ServiceNow Inc (NOW) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2013 ServiceNow earnings conference call.

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

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

We will conduct a question-and-answer session towards the end of this conference.

(Operator Instructions).

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

I would now like to turn the call over to Mr. Michael Scarpelli, CFO.

Please proceed, sir.

Good afternoon and thank 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 investors.servicenow.com.

We may make forward-looking statements on this conference call, such as those using the words may, will, expects, believes, or similar phrases to convey that 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 report on Form 10-Q, for information on risks and uncertainties that may cause actual results to differ materially from those set forth in such statements.

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.

We are pleased to announce a strong finish to 2013 with record topline metrics and a healthy backlog heading into 2014.

Revenues grew year on year 67% to $125 million and billings grew year on year 70% to $166 million.

During the quarter, we reached a milestone by booking $266 million of total contract value, which helped drive our combined backlog and deferred revenue to $875 million.

Our installed base is now approximately 2,060 accounts with 400 Global 2000 customers.

Some of the Global 2000 accounts added in the quarter include eBay, Nissan Motor, Sharp, Southwest Airlines, and Westpac banking group.

We continue to see customers deploying ServiceNow applications throughout the enterprise and well beyond the traditional IT department.

For example, a large oil and gas company choose ServiceNow in 2008 as part of an ITSM implementation.

Over the past five years, they have substantially grown their users, increasing their annual contract value more than four times the original amount.

What started with ITSM has expanded through a broad array of business applications, such as oil rig, technical support, and case management in the areas of engineering, Accounts Payable, and supply chain management.

In another example, an international telecommunications customer began by deploying a quoting application with real-time automated approvals.

The previous quoting process was manual, complex, and error prone.

Today, they can efficiently route approvals while salespeople are live with prospects, resulting in improved conversion rates.

On the heels of this successful deployment, the customer launched its self-service initiative, consolidating their six customer-facing service desks and replacing them with one portal, built on ServiceNow.

Upon completion, the portal will have traditional service management functionalities, such as self-service ticketing, [analysis basing], and service catalog.

More operationally, the system will activate and deactivate SIM cards, change mobile phone contracts, and access billing information.

One of our earlier customers has grown their ServiceNow usage to over 15 applications for nearly every line of business, ranging from human resources, engineering, network operations, legal, and support.

In 2013, this customer was acquired by a large global player that was also in the market for ServiceNow.

The acquisition actually became a catalyst for a much expanded relationships.

We closed in the fourth quarter because the implementation was so compelling to the new parent company.

A relationship that started out years ago as a small six-figure contract grew almost 20-fold post-acquisition in the quarter.

As reported repeatedly, the majority of our customers use ServiceNow for both IT and non-IT use cases.

Many customers have as many applications and more users outside of IT than inside IT.

It has been challenging to break out the respective contributions to the business.

Last year, we re-skewed our licensing scheme, which better portrays this.

Based on this, Q4 reporting suggested approximately 80% of new annual contract values are attributable to ITSM licensing and the balance to a variety of components, such as orchestration, discovery, create-now platform licensing, performance analytics, and additional system instances.

However, the Company doesn't manage the business on this distinction, because ServiceNow is a platform and our customers broadly deploy IT and non-IT applications side by side.

Granted all its hard lines, there are applications like vendor management and project management that can add both IT and non-IT aspects.

Our popular incident management application is also widely used for non-IT purposes.

Regardless of SKUs and licensing, there is no way to be confident about the breakdown.

As a result, we don't believe this to be sufficiently reliable and, therefore, will not be reporting it on a go-forward basis.

Platform adoption continues to grow at a healthy pace.

Based on usage data from February to November 2013, the percentage of those customers deploying custom applications increased from 64% to 80%.

ServiceNow's adoption as a platform as a service is not going unnoticed.

For example, in a recent CIO survey conducted by Morgan Stanley, 50% more CIOs plan to deploy platform as a service by the end of 2014 versus those using today.

Of the CIOs surveyed, 5% are currently using ServiceNow for a platform as a service, compared to 15% who expect to use it by the end of 2014.

Over the past several years, we have prioritized our cloud infrastructure and software platform for investment.

While we continue to invest broadly in these areas, we are shifting some focus and priority this year to the increased availability of enterprise service applications built on our platform.

Aside from increasing our internal resource commitment to application development, we are also releasing a brand new service this year called [Share], a content sharing infrastructure for the ServiceNow community.

Share is where members can browse and download custom applications and solutions created by ServiceNow customers and partners.

For the next few months, we're running Share as an invitation-only program and expect it to be generally available by our annual users conference, Knowledge14, in April.

Another major investment that has just come to fruition is our global digital marketing infrastructure with upgraded content, messaging, and forms for customers, partners, and community to connect and share.

Please visit servicenow.com for a look at our new online presence.

