ServiceNow Inc (NOW) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2014 ServiceNow earnings conference call.

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

(Operator Instructions)

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

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

Please proceed, sir.

Good afternoon, and thank you for joining us.

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

Our press release and the simultaneous broadcast of this call can be accessed on 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 rick factors in documents filed with the Securities and Exchange Commission, including our most recent quarterly report on Form 10-Q for information on risks and uncertainties that may cause actual results to differ materially from those set forth in such statements.

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

Thanks, Mike.

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

We finished FY14 with strong metrics across the board.

Fourth-quarter revenues grew 58% year on year to $198 million, and billings grew 62% year on year to $269 million.

We also maintained the rapid growth of our combined backlog and deferred revenue balance, which grew 57% year on year to $1.4 billion, compared to 59% growth in 2013.

The quarter was marked by strong demand from our existing customer base with a 97% renewal rate, and a 38% upsell rate, and we also signed the most new customers and new global 2000 customers in the quarter.

We booked 10 new transactions with annualized contract values above $1 million, including 4 in Europe.

The Company now has 129 customers, each with an annualized contract value in excess of $1 million, compared to 67 at the end of 2013.

We closed the quarter with 2,725 customers, and now count more than 25% of the Global 2000 as customers.

Some of our new Global 2000 logos are: satellite broadcaster, Dish Networks; financial services company, Fiserv; and global insurance provider, Generali Group.

Our strong upsell performance in part reflects our service management solutions for human resources and facilities.

We sold 40 new HR service management transactions and 38 new facilities service management transactions in the quarter.

Nearly 35% of these transactions were with customers new to ServiceNow.

One European financial institution recently went live with HR service management for their 25,000 employees.

The company transitioned from manual processes to a branded online experience to assist employees in obtaining information on healthcare compensation and learning.

They converted their manual HR processes into structured workflows to improve efficiency and reporting.

Another customer, Cars.com, created an employee onboarding application that automates the manual process to get new employees up and running as soon as they start.

As a result, 90% of all new employees now receive hardware, software, and systems access on their first day.

In addition, Cars.com extended their use of ServiceNow to help its facilities team to be more effective and efficient in managing their workload, especially while away from their desks.

The team has mobile access to ServiceNow so they can tackle issues while they are dealing with other incidents.

With ServiceNow, the facilities department has more than doubled the efficiency of their limited staff and dramatically improved internal customer satisfaction.

During the quarter, we also officially launched ServiceNow Express, a rapid deployment service management offering aimed at companies that want a standard solution with configuration kept to a minimum.

Express appeals to enterprises of all sizes, including small institutions we previously could not address with our enterprise products.

At the end of the quarter, we counted 76 customers on Express, a number that is growing rapidly.

Customers like specialty investment bank Ziegler have cited the ability to get up and running quickly with a solution that can grow with them as a key differentiator.

DealerSocket, an automotive software company, said that the discipline and process around [teenage] management was an important driver for them.

77 Energy, a diversified oil-field services company, emphasized that Express provided them the simplicity they needed without compromising the necessary functionality.

Express is currently available in North America and Canada.

We plan to launch in other geographies starting in Q2.

We also saw great traction for our recently acquired ServiceWatch product.

Existing customers use ServiceWatch to add dynamic service discovery and mapping to their CMDB deployments, a key capability that increases the value and use of the CMDB.

We've already signed more than $5 million in total contract value in the two quarters since we acquired ServiceWatch.

The annualized contract value for our overall IT operations management business more than doubled in 2014.

We saw more customers deploy custom applications to help them manage processes directly connected to their core business.

For example, Australia-based RMIT University is tackling its students admission process with ServiceNow.

The goal is not only to improve the student experience, but also to boost the student application conversion and acceptance rates, which in turn drives the University's overall revenue performance.

The ServiceNow platform was selected after a technical bake off against other large software platform players.

Finally, during the quarter, we opened previously announced data centers in Asia and South America.

These data centers improve our ability to serve the needs of local customers that require the data to reside in the region.

We now have eight paired data centers on five continents.

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

Thank you, Frank.

During today's call, we will review our fourth-quarter financial results and discuss our financial guidance for Q1 and full year 2015.

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

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

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

Total revenues for the fourth quarter were $198 million, growing 58% year over year and 11% sequentially.

Subscription revenues for the quarter were $167 million, growing 59% year over year and 11% sequentially.

Our average contract terms for new customers, upsells, and renewals were 34.5 months, 23 months, and 25.4 months, respectively.

Professional services and other revenues were $31 million for the quarter, growing 54% year over year and 10% sequentially.

Our total revenues per customer were approximately $287,000, an increase of 21% from the prior year and up 4% from the prior quarter.

Our annualized contract value per Global 2000 customer was $713,000 exiting the fourth quarter, up 40% from the prior year and up 10% from the prior quarter.

We now have 129 customers paying us more than $1 million in annualized contract value, up 93% from 67 in the same period last year, and up 21% from 107 in the previous quarter.

Total revenues based on geography were $135 million in North America, $49 million in EMEA, and $14 million in Asia-Pacific and Other, representing 68%, 25%, and 7% of total revenues, respectively.

Our total billings were $269 million in the quarter, representing 62% year-over-year growth and 34% sequential growth.

Our weighted average subscription billing term was 11.8 months for the quarter, compared to 11.8 months in the fourth quarter of 2013.

Our subscription gross margin was 80%, compared to 78% in the prior year and 79% in the prior quarter.

During the quarter, we added 32 employees to subscription cost of sales, ending the quarter with 478 employees.

