptions.

Please refer to the press release and risk factors in documents filed with the Securities and Exchange Commission, including our most recent quarterly form 10-Q for information on risks and uncertainties that may cause actual results to differ materially from those set forth in such statements.

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

The Company reports non-GAAP results in addition to and not as a substitute for or superior to financial measures calculated in accordance with GAAP.

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 www.investors.servicenow.com.

I would now like to turn the call over to Frank.

Thanks, Mike.

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

Q3 was a strong quarter for us, reflecting significant growth and continued execution across the board.

Revenues grew 73% year-on-year to $111 million, and billings grew 56% year-on-year to $127 million.

Our install base of customers is now at 1900 accounts, with approximately 360 Global 2000 customers.

Global 2000 accounts added in the quarter, including AbbVie, Daiwa Securities, Diageo, Danske Bank, Enbridge, General Motors, and Honda of America.

Our IT applications portfolio continues to be the core driver of growth.

We continue to see a steady rate of legacy system replacements.

Nearly half of all new logos in the quarter came from displacing BMC and HP.

For example, AbbVie, who recently spun out of Abbott laboratories, is relying on a highly outsourced IT model to serve their 20,000 employee base.

ServiceNow was selected to rapidly stand up a model platform for enterprise IT and deliver a consumerized service experience for employees.

In another win at large consumer products company, a two phased deployment will begin with service catalog and CMDB, then continue with a replacement of instant problem chains and asset management services.

At the same time, other departments are evaluating ServiceNow for enterprise like request management.

We are progressing in the global system integrator channel.

In the quarter, we worked with Accenture to win a multi million dollar contract at Enbridge, an oil and gas services company based in Canada.

Accenture was a catalyst in the sales cycle, helping build the business case, road map, recommendation and customer plan to implement.

In addition, our managed services providers are expanding our global reach.

For example, customers who outsource their IT function to HCL are in fact standardizing on ServiceNow.

During the quarter, HCL expanded its relationships with two prominent Nordic companies, driving significant value to ServiceNow.

In another recent MSP win, [Impulses] will leverage ServiceNow to overhaul a large customer's IT applications and infrastructure as they transition to a new service automation platform.

While IT modernization triggers the majority of new engagements, broader adoption of ServiceNow portfolio is evidence.

First, Orchestration, our automation framework is becoming a more significant contributor in new projects and upsells.

The number of Orchestration customers has grown by over 50% in the past two quarters, as users seek to automate more tasks with ServiceNow.

In one example during the quarter, a financial services customer acquired our Orchestration product to provision and decommission virtual machines allowing the customer to standardize, automate and report on cloud resources and activity.

Second, our recently introduced performance analytics products, based on the Mirror42 acquisition, contributed to a handful of contracts including CERN, National Building Society, and Scripps Network Interactive.

Third, usage of applications that serve both IT and the line of business, such as custom application development and service catalog usage, continued to increase on a same-store basis.

We see more energy and excitement in our customer base to develop applications in ServiceNow.

In the quarter, a major airline put ServiceNow to the test during a 24 hour internal development contest, with over 100 developers.

Competing against numerous other development platforms, the ServiceNow team won by creating a mobile app store using our service catalog and knowledge management applications.

A large home improvement company recently chose ServiceNow for work order management, in addition to ITSM, in its initial purchase.

This customer plans to create, manage, and assign work orders, schedule service advance, transfer parts between warehouses and manage the service levels of those requests with ServiceNow.

A prominent healthcare imaging company is about to go live with a global customer facing support system that records older deployed medical imaging equipment in the ServiceNow CMDB, and enables doctors and nurses to initiate service requests directly to the company.

This application does not involve any IT management.

It supports customer facing and mission critical business processes.

Service management is becoming an enterprise discipline.

In a notable customer win this quarter, Diageo, a consumer goods company, and number 242 on the Global 2000, chose ServiceNow as its service relationship management solution for 25,000 employees in over 80 countries.

Starting with the IT service domain, they will replace their legacy ITSM system and also deploy Orchestration for cloud revision and password resets, employee on boarding and software distribution.

This will use ServiceNow for HR case management in conjunction with Workday.

The industry analyst community is also catching on to the enterprise service management trends.

According to IDC's Robert Young, quote, IT service management processes and work flows have become better defined and more automated within most IT organizations.

However, they are often inefficient or nonexistent in most other business units.

ServiceNow's advanced automation and process work flow capabilities aim to provide a single platform to serve as the de facto standard for managing service relationships, not only within IT, but also across the enterprise.

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

Thank you, Frank.

During today's call, we will review our third-quarter financial results in our financial guidance for the fourth quarter and full year 2013.