Also during the quarter, we welcomed Charlie Giancarlo to our Board of Directors.

Charlie brings over 30 years of outstanding corporate leadership and management experience to ServiceNow.

With that, we look forward to 2014 as another great year of innovation and execution.

I will now turn the call over to Mike to go over the numbers in more detail.

Thank you, Frank.

During today's call, we will review our fourth-quarter financial results and discuss our financial guidance for 2014.

We would like to point out that the Company reports non-GAAP results in addition to, and not as a substitute for or superior to, financial measures calculated in accordance with GAAP.

All financial figures we will discuss today are non-GAAP unless stated otherwise, with the exception of revenue numbers, which are 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 investors.servicenow.com.

Total revenues for the fourth quarter were $125.2 million, growing 67% year over year and 13% sequentially.

Subscription revenues for the quarter were $104.9 million, growing 67% year over year and 13% sequentially.

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

36% of our annual contract values signed in the quarter came from upsells in our existing customer base.

Our average contract terms for new customers, upsells, and renewals, were 33.1, 23.5, and 27.2 months, respectively, compared to an average of 33.4, 23.8, and 25.7 months on a trailing four-quarters basis, respectively.

Professional services and other revenues were $20.4 million for the quarter, growing 66% year over year and 11% sequentially.

Our trailing 12-month revenue per customer was $230,000, an increase of 21% from $190,000 in the prior year and up 5% from $219,000 in the prior quarter.

We booked a record seven new deals in excess of $1 million and our average annual deal sizes for both new logos and upsells increased on a year-over-year basis, a trend we saw in each of the past two quarters.

Exiting the fourth quarter, we had 67 customers with an annualized contract value in excess of $1 million, compared to 37 at the end of 2012.

Total revenues based on geography were $86.5 million in North America, $31.8 million in EMEA, and $6.9 million in the rest of the world, representing 69%, 25%, and 6% of total revenues, respectively.

In the fourth quarter of 2012, we recorded revenues of $52.9 million in North America, $18.6 million in EMEA, and $3.7 million in the rest of the world, representing 70%, 25%, and 5% of total revenues, respectively.

Our total billings were $166.2 million in the quarter, compared to $97.6 million in the prior year and $127 million in the prior quarter, representing 70% year-over-year growth and 31% sequential growth.

Approximately 5% of our billings in the quarter were for periods greater than one year, compared to 10% in the prior year and 4% in the prior quarter.

Our 2014 compensation plan provides fewer incentives for multi-year billing, and as a result, we expect less than 10% of our billings to be for periods greater than one year.

One year is our standard billing term.

Before we turn to expenses, we would like to point out that we ended the quarter with 1,830 employees, an increase of 753 employees from the same period in the prior year and an increase of 176 employees from the prior quarter.

We would also like to note that we recorded a pretax amount of $20.9 million related to stock-based compensation expense.

This impacted our earnings per share in the fourth quarter by a tax-adjusted amount of $0.15 per basic and diluted share.

Our subscription gross profit was $81.4 million, representing a gross margin of 78%, compared to 70% in the same period last year and 77% in the prior quarter.

During the quarter, we added 42 employees to subscription cost of sales, ending the quarter with 341 employees.

Our professional services and other gross profit was $2.6 million, representing a gross margin of 13%, compared to 5% in the prior year and 7% in the prior quarter.

During the quarter, we added 17 employees to professional services and other cost of sales, ending the quarter with 295 employees.

Our total gross profit was $84 million, representing a gross margin of 67%, compared to 60% in the prior year and 66% in the prior quarter.

Moving to operating expenses for the fourth quarter, sales and marketing expenses were $50.5 million, or 40% of revenues, compared to $26.1 million, or 35% of revenues, in the prior year and $41.4 million, or 37% of revenues, in the prior quarter.

During the quarter, we added 34 employees to sales and marketing, ending the quarter with 615 employees.

Research and development expenses were $18.7 million, or 15% of revenues, compared to $10.9 million, or 14% of revenues, in the prior year and $16.6 million, or 15% of revenues, in the prior quarter.

During the quarter, we added 56 employees to research and development, ending the quarter with 352 employees.

General and administrative expenses were $13.3 million, or 11% of revenues, compared to $8.1 million, or 11% of revenues, in the prior year and $11.8 million, or 11% of revenues, in the prior quarter.

During the quarter, we added 27 employees to general and administrative, ending the quarter with 227 employees.

Our operating margin in the fourth quarter was 1%, compared to an operating margin of 0% in the prior year and a positive operating margin of 3% in the prior quarter.

During the quarter, we recorded a non-GAAP tax expense of approximately $3.1 million.

Net loss for the fourth quarter was approximately $3 million, or a net loss of $0.02 per basic and diluted share, compared to a net loss of $0.6 million, or $0.00 per basic and diluted share, in the prior year and net income of $1.6 million, or a net earnings of $0.01 per basic and diluted share, in the prior quarter.

