ServiceNow Inc (NOW) 2014 Q2 法說會逐字稿

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

My name is Denise and I will be the 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 turn the conference over to Mr. Michael Scarpelli, Chief Financial Officer.

Please proceed.

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 simultaneous broadcast of this call can be accessed at our website at www.investors.servicenow.com.

We may make forward-looking statements on this conference call, such as those using the words may, will, expects, believe, 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 the call over to Frank.

Thanks, Mike.

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

We are very pleased with her performance during the quarter.

Revenues grew 63% year-on-year to $167 million, and billings grew 59% year-on-year to $187 million.

The quarter was marked by strong demand from the customer base, with renewals at 98% and upsells at 33% of annual contract values signed in the quarter, as well as strong new account contributions.

Our install base is now 2,364 accounts, with 455 Global 2000 customers.

Some of the Global 2000 accounts added in the quarter include ENI, an integrated energy company; HGST, a western digital company; QBE Insurance Group, one of the world's largest insurance and reinsurance companies; Avago Technologies, a leading semiconductor company; and CONSOL Energy, producer of natural gas and coal.

Our strategy, to enable the service-oriented enterprise, continues to gain traction with customers and prospects.

We are seeing (inaudible) over a platform in service domains outside of enterprise IT.

Our HR service automation application has seen good uptick since we released the products last year, totaling 23 transactions in the second-quarter alone.

One of these was an upsell to a North-American insurance fund.

Their lack of a centralized HR service model inundated the group with questions and requests by phone and e-mail.

Advocated by the IT team, ServiceNow was selected to implement HR case and knowledge management for their 5,000 employees.

Another case in point, a Global 2000 insurance company chose ServiceNow to provide their 25,000 users with a modern HR case management solution.

This deployment was driven by a broader initiative to improve business process efficiency, such as reducing the thousands of inbound calls to human resources.

The IT team at this Company advocated the use of ServiceNow; drove the first platform demonstration, and assisted in the campaign from start to finish.

In other service areas, a global rental car company [built] a custom application on ServiceNow that allows the IT team to align and prioritize business demands with required resources, budgets, and overall strategy.

The IT team is now working with their finance counterparts to automate and track their supplier interactions with a moderate and consumer-like service experience, using ServiceNow to manage things like invoice and order issues.

A recent CIO survey by Morgan Stanley further illustrates our platform momentum, as approximately 30% of the CIOs polled plan to use ServiceNow as a platform by the end of 2015.

The nearly 50% increase from their previous survey in January 2014.

Few things propel our business more than customer success and community.

Our knowledge conference this year in San Francisco broke our records, with more than 6,500 attendees, including more than 100 CIOs from global enterprises.

It is a true industry event, with more than 90% of the content delivered by customers and partners.

Earlier this month, we acquired Neebula Systems for approximately $100 million in an all cash transaction.

Neebula's flagship product, ServiceWatch, automation discovery, mapping, and monitoring of IT-enabled enterprise services.

It is a fundamental transformation from component-centric management to one that puts the service portfolio front and center.

Dissolution will become a centerpiece of our IT operations management strategy and strengthens our position to capture more of the $19 billion [high tail] market.

Thus far, we have received strong, positive feedback from customers, partners, and investors on the acquisition.

Finally, we welcome two new members to our Board of Directors: Sue Bostrom, most recently the Chief Marketing Officer of Cisco, and Anita Sands, recently the Group Managing Director, Head of Change Leadership, and a member of the Wealth Management Americas Executive Committee at UBS Financial Services.

Both bring significant corporate leadership, industry, and management experience to our Board.

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

Thank you, Frank.

I 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.

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

Total revenues for the second-quarter were $166.8 million, growing 63% year-over-year and 20% sequentially.

Subscription revenues for the quarter were $132.7 million, representing 65% year-over-year growth and 13% sequential growth.

Our average contract terms for new customers, upsells, and renewals were 31.9, 25.6, and 28.5 months, respectively, compared to an average of 34.0, 24.0, and 26.7 months on a trailing fourth-quarter basis respectively.

Professional services and other revenues were $34 million for the quarter, growing 56% year over year and 57% sequentially.

Our second-quarter includes $8.2 million in registration sponsorship revenue from Knowledge, our annual users conference.

This compares to $5 million of revenue from knowledge in the second-quarter of 2013.

Our average total revenue per customer was approximately 262,000, an increase of 21% from the prior year, and up 5% from the prior quarter.

Our average annualized contract value for Global 2000 customers was $583,000 at the end of the quarter, up 67% from the prior year and up 13% from the prior quarter.

Total revenues based on geography were $114.3 million in the Americas, $42.2 million in EMEA, and $10.3 million in Asia-Pacific, representing 69%, 25%, and 6% of total revenues respectively, compared to 70%, 24%, and 6% of total revenues the second-quarter of 2013.

Our total billings were $187.1 million in the quarter, compared to $117.5 million in the prior year, and $180.8 million in the prior quarter, representing 59% year-over-year growth and 3% sequential growth.

Additionally, approximately 3% of our billings in the quarter were for periods greater than one year, compared to 12% in the prior year and 4% in the prior quarter.

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

Our subscription gross profit was $103.3 million, representing a gross margin of 78% compared to 77% in the prior year and 76% in the prior quarter.

During the quarter, we added 24 employees to subscription cost of sales, ending the quarter with 405 employees.