Before we begin going through the numbers, I'd like to point out that all financial figures we will discuss today are non-GAAP unless we 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.

Total revenues for the third quarter were $111.3 million, representing 73% year-over-year growth, and 9% sequential growth over our second-quarter revenues of $102.2 million.

Subscription revenues for the quarter were $93 million, representing 68% year-over-year growth and 16% sequential growth.

Subscription revenue growth was driven by strong bookings in prior quarters, coupled with a renewal rate of 97% in the current quarter.

Our average new business contract length was 35 months, and our average renewal contract length was 25 months, compared to an average of 33 and 25 months on a trailing four-quarter basis, respectively.

Profession services and other services were $18.3 million for the quarter, growing 101% year-over-year, and down 16% on a sequence basis.

Excluding registration and sponsorship revenue of $5 million recorded in the second quarter from Knowledge, our annual users conference, professional services and over revenues increased 9% on a sequential basis.

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.

We added 122 net new customers including 22 of the Global 2000 enterprises in the quarter.

Our trailing 12 month revenue per customer, was $219,000, an increase of 21% from the $181,000 in the third quarter of 2012, and up 5% from the $209,000 last quarter.

In the third quarter, we booked three new deals in excess of $1million, and our average deal sizes for both new logos and upsells increased notably on a year-over-year basis.

For the past two quarters, we have seen a high percentage mix of deals with annual contract value over $250,000.

As evidenced by the growth in revenue per customer, and deal size, our business has concentrated towards larger opportunities for several reasons.

First, our sales team is incented to achieve certain dollar targets as opposed to logo count.

Second, the rebalancing of our sales team at the beginning of this year led to increased focus on upsells.

Larger accounts tend to yield more predictability and higher dollar value opportunities.

In addition, our channel strategy emphasizes partners that can help penetrate large enterprises and deemphasizes partners that focus on smaller accounts.

Total revenues based on geography were $76.9 million in North America, $27.6 million in EMEA, and $6.8 million in the rest of the world, representing 69%, 25% and 6% of total revenues respectively.

By comparison, in the third quarter of 2012, we recorded revenues of $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.

Our total billings were $127 million for the third quarter, compared to $81.2 million in the third quarter of 2012, and $117.5 million in the prior quarter, representing 56% year-over-year growth and 8% sequential growth.

Our deferred revenue balance was $225.8 million at the end of the third quarter, up 8% over the $210 million reported at the end of the prior quarter.

Approximately 4% of our billings in the quarter were for periods greater than 1 year, compared to 12% in the third quarter of 2012, and 12% in the prior quarter.

We still expect 5% to 10% of future billings to be for periods greater than one year, but we also expect to see variability from quarter-to-quarter that may go outside this range.

Our typical billing terms remain one year.

Before we turn to expenses, I'd like to point out that we ended the quarter with 1654 employees, an increase of 691 employees from the same period in the prior year, and an increase of 211 employees from the prior quarter.

Please note that we recorded a pre-tax amount of $17.9 million related to stock based compensation expense.

This impacted our earnings per share in the third quarter by a tax adjusted amount of $0.12 per basic and diluted share.

Our subscription gross profit was $71.8 million, representing a gross margin of 77%, compared to 70% in the same period last year, and 77% in the prior quarter.

During the quarter, we added 33 employees to subscription cost of sales, ending the quarter with 299 employees.

Our professional services and other gross profit was $1.3 million, representing a gross margin of 7%, compared to a negative 1% in the third quarter of 2012 and 33% in the prior quarter, which included 5 million from our Knowledge with all expenses related to the events running through sales and marketing.

Excluding knowledge, our non-GAAP professional services margin in the prior quarter was 13%.

During the quarter we added 39 employees to professional services and other cost of sales, ending the quarter with 278 employees.

Our total gross profit was $73.1 million, representing a gross margin of 66%, compared to 60% in the prior year, and 68% in the prior quarter.

Excluding the $5 million in revenue from our Knowledge event, non-GAAP gross margin in the prior quarter was 66%.

Moving to operating expenses for the third quarter, sales and marketing expenses were $41.4 million, or 37% of revenues, compared to $25.2 million or 39% of revenues in the third quarter of 2012, and $47.5 million or 46% of revenues in the prior quarter.

As a reminder, sales and marketing expenses in the second quarter of this year included $8.3 million related to our Knowledge event.

During the quarter, we added 69 employees to sales and marketing, ending the quarter with 581 employees.

Research and development expenses were $16.6 million, or 15% of revenues, compared to $8.9 million, or 14% of revenues in the third quarter of 2012 and $14.2 million or 14% of revenues in the prior quarter.

During the quarter, we added 45 employees to research and development, ending the quarter with 296 employees.