Our basic weighted average shares outstanding were approximately 139.5 million.

If we had operated at a net profit in the fourth quarter, diluted weighted shares outstanding would have been approximately 158.3 million.

Fully diluted shares at the end of the quarter were approximately 169.4 million, excluding any shares potentially diluted on the conversion of our convertible notes.

In November, we sold $575 million in convertible notes with a 0% coupon due in November of 2018.

We also entered into a related bond on] hedge and warrant transaction that effectively provides dilution protection until our share price reaches approximately $107.

If this occurs, we estimate our share count would increase by approximately 7.8 million shares.

This offering generated proceeds of $512 million, net of offering expenses and the cost of the bond hedge and warrant transaction.

We plan to use the proceeds to invest in our global expansion, international development, as well as acquisitions and strategic investments.

For modeling purposes, there will be no expenses related to the convertible notes from a non-GAAP perspective.

From a GAAP perspective, the quarterly non-cash interest expense from the amortization of the discount and the amortization of the issuance cost will range from $7 million to $7.5 million per quarter in 2014.

During the fourth quarter, we generated $36.3 million in cash flows from operations.

We used approximately $16.3 million for capital expenditures, resulting in $20 million in free cash flow.

This compares to $6.8 million of free cash flow in the prior year and $3.9 million in the prior quarter.

We ended the quarter with $890 million in cash, short-term and long-term investments, up $537 million sequentially, largely driven by net proceeds from the convertible debt offering.

Our total deferred revenue balance was $266.7 million at the end of the fourth quarter, up 18% over the $225.8 million reported at the end of the prior quarter.

Our backlog was $608.4 million at the end of the fourth quarter, a 61% increase over the $379 million reported at the end of 2012.

As of the end of the year, backlog and deferred revenue combined totaled $875.1 million, up 59% from $549.4 million at December 31, 2012.

Before -- prior to turning to specific guidance, we would like to highlight some key areas for investment in 2014 and the planned headcount growth.

Overall, we expect to add over 800 employees during the year, with our hiring being front-end loaded.

We continue to see strong global demand for ServiceNow from new and existing customers.

In order to build capacity and stay ahead of this opportunity in 2014 and beyond, we plan to add over 300 employees to the sales and marketing organization during the year.

We also see opportunity to expand the availability of enterprise service applications developed on ServiceNow platform to further increase adoption.

We plan to add over 200 employees in our research and development organization to drive application development, in addition to the ongoing innovation in our cloud infrastructure and platform.

Now, let's turn to guidance for the first quarter and full-year 2014.

Please note that our margin guidance is on a non-GAAP basis, which excludes stock-based compensation expense.

For the first quarter of 2014, we expect total revenues between $133 million and $135 million, representing sequential growth between 6% and 8%.

The revenues are expected to consist of subscription revenues between $112 million and $113 million and professional services and other revenues between $21 million and $22 million.

In addition to our revenue guidance, we expect billings to be up sequentially in the first quarter of 2014.

We expect subscription gross margin of approximately 76%, down from 78% in the fourth quarter of 2013.

We expect the decrease to be largely driven by investments in three new data centers in Brazil, Hong Kong, and Singapore, all of which will begin buildout in the first quarter.

In addition to data centers, we will be making investments in our customer support organization, including a new support center in Australia to serve our customers in the Asia-Pacific region.

We expect professional services and other gross margin of approximately 6%, down from 13% from the fourth quarter of 2013.

This decrease is primarily driven by significant headcount growth to ensure we have the implementation and training resources to support our growing subscription business.

We expect overall gross margin of approximately 64%.

We expect an operating margin of approximately negative 9%, down from positive 1% in the fourth quarter of 2013.

In addition to the headcount and cost of sales investments previously mentioned, the first quarter will be the first full quarter of rent and depreciation expense related to our new Santa Clara headquarters, which we expect to total approximately $1.6 million a quarter.

We also expect to incur approximately $3 million in expenses associated with our sales kickoff event held once a year in January.

We expect basic average shares outstanding of approximately 142 million in the first quarter.

We also expect a negative operating margin in the second quarter, which will be partially driven by Knowledge, our annual users conference.

For Knowledge, we expect to recognize approximately $7 million in professional services and other revenues, with approximately $15 million of expense recorded in sales and marketing.

In the second half of the year, we expect to have positive operating margin in both Q3 and Q4.

For full-year 2014, we expect revenues to fall within the range of $640 million to $645 million, representing year-over-year growth between 51% and 52%.

Our total annual revenue estimate consists of subscription revenues between $533 million and $535 million and professional services and other revenues between $107 million and $110 million.

We are not providing specific cash flow guidance at this time, but we do expect capital expenditures as a percentage of revenue to decrease from 13% in 2013 to approximately 9% for the full-year 2014.