Our professional services and other gross margin was 16%, compared to 13% in the prior year and 13% in the prior quarter.

During the quarter, we added 31 employees to professional services and other cost of sales, ending the quarter with 416 employees.

Our total gross margin was 70%, compared to 67% in the prior year and 69% in the prior quarter.

Our operating margin in the fourth quarter was 6%, compared to 2% in the prior year and 6% in the prior quarter.

During the quarter, we added 80 employees to sales and marketing, ending the quarter with 1,011 employees; 43 employees to R&D, ending the quarter with 585 employees; and 27 employees to G&A, ending the quarter with 336 employees.

We ended the quarter with 2,826 employees, an increase of 996 from the same period in the prior year, and an increase of 213 from the prior quarter.

Net income for the fourth quarter was approximately $5 million, or $0.03 per basic and diluted share, compared to a net loss of $3 million or negative $0.02 per basic and diluted share in the prior year; and net income of $6 million or $0.04 per basic and $0.03 per diluted share in the prior quarter.

Our basic weighted average shares outstanding was 149 million, and our diluted weighted average shares outstanding was 164 million.

During the fourth quarter, we generated $48 million in cash flow from operations, and we used $9 million for capital expenditures, resulting in $39 million in free cash flow.

This compares to $20 million of free cash flow in the same period of the prior year, and $7 million in the prior quarter.

We ended the quarter with $936 million in cash, short-term, and long-term investments.

During the year, we signed a record total contract value of $1.2 billion, growing 64% year over year.

This resulted in $422 million of total deferred revenue at the end of the period, up 58% over the balance at the end of the fourth quarter in 2013, and up 20% over the balance at the end of the third quarter 2014.

Combined deferred revenue and backlog at the end of the quarter was $1.4 billion, growing 57% year over year, compared to 59% year over year in 2013.

On a constant currency basis, combined deferred revenue and backlog grew 62% in 2014.

Now, let's turn to guidance for the first quarter and full year 2015.

For the first quarter of 2015, we expect total revenues between $207 million and $212 million, representing year-over-year growth of 49% and 52%.

We expect subscription revenues between $176 million and $180 million, and professional services and other revenues between $31 million and $32 million.

We expect billings between $260 million and $265 million, representing year-over-year growth of 44% and 47%.

We expect subscription gross margin of approximately 79%, professional services and other gross margin of approximately 12%, and overall gross margin of approximately 69%.

We expect approximately breakeven operating margin, and we expect to incur approximately $4 million in expenses associated with our sales kickoff event held once a year in January.

Additionally, we expect free cash flow of approximately $30 million in the quarter.

For the full year 2015, we expect revenues to fall within the range of $960 million and $1 billion, representing year-over-year growth between 41% and 47%.

We expect subscription revenues between $810 million and $840 million, and professional services and other revenues between $150 million and $160 million.

We expect approximately 5% operating margin for the full year and to end the year with approximately 170 million diluted weighted average shares outstanding.

Similar to 2014, we expect to add approximately 1,000 employees allocated to COGS, sales and marketing, R&D, and G&A at similar rates to 2014.

We also expect our hiring will be front-end loaded, similar to previous years.

Before closing, please note our annual users conference, Knowledge 15, will be held April 19 through the 24, in Las Vegas at Mandalay Bay.

In conjunction with this event, our financial analyst day will be held on Monday, April 20 at 8 AM local time.

This year, we are also opening up our partner expo hall to attendees, giving them an opportunity to see and speak with hundreds of ServiceNow partners.

In-person attendance will be limited, so if interested in this event, please send an invitation to IR@servicenow.com.

For those who cannot join in person, we will hold a webcast to this event, accessible on our website.

Additionally due to the timing of this event, we will report to Q1 2015 earnings on Thursday, April 16, 2015.

Operator, you may now open up the call for questions.

(Operator Instructions)

Greg Dunham, Goldman Sachs.

Hi.

Thanks for taking my question.

First off, just a clarification on metrics, and that I heard you correctly.

Did you say it would have been 62% constant currency growth on the backlog versus the 57% number?

Correct.

Okay.

So a 5 point headwind.

Should we assume that the 5 point headwind was consistent with Billings as well?

There was a Billings headwind as well for the quarter.

The Billings that impacted us for the quarter approximately $5.6 million in the quarter.

I don't have it for the full year of the Billings, though.

Okay, perfect.

And maybe a little bit bigger picture, you're starting to show a lot more success in HR and facilities.

Can you give us a sense of how big the deal sizes expand when you do sell HR and facilities in the two-thirds of customers that are existing customers?

That's it for me.

Thank you so much.

This is Frank.

One thing that's really important to understand about our go-to-market motion is that we're selling service management.

We're not selling an IT flavor, an HR flavor, a facilities flavor.

So our whole thrust is to get enterprises to really embrace and adopt service management for the enterprise, and there's multiple flavors of service management typically under consideration that our customers want to implement and deploy.

We're not managing and skewing the business.

What the contributions are of these individual elements.

If anything, we're trying to erase those boundaries and not have our customers view us in terms of those individual solutions, but really take an enterprise view of service management and adopt it as a platform to implement a service platform for numerous service domains.

We talked a great deal about HR and facilities, and the reason is those are adjacent service domains.

They're typically the low hanging fruit, but there are literally hundreds and hundreds of other applications.

Some of them are very fine granularity, other are much broader.

So we don't think it is very productive to try to dissect and split the service management business into all these component parts, because we purposely try not to sell it that way, not to manage it that way; to really get enterprises to adopt it on an enterprise basis.