We expect research and development expenses to increase on a dollar basis as we continue to make significant investments, in our services, primarily in the areas of application, platform and cloud development.

General and administrative expenses were $11.8 million, or 11% of revenues compared to $9.6 million, or 15% of revenues in the third quarter of 2012, and $12.1 million, or 12% of revenues in the prior quarter.

During the quarter, we added 25 employees to general and administrative, ending the quarter with 200 employees.

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

Our operating income in the third quarter was $3.2 million, compared to an operating loss of $5.1 million in the third quarter of 2012, and an operating loss of $4.5 million in the prior quarter.

This equates to a positive operating margin of 3%, compared to a negative 8% margin in the third quarter of 2012, and an operating margin of negative 4% in the prior quarter.

During the quarter, we recorded the non-GAAP tax expense of $2.2 million.

Net income for the quarter was $1.6 million, or net earnings of $0.01 per basic and diluted share compared to a net loss of $5 million or a net loss of $0.04 per basic and diluted share in the third quarter of 2012, and a net loss of $7.8 million, or a net loss of $0.06 per basic and diluted share in the prior quarter.

Our basic and diluted weighted average shares outstanding for the quarter were approximately 137.5 million, and 158.3 million, respectively.

Fully diluted shares at the end of the quarter were approximately 169.3 million.

During the quarter, we generated $20.7 million in cash flows from operation.

We used $16.8 million for capital expenditures, resulting in positive $3.9 million in free cash flows.

This compares to negative $2.9 million of free cash flows in the third quarter of 2012, and negative $2.1 million in the prior quarter.

We ended the quarter with $352.8 million in cash, short term investments and long term investments, and we had no debt.

An increase of $6.6 million over the prior quarter, even after paying $13.3 million in cash for Mirror42.

Before turning to guidance, we want to mention that we recently updated the packaging of our service portfolio with three major objectives in mind.

First, we wanted to enable customers to consume ServiceNow at various levels of functionality.

Not all our customers have the same appetite for application functionality at the same time.

Second, we wanted to make it easier for customers to purchase our service management applications for non-IT purposes.

Deployment of ServiceNow in the broader enterprise has become a major trend in our customer base.

And finally, we wanted to offer a more flexible licensing model for deploying custom applications with ServiceNow.

Let's turn to guidance for the fourth quarter and full year 2013.

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

For the fourth quarter of 2013, we expect total revenues between $119 million and $121 million, representing year-over-year growth between 58% and 61%.

Revenues are expected to consist of subscription revenues between $101 million and $101 million, and professional services and other revenues between $19 million and $20 million.

We expect subscription gross margins of approximately 76%, professional service and other gross margins of approximately 8%, and overall gross margins of approximately 65%.

We expect our operating margin to be approximately break-even, and a net loss per basic and diluted share of approximately $0.02 with weighted average shares outstanding of approximately 140 million.

For the full year 2013, we are raising our outlook and expect revenues to land within the range of $418.4 million to $420.4 million, representing year-over-year growth between 72% and 73%.

Our total annual revenues estimate consists of sub description revenues, between $344.9 million and $345.9 million, and professional services and other revenues between $73.5 million and $74.5 million.

Before turning to Q&A, we would like to mention that we will be holding our second annual financial analyst day on Monday, April 28, 2014, at the Intercontinental Hotel in San Francisco, California.

This event will be held in conjunction with our annual Knowledge users conference, which will take place April 27 through May 1 at the nearby Moscone Center.

Please mark your calendar accordingly.

Registration details will be available in early 2014.

We hope to see many of you there.

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

(Operator Instructions)

Walter Pritchard, Citi.

You talked a bit about platform and your pricing there and how that is settling out, and as you look into the fourth quarter and next year, how do you expect that to contribute to your billings or revenue?

Walter, it is Frank.

We've been telling capital markets that we were going to be communicating on more definitive terms about exactly what the contribution of the platform really starting in January after the Q4 quarter.

There's a lot of work that we want to make sure that we're authoritative, we're consistent the way we do and that we don't have any false starts about them, and that takes a fair amount of preparation.

Now, that said, we continue to make really good progress in the business.

I think that last quarter, we reported that we had somewhere around 76% of our production instances having built custom applications on our platform.

That number has continued to inch up during the September quarter as well, and we just have tons of anecdotal evidence some of which we try to highlight in our prepared remarks.

That message is spreading.

So, about all I can say, in terms of pricing, we have evolved our pricing model to make sure that we can not only sort of strip platform out of the overall bundle, we have done that all throughout 2012, but we've now created a more flexible model that lets people get started at a smaller price point.

And they don't have to sort of buy in wholesale to start using the platform.