Our professional services and other gross profit was $11.6 million, representing a gross margin of 34% compared to 33% in the prior year and 10% in the prior quarter.

It is important to note that professional services and other revenues includes $8.2 million from our Knowledge event, with all expenses related to the event running through sales and marketing, providing a [boost] to gross margins that we will see once a year in the quarter we hold the event.

Excluding Knowledge, our non-GAAP professional services gross margins were 13% compared to 10% in the prior quarter.

During the quarter, we added 33 employees to professional services and other cost of sales, ending the quarter with 370 employees.

Our total gross profit was $114.9 million, representing a gross margin of 69%, compared to 68% from the prior year and 66% in the prior quarter.

Excluding $8.2 million in revenue from our Knowledge event, non-GAAP gross margin was 67% in the quarter.

Our operating margin in the second-quarter and in the prior year was negative 4% and a the negative 5% in the prior quarter.

Sales and marketing expenses included $15.3 million related to our Knowledge event.

During the quarter, we added 76 employees to sales and marketing, ending the quarter with 806 employees; 60 employees to research and development, ending the quarter with 470 employees; and 32 employees to general and administrative, ending the quarter with 277 employees.

Net loss for the second-quarter was $9.8 million, or a net loss of $0.07 per basic and diluted share, compared to a net loss of $7.8 million, or a net loss of $0.06 per basic and diluted share, in the prior year, and a net loss of $11.7 million, or a net loss of $0.08 per basic and diluted share, in the prior quarter.

Our basic and diluted weighted average shares outstanding were $144.5 million.

If we had operated at a net profit in the second-quarter, diluted weighted average shares outstanding would have been approximately $161 million.

Fully diluted shares at the end of the quarter, assuming the treasury stock method, were $169.8 million, excluding any potentially diluted shares from the conversion of our convertible notes.

During the second quarter, we generated $42.1 million in cash flow from operations.

We used approximately $16.4 million for capital expenditures, resulting in $25.6 million in free cash flow.

This strong free cash flow in the quarter was positively impacted one time by collections which slipped from Q1 into Q2, and the delay of payment at the end of Q2 into Q3 due to timing of our check run.

This compares to a negative $2.1 million of free cash flow in the prior year and positive $13.2 million in the prior quarter.

We ended the quarter with $957.1 million in cash, short-term and long-term investments, an increase of $32.7 million over the prior quarter.

Our total deferred revenue balance was $328.9 million at the end of the second-quarter, up 7% over the $308.5 million reported at the end of the prior quarter.

We ended the quarter with 2,328 employees, an increase of 885 employees from the same period in the prior year, and an increase of 225 employees from the prior quarter.

Let's turn to guidance for the third-quarter and remainder of the year, which includes the impact of Neebula.

Please note that our margin guidance is on a non-GAAP basis, which excludes stock-based compensation expense, acquisition-related expenses, and amortization of acquired intangibles.

For the third-quarter 2014, we expect total revenues between $173 million and $175 million, representing year-over-year growth between 55% and 57%.

Our total third-quarter revenue estimate consists of subscription revenues between $147 million and $148 million, and professional services and other revenues between $26 million and $27 million.

We expect Neebula to have an immaterial impact on our third-quarter revenue results.

We expect billings between $190 million and $193 million, representing year-over-year growth between 50% and 52%.

We expect subscription gross margin of approximately 77%, professional services and other gross margin of approximately 8%, and overall gross margin of approximate 66%.

We expect an operating margin of approximately 1%.

As a result of Neebula, we expect a negative 1% impact to our operating margin and to pay up to $15 million in capital gains tax to integrate Neebula into our global tax structure in the third-quarter.

For the full-year 2014, we expect revenues to be in the range of $668 million to $657 million, representing year-over-year growth of 58%.

Our total annual revenues estimate consists of subscription revenues between $558 million and $560 million, and professional services and other revenues between $110 million and $113 million.

We expect Neebula to have an immaterial impact to our full-year 2014 revenue results.

As result of the Neebula acquisition, we acquired 29 employees and expect to add another 30 employees by the end of the year.

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

(Operator Instructions)

Michael Turits, Raymond James.

Hey, guys, good afternoon.

It's James Wesman sitting in for Michael.

Mike, a quick question on the Neebula acquisition and your billings guidance: any impact from Neebula on the $190 million to $193 million figure for the third quarter?

No, Neebula is really an immaterial acquisition from a revenue perspective in 2014, including billings.

Got it.

So, immaterial to billings for 2014 as well, if I heard you right?

Yes.

Great, and then a follow-up for you and Frank -- a housekeeping question.

What percent of the net new annual contract values from non-ITSM this quarter?

I think it was 34% in 1Q.

Did you guys give that figure this quarter?

This is Frank.

I think the figure is 32% this quarter, so it's substantially in the same area as it was last quarter.

But we will reiterate again: That is not a metric that we manage the Business on, because we still have a lot of legacy contracts where there is upsells where they buy under our old licensing model.

So, that doesn't accurately capture all of that business.

We believe it is an understated metric.

I'd also like to correct -- when I was giving the full-year guidance -- the correct number is $668 million to $673 million.

I believe I got that wrong.

Misspoke.

Yes.

Great, thank you, guys.

Jason Maynard, Wells Fargo.

Hey, guys.

I'd like to focus my questions a little bit on this HR case management opportunity and some of the wins you had in the quarter.