Okay, understood.

Thanks, Frank.

Jennifer Lowe, Morgan Stanley.

Thank you.

Frank I wanted to follow up on a comment that I think you made in the prepared remarks around Express, and in particular, I think you mentioned that the functionality is something that would be appealing to customers of all sizes.

And, I know in the past and even on this call it was positioned as more of an entry-level product at the lower end of the market but I'm curious if you see scenarios where Express could potentially get traction in large organizations as well?

Yes, that is absolutely a scenario that we think is realistic.

We've not seen a ton of evidence of that to date, but we don't want to position Express sort of as a mini-me SMB type product, like the little brother of big ServiceNow.

The focus of Express, and that's why it's branded that way, it's really a product that is extremely proscriptive.

It is meant to deploy very, very quickly.

Where customers are not engaging in process design workshops and so on.

They are using the processes as defined out of the box, so it's a little bit of a different tangent, if you will, on how to do things.

We think that that may eventually start to appeal to larger enterprises as well, so we didn't think it was wise from a positioning standpoint to say this is a small business type product; even though it does open up that market for us, which is great incremental opportunity, but we will not preclude the fact that larger enterprises may -- that this may have appeal for them as well.

Great, and then just one last one for me.

Just curious if you can comment a little bit on what you are seeing competitively, either on the ITSM space, or more specifically as you get more into other areas of ITOM, and into some of these platform use cases?

Have the companies that you've come up against competitively shifted at all?

It hasn't really shifted.

If anything, the profile of the Company has grown so much and specifically, you know we are moving away from an ITSM centric positioning to an enterprise service management approach, which really helps in terms of competing with people that had had a very, very narrow perspective on the opportunity.

We see the market moving in that direction.

We now have customers coming at us that really are starting the conversation with us in that way, rather than starting with a very narrow defined ITIL toolset.

That was the way the business was for years and years.

We still see the same old folks that we've always seen on the custom application side.

We see contention and contest there with pure play platform companies, like for example: Salesforce, Oracle, and so on.

And we'll see more of that as time goes on.

On the ITOM side, it's the other set of players that everybody is familiar with that we are competing with over there.

I don't think there's been a fundamental shift.

The theme here is that the company's profile has grown so much that our hand has grown stronger relative to serving all these opportunities.

Great.

Thank you.

Walter Pritchard, Citi.

Frank, on the sales side, it looks like you're going to add, based on Mike's commentary on headcount adds in the pro rata versus last year, it looks like you're going to add about the same number of salespeople this year as you did last year.

Can you talk about where you're adding those people, and how you are maturing as a sales organization?

And I'm just curious, are you at the point yet where you are starting to really push on productivity as a big driver with quotas going up and so forth, versus just adding headcount and driving it that way?

So, Walter, in terms of productivity, if anything we're going to hire as fast as we can while keeping productivity roughly in the same place.

That's what we've been doing and we will continue to do that.

We see really strong uptick in productivity, it just means to us that we're not hiring fast enough and we're leaving opportunity out there for somebody else.

Our posture in that regard hasn't changed.

In terms of the maturity of our sales motion we have a much more extensive coverage model now because we have a global accounts model that is split both between people that are focused on new logos and new accounts, and then we have the client-director model; and that's an entire team of people that's focused on existing customers.

Then below that we have an entire commercial organization that is also split between new logos and existing accounts.

So, we have become much more fine grained and granular in terms of how we're addressing the different types of account, whether new or existing.

Because, selling to existing accounts is very different motion, very different model than hunting new logos, where it's all about getting beach head and initial buy-in, and then sort of growing it from there.

It has matured and become much more sophisticated over the last couple of years.

And then Mike, just a quick one on the numbers.

It looks like CapEx was half of what it was in the year ago Q4, and I know you're doing a lot of data center buildout and re-platforming and so forth.

Can you talk about what drove that, and how we should think about CapEx in 2015?

So, the CapEx in Q4 being as low as it was, was really timing on things, and in 2013 Q4 there was more facilities related buildout.

We were roughly for the full year CapEx about nine point -- the low nines as a percent of revenue.

In 2015, as we announce the new facility we're going to be moving into, we expect CapEx is going to be roughly at that low 9 point something percent of revenue for the full year.

Now remember, three years ago was when we did our original big data center migration.

We have the refresh that's happening in all our data centers with that old equipment that's coming off depreciation we'll be replacing over the next year as well, that's the other reason why our CapEx is staying relatively high in 2015.

Okay, great.

Thank you.

Brent Thill, UBS.

Hey guys.

Mike, just on the customer add, that stuck out as one of the highest growth rates you've had in two years, and I know that in 2013 you focused on the existing base, but it seems like this year was a re-pivot to adding net new.

And, I'm just curious if you could maybe walk through the strategy as you go this year, and it sounds like from Walters question, that Frank addressed, that this is a segmentation you are pushing pretty hard in both existing and new, but not favoring one or the other.

Can you walk through that buildout?

What I would say is, one of the reasons why you'd expect our new logo count to go up with the number of reps we've added and the number of ramp [traps] we've had, you have to have more logos or those people aren't bringing in new accounts.

Our focus is really on quality of customers.

As I've said many times, and what we mean by quality of customers; large customers.

Because those are the ones that buy more from us, so the one metric that we tend to focus on, and I am particularly focused on, are the Global 2000.

We now have 522 of the Global 2000 as customers.

31 of those were actual adds.

