ServiceNow Inc (NOW) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2014 ServiceNow earnings conference call.

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

At this time all participants are in listen only mode.

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

(Operator Instructions)

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

I would now like to turn the conference over to your host for today, Michael Scarpelli, Chief Financial Officer.

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 annual report on Form 10-K 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're off to great start in 2014, with strong execution and enterprise demand for ServiceNow.

Revenues grew 62% year-on-year to $139 million, and billings grew 64% year-on-year to $181 million.

Our install base is now at 2,195 accounts, with 426 Global 2000 customers.

Global 2000 accounts added in the quarter include [Bombardier], BP, [Susutation of Out], Thomson Reuters, Visa and Walmart.

We continue to see deeper and broader penetration of the large enterprise.

Our average annual deal size for both new customers and up-sells increased year-over-year for the third consecutive quarter.

We booked a record nine new transactions with annual contract value in excess of $1 million.

The quarter also witnessed the two largest annual transactions in our Company's history, one of which had a total contract value in excess of $10 million.

These increases are attributed to customers deploying us as an enterprise service management platform.

While IT service management usually is the catalyst for transactions, the largest transactions are driven by a much broader enterprise scope.

Building on our considerable presence in large pharma, AstraZeneca made a substantial investment in ServiceNow to execute on a global service management model.

They will deploy ServiceNow to consolidate their global IT services, providing users with a consumer-style self-service experience.

AstraZeneca then plans to deploy service model into other dimensions such as finance and facilities.

Another Global 2000 company chose ServiceNow to deliver service automation for their organization.

Their immediate need for an HR case and knowledge management solution allowed us to demonstrate the broad applicability of service management in the enterprise.

This initial transaction will enable service delivery for 150,000 employees.

Starting with IT and HR, the company has the goal of deploying across other service domains.

The usability and agility of our platform was decisive in winning the contract, with an annualized value of approximately $4 million.

The larger and broader upfront investments we sell in the quarter further reflect enterprise-wide adoption of ServiceNow.

Before closing, please note our upcoming annual users conference, Knowledge14, in San Francisco, April 27 through May 1. 6,000 professionals and ServiceNow experts will convene for five days to share service management strategies and learn how others are achieving success in the enterprise.

As a part of the event, we will be holding a financial analyst day on April 28 for which many of you on the call today are already registered.

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

The event is not to be missed by anyone who is an investor in ServiceNow or contemplating becoming one.

With that, I will now turn the call over to Mike.

Thank you Frank.

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

All financial figures we will discuss today are non-GAAP 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 quarter were $139.1 million, growing 62% year-over-year and 11% sequentially.

Subscription revenues for the quarter were $117.4 million, representing 64% year-over-year growth and 12% sequential growth.

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

34% of our annual contract values signed in the quarter came from up-sells in our existing customer base.

Our average contract terms for new customers, up-sells and renewals were 36, 23.2 and 24.2 months, respectively, compared to an average of 34.3, 24 and 25.6 months on a trailing four-quarter basis, respectively.

Professional services and other revenues were $21.7 million for the quarter, growing 51% year-over-year and 7% sequentially.

Over the past few quarters, we have seen the revenue mix of professional services and others decrease as a percentage of total revenues, as we continue to focus on strengthening and supporting our growing professional services partner ecosystem.

Our trailing 12-month revenue per customer was $241,000, an increase of 22% from the prior year and up 5% from the prior quarter.

Our average total annualized contract value with Global 2000 customers was $572,000 at the end of the quarter, up 31% from the prior year and up 12% from the prior quarter.

Total revenues based on geography were $95.0 million in North America, $36.3 million in EMEA and $7.8 million in the rest of the world, representing 68%, 26% and 6% of total revenues, respectively, compared to 70%, 24% and 6% of total revenues in the first quarter of 2013.

Our total billings were $180.8 million in the quarter compared to $110.3 million in the prior year and $166.2 million in the prior quarter, representing 64% year-over-year growth and 9% sequential growth.

Additionally, approximately 4% of our billings in the quarter were for periods greater than one year, compared to 7% in the prior year and 5% in the prior quarter.

In the future, we expect approximately 5% of our billings will be for periods greater than one year, but one year is our typical billings term.

Before we turn to expenses, we would like to point out that we ended the quarter with 2,103 employees, an increase of 834 employees from the same period in the prior year and an increase of 273 employees from the prior quarter.

We would also like to note, we recorded a pretax amount of $29.2 million related to stock-based compensation expense and $7.1 million in expenses related to our convertible debt.

This impacted our earnings-per-share in the first quarter by a tax-adjusted amount of $0.22 per diluted and basic share.