As we look further down the road beyond 2014, we continue to see an expanding market and we will continue to invest for long-term growth.

You should expect to see continued investments in our global expansion, platform and application development, and cloud infrastructure.

At this time, we would like to reiterate our long-term financial model.

We ultimately aim to reach non-GAAP gross margins between 68% and 70%, sales and marketing of 29% to 31% as a percentage of revenue, research and development of 11% to 13% as a percentage of revenue, general and administrative of 4% to 6% as a percentage of revenue, and an operating margin of approximately 20%.

Before closing, please note the date of our upcoming annual users conference, Knowledge14, in San Francisco, April 27 through May 1. In conjunction with the event, we will be holding an analyst day for professional financial analysts on Monday, April 28.

We are planning a great lineup of speakers showcasing the breadth of the management team and a customer panel to discuss their use of ServiceNow throughout the enterprise.

If interested, please send an email to IR@servicenow.com.

For those who cannot join our analyst day in person, we will hold a webcast of the event, accessible on our website.

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

(Operator Instructions).

Jennifer Lowe, Morgan Stanley.

I wanted to drill in a little bit more on how you are thinking about your own application development efforts with the incremental investments in R&D, versus the aspirations for Share and really getting the partner and your customer community developing applications.

As you think about the three- to five-year outlook for platform as a service, how much of that do you think is productization that ServiceNow really wants to do outside of ITSM, versus the goal for others to do that development on your platform as a service?

How are you balancing those relative constituencies?

Jen, it's Frank.

We definitely are going to build certain applications ourselves, really with a focus on priming the pump and showing the marketplace what's possible, and certainly going into two areas that we think that are high leverage to demonstrate the power of the platform.

That said, if you go out three, four, five years, we expect the vast, vast majority of application availability to come from our community -- customers, partners, third-party software providers.

And the number one ask last year from our users conference was to build the sharing infrastructure, which is what we have now done.

And we're going to be maturing that, and then making that generally available come April of this year.

So we're really pinning our strategy on community and partners to build the availability of apps in the platform.

And then, just one more for me.

If you look at the upsell in the quarter, and that's been pretty consistently strong for a number of quarters now, how much of that at this point is coming from customers starting to expand usage of ServiceNow into areas outside of the IT department, versus increasing their footprint of either ITSM or other IT-oriented applications within the IT department?

It's a good question, and I wish I had a very definitive answer to your question, but in general, it is both.

A lot of the -- most of our expansion outside of IT comes from upsells.

Typically in the original, the transactions tend to be very much dominated by IT of some centric deployments.

We have a ton of evidence that the platform is getting traction to our own operational metrics, as well as the surveys that you guys have been doing.

So it's very evident that the community is super active in this regard.

So the general answer is it is coming from both areas in large volumes.

Great, thank you.

Ray Lenschow, Barclays.

It is David Wang on for Raymond.

So quick question is just help reassure some of the investors who are less familiar with what happened.

Could you perhaps talk about the recent CTO departure and just what happened there?

Yes, that was not a major event for the Company.

I think that we hired Arne early on in 2011, and he was very instrumental and helpful in transitioning our cloud infrastructure to what it eventually became.

But because of the success that we've achieved over the last several years in that process, he essentially worked himself out of a job, and we really consolidated and organized into our permanent form.

And it became sort of a natural conclusion for both himself, as well as the Company, that this was the way forward for us.

So it's really not something that was unexpected, at all.

We were just looking for a good way to make that happen, both for him, as well as for the Company.

Okay, great.

Thanks a lot.

Michael Turits, Raymond James.

Can you, Mike or Frank, walk through the impact of the two different sets of pricing changes and how that is going on platform per user and I think maybe towards [per half], and then the service bundles.

I don't know if you covered this at all before I jumped on, but anything you can tell us would be helpful.

It's Frank.

I can make some general comments on this topic.

In general, it is a change that our marketplace is getting used to, so it's still early going in that process, but as you can see from our numbers, we were coming off an extraordinarily strong quarter.

So we are obviously being very successful in running through the business with these new pricing models.

In general, we are getting stronger monetization of the various aspects of our product portfolio, but all that said, we're still in the middle of consolidating, stabilizing, and the marketplace in general is getting used to the new way of doing things.

And we expect that is going to take some time, but I think we have been very good at -- in transacting business in the last several quarters.

So it is certainly helping us do what we want to do out there.

And if I could get one more, obviously, it's great to see it looks like an upping of the amount of sales that you're going to add.

As far as I know, there was going to be somewhat a shift to a little bit more focus on new logos as opposed to penetration of accounts in the coming year.

Maybe if you could talk a little bit about that, how that's going, and what you're doing in terms of sales motion and the type of people you are hiring.

Prior to -- this is Frank again, prior to 2013, our sales force was almost exclusively focused on new logos, and coming into 2013, we changed that.