The other movement was because of Global 2000 acquiring customers of ours, but that's the metric that I really look at, and why that is is the Global 2000 account for 50% of our business.

We don't actually pay anyone on new logos per se, and in 2015 our goal is really going to be going after quality customers, not necessarily a fixed number.

This is Frank.

One quick follow up, I think we have said over the years it's a three-legged stool.

It is high renewals, high upsells, and new logos.

And if you execute in each of these three areas, that's when you get the high growth and the combustion and the whole business is humming and working well.

There's no re-pivoting going on here, we just shifted emphasis.

We've always pushed on all three.

Very high renewals, very high upsells, and we must plant the flag in terms of new logos at the same time.

All these things need to happen.

We're going to do very well, and that's our strategy.

I just want to remind you, with these large customers it's long sales cycles.

Okay, and Frank, at the analyst day there were a number of real high profile SI's that had talked about the partnership they are building with you.

If you could comment about what you are seeing from some of the SI's?

If you could comment just a little bit about the capacity that's coming on?

If you're comfortable with where you are getting that support in the field?

We've really made an enormous amount of progress certainly in the last couple of years, but especially in 2014.

The large SI's, and it's a whole spectrum.

At the top end, obviously KPMG has been with us for a very long time.

They were really early to invest, but people like Accenture are sort of the top of the heap.

They're really beginning to double and triple down, and realizing, understanding how important this is.

Again, it's an enterprise play.

Forget the ITSM positioning.

That is just one component of it.

So the very high-end brand profile GSI's are coming in very hard, but then there's a whole group of GSI's and outsourcers that are super active in our business.

People like [Taka], TCS coming in, InfoSys, ATL's been with us for a very long time.

Super successful.

[cognizant CSC].

What's really great about it is that for our customers there's a tremendous ecosystem.

There's very, very extensive set of choices geographically as well, where you can engage people that have really, really good experience on our platform.

It's a key factor in our growth and our business going forward.

It's a big focus as well for our sales organization, 2015, to really work on a very fine engagement model in all geographies where we operate with that community of players.

We think it's very important for our business.

Thank you.

Jason Maynard, Wells Fargo.

Hey, guys.

Good afternoon.

I had a question on your 2015 operating plan.

If you look at your sales productivity metrics and new adds on customer fronts, you're doing great both in adding new logos and obviously upselling and cross-selling into the base.

So, my question then is when you look through 2015 and you look at your target operating margin, is that a fixed point that you're going to try and solve for during the year, or do you accelerate hiring, maybe in the second half, if it looks like you are beating your targets on the top line?

Thanks.

We are never going to stick with a firm operating margin target for the year.

That is kind of the way we look at it right now.

We think that something that's achievable, but if we see we are able to ramp reps faster the opportunity, or we find good people we will accelerate the hiring.

If we see any type of slowdown in terms of customer demand, we will put -- take the pedal off the accelerator and not hire as many, and then you'll drop more to the bottom line.

But, we're really focused on growth and continuing to show some margin expansion, but not too quickly.

And maybe a follow-up for you, Frank.

If you look at where you're making the progress on the operating margin front, I know we're just talking about 2015 here, but is given your expansion of the product portfolio and your penetrating new parts of the enterprise, is there a range that you think is too aggressive or not aggressive enough in terms of expanding headcount even as you think about going into next year?

Well, there is, right?

We look at headcount expansion.

It's all led by the tip of the spear, which is our sales organization, and all the other functions need to be balanced out in support of that effort, right?

And, we are essentially looking at sales expansion in terms of the productivity, how that's developing for us.

So, that's really how we;re led.

We're not led by trying to produce an operating margin of a certain number.

Obviously, when we give guidance, there are constraints on how that all works out, but fundamentally, this is a productivity equation, and we've said over and over, if productivity holds, it means the model works.

We are converting people to yield, and ramp reps are coming in at those productivity rates, we will continue to hire.

If productivity rates are starting to really go up, that's a signal for us to go harder.

Right?

If it goes down it would be a signal for us to moderate the hiring.

There's other metrics as well that we look at that would help us determine whether we go faster or slower.

That's fundamentally how we are looking at our business.

So, we're -- from a profitability standpoint, we're much more economically oriented in the sense that it's about contract values, it's about cash.

And, if we keep that in a very healthy balance, we have a very, very healthy, very high-growth business, and we're gradually moving the margins up as we go along here.

Got it.

Thanks guys.

Rob Owens, Pacific Crest Securities.

Great.

Thank you very much.

Just in terms of sales and sales compensation, is it still equal as we look at new customer versus upsell in terms of quota retirement, and how your salespeople are compensated?

Yes.

A dollar is a dollar to us, whether it's a new customer or an upsell.

Where you get the variability is a rep who is one of our client account directors who has some of our installed customers.

Their quota will be different than what an account executive who's going after hunting.

Generally, a new customer those people are going to have lower quotas, so they are going to make more commission dollars per dollar of ACV or contract value versus the guys who have the existing accounts.

Okay.

There's a little bit of a spike in G&A sequentially, and it's been kind of volatile throughout the year.

What was that?

And should that -- is 18.5% a run rate going forward, or should we see that resettle a little bit, here?

As you know, we do have some litigation and there's costs associated with that litigation that are now starting to heat up with DMC and HP, so you will get some variability based upon the work that's done by outside lawyers.

So that being said, we should continue to see this higher rate of G&A?

Correct.

Lastly on the DSO front.

It's improved year over year for the last three quarters.

Is that a function of linearity, or just a better job of collections on your part?