Our subscription gross profit was $89.3 million, representing a gross margin of 76% compared to 77% in the prior year and 78% in the prior quarter.

During the quarter we added 40 employees to subscription cost of sales, ending the quarter with 381 employees.

Our professional services and other gross profit was $2.2 million, representing a gross margin of 10%, compared to 8% in the prior year and 13% in the prior quarter.

During the quarter, we added 42 employees to professional services and other cost of sales, ending the quarter with 337 employees.

Our total gross profit was $91.4 million, representing a gross margin of 66%, compared to 65% in the prior year and 67% in the prior quarter.

Moving to operating expenses for the first quarter, sales and marketing expenses were $60.4 million or 43% of revenues, compared to $34.2 million or 40% of revenues in the prior year and $50.5 million or 40% of revenues in the prior quarter.

In the first quarter, we incurred $2.7 million in expenses associated with our annual sales kickoff event.

It is important to note that in the second quarter of 2014, we expect to incur expenses in sales and marketing of approximately $15 million related to Knowledge, up from $8.3 million incurred for the event in the second quarter of 2013, due to a significant increase in the size of the event.

During the quarter, we added 115 employees to sales and marketing, ending the quarter with 730 employees.

Research and development expenses were $23.3 million or 17% of revenues, compared to $12.9 million or 15% of revenues in the prior year, and $18.7 million or 15% of revenues in the prior quarter.

During the quarter we added 58 employees to research and development, ending the quarter with 410 employees.

General and administrative expenses were $14.8 million or 11% of revenues, compared to $9.9 million or 12% of revenues in the prior year and $13.3 million or 11% of revenues in the prior quarter.

During the quarter we added 18 employees to general and administrative, ending the quarter with 245 employees.

Our operating margin in the first quarter was negative 5%, compared to a negative 1% margin in the prior year and an operating margin of 1% in the prior quarter.

During the quarter we recorded a non-GAAP tax expense of $5.8 million.

Net loss for the first quarter was $11.7 million or a net loss of $0.08 per basic and diluted share, compared to a net loss of $1.9 million or a net loss of $0.01 per basic and diluted share in the prior year, and a net loss of $3 million or a net loss of $0.$0.02 per basic and diluted share in the prior quarter.

Our basic weighted average shares outstanding were approximately 142.1 million.

If we had operated a net profit in the first quarter, diluted weighted average shares outstanding would have been approximately 161.4 million.

Fully diluted shares at the end of the quarter were approximately 172.3 million, excluding any shares potentially diluted on the conversion of our convertible notes.

During the quarter we generated $24.2 million in cash flows from operations.

We used approximately $11 million for capital expenditures, resulting in $13.2 million in free cash flow.

This compares to $4.6 million of free cash flow in the prior year and $20 million in the prior quarter.

We ended the quarter with $924.4 million in cash, short-term and long-term investments, an increase of $34.5 million over the prior quarter.

Our total GAAP-deferred revenue balance was $308.5 million at the end of the first quarter, up 16% over the $266.7 million before the end of the prior quarter.

Let's turn to guidance for the second 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 second quarter 2012, we expect total revenues between $160 million and $162 million, representing year-over-year growth between 57% and 58%.

Our total second-quarter revenue estimate consists of subscription revenues between $128 million and $129 million, and professional services and other revenues between $32 million and $33 million.

Our professional services and other revenues outlook includes approximately $8 million related to Knowledge, with the related expenses of approximately $15 million recorded in sales and marketing We expect subscription gross margin of approximately 77%, professional services and other gross margin of approximately 30%, and overall gross margin of approximately 67%.

We expect an operating margin of approximately negative 6%.

For the full year 2014, we expect revenues to be in the range of $652 million to $657 million, representing year-over-year growth between 54% and 55%.

Our total annual revenues estimate consists of subscription revenues between $545 million and $547 million, and professional services and other revenues between $107 million and $110 million.

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

(Operator Instructions)

Jennifer Lowe, Morgan Stanley.

Thank you.

The first question I had, I just wanted to touch on the sales and marketing head count adds.

And it looks like maybe the additions in Q1 were a little ahead of at least where we were.

First question there -- is more than 300 heads still the right level to think about for the year?

Or any thought towards changing that target?

And two, to the extent that you are adding heads, for the heads that you added last year, what the productivity [rut] been like?

Yes, as we have mentioned before, we are going to front-end the hiring in 2014 similar to what we did in 2013.

But with that we enter a year with a target.

But that target can vary based upon how we see our actual results of ramping reps.