So it's really a pricing strategy that makes it more granular for customers to get started without immediately being confronted with all kinds of pricing consequences with ServiceNow.

So that's really the change that we have made to our pricing model.

Pricing model has been in transition in October.

We rolled out a fairly significant changes to that, and it's the best we feel about our pricing model to date.

So we're in the midst of really rolling that out and implementing that throughout our operating territories.

And Mike, just on the sales hiring side, you're -- just wanted to get a sense of what sort productivity you see on the cohort that you hired earlier in the year, and how we should think about, last year you definitely ramped up your sales hiring beginning of the year.

How you think about that looking towards your plans in early 2014.

When we look at our reps, we look at reps in a few different ways.

One of the ways when we look at ramp reps, our productivity for ramp rep has actually stayed pretty consistent, which is good.

The new reps we hired, the sales cycle is a nine month sales cycle.

People are still ramping with all the hires we've done in the year.

On average it takes nine months to ramp a rep we've said in a developed territory, and new territory, remember, a lot of our hires we have put into new territories internationally as we really are trying to expand internationally.

That's a 15 month ramp on average, and we're pleased with what we see.

We wouldn't continue to hire at the rates we're doing if we didn't see the productivity coming out of these people.

Great.

Thank you.

Your next question comes from the line of Michael Turits with Raymond James.

Couple questions.

One is, I may have missed it, I'm not sure did you give the up sell percentage?

And also maybe you could you drill down a little bit more on the licensing change to multiple SKUs, and what -- if there's any [opertierment] to expect on longer term what the longer term impact might be.

And how it relates to any changes in your target market, is expanding and some length that that addresses

The up sells were 29% in the quarter, and that was an inadvertent miss by me.

You'll see Operator's actually in our investor presentation on our website which will be up later today, if it's not up already, and then on the pricing, Frank?

In terms of pricing, what we've done is we've really created a much more granular way for our customers to buy into our services portfolio, which is pretty broad these days.

We have operated with a one-size fits all, one price for everything else.

As you know, we started to strip out this year -- the use license for platform development, but the things that we've now also done is we've really segmented the application portfolio itself.

We've always been confronted by customers who on the one hand like the fact that one price buys all, but we have the dynamic where customers say well, I'm not going to use everything, so therefore, I don't want to pay for it.

So eventually, we started to really settle on the pricing model that our customers can buy in on a limited set of applications and expands that functionality to sort of everything that we provide.

Also as we said, the use of our platform for non-IT uses, and we have that now skewed on price separately, and getting started on the platform itself in terms of building custom applications on a very limited basis, we have a price for that as well as all in all out all you can eat kind of thing.

We have a price for that as well.

So it's a much more fine grained pricing structure and model from what we've had in the past.

And there is a natural evolution from what we started with, in January of this year.

It is still early going in terms of measuring all of the impacts, because we are literally in the midst of rolling it out for new customers.

This will be a very positive change for existing customers in renewal situations, and up sell will probably take a little bit more work on our part to really transitioning from the old to the new

If I could just get one follow up as we go into the fourth quarter, how should we look at billing seasonality?

Obviously you've got some nice billing seasonality in Q4 '12, 20%.

Is that a reasonable benchmark, or is that seasonality changing in some way?

We expect that billings in Q4 will be north of $150 million.

Okay.

Thank you.

Your next question comes from the line of Nandan Amladi with Deutsche Bank.

Thanks for taking my questions.

You acquired Mirror42 recently.

Obviously you are selling that as part of your portfolio.

Is that priced separately, or is that priced among one of the new tiers that Frank just mentioned?

it is priced separately, but it's can also be purchased as part of a bundle.

But it is a chargeable item.

Okay and then one quick follow up.

Is there a risk of customer serve down-sizing as a result of this more granular pricing scheme?

Where they maybe bought the whole thing before and now they think they need less?

There's always the -- that's always true in the case of renewals.

There's always the opportunities for customers to true up as well as true down.

But the history has been that our customers have had to true up both in terms of users as well as the extent of their utilization, although the services and functionality that we provide, so it does go both ways.

That's always been true.

Thank you.

Your next question comes from the line of Raimo Lenschow with Barclays.

This is actually Chris Hogan on for Raimo.

I apologize if I missed it, but did you give a sales and marketing head count?

I know we got total head count.

Yes, the total sales and marketing head count was 581.

581.

And then, I mean from these levels obviously there's really strong hiring through the first nine months.

What are -- any change in plans going to year-end, or can you give us a little bit more detail in your thinking there?

So our original planning for the year was to end the year with 600.

And as we have mentioned before that if we find good people, we may pull that in, and all that would be doing is pulling in some hiring we're going to plan on doing in Q1 2014.