It's a better focus on collections for us, I will say.

Okay, great.

Thanks.

Kash Rangan, Merrill Lynch

Hi.

I'm the newbie, so I'm going to ask you the dumb question.

So thanks for indulging me.

Question for you, Frank.

When you look at your opportunity relative to Salesforce or Workday, how are you looking at those companies relative to how your go-to-market?

When you look at Salesforce, sales, marketing, and customer support, are broadly speaking front office, certain amount of leverage and understanding of the sales process there.

Whereas Workday selling to two completely different problem domains; finance, HR.

Are you more like a Workday in terms of your go-to-market or more like a Salesforce?

What are the things that you looked at this vast landscape and have figured that are worthy of replicating?

And certain things that are so unique to ServiceNow.

Thank you again for taking my question.

Thank you.

So we're definitely farther afield from Workday than we are from Salesforce, in the sense that I think Workday and us have a fairly good balance relationship in terms of what they do, what we do.

There is not a lot of overlap.

Sometimes there are some processes that probably either company could tackle, and it depends on various factors whether a customer goes this way or that way, but on the whole that's fairly well delineated.

Salesforce lives much closer to where we are because of Service Cloud, because of Force.

There are many more opportunities for us to sort of get into an overlapping motion.

I mean, fundamentally, when you strip away all the jargon and the alphabet soup, we're all workflow orchestration platforms, and we can tackle a very wide range of applications, whether they are external like CRM or whether they are internal like service management.

And it's no surprise -- and by the way, Salesforce is very well aware of this.

There's no secret here.

The market is very large, so as a result, we are not bumping into each other every minute of the day.

But as the company's get larger, and we all are getting larger here, I think the potential for contest is going up.

Certainly our customers understand this as well.

That when you peel away the veneer and the jargon and the rhetoric, the core capabilities all move on a similar set of issues.

Got it.

And, I guess as a consequence the nature of salespeople you're hiring going forward is going to be different than the kind of people that you hired a year or two back, I would suppose.

Well, I think that years ago we picked up people that were very familiar with the ITSM problem set.

ITIL processes and so on.

We have long moved past that, and we've been hiring people with ERP backgrounds from Oracle and SAP.

People that really have big time enterprise selling backgrounds.

We've actually done very well with people coming from enterprise infrastructure companies as well that have done outstanding in our world.

There really wasn't sort of one place to go to for us to really run our hiring model through.

We have to figure it out and piece it together on our own.

We haven't gone to one set of companies where we sort of consistently get our people.

That's worked well for us, and it is an ERP grade type of sales, they are long sales cycles, they're very strategic, very campaign oriented, they involve many, many different audiences and stakeholders all the way to the top of the house.

Executives, CIOs, COOs, CFOs and sometimes in many cases even CEOs as well, and that's not untypical for the other companies I mentioned either.

Thank you so much.

Nandan Amladi, Deutsche Bank.

Hi.

Good afternoon.

I just have one question.

Clearly, 31 net customer adds in the Global 2000 is pretty impressive.

Just wanted to ask, how has the profile of an initial signing changed?

Is it more skewed toward seeds or a broader set of modules?

And how do you skew compensation for your salespeople?

So, that actually has changed a lot, and you can see that from the success not just in Global 2000, but how large the transaction sizes are.

That is a function of how broadly we are selling now.

Instead of trying to do a legacy service desk system replacement, that's not how we're selling anymore.

We're going in at a much higher level, and we're driving service management as an enterprise discipline, and right from the get-go we are trying to get the higher-ups and the CIOs to see the opportunity for all the other service domains that they have to address and the fact they have tons of legacy sitting around in terms of Lotus Notes and SharePoint and a plethora of web tools.

They are looking for a platform that they can sanction for their organizations to stand up this new class of workflow services, right?

So, our sales motion and our messaging has evolved dramatically, and that is what's driving larger transactions for us.

That is how we are training our sales organization, that is how they're going to market.

We used to really sell at manager and director level and [other VP signature], and now we're really -- almost invariably we're at the top of the house with our transactions because of the size and strategic nature of it.

And I will add to that too that most of our sales still are on a per user basis.

It's licenses that are seat license that are driving that, other than our ITOM space, which is more on a per device basis how we are licensing those.

Thank you.

Abhey Lamba, Mizuho Securities.

Are you seeing more landing points within HR and facilities, or is IT still a lead-in [field] for you?

And, when you see some (inaudible) HR, facilities types of opportunities, competitively do you see any different players over there?

It used to be that way.

It was always landing in IT.

That has absolutely changed.

I think I said in the prepared remarks that a third of those HR and facilities transactions were with customers where we had no IT engagement.

I mentioned the example of the Australian university.

They are not IT users of ours either, so it is becoming more and more common.

It's a growing part of our business, where IT is not the entry point.

So, this is really good for our sales organization because we don't easily strikeout.

We can also come in through the ITOM side of the house these days.

It's great.

We will take any opportunity to build the beach head and we will go from there.

That's a growing trend, and I definitely expect that to continue.

And competitively, any different kind of players there?

Yes, we do see in HR and facilities you say pure play's, people that only do that sort of thing, and obviously we're a platform player, and we're a service management company.

So as a result, it's a very different tangent, and it's driven as an enterprise initiative.

What companies are fighting is the extreme fragmentation and sprawl of tools.

It's really not in their interests for HR to have their own little thing and facilities and field management.

Pretty soon they of hundreds and hundreds of things laying around.

That is the nightmare of an IT organization to get this fragmentation and sprawl.