And one thing that we are very pleased with is our productivity per ramp reps in Q1 over Q1 2013, increased nicely.

It increased up 20%, actually.

So with that, that gives us the confidence to hire people, showing that we can ramp them.

Great.

Maybe just one for Frank, and I know we will probably get a lot more on this next week but just curious, now that I think we're a little bit into at least the beta, or the invitation round with the new share offering, just curious if there was any early feedback yet on people starting to use that app exchange framework at all?

Yes.

As you indicated, we're going to announce that really and demonstrated it really, introduce it fully next week at our Knowledge 14 event.

It is actually was the single most requested item of last year's Knowledge event, so this has been anticipated for quite some time.

We have some really good partners and customers that are early adopters and contributors and really design partners involved in this infrastructure.

And we're in the middle of populating it, both with our own content as well as content from customers and partners.

They are pretty excited about the prospects of it, but still early going; so we're going to have updates as we go forward here.

Thank you.

Next question, Brent Thill, UBS.

Good afternoon.

Frank, you mentioned the deal over $10 million.

I am just curious if you could give us a sense of if that was from a new and existing, or existing customer?

If you could just maybe walk through on the deal?

When you're getting deals that large I would assume that is an all-you-can-eat transaction.

How do structure the transaction?

If you could just give a little couple more details?

And I had a quick follow-up for Mike.

So that was a [first sale matter], not an up-sell or a repeat; that was an initial transaction, so it was quite significant.

The important thing there was that this is a customer who actually attended last year's Knowledge event and really took very strong notice of our positioning of service management as our enterprise platform.

And really adopted that motion, which is what dramatically expanded to transaction.

It is not an all-you-can-eat transaction.

We believe that in this particular situation we still have a ton of room up in terms of future expansion and up-sells.

Just because of the position at our enterprise-level -- that is really what upscales these deals to levels we have not seen previously.

Because the user accounts are so much greater than what they are when you view them in a very narrow IT service management context

Okay, great; thanks for the color.

I guess more of the question on the go-to-market, number of companies that used Q1 to reshuffle and refocus the direction.

Is there any change this year in terms of your go-to-market and how you are reaching the customers in the distribution model?

Or is it more of a tweak in terms of how you're adding reps, to go after this opportunity?

There's really no fundamentals change.

Like last year we did have a fundamental change that would really balance between existing customers and new customer focus and we're continuing that into this year.

What is different this year is that we have a greater relevant emphasis on populating new service areas internationally.

We are very intent on getting into Asia.

About one-third of the Global 2000 is in that hemisphere, so it is very important for the Company to establish itself, and that takes time to do that.

Thank you.

Next question, Michael Turits, Raymond James.

Marco Turits?

I became Italian, I like that.

Michael Turits.

Michael, did you comment at all on any expectations for billings in the next quarter?

And, also on that large deal, will that bill all up front or is that over time?

So the billings -- we are not giving any guidance on billings.

We give enough information for you guys to calculate billings in your models.

In terms of that large deal, the annual contract value is billed up front, but that was a multi-year contract and so it was included in our billings but just one year of that.

Okay and then you talked about rolling out some kind of a mid-market or down-market product.

Where are we with that?

And how does that fit into the market strategy in general?

This is Frank.

That's a product that we refer to as ServiceNow Business Edition.

We have been running it in tests and we now have a half-a-dozen paying customers on that platform.

And we're really heavily in a mode of getting the product right, getting the support model correct, the contract model and so on.

It really is a mid-market product.

There's a bunch of things that we've learned in the process that we're actively dealing with, but we expect to really scale and broaden the [cola] market effort around that product in the second half of the year.

We are not in a debt rush to get that thing to market.

We are selling it; we are able to sell it.

But we are not stepping onto the pedal until we feel we're really ready to do that.

It is a very different approach than what you get on the enterprise side of ServiceNow.

You're really scaled down-market in every dimension of the product itself.

I will also add, Michael, we do not include the Business Edition product in our customer ads because those customer ads we give to our Enterprise customers.

If I can just have one follow-up, on the billing for that?

So it was $10 million deal, any sense, I don't know if you said exactly how many years, but what portion of that $10 million was a contribution to billings this quarter?

That was a multi-year contract, that was a three-year contract with some professional services in that.

It was just under $4 million, is what the contribution to billings was.

This quarter?

Yes.

Great.

Thanks a lot.

Next question, Walter Pritchard, Citigroup

Thanks.

Frank and Mike, I was wondering if you could talk a bit about your incentives around up-sell versus new.

You still have great billings.

The customer count increased year-over-year, or the incremental counts increased year-over-year.