But remember, Q4 is one of the tougher quarters to hire salespeople, because most good salespeople they are into acceleration in their fourth quarter, and they are going to stick around through the end of the year.

Got you.

And then just one quick follow up, as you look at sales and marketing, the leverage -- you actually got a little bit of leverage there.

Even when I adjust for the Knowledge revenue in Q2 that flowed through sales and marketing, looks like you picked up leverage there.

Anything going on outside of just normal, you know, getting normal leverage in the model or how would you expect that to trend?

Should that stay on a downward trajectory from here, or maybe just talk us through that a little bit?

No.

I'm not expecting Q4 to be down in terms of sales and marketing as a percentage.

One of the reasons being is I expect Q4 marketing to increase.

We are holding these now forums that are really like mini Knowledge events in Europe in three cities, so that added to the spend for long term.

We do think sales and marketing will be 29% to 31% of our revenue in our long term model, and we are not changing that.

But I think it is going to be a while before we get there, given the growth opportunities we see in front of us, we are going to continue to add pretty heavy.

And keep in mind, too, we added 66 people into our sales and marketing organization, but we are going to have the full impact of that in Q4 coming in.

So I do expect our sales and marketing to continue to be increasing in dollar terms.

Got it.

Thanks a lot.

Next question comes from the line of Brent Thill with ServiceNow.

I didn't realize I changed companies.

Thanks for taking my question.

(laughter) Frank, on the platform, when you look at the number of live customers that are now in production versus effectively maybe playing with it in the lab, or some simple apps that they are building, where do you see the number of reference-able customers that can then talk to other customers?

It sounds like you've given us a lot the great wins in the past, and that base is very diverse.

But I'm just curious if you can at a very high level walk us through what you're seeing from that perspective.

I believe the absolute vast, vast majority of our production customers are actually reference-able, I'm saying that on the basis of the fact that on an on going basis, the number of escalated accounts that we have.

Those are accounts that are in some form of distress for whatever reason is extraordinary small, and many times is actually at zero.

If you have attended our users conference Knowledge this May, you'll get a sense of what the reference-ability of a broader customer base is, which is extraordinarily large.

Our net promoters scores which many of you are familiar with, are also exceptionally high for our industry.

So that part of our business is just excellent.

Okay.

And real quick, for Mike, just on the sales hiring, is that from your perspective, the biggest capacity constraint right now to your growth, or is there something else we should be aware of that could potentially idle any moves on the revenue and bookings?

The biggest constraint to our growth is getting good people on board, but it's also getting our system integrators as we are focused on large customers.

The system integrators are key to that growth as well to accelerate our growth.

But at the end of the day, it takes time to ramp people and this is an enterprise software sale, and it is a long sales cycle.

This is Frank.

The only thing I would add to that is our business does encounter a considerable amount of friction due to the fact that we are replacing legacy systems that have been in place for 10, 15 years.

They are highly customized, they are highly back end integrated.

It's not a trivial exercise to just turn those things off and move on to a new platform.

It's a real undertaking.

So it's not a matter you can throw unlimited people and the growth will just go on from there, because it is a considerable campaign both from a sales standpoint as well as from an implementation standpoint to get customers fully deployed and serviced.

In spite of that, you're seeing extraordinary growth.

I think that is due to the compelling nature of the platform.

But it is a transition in the industry that is going to take years and years to fully play out.

And that's why the penetration numbers that we report are still actually relatively small.

Thank you.

Jason Maynard with Wells Fargo.

I have one question on the platform.

Obviously you gave some great examples of cases by customers.

Can you maybe help us understand how much of that platform adoption is actually driven by customers in effect just doing it themselves and having the understandings of your capabilities versus a ServiceNow rep educating them about what they can do?

Do you have a sense on sort of the push versus pull dynamic?

Yes, we do, Jason.

I'd like to say that it's all our doing, but that's just not the reality.

Our customers are the ones that are fully understanding the capabilities that they have in house, and the IT organization is still the central advocacy point for our broader adoption.

IT organizations have tremendous influence in the outer lines of business, and the other functional areas in these enterprises whether it's human resource or facilities or procurement, whatever it is.

They typically go to HR when they have challenges or need help or advice, and that is really how ServiceNow spreads throughout the enterprise.

We have maintained a lot of discipline really staying focused on the IT organization as our core constituency, and we have really spread through the enterprise through the IT organization.

In future, we have every intention of becoming much more effective and much more literate, if you will, in the broader enterprise and being able to speak the language of human resources and facilities and procurement and so on, but so far, this dynamic has really played out very much virally through the IT advocacy in the enterprise.