So we are the antidote to that mentality and approach to standing up this class of services.

I will add to that, Abhey, even though we may be selling into HR or some of the other lines of business, we're generally still doing this with the IT organization, the CIO, we're not doing this behind their back.

Preferably not.

We're always looking for the advocacy of the IT organization, the sanction, if you will.

We absolutely prefer not to be at odds with the IT organization.

There's a bunch of competitors out there that do come in throughout organizations other than IT, and then are at odds with IT.

The last thing we want to be with our customers is be at odds with the IT organization.

That would be very counterproductive.

Thank you.

Matt Hedberg, RBC Capital Markets.

Thanks for taking my questions.

Frank, I believe last quarter CreateNow was between 8% and 9% of quarterly ACV.

Can you give us a sense for where that was in Q4, and how that should trend in 2015?

I don't know off the top of my head.

The one thing to -- I don't know what that number is right now, and the reason we don't know that is, we're not really managing our business that way, as we have said before.

Such a big portion of our business is coming in from our repeat customers with upsells, and yes, we know exactly what the SKU number is for the current quarter, but remember 38% of our business we said was upsells, and a big chunk of those upsells tend to be custom app development on our platform, so we really want to stop talking about the platform and ITSM and it's going to be a service management concept that we're going to be talking about going forward in ITOM.

Got it.

It's super important for everybody on the call to try and internalize that there is no platform business here that is separate from any other ServiceNow business.

ServiceNow is really one thing.

That does many things, but it's one thing.

And we're trying -- we're not selling it that way, we're not managing it that way.

And it doesn't serve our capital markets customers to think of our business that way.

Helpful.

And obviously, very strong cash flow for the quarter and the year.

Q1 guide looks great, I think it's over 130% growth.

Mike, when we think about the 5% operating margin targets for the year, is there a way we should think about the spread between a cash flow margin and operating margin going forward?

Is there a way to think about that?

Yes, there is a way to think about that.

You will see next year our free cash flow margin will be greater than our operating margin.

It's going to be some time before they catch up.

Eventually over time, they should converge or get close to converging.

Great.

Thank you.

Kirk Materne, Evercore ISI.

Hi.

Thanks very much.

Frank, you guys had a really nice year in terms of growth in the Global 2000 customers.

Is there any way to think about what is helping them expand?

Is it new use cases, is it more seats on existing use cases?

I know to you guys it probably doesn't really matter as long as they are growing, but what do you see fueling that growth within customers that obviously know you very well to start with?

Both those things, right?

Sometimes we're biting off new divisions in the Global 2000.

We don't always take down everything there is to take down.

Most of the time, we don't.

There is internal organizational delineations that sort of prevent that from happening, and it takes time to sort out who will become fully standardized, fully implemented, and be the [wall] implementer.

There is certainly a growth factor there in terms of consolidation, and then other growth factor is the one you mentioned, which is going after other use cases, and the use cases are endless, right?

Any structured workflow orchestration problem we can go out and pursue with our platform, and you never are going to run out of opportunities with that kind of scope.

Frank, can you talk a little bit about the app showcase?

Could you believe you can get a little leverage from some of those apps this year?

Is that something that takes 12, 24 months to build momentum behind?

How should we think about that sort of opportunity for you guys from other apps, other ISV's building on top of your platform?

That actually has become a growing focus for the company, certainly at our big conference this year in April in Vegas you'll see us introducing the notion of a ServiceNow store.

We're very active now in really building ServiceNow as a place for professional software developers, and the difference here is that professional software developers are not just people that build software for a living.

They are people that sell software for a living.

We have tons of people that build software for living, but they don't sell it.

They just build it for their own purposes.

It's really for the crowd of people that build software and sell it.

Those are the people that we have to make incremental accommodations for in terms of what it costs to develop on our platform, how attractive we make that.

We need to provide them with a community and monetization model so that they view the ServiceNow market, if you will, because we now have, as Mike said 500 and some Global 2000 Enterprises.

Those are a lot of opportunities for them.

This is a market to sell into with a great platform, very well established routes to market, but we have to make sure we have everything in place operationally, contractually, and economically to make this a good place to be for them.

Great.

Thanks, guys.

Congrats.

Thank you.

Alex Zukin, Stephens.

Hey, guys.

Congratulations on the quarter.

I want to expand on the just asked question about the monetization of the app store opportunity.

If you compare and contrast the way you are thinking about monetization with respect to that AppExchange from a Salesforce.com?

Either what have you learned or what are the puts and takes about how you are thinking about that space, versus some of these established players?

So, a couple things.

First of all, we think Salesforce has done a really good job, so we've gone to school on their learnings and their successes in that regard, and it's a little bit different than what you see on the consumer side with companies like Apple and so on.

That said, our focus is going to be more aggressive on recruiting people rather than -- the monetization is not monetization for our sake, it's monetization for their sake.

In other words, the software developers, they have to be able to run a viable business on our platform.

It is not as critical for us to insert ourselves transactionally, even though we're going to do that, that's not the focus of this effort.

Certainly not in the initial going, right?

It's really how do we make ourselves as compelling a place to be for people that build and sell software for a living?

So we're going to be more aggressive than players that are further along and more established in this regard, because we're now going to contest and infect other players in this regard.

Got it.

And Mike, on the seven-figure deals you guys signed in the quarter, Were there any elephant or whale sized deals?

Multi-million dollar ACV's?

No.

There were -- $2 million was the highest.

Got it.

Thank you.

Michael Turits, Raymond James.