But (technical difficulty) I'm just wondering how you're thinking about those two drivers of your growth?

Both this year and then beyond this year?

That's a good question.

Walt, this is Frank.

The important thing for you all t] realize is, we do not measure, or incentivize, or hold accountable our sales organization for the number of ads.

We start managing that way we get a very different model in terms of how people try to connect with the business.

The organization has been very successful in connecting with the contract values.

And they're doing that in a way that really optimizes the result.

What you're seeing is the most optimal model for us to record those kind of results.

Now are they naturally gravitating towards the larger enterprise?

Apparently, yes.

So for sure, it's the large up-sell on the large enterprise where we are the most productive in terms of deploying our salespeople.

Are we keeping an eye on this particular issue?

We absolutely are, and we're looking for ways of balancing that out.

But we're not going to be hard-over.

We're not managing logos per se.

Not all accounts are created equal.

That's an understatement, by the way, because there's some logos are almost markets unto themselves, because they're that large.

Versus domains when you go down-market they become far more insignificant.

That is how we are thinking about it.

We're looking to balance it a little bit, but we're super-pleased with the bookings performance of our sales organization.

The last several quarters, the last thing we want to do is mess with something that works extraordinarily well for us.

Got it.

And just Frank, related to that, I'm wondering, near and dear to your heart are the developers and you've spent part of your career in that market.

I'm wondering, on the up-sell success you are seeing, is it possible to talk about what areas of IT head count or of the organization you are doing a better job in penetrating?

Is there any trend in terms of what you're seeing this quarter, here?

Well, I don't think there's a particular inflection this quarter that's different from other quarters.

I mean the main thrust of ServiceNow in the marketplace, and you see it in action and you see it working, is that we are really expanding people's perspective of service management from an IT context to an enterprise context.

And that's what our customers are looking at and that's what they are moving into.

Sometimes they're doing it IT plus HR, or plus some specific applications.

Other times, they're really going hook, line, and sinker and really are viewing it much more on a global level.

And it's really up to us as a sales and marketing organization to make the case for that.

But what I think what you're seeing is that we're increasingly more successful in doing that.

We're super-excited about that because that is the main mission of the Company: to make that transformation in the marketplace from IT service models to enterprise service models.

Got it, thank you.;

Next question, Jason Maynard, Wells Fargo

Good afternoon.

Frank can you talk a little bit more about your non-ITSM, or service desk sales cycles?

And maybe, as you continue to penetrate these accounts what are you seeing in terms of the competitive dynamic?

Is some of it guys moving from do-it-yourself to onto your platform?

Or are you seeing other competitors?

And how does that just impact what your reps are communicating to customers out in the field?

Thanks.

Yes.

It's Frank, Jason.

The really important thing to understand is there is not a separate sales model or sales approach or message for ITSM versus non-ITSM.

We don't make that distinction, ServiceNow is one platform.

It is a platform that hosts service management applications.

IT is just one specific variance, one specific instantiation of that service model.

So our people go to market with that message -- we're pitching one thing, not two things.

It is true that ITSM is usually the starting point, because people are replacing legacy systems.

But our whole goal with the customer is to really expand their view and the opportunity and what is possible.

That is the game that we are playing out there; we are increasingly more successful at that.

So we do not go banging around and opening the door at facilities, one at procurement, one at HR; we really go in through the front door.

We use the IT organization as our landing spot, if you will, and then we are advocated by IT into the larger enterprise.

That is the very unique strategy that ServiceNow has relative to the enterprise, as opposed to trying to breaking doors open with various departments throughout the enterprise.

So we're really landing on IT and then we are literally advocated into the balance of the enterprise through that organization.

So that is how we operate.

What do you see though, from say, maybe when you get to that non-IT person who's looking at the platform?

Any data yet that you can grok on?

Yes, we see differences, for example, between HR and IT.

We have done a lot of HR implementation.

That's probably the service model that we are most familiar with outside of IT; and they're actually very different, because HR people are very information-centric.

So they're really focused on knowledge management and so on, whereas IT service models are very much focused on defects and things that are not working.

So the service models are different and the issues that people are focusing on, the mitigation strategies, are different in the service domain.

And we expect that, right?

Every service domain is a little bit different, but they're fundamentally deploying a very similar type of service model.

From a competitive standpoints, sometimes we go after these spoke applications, we may run into another platform player out there like Force.

But most of the time when we really are selling service management for the enterprise, there really is not a direct comparative confrontation.

We're the only people out there that are really driving enterprise service management as an IT strategy.

Appreciate the color, thank you.