Frank, maybe talk a little bit about how you are seeing that materialize in your pipeline, and, frankly, how repeatable and consistent do you think your sales motions in this area can be over the coming year or so?

Thanks.

It is actually -- Jason, this is Frank.

It has become a pretty substantial pool of activity for us.

We highlighted in the prepared remarks how many transactions we've done.

One of the other things we notice is that the pipeline on HR case management is now larger than what we have around PPM, which is our project portfolio management applications.

So, it is really rocketing up the pecking order, if you will, in terms of the hot applications that are in demand out there.

And it's definitely a sales motion that is becoming more predictable because of the activity, but it is also something that makes a ton of sense.

We are learning a lot more about why HR organizations are interested.

We learn how to talk about it.

We learn the language of HR better.

And we're able to point to a lot more references, successes we've had, and it is another one of those areas that's just wide open.

HR has lift with email and voice messaging-oriented systems to execute on the service model, and this is just an area where they can book gains in terms of service experience and efficiency really quickly.

So, we expect this to continue.

Same thing is going on in facilities, procurement, those are the service domains where the IT organizations typically are driving these kind of service efficiencies.

Is there any way to think about initial order size with HR case management, and how it would compare to some of your other product areas?

And do you anticipate it being bigger or smaller in relative size?

And then, would you see a similar ramp, in terms of how big these projects can get over time?

Thanks.

We probably have to do a little bit more work to have some authoritative data on that.

I'm sure that there's data that's there to be had; I just don't have it at the fingertips, and I don't want to do a characterization that doesn't reflect what it really is.

Anything you want to add to that, Mike?

Yes, what I would add is that what the HR case management does for us now, it gives our salespeople an opportunity.

When a customer isn't ready to do an ITSM switch, it is another sales front into those organizations to get our beachhead as HR case management; we're seeing more and more of that.

The other thing I'd say is that HR case management is different from IT service management.

It tends to be very much focused on knowledge.

HR is a very information-centric service model, where employees are looking for answers to questions; whereas IT tends to be very defect-oriented, something's broken and people need help mitigating a situation.

So, even though the concepts are similar, where it focuses, and the type of techniques and approaches they use, are actually quite different.

And these are the types of things that we are learning, which is really, really helpful when we go into new accounts and we try to explain what this is going to do for them.

Great, thank you, guys.

Appreciate it.

Rob Owens, Pacific Crest Securities.

Sorry about that -- maybe a little bit more around Neebula.

And I understand it's immaterial to the remainder of the year, but just a sense as to what the revenue model will look like?

How much revenue pre-existed at the company?

What you are looking to do in terms of integrating into your process?

And then, I know you're not giving any guidance on the out year, but how excited should we be getting about this opportunity?

Rob, this is Frank.

We are super excited about Neebula, not just because of Neebula as a stand-alone technology and what it can do, but we think it is going to really help charge the overall ITOM strategy that we've had.

It is going to help a lot with our discovery with our CMDB because it's extremely value-added to those technology.

So, it is not just an asset and a revenue opportunity; in its own right, it will help all the other products that we have in our ITOM portfolio today, as well as the ones that we are going to have in future.

This is really a leap frog.

It really tries to set aside what we've been doing for 30 years in this marketplace, and fast track to what enterprises are really looking for, and is understanding what the service availability is and how that analyzes out in terms of its component parts.

It is an exciting thing.

The reason that we are still projecting it as non-material is we don't have any history yet with the product, and it is going to take us a quarter or two to start developing that history -- same thing that happened last year when we acquired Mirror42.

We now have some good history on that.

But we are excited about it.

This is a very strategic component to our approach to that part of the marketplace.

What I would add, Rob, is: The company was a mix of perpetual and subscription licenses.

In fact, when you normalize that to be subscription, they are doing less than $1 million a quarter.

And in purchase accounting, we lose a lot of that, and we are not expecting, with new deals being signed, that it's going to be that meaningful for the balance of this year.

And going forward, we're not going to do any perpetual transactions with Neebula; everything will be on a subscription basis.

Sounds good.

And then second, around new customers added, I think it was one of your strongest, if not your strongest quarter.

So, talk a little bit about customer acquisition at this point -- types of customers that you are seeing out there, and what competition has at this point.

Are you seeing anyone get a little more competitive with any of their cloud offerings?

Thanks.

This is Frank again, Rob.

I think we were exceptionally strong, both within our customer base this quarter with our renewals and our upsells both being at or near record numbers.

As well as our new customer acquisition, obviously with the scale of our sales organization, and then the number of ramped reps that we have out there going up quarter on quarter.

Those numbers are going to get pushed higher.

We also had a record number of acquisitions in Global 2000 accounts, which is even more meaningful to us because that represents a ton of future upsell potential.

I think we are hitting on all cylinders here.

From a competition standpoint, the dynamic really hasn't changed.

It is really more of the same of what we have reported on historically, in terms of the legacy vendors -- a little bit of competition coming up from the bottom.

That's really the end of it.

Our win rate is exceedingly high.

If we have any losses, it tends to be in the context of postponements or doing nothing for the time being.

The status of that is really good.

I think our brand and position in the marketplace continues to strengthen quarter on quarter here.

Thanks.

Walter Pritchard, Citigroup.

Hi, thanks.