Mike, I jumped on a little late, so if you just reiterate the margin guide for next year, and also the FX impact in the quarter and in the guide.

And then Frank, I was wondering if you could visit the ITOM -- your thoughts on ITOM event management?

Some of those things you've talked about in terms of your entrance there and what you may be doing so far there with Neebula?

So, we said 5% operating margin for the full year, breakeven Q1.

In terms of the FX impact, what I had said was on the deferred revenue and backlog year over year, there was a $40 million impact there for the full year on a constant currency basis.

And on the Billings for the current quarter, there was an FX headwind of $5.7 million, is what the FX headwind was in the current quarter on Billings.

Anything on the revenue, since you've given guidance on the revenue and you also mentioned what you thought 2015 would be?

So, 2015, just given where the euro and other currencies have moved against the dollar subsequent to December 31, we took another $13 million out of our revenue, which has already been factored into our guide for 2015.

Which had already had a big impact on our backlog, as you saw.

And then Frank, on the ITOM?

In my prepared remarks I mentioned that we had really good progress during the quarter on ServiceWatch.

Sort of the first quarter of that we started to get our act together, and we started selling it.

We exceeded our own expectations in that regard.

So, that was good.

The second thing that was good was we nearly tripled our ITOM business year on year in 2014.

And that's really -- I don't want to say without trying; I'm sure the sales force would take exception to that comment.

But, we didn't have a real strong effort and focus behind it.

It sort of drafted everything else that we're doing.

I'm actually super excited about the opportunity that we have there, because that market is really, really large.

Larger than the service management opportunity, and we have this ideal jump of opportunity.

Just last week I was up in Seattle, where our folks are that are managing our ITOM products, overseeing the ServiceWatch reimplementation on ServiceNow.

We are going to show that at Knowledge15.

I'm super excited about what we're doing in this area.

It is such a compelling piece of technology, and it is just very, very high leverage, because it is going to help just about everybody there.

Everybody needs to have the ability to dynamically map and discover services, and the way this technology does it, it's just very compelling.

So, I'm excited about ITOM, I think we can drive this business way harder than we have.

We have a very strong dedicated group of people getting after this business, and because it's not been our traditional focus because we are a service management company; I just think we have room up here going forward.

So, all good.

Thanks guys.

Greg McDowell, JMP Securities.

Great.

Thank you very much.

Just one quick question for you, Mike.

I want to go back to that $1.4 billion backlog and deferred revenue number.

Since we only get that number once a year, and as I look at the historical relationship between backlog and deferred and full-year revenue, it does suggest revenue growth this year could be quite a bit higher than your 2015 guidance.

So I guess my question is, is there anything different about the backlog in deferred revenue number and how it may translate into actual revenue number this year?

Or is there just some level of conservatism in the 2015 guidance, and obviously FX impacts it.

I was just wondering if you can give us a little more color on it, thanks.

The one important thing you need to remember is the backlog is multiple years of contract value in there.

So, what I will say is, in 2014, we saw a lot of renewals for customers being three-year renewals because that's how we were incenting our sales force.

So, you can't necessarily do a direct correlation between our deferred revenue and backlog growth to our revenue for next year because there's multiple years of contracts to be billed in that number.

And what I will say is, we've disclosed -- we signed I think it was 34.5 months was our average new customer contract last quarter, which was up from the quarter before.

So, you do get variability in your contract lengths quarter over quarter.

That's helpful, thank you very much.

Justin Furby, William Blair & Company

Hey guys.

Thanks.

Frank, I was hoping you could discuss new ACV bookings by geography in Q4 and maybe talk a little bit about if you look outside the US, how win rates have been trended across the major APAC and European market?

I think we're -- North America and EMEA, the main European theaters, are all doing really, really well.

We're very happy with how diversified our revenue streams are geographically, not just across North America but a lot of the European markets and just made up a lot of ground there, and it's just very, very consistent, very reliable productivity and so on.

Now, when you get to markets beyond that, like Latin America and you get to Asia outside of Australia; Australia also a market where we've been a long time, where we have strong critical mass and a lot of predictability.

The newer markets is where we still are up and down from one quarter to the next, because we're very developmental in nature over there.

We just accept that, because we have to get started sooner or later.

And it's just the investment that we're making, and that's sort of part of the productivity equation, as well.

If you just invest in the markets that are super productive and predictable you can drive your productivity numbers up rapidly.

But we know we have to be in these places, and sort of biting the bullet and dealing with the pain that we're going to have upfront to really figure out the models and how to do business there.

I'll specifically single out places like Japan and Brazil, where we have those kind of challenges.

Those are markets where we have to be, and we're there.

Okay.

And then just quickly on the Global 2000.

You've got a quarter of it.

Do you think the next 500 that you go after, are those easier to win, harder?

And what's the primary reason preventing the other 75% from moving to you.

Is there one theme across those, or is it all sorts of different reasons?

You can see it both, as easier and harder.

Harder in the sense that this is a group of people that were not really adopters.

The other guys were more aggressive, more technology savvy, more focused, more interested in moving quicker.

But at the same time, time is not their friend because the systems they are sitting on are aging and old and getting increasingly higher risk and more expensive and more painful.

The other thing I will tell you, is the risk for that next batch of globals is going to be way down, because there's just so much experience out there in the ecosystem.

It's so big and rich that it's going to be much easier to cross this bridge forward.

ServiceNow is much bigger company than it was at the time when the first 100 stepped through the door.