Next question, Raimo Lenschow, Barclays

It is actually Chris Hogan on for Raimo.

I just wanted to touch base on the shift that you are seeing -- and you commented on it, Mike, on the call -- of the service work that is shifting to partners?

Obviously, with the growth that you guys are experiencing a lot of work you know that those partners are getting -- and we spoke to a number, a couple that actually got your highest designation this quarter.

I mean they're struggling to find capacity to get deals implemented.

How are you managing that as the business is growing as rapidly as it is, and you want to, obviously, shift a lot of that to the partners; give them the opportunity, but at the same time making sure that there is enough capacity in place in the ecosystem to get deals done?

This is Frank.

Chris, this is been a perennial challenge for a business like ServiceNow.

But that's been going forever at the rates, so this kind of scarcity of resources -- as long as we're growing, [lackness] is not going to go away, right?

And we see partners growing talent; there is a lot of talent going to the customer organizations moving to the other side.

So, there's a lot of that jockeying going on.

But fundamentally, obviously, we are adding a lot of talent to the industry.

We have a very significant training activity so we are training a ton of people -- our own people -- but we're also trailing a ton of people among our customers as well as in our partner community.

And one of the big things of Knowledge, our conference that starts next week, it is a gigantic training event, and that is what attracts a lot of people to the conference.

We are literally developing skills and experience and talent as fast as we can.

The important thing to notice, we are really very careful not to crowd out our ecosystem and to create ample room for our partners to develop their business.

We have no goal of our own to grow the services businesses to a certain size.

Our services business is there to enable success with our customers and to enable success for our partners.

We do not need our service business to be any bigger than it needs to be to meet that objective, because as everybody can tell, it is a drag on the profile of the Company as a whole.

So we are actually quite pleased where it is in relative terms, as well as where it is as a percentage of the total business.

Whether it's going to stay there not really depends on whether we are meeting our objectives in the neighboring customers and partners out there.

That is helpful.

And then just one quick follow-up.

One thing that we've heard just from talking to some of those partners, specifically some that may be a little bit smaller, is that they are seeing they have reached in to customers in existing relationship with some more mid-market customers, and they see a potential need for a mid-market solution.

In some of that the push to introduce the Business Edition, are you seeing some of that demand from partners?

Or that may be one-off conversations that we are having?

Business Edition is actually a product that is built to require very little services, if any.

That is the whole point; we should be able to deploy that in hours and days, is the idea.

If we have to add real professional services to that product, I think it is going to defeat the product concept, because economically it won't make a whole lot of sense.

So that [distribution] is really going after mid-market.

It is much more of a turnkey product; you stick the key in and go -- that is the whole idea behind it.

And you would just be able to sell that directly?

You would not need any partners involved at all, essentially, is what the implications to that are, I take it?

Don't have to, but we certainly wouldn't mind having partners in the mix.

Got it, thank you.

Next question, Rob Owens, Pacific Crest Securities

Thank you and good afternoon, gentlemen.

Couple of questions.

First off, as you're seeing deal sizes increase materially and customers leverage the platform for increasing applications, what kind of customer pressure is there to do ELAs?

And what is your attitude toward ELAs?

Good question, Rob.

We are getting more requests for ELAs, mostly because customers do not like managing compliance; they do not want to count users, and having to manage the population is an ease of use feature.

We have done a number of those kinds of transactions.

It is not an all-you-can-eat, you know; typically so many users really good boundaries around how many users.

And then we define the functionality that we're licensed to them for a certain period of time and then they do not have to manage compliance during that period of time.

Eventually, of course we are back to the renewal and up-sell process and so on, so that your relationship gets reset.

We're very open to doing them, but obviously we are going into those deals with our eyes open.

We also have to protect our downside in deals like that, that we do not give away the store.

There's a bit of that push and pull there in terms of what the customer wants and what we need to get out of it to protect our side.

And then, you talked a little bit about the transition service management from an IT context to an enterprise context.

You've talked in the past about moving to HR and financial.

Are you seeing any applications written for the external community or external customers -- so not enterprise-facing, but actually customer-facing?

And any examples would be great.

Absolutely.

I would say that going to the customer-facing side is usually not the first place where customers go, but we have a ton of examples.

And spend any time at Knowledge next week, you'll be confronted with them.

That we have one [rare] medical manufacturer, for example.

Europe actually uses the [C&DD] not to store information about their IT infrastructure but actually about their actual machines, their MRI machines, and so on.

They use ServiceNow for all the doctors and nurses in the hospital use these machines to interact with them as the manufacturer to provide the service model around it.

It is not untypical application.

We have done that with GE Energy; we talked about them in the past.