And we now really have a balanced model that focuses on new logos, and then we have a whole sales team that looks after our existing accounts, and you can see from the strong upsells all year long that that model is working very well for us.

So we are not going to shift the balance back now towards new logos, because a SaaS business becomes increasingly dependent on existing book of business and revenue portfolio, so we're certainly not going to take our eye off that ball, but we are literally expanding as fast as we know how to do within a safe way.

You can always add more people, but you can only split territories so quickly.

It takes people nine months, 12 months to scale.

So you cannot be ripping territories apart every three months because after a while, you get into the threshing zone and it becomes unproductive to add headcount even faster than what we are already doing.

Okay, thanks.

Brent Thill, UBS.

Just as it relates to the platform, I know it's tough to break out, but when you look at 2013 going into 2014, is there a way to help us measure (technical difficulty) out there?

You broke up a little bit in the asking of that question.

I think you were asking about how to think about the platform.

We have struggled quite a bit internally to try to respond to general interest in the capital markets on this topic.

But it's real hard to do with real authority, but there's a few things that I will tell you.

We think that any kind of metric of a financial nature that we produce is not going to be, number one, very accurate because there is many variables in the transaction of business that influence it.

Number two, it's going to be understated, also for a whole bunch of separate reasons.

But the important thing for you all to realize is this is not how we manage our business.

This is not how our customers think about the business.

They see ServiceNow as one platform.

There's all kinds of applications running over them.

Some of them are standard, some of them are custom, some of them are IT, some of them are non-IT, some of them bridge the middle in there somewhere.

So that attempt to separate one set of use cases from another, we can -- it's very difficult to do with some form of credibility.

So we really urge people who are following the Company to really look at our marketplace in terms of what are our topline metrics, what is our penetration, what is our saturation, because it's really one business.

It is not multiple lines of business that are executing in separate trend lines from one another.

It's something that we will be emphasizing a lot.

We have tried to respond in various ways to the interest those and try to delineate that we find this is becoming less and less relevant to the way that we run our business and the way our customers view our business.

Abhey Lamba, Mizuho Securities.

Mike, the revenue -- the subscription revenue upside was pretty material this quarter, as well as the previous quarter.

Given your revenue model, is that the linearity or was there any true-ups in the quarter?

Any color on that?

There were no true-ups.

That was just the way the contracts were signed in quarters and the way they got recognized.

Got it.

And can you talk a little bit about the momentum in international spaces?

You touched upon it and it is one of your areas of investment.

What type of investments are you making, and which areas, which regions offer the most potential, and when can they start becoming meaningful contributors to your bookings?

Sure, so there's two ways that we invest internationally.

One is putting data centers where we know there is going to be data sovereignty issues, and Brazil is one of those that we started making investments last year with opening our first data center.

Our second data center -- remember, we pair our data centers -- our second data center is being opened in Q1.

And then, we're opening a pair of data centers and in Asia-Pacific, one in Singapore and one in Hong Kong.

And so, we're doing a lot of hiring in Mexico and Brazil, as well as APJ in Singapore, Hong Kong, Japan, and other areas over there, as well in Europe.

We are going deeper in some of the other countries in Europe where we never had a presence before and we are looking at some of the eastern bloc countries as well, right now.

Thank you.

Jason Maynard, Wells Fargo.

A question for you, Frank.

As you look at 2014, do you have a goal or target in terms of how much business will be either influenced or -- I don't want to say actually on paper with partners, but really being driven by some of your system integrators, whether that's the boutiques or the global [FS]?

Yes, we don't have a specific goal, Jason, in regards to that.

We obviously want our partners to become more instrumental in our business.

I think we have made huge strides during 2013.

KPMG has been a longstanding -- really a leader in our business.

They jumped in without any reservation.

Accenture is now coming on very strong.

They influenced some very large transactions during the quarter.

What we really want to see is where the system integrators are sort of not following us around, but that we get an opportunity to follow them around.

In other words, that they are starting to become more leaders of transactions, rather than catalysts or influencers of transactions, which has sort of been the pattern that we have had.

All that is very beneficial and good for the business, but we want to get it to the next level, and if there is a goal for 2014, that is really what we want to see.

We have evidence in a bunch of pockets why this is taking place, but we want to see it broad based.

How much of Share do you think will help contribute to that goal in terms of getting these guys to actually be able to productize, if you will, some of their custom-built implementation work?

Well, what we really want them to do is proactively take this into their core business.

So far what's been happening, they've been following us around, and if we had an overlap between our efforts and they had presence in those accounts, they were all too happy to participate in those opportunities, right?

But we obviously -- we want that situation to invert where we are going to be following them into their core business where we don't have any presence yet.

So that's our goal for 2014.

Great, thanks.

Steve Ashley, ServiceNow.

This is [Matt Lemanger] on for Steve.