Mike, I'm wondering if you could talk about million-dollar deals and how many you had in the quarter, and just generally characterize what the large deal success rate and the environment looks like for large deals in your Business right now?

Yes, last quarter we closed five deals north of $1 million.

We now -- with the upsells that we had in the quarter as well to the customers, we now have 91 customers that are paying us north of $1 million a year, up from 80 the prior quarter.

In terms of looking at our pipeline, we have a lot of big deals in the pipeline, but big deals tend to be lumpy.

We had a number of big deals that pushed from the quarter into this quarter right now.

We expect that, and that will continue to happen, but the nice thing about our model is we're not dependent on any big deals to make our number.

And you can see with our guidance increase how comfortable we are with the opportunity we see in front of us.

Got it and then -- (multiple speakers) go ahead.

What I was going to say is -- what I will say is we had record number of deals in that $500,000 to $1 million bucket this past quarter.

Got it, and then, I think I ask you about this almost every quarter in terms of your sales hiring, and we continue to see just very steady additions on the sales side.

Is there any reason to think that it will be different than that, either you slow down in the second half or you accelerate the sales hiring in the second half?

Or how should we think about that, looking here to the back half of the year?

We now are at 64% of our hiring target for our sales and marketing organization.

As we've said before, we typically front-end load that.

But we are going to continue -- we are going to add roughly another 170 to 180 in the second half of this year, so slightly below where we are at right now.

We are executing on our plan.

Yes.

Okay, great, thank you.

Brent Thill, UBS.

Thanks -- a follow-up on Walter's questions and the big deals.

Mike, I think you had two of your largest transactions ever in Q1.

And I just wanted to be clear: In the second quarter, did you have any elephant-sized transactions?

Or just as you described, they were more antelopes than elephants this quarter?

They were good.

We had two deals in Q1 that were -- they were $4 million-plus annual deals.

This past quarter, the biggest deal we did I think was $1.8 million in the quarter.

So, as I said, we had five deals, but what I will say is the upsells -- we did a number of -- three of those big deals were upsells, but we also had a number of upsells to customers in that $500,000 to $1 million range.

We also saw two big deals in APJ which were north of $1 million, which we are very pleased with the execution in that region.

Remember: We opened up a lot of new countries in APJ in 2013, and we are starting to see the impact of that.

Okay.

And a quick follow-up on -- Frank, you mentioned the strong traction in the Global 2000, and you saw that in your average transaction size.

Can you just give us a sense of -- are you starting to see the concept of an enterprise license agreement get put in place so they can expand beyond IT and HR to different divisions?

Or is it still a case-by-case combat, if you will, that you're still seeing in the sales motion?

This quarter, with the pricing evolution that we talked about previously and that we introduced, there now is an ELA framework that we have trained our sales organization on, whereas before, that's really something that we reserved for special situations.

Now, really, that is just another vector that we've trained our sales organization on, that they can execute on, because we are getting in more and more conversations where customers do not want to buy incremental.

They want to know: What it is going to cost if I just go wall to wall, standardized?

I think there is definitely an inflection happening where customers are looking at us like: What does this look like when we go wall to wall and we standardize on ServiceNow, versus I'm just going to do this set of applications for this set of users, and we price it a la carte.

Enterprise licensing is going to become a much more dominant part of our Business going forward.

We've always had activity around that with some of our leading customers that were very, very far along in the implementation.

But it is now something that's happening upfront in new conversations with customers, because they realize that if they are going all out with ServiceNow, that's the way they have to approach the pricing model.

And it is much more favorable as well, because the economics look much more interesting on an ELA basis if you go wall to wall than it does incrementally.

Great, thanks.

Matt Hedberg, RBC Capital Markets.

Yes, thanks for taking my questions, guys.

As a follow-up to the nice wins in the HR service automation side, I'm wondering: What could cause you guys to implement a separate sales model?

Say again -- what would cause us to implement a separate sales model for these different use cases?

Correct.

That's something that we have to be pretty damn careful with, because it starts to bifurcate the model that we have and how we go to market.

And our go-to-market -- if you may recall from prior calls, we always seek to land an IT organization, occupy that space, then use the advocacy of the IT organization to start invading adjacent service domains.

That's what we do.

So, we would typically don't like to go off to HR on our own without first having established an IT, or certainly not without having IT as a strong advocate in rolling that out.

It's a very key part of our sales strategy that we don't want to do that.

We've sometimes violated that, and it comes back to bite us because all of a sudden, IT is now at odds with us because we've established ourselves in another service organization, and we are not in IT yet.

So, we try to avoid that.

Now, is it possible that, down the road, we get so much critical mass in some of these other service domains that it pays us to do that?

We will definitely consider that.

At this point in time, that's not on the horizon.

That's helpful.

Then, as a follow-up to the question on sales and marketing adds, obviously you're adding at a very high rate.

I'm wondering if you could comment on growth in sales productivity this quarter?

Sales productivity was actually good.

It was up both sequentially as well as year on year.

Ramp reps are increasing in productivity, which really illustrates that our growth model is working.

We are successfully converting salespeople to yield as they move through their ramp period.

That continues to work and gives us the confidence to continue to add resource to the sales organization as we go forward.

This has been very consistent for us historically, and it continues to be as we get bigger and bigger here.

That's great.

Thanks, Frank.

Raimo Lenschow, Barclays.

Thanks for taking my question.