Turbines and power plants.

So those are some examples, every hard and soft asset, whatever it is, it has a service model around it.

Whether people are managing the service is another question, but there is a service model.

Every asset has challenges, it has problems, it has defects, it has questions around information, it has claims, it has warrantees.

So all these service models that exist have to be implemented and they are customer-facing and that is definitely a part of the business that we are in and that we're going to be in more so going forward.

Actually, one of our customers on the panel at our Analyst Day, Getty Images -- they have a customer-facing (inaudible) that they'll talk about and you'll have a chance to talk to them at our analyst day next week.

Great; appreciate the color.

Thanks, guys.

Welcome.

Next question, Kirk Materne, Evercore.

Thanks very much.

Frank, somewhat related to Rob's question -- when you go ahead and you talk to some of your partners right now, it seems like a lot of them are building some templates on top of your platform right now.

But I was just curious, how far out you think it is before you start to see people building standalone applications that are built on a one-to-many basis?

I realize it is early, but it seems like you're going that way; you have some partners that build SRM showcases and things like that.

I guess I was just curious if that's something you'd think it would start to occur over the next year or two years, or just too far out to start to think about that right now?

No, Kirk, I think we are going to start to see that.

One of the things that we have done with the launch of the [show] infrastructure is exactly for that purpose, right, because it is one thing for us to enable the platform for external developers to build apps that can be sold over and over, but we have to give them a route to market.

And we have some routes to market; certainly our conferences are.

But having to share infrastructure allows them to really host content and let them be exposed to our thousands of customers out there.

So it is really, we're the platform, so when they are selling the app, they have to sell the app to people that are roaming the service [mount] platform.

Now maybe it triggers to sell the platform, but the real nice route to market for the software developers is selling into the market that we already have, people who are already on service now.

So I -- definitely, it's a focus area for us; it is important for us, and I definitely think we're going to start seeing that in the second half of this year and years to come.

Just a second question, just around the bigger -- the nine deals over $1 million -- I guess was there any commonality in terms of you mentioned the one large deal was a new user.

I guess of the existing customers, was it mainly functionality expansion, user expansion?

I realize each one might be somewhat unique, so there might not be any common traits, but I was just curious if there was anything you are seeing happening within the bigger deals that you are signing?

Thanks.

No, I do not think that there is anything in terms of an inflection, things that piqued their interest.

These are the types of deals we've been doing all along; they're just getting bigger and bigger and poking above the seven-figure line.

As I said earlier, it is because we're driving a larger scope for the platform is what drives up these deal sizes.

In terms of composition, they are similar to what they were before.

Great, thanks very much.

Next question, Matt Hedberg, RBC Capital Markets.

Yes, thanks, guys.

Clearly, you guys are the leader in the ITSM market and there is obviously a lot of talk on how you guys are going to expand beyond IT.

But how do you think about penetrating other areas of IT?

Perhaps like an application performance area?

Yes, so Matt, this is something that we'll actually be talking and demonstrating brand-new software next week at our conference, The IT operations management market is a market that is very closely aligned to the IT service management market because the workflow that exists in service management versus a systems management are very close.

For example, events and incidents are artifacts that are extremely close cousins.

So many of our customers now have already integrated our service management systems with their system management infrastructure, and we have been watching this for quite a while now.

And we are now beginning to enable the integration of those workflows.

So if you're out next week, there will be a whole lot of new things that we're going to show in that regard.

That is great.

And then, maybe for Mike -- given all the head count additions that you have been adding here, is still safe to assume that we would see breakeven operating margins for the year?

Yes, for the full year, yes.

That is great, thanks, guys.

Welcome.

Next question, Abhey Lamba, Mizuho Securities

(Technical Difficulties) Abhey, your line is open.

Hello?

Sorry about that.

Next question, Brad Sills, Maxim Group.

Hey, guys, thanks for taking my question.

Just one on ITSM.

Within the existing suite are you finding certain services that have gained traction on attach outside of core incident and problem?

Yes.

There's lots of asset management issued, product management has taken off.

We are introducing a whole bunch of new applications in our mid-year release that we're going to be showcasing next week as well as a whole bunch of software that we're releasing at the end of this year.

New demand management, vendor management, [club] management applications and password reset.

There is a ton of stuff that we do.

The core [IT] processes that you just mentioned is something that everybody has and everybody does, but our customer rates has expanded much beyond that and it is really the notion of an [ERP4IT] that we've talked about previously is really the concept that they think of when they think of ServiceNow, more so than that narrow definition of ITSM.

Great.

Thanks, Frank.

and then just one on the platform.