So the logical follow up then is as you start to talk more about SRM and customers really believing that, in the -- in conjunction with the pricing changes that you're going to put in place for next year, are you going to come out with, you know, two, three, four common use cases or sales notions that you're going to have your reps run as they talk about SRM and talk about the platform?

Or do you have plans to marry, if you will, the go to market messaging sort of the stuff they need to have in the field, along with pricing changes?

Yes, that's in effect already happening.

I wouldn't say that it's universal across the board, but there are certain countries and certain markets for some of our more aggressive and progressive representatives who have really been running the HR play very effectively, and sort of acquired the go to market lingo, and be effective in starting up that conversation with customers.

We certainly are going to come out with a lot more content in terms of applications to support that efforts.

So there's a better starting point than just the platform itself.

So you're going to see more and more of us really priming that pump, and doing a lot more than just waiting for customers to figure it out on their own.

Great, thank you.

Your next question comes from the line of Kirk Materne with Evercore Partner.

Thanks very much.

Frank, just a question on the pricing side.

When we talked to clients or some of your customers, especially on the platform side, there's a lot of interest obviously around that, but pricing was a thing that not necessarily holding it back, but confusing, especially as it related to non-IT users.

How much do you feel, obviously you are making the changes -- I guess how much of that was driven by the desire to get your platform in the hands of more and more people?

I guess did you see that at all as a gating factor to the growth, or adoption of that at all this year?

And I guess, what does that mean for you guys as you head into next year in terms of having even more adoption?

I think that the transition in terms of pricing that we've been going through for the better part of the last year, it's just a necessary one.

Because the set of services and capabilities so broad, we have to make it more granular, so it's an adjustment for customers, but we're never go let pricing stand in the way of meeting customers' needs and dealing with the ambition they have in terms of deploying the platform.

It just takes a little getting used to, it just takes time for them to sort of fully get their head around how it's going to go -- how it's going to work going forward.

That is where we've been in the middle of that for the better part of this year.

We will still be in it for the next three to six months.

As you can tell, it's not holding the business back.

It's just more work on our part to help the transition along.

Right.

And then just along Mike's comments about system integrators.

When you guys think up to 2014, where are you all building in terms of additional capacity to train more SI partners?

What's the thought process about how many SIs you have trained today versus where you would like to be, in perhaps a year?

We're, we have a lot incentive for our SI partners to certify their people, and we've made an enormous amount of progress also during the last quarter.

And incentives are in place for the SI partners to certify more and more people, because they will receive preference in the field from ServiceNow in terms of getting plugged into new engagements.

So as you know, strategically, about 70% of the service's business around ServiceNow is executed by partners and the balance of them by ServiceNow.

We really have to expand and build our ecosystem in order to continue to enable the growth that we have seen historically.

So getting some of the really large integrators on board is extremely helpful, because they are able and willing to make the investments ahead of the curve, and that's what we need to do to be opportunistic and wait for business to fall in their lap.

So it's a big focus area for us to expand the capacity of that ecosystem, not just in terms of people, but in terms of trained people.

Your next question comes from the line of Richard Davis with Canaccord.

So every high quality cloud software company I talk with is having a good problem of a lot of demand, and that you've kind of touched on it with regard to hiring a lot of people in sales and marketing.

Focusing on that side could you just talk about the service side?

Where are you finding these people?

What I've heard from some people -- some firms is like wow, we have a kind of picked the bones clean of the traditional enterprise firms and stuff like that.

Where are you finding them?

Are there common traits to those who have become successful?

And how do you think about modulating or keeping your forecast opinion so you have a conservative cut with regard to assumptions on how fast these new hires come up to full productivity?

This is Frank, Richard.

One of the advantages that we have is that people can be trained pretty quickly on our platform.

Our platform is not a super demanding environment in terms of programming skill sets and so on.

So a lot of feed that we get into our ecosystem comes from our customers.

That's not necessarily always a positive thing for our customers, because our customers sometimes see career paths working for the system integrators and moving along that path, but it's possible to actually make that transition on the ServiceNow platform.

So we have a very large pool of talent to plug into, but that pool of talent needs to be trained, and it needs to be focused on this type of work.

Obviously that -- it takes the concerted effort of a firm to make that happen.

So I really feel good, and I think we've shown over the last couple of years we've been able to grow our ecosystem even though as you point out with the kind of growth we have, that we are never living in a surplus situation.

It feels like there's tension that we could use a lot more.

I do expect that to continue until the growth rate moderate a little bit more.

Great.

Thank you very much.

Operator.

Your next question comes from the line of Steve Ashley with Robert W. Baird.

This is [Jadana Armana] for Steve Ashley.

You've released the app creator tool last quarter, just wondering if you could comment on what kind of traction you're seeing with that tool in terms of helping the adoption of the platform?

I think the app creator is not a one-time thing.