And, Frank, new record: there were six minutes for prepared remarks.

The question I had was -- a lot of mine have been answered, but at the synergy -- at the conference, not synergy, but at your conference -- at Knowledge, you talked about IT operations and an opportunity there.

And there is obviously a lot of talk about the platform and going beyond IT.

How are you feeling about -- and what are the latest developments around IT ops and what you are seeing there with the initial steps?

Thank you.

Raimo, I will try to set a new record next quarter.

But on ITOM, here's the key point to remember, and this is our macro observation around what's going on.

IT service management and IT operations management have really stopped being separate markets, separate spaces, separate tools, separate people and skill sets.

The workflows are now cutting across operations and service management.

We have observed that for some time, because we are in the middle of that.

We are integrating with operations management tools all over the place, through Orchestration; we are not just managing the work, we are actually doing the work as well.

We think it is exceedingly important for us that we don't view ourselves as a service management platform exclusively.

I think that ITOM is something that is separate and a different marketplace.

Those boundaries are disappearing, which is why you see us move aggressively in these areas.

There's a ton of opportunity, because the people that are on the operations management side are going to have to figure out how to bridge into the service management side, and a lot of those vendors are the same legacy people that we already compete with.

So, the nice part is -- and we are pleased with the Neebula acquisition, because there's always three things that we look for when we move into a new marketplace for like the operations management side.

Number one is we are looking for exceptional talent, which we believe we acquired with Neebula.

We're looking for really -- for technology that solves really difficult problems.

And thirdly, we are looking for a completely different way of approaching the problem.

We don't want to go in with same-old, same-old just in order to have it.

We are trying to invert the market; the same thing that we've done with service management.

And it is a very exciting time.

The tools on the operations management side are very stale, are very old, are very expensive.

Customers are very, very ready to look at new approaches, and especially -- they understand as well as we do that service and operations management are not going to be separate markets going forward.

That's helpful, thank you.

Kirk Materne, Evercore.

Yes, thanks very much, guys, and congrats on a strong quarter.

Frank, you talked a little bit about the -- you're seeing solid growth from the HR app that you guys put out there last year.

I was just curious if you had any updated thinking on what you guys might do around developing additional first-party apps versus creating more of an app exchange or an app store for the platform.

I know you guys have been thinking about that.

I was just wondering if you have any updated thoughts on that?

Yes, that's actually, Kirk, that's heavily in planning mode within ServiceNow.

Last year, you saw us introduce the sharing infrastructure, which is really a content exchange, especially for customers and partners.

But in order for us to attract the professional software developer, people that develop software for a living and have to sell it, we are going to have to have a monetization infrastructure as well.

We are in the midst of planning on having that.

We have preliminary designs making that available by Knowledge 2015 next year, so we're first, definitely going after the professional software developer with the ServiceNow platform.

And we need to have a monetization infrastructure in order for that to be a successful strategy for us.

That's a great question, because it is very much on our minds these days.

Okay, and just to make sure I heard that correctly, by 2015 you guys think you'll have something in place to start monetizing some of those apps that could be built on top of it?

Knowledge 2015 -- we like to draw the line in the sand around our big Knowledge conferences, because it is like a forcing function for us to make sure that we deliver.

And we did that with Knowledge 2014 with the sharing infrastructure.

A lot of our product sees the light of day around the Knowledge conference.

Great.

Congrats on the quarter; I will turn it over to others.

Thanks.

Thank you.

Abhey Lamba, Mizuho Securities.

Thanks.

Frank, can you talk about ServiceNow Business Edition?

Have you found it to help you expand your TAM?

And how different are these markets -- the mid-markets and enterprise?

Also, would you need to develop a separate sales force to target them?

Good question.

We've been adding customers on Business Edition reasonably well.

We now have quite a few customers where we have a nice population that we can learn from, from what the product is doing and what it needs.

But in terms of the go-to-market model, we are really trying to change things up quite a lot to make it [completely unattended] to get away from a lead-generation model, move toward a demand-generation model.

It is going to -- when we're all said and done with this, it is going to look a lot more like our low end -- our very low-end competition, people that really are aiming for the SMB marketplace.

You are talking about transactions that are $5,000, $10,000, $15,000 a year in size.

It is different in every regard, and not just in the product, but the contractual model, the support model, the feature set, the product and so on.

We are getting some really good experience.

We are adding customers, but we are still on a journey here.

It is going to be very, very different from our go-to-market motion that you see us exhibit on the enterprise side.

Thanks.

And Mike, a follow-up on your billings guidance: Now, will specific billings guidance become a regular feature now?

And also, you're calling for about $15 million in (inaudible) and deferreds next quarter.

That's in line with what you did over the last couple of years; whereas in the first two quarters, we've seen an uptick in change and deferreds this year.

So, if you can just help us understand puts and takes for billings for next quarter, that would be helpful.

Thanks.

We will be giving billings guidance, and the deferred revenue is just falling out from the billings and the revenue guidance, and we feel comfortable with that.

Greg McDowell, JMP Securities.

Great.

Thank you very much.

I just wanted to ask about the Eureka release.

I think you guys pushed that out earlier this summer.

Any trends you are seeing from the customer base so far, in terms of update -- or uptake and some of the new features of that recent release?

Yes, this is Frank.

The uptake on the Eureka has been amazing by historical standards.