Can you comment a little bit on attach rate in new deals versus renewals?

Are you are finding the customers are committing to the platform earlier now, whether it is in year one, year zero, or later in the cycle?

I do not know that I have any inception to say that on that.

What I will tell you is that last quarter we talked about the split between ITSM and non-ITSM revenue.

I think at that time we said it was around 20% of the business was non-ITSM and then this quarter was more like 37%?

34%?

34%.

By the way, that is for new transactions, leaving out the up-sells and the renewals.

Including up-sells; leaving out the renewals.

We are seeing a lot of activity; we saw a pretty big jump also in Discovery and Orchestration this quarter.

There is a ton of activity going on outside of the core ITSM functionality

Great, thanks guys.

Next question, Tim Klasell, Northland Securities

Good afternoon, everybody.

Just a quick question on Share, I do not want to grab some of the buzz from the conference next week, but how would partners monetize that?

Are you going to leave it up to them to set pricing?

Or is that something that you will have a say in as your partners put content up on Share?

Good question.

So Share is initially now not intended to be really a monetization on our platform.

That's why it's called Share; it is really intended for content to be broadly available to everybody in our community that wants to see that.

Now that said, anybody that wants to sell content obviously cannot transact off-line one-on-one with whoever wants it.

So it is much more of a marketing vehicle, if you will, rather than a transactional or sales vehicle.

Now that does not exclude us in the future from inserting ourselves in the process.

But obviously new content gets deployed on any of our customers instances that, that tends to generate incremental license revenue for ServiceNow because we're the run-time platform.

Exactly.

And I know in the past you've mentioned you speak IT very well; you've had to learn to speak HR and procurement.

Share strikes as it could get you into a lot of other departments fairly quickly.

Do you foresee any challenges in having to learn the lingos of other departments?

And do you have any plans to address that?

Yes, it is an interesting question.

Here is the thing -- we really believe that service management is the language that we have to really master and be excellent at.

And service management is applied to many different domains and it does vary, as I explained earlier, between HR and IT: different focus area, different definitions, and they certainly have a different nomenclature.

And those kinds of things we have to learn.

But fundamentally we have to be expert as an organization at managing service, service models, how that works; because that is what we bring to these organizations.

When you talk to an HR organization, they don't really know about service models because they historically have not had them.

We're the organization that brings that to them and explains how these service models work and operate.

So that's our expertise and value added in the process.

Obviously, we do need to learn their speak, but that's more of a terminology nomenclature thing rather than fundamental concepts.

Thank you very much.

Next question, Greg McDowell, JMP Securities.

Great, thanks very much.

Hello, Mike and Frank.

I wanted to ask you guys about strength in certain verticals.

You mentioned the nine deals over $1 million, and I was just wondering if you saw any particular strength in verticals?

And are you seeing any verticals starting to pull back on enterprise IT spend?

Thanks.

Not seeing -- we're not really seeing anything.

Pulling back really.

Business has been pretty strong but geographically diverse as well as in terms of verticals.

We are, where we have been really strong is in the financial sector.

ServiceNow is absolutely everywhere in large financial institutions; also large insurance now.

Pharma is exceedingly strong for us.

Big retail.

So I think we are very broadly represented in terms of verticals.

In terms of geos, we are starting to edge into Europe, bigger and bigger every quarter.

But [I think it is] just 60% of our revenue mix, so that is our guess.

We have an enormous amount of room up in Asia, we feel, and so that is our focus now.

[And] we have a very good pipeline and some nice size deals in Asia-Pacific.

Thank you.

Next question, Stephen Ashley, Robert W Baird.

Thanks very much.

I would just like to circle back to the enterprise deals that you started to do.

I was just wondering if you could give us a little color of who's at the table when you're doing those deals?

I'm assuming that even if it is a new customer that IT may be an advocate for you.

But are you meeting with the chief operating officer?

You're crossing over to the line of business side?

Or are you touching those budgets?

Are they represented?

Just some general color on how broad the audience is for those enterprise deals.

Yes, very interesting question.

For the most part we really end up in the CIO's office, because these transactions are of a size and of a exposure and a sensitivity that the most senior executive in IT is a very key stakeholder.

That was not always the case.

We often sort of lodged, sort of a level below that, head of infrastructure, and that person is still super important in the mix as well.

But we are seeing enterprises now where it is going above IT and IT is just one of the user organizations now of ServiceNow.

We're just seeing the very first evidence of that.

That is definitely a new thing.

Of course, when you see the contractual commitments that are involved and a much larger involvement in the broader enterprise, that makes total sense that we're moving in that direction.