It's a development environment that we will continue to evolve and invest in, and to essentially really productize the development platform for ServiceNow.

It will help the platform become more approachable for more people and become more productive.

As we have said on previous calls, our platform was originally developed for ourselves, and maybe for other professional services developers.

The big focus for ServiceNow has been and will continue to be, to really bring the platform to people really with minimal skill sets, and really embrace what [gardener] group we first to contest where people actually built their own applications.

As they do on Microsoft excel, it's no longer a professional staff, if you will that, does all the work on the applications but then is used by a separate group of people.

So you will continue to see continuous new continuous new functionality, new features, new deliverables from us to make our platform and development environments more attractive, more compelling, more approachable for very large numbers of people.

Great.

Very helpful.

Thank you.

The next question comes from the line of Phil Winslow with Credit Suisse.

This is [Suki Panagrea] for Phil Winslow.

My question is about your newer product beyond platforms such as Discovery or Orchestration and your Runbook automation.

I'm just curious, what you are seeing in terms of adoption from an install base for this product, and also if you could say what percentage of your revenue bookings are from this new product?

This thanks.

You know, as we said during the prepared remarks in the automation hat is undergoing quite a lot of growth in terms of adoption in our customer base, and the reason is we are really emphasizing the use of the automation framework with ServiceNow.

Automation is really the key to driving a really enormous benefit and returns on investments.

That is really where the big pay offs are.

We have talked to a very large financial institutions that was heavily scaled on ServiceNow, and they told us, they see opportunity with our automation framework to dramatically reduce the level of the staffing they have historically had in their IT environment.

That's what it's all about, so our emphasize in terms of automation and really using that as an integral part of the overall platform is really leading to increased adoption there.

We have also done a lot of template applications, new applications on our automation framework to help customers really understand what the potential is of the framework, the type of ought makes they can undertake, with the technologies.

So I expect that to continue.

It's very important part of the overall strategy.

In terms of Discovery, that's really a companion product in terms of the CMDB, so we really view that as part and parcel of our configuration management database.

Thanks.

Your next question comes from the line of Tim Klasell with Northland Securities.

Good afternoon.

Quick question, on the selling into the non-IT departments, you've touched on it a little bit, that's obviously growing.

Do you see yourself specializing your sales force, ie, maybe having a sales force that sells into the non-IT departments -- maybe into HR, or procurement or something like that?

Or do you think you will continue to have mostly [generals] in your sales force

It's a good question.

A question we ask ourselves and I think that's probably more a question of timing.

In other words, a question of when rather than if, and it could be a considerable time in the future, when we do this.

But I think that eventually, if we really are as successful as we think we will be in time, in terms of penetrating all the other dimensions of the enterprise, it could well lead to that kind of a structure.

We are obviously not ready to project that right this minute, but it is a consideration and we're not excluding it at all.

Okay.

Good.

And then a quick follow on.

And on the new pricing model, roughly speaking, how many of your current customers are, have that current pricing model and how long do you think you think it'll take to flow through the existing customers to the remaining existing customers?

All our new customers are getting the new pricing model, period.

So that is a given.

In terms of existing customers, it's really the renewals that we do every quarter, and that's just a subset of our overall customer base that every quarter that goes through on renewal process.

Going to get confronted with the new framework and structure.

They all take time, because our average contract is about 32, 33 months, so it takes time to cycle through that.

So just to clarify, this new pricing we just rolled this out in October into the field, so it's going out in all new quotes right now.

You do have some quotes that had our original platform pricing from early on in the year as well as up sales that don't have what we expect in 2014 as you are re-quoting all the new customers will be completely on that new pricing, and we continue to push with renewals to get on this new pricing, too.

Great.

Thank you.

Your next question comes from the line of Brad Sills with Maxim group.

Just one on the platform, I know you've given us a lot of great color on how it's doing in service, support type applications in lines of business like HR, procurement.

Do you see it involving where it's more applicable to heavy duty transactional type custom applications down the road, and if so, what do you think needs to happen?

I know there's plenty of opportunity in the near term it sounds like on those other scenarios, but do you see it evolving further up the stack down the road?

Thank you.

This is Frank.

That's actually a very good question.

We're not a generic application development platform that you would attempt any type of application on.

As we have said many times, our platform is ideally suited for tackling requests for workflow applications and then when I say requests, these are applications where the users are in need of product, service, help, change of information.

And the provisioning of these requests goes through a particular type of work flow in terms of the people that actually have to do the work.

Sometimes that's heavily automated, it involves approvals escalations, and so on.

So it is a very pervasive, very, very common service model that actually, today, a lot of it lives in your e-mail in-box, but that's why there's so much opportunity here.