I think the data so far shows that it has moved 3.5 times as many people by this time than our previous release, which was Dublin, and that's a function of how compelling the content of the Eureka release has been.

So, that is going really, really well.

One quick follow-up: I was just wondering if you could expand a little bit on the expansion of the Board of Directors, and your views on why that took place?

Thank you.

The Board of Directors is evolving as a function of the Company going public, the VCs being fully distributed, and the Company moving into the mode of being in a completely institutionally held public enterprise.

So, we've added -- last year we added Charlie Giancarlo to our Board.

Just now we added both Sue Bostrom and Anita Sands.

These are all people that have really large company backgrounds and experience.

We plan on becoming a large enterprise, so we need to have people around the table that have been there and seen it done and can really help guide us.

So, our VCs are still around the table, but they will not be forever.

So, this is just an ongoing evolution.

There's nothing abrupt about it.

It is something that will take place over a number of years.

Steve Ashley, Robert W. Baird.

Thank you very much.

I'd like to swing back to the HR service management module, and ask: What kind of improved service efficiency are some customers seeing by putting this in?

And then separately, what is driving that improvement or whatever level of improvement they're seeing?

Is it automation and self help?

Is it changing the processes?

I'm sure it is a number of things, but if you could help us understand what kind of benefit people might see and in what form, that would just be great.

Yes, it is Frank -- terrific question.

What happens in most HR organizations today is that there's just a volume of inquiry coming over the transom -- by email and by phone.

HR organizations staff to try and deal with it, and respond to that in some reasonable manner.

The problem there is we don't know how well we're doing.

We don't really know what we're working on, what the sources is of the volume of work that's driving through the organization.

So, while we are executing on the service model, we are really not managing it.

What happens when you put a service model in place -- a number of things start to happen.

You get immediate data on what it is that your organization is working on.

You can break it down by geography and categories, and also how well your organization is actually doing in terms of responding to the workload that is coming at your organization day in, day out, and so on.

Once that data becomes apparent -- first of all, we can manage our workforce a lot better.

We can hold people accountable for their performance, but we can also start to get proactive around: Why is all this work coming over the transom?

Are we having a problem with our group plan health insurance?

Are we having a problem with our 401(k) provider?

What is it that's driving our work into the HR organization?

Once people proactively start knocking off the problems that are driving the volume, this is about exactly what IT organizations do as well.

Then you often see the staffing levels drop dramatically, because the work loads go down.

That is the essence of service management.

Now, as I said earlier, in human resources, the workloads tend to be very information-centered.

People are looking for answers to specific questions.

What's the policy on this and so on?

And the faster that people can get to that information without actually invoking the time of people, the less resources are needed to deal with those workloads.

I've seen organizations that have cut their HR staffs in half -- 50% -- once they start to get full visibility to the work that was flowing through their organization, week-in and week-out.

So, going from not having a service model and not managing service model to actually having one and then fully incrementally improving it, the benefits are dramatic.

That's why a lot of organizations say this is a total no-brainer compared to being on voicemail and email and chasing our tail all day long.

Great.

When you stand at a high level, you look over the organization, there was a ton of white space in the IT department.

As you've just described, there was a ton of white space in the HR department.

Where else, when you look over the entire organization, are there pockets of white space to be addressed also?

If you take it to its logical conclusion, everybody who works in the enterprise is both a requester of services and a provider of services.

As a provider of services, that's really what your job is.

If you work in an organization, you are a provider of services in some form or fashion.

So, that means that if you are a provider of services, a service model is probably in order, depending on what you deal.

You work in procurements, you deal with suppliers; you work in facilities, you work in sales, you work in marketing, wherever it is, if you're a service provider, a service model is typically not far away.

You're also a requester of services.

A requester of services -- we all are, because we need help from HR; we need help from IT; we need help from facilities.

So, we need to have the ability to invoke the help and the systems of these organizations.

And that's also, of course, where we have a service model.

So, on the end, every single employee in the enterprise is both a requester and a provider of services.

And they're going to be -- depending on what hat they're wearing at that particular moment, they are going to be on a ServiceNow system [of sorts].

And whether it is facilities or HR or IT or procurement, vendor management, whatever it is, you're on one part of the service model as a requester or as a provider on the other side.

That's how -- it is not just white space.

It engulfs the entire world of work, if you will, that goes on in an institution or in an enterprise.

Great, that was terrific, thank you.

Alex Zukin, Stephens.

Hey, guys, congratulations on another solid quarter.

One housekeeping item: Did you guys give the Global 2000 customer adds in the prepared remarks -- maybe I missed that.

Yes, 455 Global 2000s; we added net 29.

Got it.

Thank you.

Frank, one for you.

How does the competitive environment change for you in some of these large deals where you're going after the very broad enterprise service management deployment?

I think, first of all, it's not that different in terms of who the usual suspects are.

They're the same people that we've always contended with, because they are the incumbents trying to hang on to the legacy that I've built over a long period of time.

But as I said earlier, we are at an inflection now where ServiceNow is not just viewed as being usable or useful in a few areas, but it is viewed as something that needs to be standardized upon, because it makes sense to do so.

Also, my comments about the whole ELA structure on pricing also addressed that.

So, competitively, people are viewing us much more as an enterprise platform now than they ever have before, when they really were targeting a few specific applications that they wanted to automate with ServiceNow.

So that's -- from a competitive dynamic standpoint, I think we are much more threatening than we've ever been.