Thanks for taking our question.

Just a quick one on the -- with the new pricing, the ITSM mix, how much has been looked at as platinum versus gold versus silver and how that adoption is going along?

Thanks.

It's Mike Scarpelli.

I actually don't have that mix, and that's not something we really looked at internally, but I will say there are a number of large deals that we've been quoting with diamonds lately, which is our highest-level SKU.

Yes.

Matt Hedberg, RBC Capital Markets.

Thanks for taking my questions and congratulations on the strong end of the year.

I have a question about performance analytics.

Is there a way to think about the ASP uplift that product is having and maybe where you are seeing adoption?

Yes, this is Frank, we have actually been super pleased with the traction we have with performance analytics during Q4.

It is only two quarters in, and we largely exceeded our own plans and expectations on what that product is contributing in terms of ACV, so I think we're kicking off that trend line very favorably.

It is just a product that can draft our overall go-to-market cadence really, really well, so we are super pleased with the way that's going.

That's great, and then maybe for Mike, billings growth outpaced revenue growth this quarter, which was great to see.

Assuming you can grow revenue in the low 50% range per your guidance, how should we think about billings growth relative to revenue for the full year?

You have to remember that billings doesn't necessarily flow directly with revenue, because it depends upon the contract terms that you've signed, and it depends upon, A, how are you billing your backlog, your renewals, as you get your renewals, when those are coming up for renewal.

And so, it is very hard to give an overall longer-term billings guidance at this time, because you will have lumpiness in it, but we feel very confident that billings will be up this quarter from Q4.

Got you, thanks, guys.

Richard Davis, Canaccord.

Just kind of a tactical question, I guess for Frank.

You spoke at that technology business management conference.

Where do you guys see your product ending and the stuff that the guys at that conference begin, and how do you think about the evolution of that kind of effectively, I guess, cost accounting on steroids?

Thanks.

Yes, Richard, we do believe that the financial dimension is important, which is why we have a partnership with the company that you mentioned.

It's certainly very possible that the company will make incremental efforts in that area.

We are very rich on operating data, and the opportunity to map that operating data to financial data is something that the marketplace really likes.

And of course, the IT community is really keen on that, but it is equally applicable to all the other service domains in the enterprise, right, whether it deals with procurement or sales or HR.

So it is something that is important to us.

Great, thank you so much.

Walter Pritchard, Citigroup.

Frank and Mike, I'm wondering if you can talk about -- I think we saw you do similar things last year in terms of ramping up sales hiring pretty aggressively coming into the year, and it played out pretty well.

I am wondering if you could compare where you are putting the resources this year and how that might be different than where you added the resources back about a year ago when you did a similar thing?

Yes, we're still adding in North America.

We think there is still a lot of runway in front of us to continue to split territories in North America.

So you will see a large percent going there.

But overall, there's a lot of new markets we're going into, Asia-Pacific in particular, and there is still a lot of countries in Europe where we just don't have the bandwidth to cover all of the accounts that are there.

So it is going to be pretty much distributed.

One thing, this is Frank, one thing that I would add to that, Walter, is that in spite of the fact that we've added an enormous number of headcount during 2013 and a lot of that headcount have gone into markets that were relatively cold -- in other words, we're not developing; we are pretty much starting from scratch.

Our sales productivity, Q4 over Q4, actually went up.

So we view that as an extremely good sign that we are able to expand our sales organization, even though we are sending a lot of those people into very cold territories and still be able to drive our sales productivity the way that we have.

So that is the reason why we are confident about it, and we're going to continue to do it.

So about 50% of those adds are going in the Americas and the balance are going internationally.

And Mike, in terms of the low end of the market, I think under 40 seats or there is a threshold there that you are not addressing yourselves.

Is that continuing into 2014?

And then, also, are you starting to pursue anything vertical from a sales infrastructure or is it way too early to think of that type as a go to market?

Yes, so in terms of the lower end, this is Frank, in terms of the lower end of the market, I think we have -- previously, we had talked about or hinted at the fact that we are coming out with a lower-end product that really goes below that threshold that you mentioned.

We're in test with that product at this moment in time.

It is in the hands of a few customers, and it is going to take some time for us to get that ready for prime time where we're really confident to get more aggressive about that.

But we are definitely intent of having ServiceNow really drill down into much larger volumes of accounts, but obviously much smaller institutions.

In terms of verticalization, we are not quite ready because our marketplace is incredibly horizontal.

For us, it doesn't pay yet to have a real vertical orientation to our business, but a lot of our partners that are system integrators, they do have that vertical orientation.

So we map against their organization, so in that way, we do pick up some of that verticalization in the go-to-market approach.

I would not exclude from the realm of possibilities as we get bigger and better in terms of the broader enterprise deployments that that kind of an orientation will become a reality for us.

Great, thank you.

[Harry Hier], Credit Suisse.