But if your going to ask us, even attempt an ERP suite of applications on your platform, it's lot less likely.

We would be looking for partners to do exactly that on the platform, but we ourselves wouldn't necessarily try to attempt that level of complexity and logic.

That is not our core business.

Got it.

Thank you very much.

Your next question comes from the line the Derek Wood with Susquehanna Financial Group.

Thanks.

This is Rakesh Kumar for Derek wood.

I was just hoping if you could talk about cloud provisioning and [manment] market.

Is this a market that you are looking at getting into more aggressively and how do you see the competitive dynamics play out?

This is Frank again.

On of the really important things to sort of keep in mind when you look at Service Now, is that we're not approaching the marketplace in terms of separate markets like for example cloud revision and looking at it as a separate market.

Because we are a very comprehensive IT national platform, the provisioning is just one of the services that we deliver.

It benefits a great deal from being on the platform, because of user administration, a common data model, single code base, the fact that it's operationally all hosted in the single environment.

It makes it compelling for our customers to say look, instead of going one off for cloud provisioning, - I'm just going to do this on ServiceNow.

So the strength that we derive from our platform is very important in terms of how we go to market, and it's true for many of our other applications, when you look at project portfolio management, that really is a stand-alone market.

But we don't approach it as a stand alone market, because we have unique value that we deliver to that opportunity through our platform.

The same is true for government risk compliance, asset management and so on.

So ALM another area, so we always go to market not on a one-off basis against pure play competitors but really trying to leverage the strength of our platform.

And that's how we gear it and it works well, because we have value in these categories that nobody else can replicate.

So I want to emphasize that is really important understanding our business and not look at this as a collection of separate products and businesses because it's not.

A quick follow-up, any specific [wordgles] where you see most trends from?

We're pretty strong across the board.

We're obviously very strong in financial services, we're very strong in big farming, really strong in technology, big retail, the entire managed services provider.

And it's across the board.

The only area we wish we would do better in is the public sector.

We've been doing well in state and local.

The federal government is probably an area where we have a lot of room, which is a good thing.

Thanks.

Your next question comes from the line of [Yuen Kin] with Janney Capital Markets.

Thank you.

Along with that last question, and just where are you in terms of cloud provisioning product and sales momentum, especially for the scenarios where you have to manage external cloud resources and managing third part [sass] applications?

This is Frank again.

So we do provide cloud provisioning capabilities in our product, we've done this as Knowledge13 earlier this year.

I think we referenced one example in our prepared comments of a customer that specifically -- to do cloud provisioning.

So that's, we believe that's going to become a very popular use of our platform.

So loud provisioning through the Orchestration framework.

Lot of stuff we provide out of the box, because of the platform.

There's just no limit to how far customers can take this in terms of various resources both by the cloud, public cloud and other cloud applications.

Is there any way to give us a sense on how much of that product represents in terms of [ready]?

I think we have in the past given numbers on Orchestration in general, but not specific to cloud provisioning.

And then also, Frank, we are seeing a nice uptick in field size and you mentioned in your prepared comments that you are pursuing larger field sizes out there.

Can you just talk about where you are seeing the field size increase?

Are you seeing that in the initial deployment?

Or are you seeing that increase in up sales as well?

It's actually both.

Both our initial transactions are getting larger, and that's because we're aiming for larger entities but also because we are casting a much bigger message.

I referenced one transaction that was actually much larger than originally envisioned, because it included a lot of non-IT objectives that the organization had.

Our up sales are also getting bigger because the entities we are selling to are getting bigger, and the overall scope of the projects that were undertaken is getting bigger.

Whole organization -- the staffing, that we've done in terms of our sales organization.

These are all people that are very, very capable in dealing with larger enterprises, so that's why you see that trending in that direction.

Great.

And Mike, I have one last question for you.

Can you talk about the pace of head count growth in your professional services business, how should we think about that more strategically longer term.

Do you expect the head count growth to align with the subscription revenue growth, or do you actually expect it to be a little bit higher and your activity trend below that?

We're going to continue to add people into the professional service organizations but as a percentage of the total of people in the organization, it's not going to grow that fast, and the reason being is we are not out to do all the professional services.

We want to create an environment where our partners can be successful in professional services, and we also don't want to staff up to do 100% of services that we have sold.

We will out source some of that to third parties.

It depends, but I don't expect that to grow at a very fast pace in terms of head count growth.

Training is the area that we will be investing heavily in, and that's for training both our partners and our customers.

Okay.

Great, thank you so much.

Ladies and gentlemen, this will conclude the question and answer portion of today's conference.

I would like to turn the call over to Mr. Michael Scarpelli for closing remarks.

As a remind, 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.

Thank you 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.

Operator.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.