And if you tie to that our forays into ITOM, now we're invading from our service management platform those markets as well, and that obviously also deals with the same set of competitors that we have on the service management side.

This game is far from over.

We are just still in early innings, and we're going to be dealing with that same cast of characters for a long time.

On the platform side, are you starting to have situations where you're running into Force.com?

Yes, we do, and that's been going on for years as well.

I referenced in the prepared remarks the CIO survey that is done by Morgan Stanley.

And they survey 150 CIOs every six months or so, I believe.

And there's always two platforms that get mentioned in that survey: it's Salesforce and it is ServiceNow.

And I believe in the last survey, our numbers, in terms of projected use by CIOs were right up there with Salesforce.

So, I think we are having tons of traction in this area.

And we are obviously high profile that CIOs know about us and are planning to be on our platform this year or next.

Thank you, guys.

Derrick Wood, Susquehanna Financial Corporation.

Great, thank you.

I wanted to ask about the pricing change.

And now that it has been out for a couple quarters, just curious what the net effect has been?

Is it helping with velocity of new use cases?

Is it helping to monetize usage from the install base?

What really has been the desired effects, and how is that tracking relative to expectations?

This is Frank.

The net effect of that set of introductions has been a reduction in friction.

Making changes in pricing is never easy, and we keep doing it.

And when we encounter friction, or have opportunities to make business go easier and faster, and we strongly feel, based on the experience that we now have under our belt, that the latest set of changes is really, really helping for various reasons to reduce the friction.

So, we're pleased with it.

Our sales people are pleased with it.

It is a lot of progress from where we were.

I referenced the ELA framework as really being a second vector to really approach enterprise-wide transaction.

That is helping a lot, because the incremental model introduced a lot of friction for enterprise-wide deals.

So, it is really good steps forward, and we are pleased with where we are on pricing.

It is not an easy thing, but we are converging on a really good place with it.

Great, thanks.

And I wanted to go back on the question on the new customer activity -- very good number.

I'm just wondering if you could give a little bit more color as to the incremental strength?

Is it more international?

Is it moving down market?

Is it more channel leverage, because it does seem like it was a bit of an inflection from looking over the last year or two, so just trying to get a better sense of what the drivers were, if anything sticks out?

I would say it was broad based across the world.

And what I would say, too, is it is really still very much a direct sales model.

We don't rely on channel that heavily for sales.

We do rely heavily on partners for our implementation services.

I did point out that APJ -- we are very pleased with our results there with some very big deals.

But it is really across the board, and you would expect our new logo count to go up, given the number of ramped reps we are moving into right now.

So, there was no surprise there on our front.

By the way, new customers excludes Business Edition customers.

Okay.

Tim Klasell, Northland Securities.

Thank you.

Congrats, gentlemen, on another nice quarter.

Just a follow-up there on Business Edition: How many customers do you have on there?

I think you gave us some customer counts a quarter or so ago -- wondering how that has ramped?

On Business Edition today, paying customers, we have 14 accounts in the last few quarters that we've signed up.

And we do have some other customers as well, too, but as Frank said, we are still learning a lot from those customers on what we need to do before we really do a big push with this.

We are not in the mode of massively scaling and ramping Business Edition.

We're very much in a mode of discovery and improvement where we are not yet applying a full thrust of effort behind it, because we feel we are not ready to do that.

We have now, what, a couple dozen customers that are -- Mike said 14 or so that are paying customers, where we have a whole bunch of them that are in test mode.

It is the right pool for us to do the work that we have to do to figure that out.

I expect that we're going to spend a few more quarters really in this mode of adding customers incrementally like this before we really are going to open the floodgates.

We're not at that point.

We don't think we can productively apply the resources to it.

So, we're holding our powder dry until we feel we are at that point.

Okay, great.

Then on the Neebula acquisition -- getting good feedback from your partners on it.

How much customer overlap do you have?

How many joint customers do the two companies have?

I think Neebula has about 30 customers in production.

I think there's probably maybe about 12 or so might be ServiceNow customers.

They were a very active partner of ServiceNow; they came to our conferences.

We had an integration with Neebula already.

They were able to populate our CMDB and work with our discovery tools, but that's just the history.

We think that every single customer that Neebula can appeal to, ServiceNow can appeal to as well.

There's 100% intersection there from an opportunity standpoint.

We will present and lead with Neebula on every single place that we go in with ServiceNow.

You can count on that.

One thing on Neebula: We are completely re-implementing that on top of our platform, which is going to take us some time to do as well, and you will see a really big push on that.

That's actually a question that was asked earlier that I didn't address.

We said it in prior calls.

We are very fanatical around platform.

And when we do acquisitions, we look at the architecture and the implementation to make sure that we can do it and that we can do it in a reasonable time.

Mirror42, the acquisition we had last year, was fully implemented over a nine-month period.

We are already far along in the planning stages, doing exactly the same thing with Neebula.

It's going to move into the ServiceNow cloud.

It is going to use our data model.

From a UI standpoint, you will not be able to tell that it is not a ServiceNow application, and it will get refreshed and managed right alongside everything else inside ServiceNow.

So, that's a very strong commitment we have to platform strategy.

Okay, great.

Congratulations again.

Brad Sills, Maxim Group.

Thank you for taking my question.

It sounds like great uptake this quarter -- early traction on the HR application.