I apologize in advance if you have already given an answer to this.

I was just hoping you could walk me through your traction on some of your newer products beyond platforms like Discovery, Orchestration, Runbook Automation, I am just curious to see what you are seeing in terms of adoption from your installed base?

On Discovery and Orchestration, Orchestration is a product that we're really seeing, and a lot of our upsales were in our existing accounts that were buying Orchestration.

And as Frank mentioned, about 80% of our business comes from the core ITSM, and that 20% has come from CreateNow, the platform, and Discovery and Orchestration, and we think those will be drivers in the future of our business and will become a bigger percent in the future.

I think Orchestration has dramatically increased, and by the way, having part of our sales organization focused on existing accounts has really helped that part of the business, because that's typically the follow-on side of the sales that those guys focus on.

Thank you, guys.

Kirk Materne, Evercore.

Just a little bit along the same lines as the sales questions before, I guess, Frank, are you thinking all about specialist sales around platform or when you think about things like HR or Service Automation?

I guess, does it make sense to start having sales people with specialization along maybe more of an application route, or is your opportunity still just too broad right now to start worrying about that?

Our opportunity is really broad, but we are talking about having specializations in some of the areas that you mentioned, especially HR, not so much because the applications are that different.

It is because you have to be able to speak the language.

They have a different terminology, and we just have to look and feel a little bit more like HR people than IT people.

But the applications themselves, technically it is all service management, right, whether you are talking about IT or facilities or HR.

It is amazing when you strip away the veneers, these things are doing very, very similar things.

It's just in the interaction with your core audience.

They just talk differently about the artifacts and constructs of their business, and that's why we are right in the middle of thinking about having centers of excellence, people that we can use for those kind of projects.

Because we are getting noticed, but we are good at talking to IT people.

We are not as good as talking to people in other service domains.

And I guess just around HR Service Automation in particular, since you guys have launched that, have you seen more HR-oriented consulting firms or system integrators looking to partner with you all to maybe provide that level of, I guess, interaction with the customers?

Has that picked up since you guys have planted a stake in the ground on that front?

Yes, it actually has, and it was really interesting for us that we are starting to trigger a whole new set of partners that are specific to that space, and they are coming to us because they are finding that we are crossing over into their areas, and these are conversations that are new to us.

These are not firms that we normally we would talk to.

So we view this as a very positive development in our business.

And then, just last one for me, really quickly, Mike, just with the cash balance where it is right now, I assume M&A would be the primary use.

I guess, are you guys going to be looking maybe more so than you were even last year?

I am sure you are always looking.

I guess, should we expect perhaps a little bit more activity on the M&A front this year?

Thanks.

It's Frank.

We are much more organized now in terms of systematically evaluating categories and targets within the categories that we are looking at.

We assigned a Chief Strategy Officer, somebody that actually is part of our executive staff and reports directly to me with a team of people.

And that's most of what they are engaged in, involved in.

It's not that we're -- the money is not burning a hole in our pocket.

We have a much stronger strategic posture these days than what we have had in the past.

We know where we're going and we're aggressively evaluating targets.

That said, it's not easy for us to convince ourselves to move.

We're looking for very strong talent and technology that would be a good fit to our plans.

Thanks.

Tim Klasell, Northland Securities.

Thank you very much and congrats on the quarter.

I just have one question.

When you are in the platform sales and customers are looking at that solution, is it primarily for new solutions that they are thinking about building or migrating over existing solutions on some of the legacy platforms?

That's a very interesting question.

Obviously, both of those things are going on, but oftentimes people are looking at migrating applications that have lived in Lotus Notes for literally two decades and moving them over to ServiceNow.

SharePoint, a whole plethora of web tools, stuff that has been lying around, and consolidating all these scrawled application portfolios and bringing them onto ServiceNow, that's how a lot of our CIO customers view ServiceNow, as a service platform for the entire enterprise where they can consolidate and really sanction application development that historically has been extraordinarily fragmented.

So, it's a good question.

A lot of this stuff is also brand new.

It's stuff that has lived on email and spreadsheets, and somebody finally woke up and said, you know what, we're much better off implementing this on a real record-keeping workflow platform, rather than continuing to do this in a messaging type of system.

So that is what is driving that end of our business.

Okay, then a quick follow-on.

Who are the other solutions that your customers are looking at when they are evaluating your solution?

On the platform end of it?

Yes.

Yes, it's actually -- the one, obviously, one name that we probably see more than most others is Force.com from Salesforce.

I think we are typically the two flavors that get considered for those kind of projects, so that's most common, and then you look at it in terms of things that are similar in concept.

Okay, thank you.

Derrick Wood, Susquehanna International Group.

We have been hearing about an increase in priority, transitioning off of old ITSM systems.

I'm just curious if there is any color or data you can give with respect to what you are hearing around legacy systems, end of lifeing, and what you are seeing in the pipeline for 2014?