There's a bunch of things going on, I just think we're still early going, and not only have we sort of tackled the first 500 of them, we're far and far from saturated in our opportunity in the global that we already have.

And that's why we have the type of sales organization and allocation of resources the way we have.

Because, we view those globals almost as markets unto themselves.

That's how rich an opportunity they are and how much upside we have to sort of gain more share of wallet, if you will, in those places.

When we go into a new geo, the first question we ask is how many Global 2000 are in that geo, and that is usually the deciding factor as to whether we go into that market or not.

And there are still a lot of markets out there that have Global 2000 where we're not there yet, and it just takes time to get there.

And we'll get there eventually, but we're going to do it at a measured pace.

Great.

Thanks, guys.

Congrats.

Steve Ashley, Robert W. Baird.

Hi.

Thanks for squeezing me in.

At your analyst day, you laid out your broader vision help us understand -- that included ultimately pushing into business management.

Can you give us an update where that initiative might stand today?

Business management is a whole group of capabilities that are sort of above the layer of the operational workings of service management.

So it has things like project portfolio management, our government's risk compliance, all our analytics capabilities we announced last year at Knowledge.

A financial management initiative that's something that we're going to showcase at the Knowledge conference coming up, because financials are sort of the third dimension.

The first dimension being assets, and the second one being operating data.

So, there is going to be really -- business management, I see that as another area like ITOM where there is an enormous spend opportunity for us to access.

We're just getting started in really beginning to understand and really get footholds in those opportunities.

So, we're very opportunity rich as a company, which is exciting going forward.

We have many places, and if you do come to Knowledge, we are going to showcase as much as we can in the time that we have available to do so in a lot of these places like business management.

You are going to see business management, you are going to see service management, you're going to see operations management, you're going to see application development.

All those things.

So it will be a much bigger view of ServiceNow than you'll have ever seen before.

Thanks so much.

Derrick Wood, Susquehanna International Group

Thanks.

Congratulations on the quarter.

Pretty impressive 60% growth on $1.4 billion in bookings.

But Mike, you mentioned briefly that sales cycles are longer, these deals are getting bigger.

Obviously as you move into more domains, the deals are going to get more complex.

Can you just frame out a little bit on how that changes sales cycles, or seasonality, if at all?

Or do you still go-to-market kind of on a domain by domain basis and hence you wouldn't see much change in the sales cycle?

So, what I had said is I was reminding people that these are long sales cycle.

They're not getting any longer, but they are not short, is my point, there.

I think you're going to see the normal seasonality that you see in most software companies, that we tend to a very large Q4's and a fairly big Q2.

Q1 and Q3 are the more challenging quarters.

And that's been the same that we've always seen and I think that will continue.

As we get bigger, you'll see more seasonality in Billings with that Q1 being a down quarter, and as you can see from my guide, we are guiding slightly down from where we were this past quarter.

Great helpful thank you

Tim Klasell, Northland Securities.

I just have one quick question here, and sort of a follow-on from some of the prior questions.

We're noticing amongst your install base that as you become broader they are beginning to hook in some other solutions around operations or security to trigger a service request.

Are you noticing that, and are there are any particular partners or integrations where you think you're providing extra value?

Yes, that's actually a very good observation.

As I said earlier, fundamentally when you strip away the veneer and the jargon and the rhetoric, we are a structured workflow and orchestration platform.

So, essentially we manage work, and we change the way work is managed.

Work these days doesn't come from people, it comes from systems.

So, for example in the area of security, when security events are [a raised] by something like splunk, for example, which is a very good partner of ours it automatically triggers a structured workflow on ServiceNow.

Because that's how the systems are working.

If something happens in one part of the organization and it triggers actions and orchestrations in another part of the organization.

Once you start looking more closely you see endless opportunities for this sort of thing.

It can happen at a very high level, where you get very, very close to the business itself, or you get very deep in the infrastructure, like as related to security events, for example, that are very arcane in nature and actually difficult to understand.

So, it's actually the applicability of this core set of capabilities is very deep and very broad and if you stay involved with it you'll see more and more of this variety and diversity.

Okay, great.

And is there any way to monetize it, or is it something that customers sort of expect to be part of the platform?

We are monetizing, right?

Because we are monetizing on the ITOM side, on the basis of devices or nodes, and on the service management, we're monetizing on the user.

So any time more devices, physical or virtual, are involved, we gain and more people get involved; we gain.

Eventually everybody in the enterprise will be touching ServiceNow, and our whole game is just to increase the density of that service fabric, where people are using us for more and more things to get through the day.

Okay, so expanded use.

Very good.

Thank you.

That's very helpful.

Phil Winslow Credit Suisse

Hi, this is Siti Panigrahi for Phil.

I wanted to ask about orchestration and discovery products.

Just wondering what kind of traction you're seeing with the newer install base, and what sort of opportunities we should think about going forward?

Thanks.

That was about 10% of our business in Q4, I believe.

As I mentioned earlier, it had almost 200% growth.

Much faster growth than the rest of the business, and it's happening without it being a core focus of our sales organization.

We're actually going to put a lot more wood behind that arrowhead.

We think the addition of ServiceWatch, the product that we acquired from Neebula last summer is going to help really charge that business, because it's going to become so much richer in value as a function of that addition.

So, we're very excited to be in that business because the ServiceNow platform is just an ideal leverage and jump off point for us to be in that feature set.

Thank you.

There are no further questions in queue.

I'll now turn the call back over to Mr. Scarpelli for closing remarks.

Thank you.

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

Thank you for joining us today.

Ladies and gentlemen that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.