Can you comment a little bit on what you are seeing in the other two: facilities and field service?

Yes, these are application areas that have exactly the same kinds of characteristics in terms of service model.

Typically, they're similar to HR in the sense that, historically, they haven't had anything.

They've just had email interactions with people that needed help or services from those areas, and particularly in procurement.

They really ought to view themselves as a service organization, because there is a very high intensity of interaction with people that are doing the requisitioning of services.

So, that's why the payoff is quite compelling to go to a structured, defined service model.

But HR, because it is so employee-facing in terms of what it does, it is the place where people like to go first.

And HR organizations are typically quite animated and interested in service models, because they view themselves more as service organizations, I would argue, than the purchase organization does that deals with suppliers all day long.

But we will see good uptake in all these areas.

The sale that we're really trying to make with CIOs is that: Look, you need an enterprise service model to make sure that the organization that you have in your enterprise are behaving as service providers, and that you have structured processes that allow you to report on it and see how well you are doing.

Are you efficient in delivering the services, and so on?

That's a new thing for large enterprises and institutions in the public sector.

Great, thanks, Frank.

And then just one on the CreateNow portal.

Are you seeing any trends with use cases or even applications that you could see evolving into another category of line of business application that you package up and sell yourself?

Thanks very much.

We haven't really seen anything of that sort where there was activity going on that we picked up and started repurposing for sale, not excluding that that might happen at some point.

One thing I will mention about CreateNow, there was quite a bit of inflection during the quarter in terms of [it] percentage of the total non-ITSM revenue, because it jumped during the quarter from 6% to 14% of our revenues -- of our bookings -- excuse me, of our bookings.

And just remember: 18 months ago, we weren't even charging for this yet, so this is leaps and bounds.

We were even surprised to see the numbers jump as hard as they did, and we think it is an indication of general interest in the platform building custom applications.

It has been out there awhile now; sales people are getting used to it.

Customers are getting used to it, so it is becoming much more mainstream in our go-to-market motion.

So, that was an interesting metric to have seen emerge as well.

Great, thanks again.

Justin Furby, William Blair & Company.

Hey, guys, thanks for taking my questions.

I was just curious on the IT operations market, if you look at that $18 billion or whatever the number is, how much of that today -- post-Neebula -- how much do you think you can address of that?

And then, if you look out maybe over the next 3 to 5 years, where do you think that goes, and is it likely to be through continued acquisition or more internal development?

The $19 billion is a highly fragmented aggregation of subsegments, and it includes mainframe.

So, a nice wrapper, but there's no doubt that most vendors, including us -- we're not addressing the full scope of that today, or will we in the future.

But obviously there are many, many billions of dollars of spend going on in that area.

We get questions all the time from our customers -- what are we planning on doing in this area, because they're very, very interested in having this kind of software be on our platform.

There are many, many more segments that we are evaluating opportunities, both to build, to expand, or to acquire.

Neebula was a really nice shot in the arm, and a really good, solid asset that really helps service availability management, which we think is a centerpiece for IT operations management.

But there are many others that are existing categories that are being reinvented and where opportunity is lurking, so stay tuned.

Okay, great.

And then just one quick one on the government.

Was there any activity this quarter?

You look into Q3 -- it's an important quarter.

What are your expectations as part of your billings guidance around the federal vertical?

The federal vertical was not unusually strong this quarter.

I do expect next quarter will be strong, and we don't give specific billings guidance around different segments of our Business.

But I do expect Q3, as you'd expect, will be a good federal quarter for us.

Okay, great; thanks, guys.

Philip Winslow, Credit Suisse.

Hi, guys.

Congrats on a great quarter.

Most of my questions have been asked already, but just wondering if you could give more color on the Orchestration, add-on sales, as well as Discovery.

And obviously, how ServiceWatch can fit in with the Discovery tools?

Thanks.

This is Frank, Phil.

Those products have been doing really well.

They've been growing as a percentage of our Business almost every quarter.

It is becoming -- by the way, we did a new customer transaction, the largest transaction we did this quarter, which included -- that customer is now our largest Discovery and Orchestration customer.

It is literally like an initial transaction.

Usually we sell Discovery and Orchestration downstream from the initial transaction, and it shows you it is going to become more front and center to what we are doing.

How does it fit with Neebula?

Orchestration -- excuse me, Discovery, really, it finds the hard and soft assets in the infrastructure, and then, populates a repository.

And that scan is typically repeated on a weekly basis to keep it up to date.

What it doesn't do is map those hard and soft asset to the services that it support.

That's what Neebula will do.

So, Neebula is highly complementary to the sale of Discovery and the CMDB.

This is something that has to be -- if you don't have Neebula, that is something that has to be done manually, which is darn near impossible because it will be out of date by the time you do it.

And Neebula is completely dynamic and automated, which is what makes it such a compelling add-on to our portfolio of capabilities -- very, very necessary.

We believe every customer has a series about managing service, the availability of service, they're going to need to have Neebula or something like it.

I would add that Discovery and Orchestration were both 7.4% of our net new ACV in the quarter, up from the prior quarter and up from the prior quarter before that, with Orchestration growing the fastest of those two.

Great, thanks, guys.

We have no further questions.

I will now turn the call back over to Mr. Michael Scarpelli for closing remarks.

Please proceed.

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.

This concludes today's conference.

You may now disconnect.

Have a great day.