There is a general sense, because we now have well over 2,000 enterprises and 400 of them are Global 2000, there is a huge amount of experience in the marketplace.

There's a huge amount of success.

There is a strong ecosystem.

So the level of confidence that has been built in the marketplace to go and undertake these transitions and these kind of implementations is much greater.

And that is part of the critical mass that has been building momentum behind our business.

So it gets easier because of the history that we have under our belt.

That said, these are literally ERP-scale enterprise-type projects.

It's not the sort of thing that you do on a Saturday afternoon.

They are very serious undertakings.

They have to turn off legacy systems, systems that they may not have touched or don't even have people anymore to understand them.

So these are very serious projects, and that -- if anything slows us down, it's the general friction of turning off all systems and then launching brand-new systems and managing through that transition.

But as you can see from our revenue trajectory over the last eight years, it has going pretty quick.

Great, and you guys have a lot more business coming up for renewal this year.

How should we think about that?

Do you guys anticipate any change in contract structure versus the original engagements?

And then, during renewals, is this usually a time where you have upsell/cross-sell engagement, as well?

Yes, so we have contracts coming up for renewal constantly, and at that time, it's generally -- there's usually a discussion around an upsell, but that is not the only driving factor of an upsell.

Our sales reps who cover accounts are constantly looking at the usage of our customers and going back in and upselling those customers.

So yes, we do anticipate that 2014 will be another very good year of upsell, but it's not necessarily just driven by the renewals.

Okay, all right, thanks.

In terms of the structure of the contracts, I don't really see the structure, in terms of the terms of contracts, changing dramatically.

Greg McDowell, JMP Securities.

High-level question first, based on last year's performance and 2014 guidance.

I was wondering if you have increased confidence in your multi-year revenue trajectory and reaching $1 billion of revenue in FY 2016.

Yes.

Yes, that would be a yes for me, as well.

I think we are coming off an exceptionally strong quarter.

We are feeling extremely good about our business because of the aggregate amount of experience that has been built up.

Our infrastructure has been rock solid.

We are increasing five [nines] of availability, so we feel in really, really good position to continue to hire and scale.

We sort of have everything going for us at this point.

Great, thank you, and one quick follow-up.

The number of customers with ACV over $1 million, it looks like that almost doubled from 2012 and 2013.

I was wondering as you look at the pipeline and how things are shaping up, could we come close to doubling again in 2014 the number of customers with ACV over $1 million?

Thanks.

Yes.

A, we have a very healthy pipeline of new deals that are north of $1 million, but remember, we continue to upsell our customers, and as we upsell our customers, they go over $1 million, and we have a lot of customers that are as well in that kind of $750,000 to $1 million range that will go over the $1 million next year just with upsells.

Great, thank you.

Brad Sills, Maxim Group.

Just one on -- the EMEA revenue mix has been gapping up nicely quarter to quarter now for several quarters.

Can you just comment on performance in certain regions?

Are you surprised at the upside in certain countries or regions within EMEA?

Yes, you are correct.

EMEA over the last three quarters or so has been strong, has been consistent, and as you said, it's stepping up to the upside, so we are very pleased with the sales execution.

One market where we are finally turning the corner is Germany.

We have had a complete reset there, and as you know, in Europe because of how long it takes to bring people in and out, it takes a lot longer to turn territories around there.

But because Germany is such a dominant marketplace over there, we feel that we're really on the right track, and Q4 was really good for them, as well.

So that can really become a major engine for us.

So we are doing well in the UK.

That has always been an exceptionally strong market for us.

France has been a great market for us.

We have a really, really strong team there.

We have branched out into the rest of southern Europe, because we typically go where the Global 2000 accounts are hanging out.

That is really how we deploy our resources.

So we are pleased with the performance of EMEA in 2013 and especially in Q4.

Great, thanks.

And then, just one last one, you mentioned some of the products that performed particularly well with the upsell.

Are there any user groups within IT, whether in support ops or development, that you are finding more traction in the upsell side of the business?

We typically -- when it comes to IT, it is really the IT operations side of the house is our center of gravity.

Within IT operations, you have a specific IT of some constituency.

Obviously, those people are involved with ServiceNow.

But we typically tree up all the way to the head of operations and the CIO.

Most CIOs these days think of ServiceNow as their ERP.

They view this as 10-, 15-year type of position.

So it is very broad based, and it does go all the way to the top of the house.

So we are not selling in tiny pockets in IT.

If you had that impression of us, that is not how it works.

These are very broad positions for IT organizations.

Great, thanks, Frank.

Ladies and gentlemen, that is all the time we have for questions.

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

Thank you.

As a reminder, a replay of this call will be available as a webcast in the investors 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 April, following the close of the first quarter.

Ladies and gentlemen, thank you for participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.