I will stress, even though we have seen evidence of it, this is still fairly early in that evolution.

Great.

And then, in October you made a number of pricing changes.

And you were really trying to accomplish a number of different things.

My very high level question is, has that generally worked out the way you'd hoped?

And I realize it is still early, but are you seeing the kinds of benefits from those changes that you were hoping to see?

It is a twofold answer.

When it comes to new customers, the answer is absolutely yes.

I mean we are just much better at monetizing, like I mentioned earlier that we're just seeing much better revenue contribution from Orchestration, Discover.

We're up-selling very successfully as well.

But existing customers, obviously, it is always a much taller order during an up-sell process or a renewal process to get them used to the new models.

And it is what it is; we have to work through that and sometimes we have to grandfather people in because there is too much friction.

But on the whole, we make it through and that is just part of the business.

It is working for us but I would certainly say it is not without friction.

But any kind of change would bring friction with it.

Real quick, Mike -- just to clarify, did you say, to the answer to the prior question when asked about the percentage of business from non-ITSM, that you would've saw new and up-sell average contract value in the fourth quarter was 20%?

Non-ITSM in this quarter was 34%?

Correct.

Wow.

Okay, thank you very much.

Next question, Alex Zukin, Stephens

Congratulations on a great quarter.

I wanted to ask first just about, are you starting to see any vertical-specific applications emerge that are being built on the platform?

And how you are thinking about that going forward?

Yes, that is been going on for quite some time.

We have seen them in insurance for [exception] claims handling; we have seen them in oil and gas for OSHA violations reporting to the federal government.

I mean there is a ton of examples of that kind of activity going on in our ecosystem.

Very common.

Got it, thanks.

And then on the competitive environment, just wanted to ask if you're seeing any changes?

Is it becoming, are the sales cycles shortening because you are now looked at as more of a standard bearer in the space?

Well, I don't know that it shortens the sales cycle, but you are right; we are seeing us as the go-to on our platform.

And the relationships are viewed bigger and more strategic, and you get more players in the game.

And sometimes you have the opposite effect for sales cycles, and contracts are viewed with an immense amount of scrutiny as well, because people know these are 10-, 15-year [positions].

So [selling] legal context for these relationships is exceedingly important for them and they're going to spend the time getting it right.

So it goes both ways, is what I'm trying tell you.

Thanks, guys.

Next question, Harris Heyer, Credit Suisse.

Thanks for taking the questions.

I'm calling on behalf of [Phil].

Just had a quick question -- you talk a little bit about pricing.

Can you give us an update in terms of the kind of pricing dynamics from a competitive standpoint?

What you're seeing from HP or BMC?

Well, I do not think it matters a whole lot, with HP and BMC if they're willing [to let go] for zero dollars just to keep people like us out of the accounts, because we are an obvious threat to their business in terms of ITSM, but also things downstream like IT operations management, stuff like I talked about earlier.

So pricing is not a factor.

The problem that the incumbents and the legacy vendors have is they have no product.

So pricing pretty irrelevant if you do not have a product.

All right.

Next question, Derrick Wood, Susquehanna International Group.

Thanks.

I wanted to touch back on the 34% figure.

Are you seeing any change in the type of vendor or technologies you are displacing as you're moving beyond core ITSM?

Or is it more of a greater mix of greenfield?

This is Frank.

It is a much greater focus on greenfield.

You move into HR -- they've never had anything.

They've had e-mail, they have had Excel, they have had Microsoft Access, maybe they've had Lotus Notes, right.

That is the stuff that is being replaced.

It is like absolutely nothing or some makeshift representation of some kind of a service model.

It is mostly message-based, so very much replacing really labor or substituting labor for systems here.

These are brand-new things for a lot of these organizations.

They have never had service management systems in these service domains before.

And of course it is very impactful when you see HR organizations implement service model -- all of a sudden the insight that they get in their workflows and what they can do about it.

You know IT has lived this life for some time; they understand it; they have matured; they are very adept at it.

And you get outside of IT, it is a completely new world for these people out there.

That is what we find so exciting about our business, is introducing these concepts to new service domains.

That is great, thanks.

Mike, given the broader aspect of your platform today, should we expect contract sizes with initial wins to start trending higher?

Or are you still more focused on this land and expand model?

We're still very much focused on the land and expand.

But with that said, our average initial transaction size has continued to increase quarter over quarter.

And we think that trend will continue.

Focusing on the enterprise; not including the business edition product

Got you, thank you.

That concludes our question-and-answer session.

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

Thank you.

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

Thank you for joining us today and we look forward to seeing many of you next week.