ServiceNow Inc (NOW) 2015 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Q1 2015 ServiceNow Earnings Conference Call.

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

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

(Operator Instructions)

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

I would now like to turn the call over to Mr. Mike 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 at Investors.

ServiceNow.com.

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

These statements are subject to risks, uncertainties, and assumptions.

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

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

Thanks, Mike.

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

Total revenues for the first quarter were $212 million.

The quarter was marked by solid demand from our existing customer base with a 97% renewal rate and a 32% upsell rate.

We booked eight new transactions with annualized contract value above $1 million.

The Company now has 168 customers with annualized contract value in excess of $1 million.

We also landed 23 net new Global 2000 customers, bringing our total to 545, including Illumina, a global leader in gene sequencing and array-based technologies; Southern Company, a premier energy company based in Atlanta; the National Bank of Canada; Wolseley, a leading supplier of building materials; and Lennar, one of the nation's largest home builders.

As our customers expand their use of service now, we see them using our solutions not just to support the business, but increasingly to actually run the business.

H&R Block Canada stood up a new application on ServiceNow during the quarter just in time for tax season.

The company used ServiceNow to support their annual field office readiness, providing the executive team with a dashboard view of the work associated with preparing 600 stores for tax season.

The success of that program kicked off additional ServiceNow projects they will be pursuing over the coming year.

The United States Postal Service created a Stamp Fulfillment application on ServiceNow with Accenture Federal Services in just 21 days.

That application allows the agency to better manage the inventory of more than 20 billion stamps based on local customer demand at 34,000 retail locations.

This helps the Postal Service minimize the disposal of unused stamps, directly impacting the agency's $7 billion in stamp sales.

During the first quarter we launched our latest software feature release, extending service management across the enterprise to marketing, legal, and finance.

This release allows business functions to configure their own services and work flows with dedicated analytics and dashboards.

For many of our customers the objective is to create an integrated service experience across all departments and enterprise functions.

We helped AAA Allied Group reduce their reliance on e-mail across eight different departments.

The customer said that any interaction with the business will go through ServiceNow.

Their marketing department is using ServiceNow to manage creative service requests, taking that service out of e-mail to provide a more efficient and structured work flow.

Our latest release also provides a new financial management application to help organizations better understand the costs associated with delivering a service.

ServiceNow financial management gives CIOs an interactive dashboard that maps IT costs imported from general ledger due to consumption of services, allowing them to drive dynamic cost allocation rather than an arbitrary IT tax.

During the quarter we also acquired a company called Intreis to help us develop our solutions in the governance, risk, and compliance segment.

We see an opportunity to change the way organizations manage risk by running their compliance process on ServiceNow.

We've already helped the Emergency Services Telecommunications Authority in Australia transform their audit and risk function.

According to the customer, this initiative reduced the collection time for critical compliance data by 93%.

Before closing, please be advised of our upcoming annual conference Knowledge15, which will take place in Las Vegas next week.

We expect approximately 9,000 attendees to share experiences and learn how others achieve success with ServiceNow.

At Knowledge15 we will also be hosting CreatorCon, our first conference specifically aimed at application developers.

CreatorCon is part of a broader launch of programs to build a community of highly skilled ServiceNow developers.

This will be open to customers, partners, as well as ISVs.

To help those partners and developers monetize their work, we will also be launching the ServiceNow Store.

Store is our marketplace for applications and services developed on the ServiceNow platform.

Together, these programs boost the availability of apps and services to help customers extend the value of ServiceNow across their organizations.

And finally, as part of Knowledge15 we will be holding our annual financial analyst day on April 20.

This event is highly recommended to ServiceNow followers and investors and we look forward to seeing you there.

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

Thank you, Frank.

During today's call we will review our first quarter financial results and discuss our financial guidance for Q2 and full year 2015.

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

All financial figures we will discuss today are non-GAAP unless stated otherwise.

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 at Investors.

ServiceNow.com.

Our total revenues for the first quarter were $212 million, an increase of 52% year over year and 62% in constant currency.

Subscription revenues for the quarter were $180 million, growing 53% year over year, and professional services and other revenues were $32 million, growing 48% year over year.

At the beginning of 2015, we changed our customer count methodology.

Previously, as defined in our SEC filings, we counted all production instances as separate customers, meaning some logos were counted as multiple customers if they had more than one instance in production.

Under our new methodology, we count each logo once regardless of the number of production instances.

Although individual production instances are often separate sales cycles and sold by different sales reps, we feel that this new methodology is more intuitive and gives better insight into our business and key operating metrics.

This change in methodology impacts total customer count, upsell rate, revenues per customer, number of customers paying greater than $1 million in ACV, and average contract terms.

Each of these metrics have been restated for historical periods and are available in our quarterly IR deck at Investors.

ServiceNow.com.

Our total customer count excluding express customers was 2,461 at the end of the first quarter under our new customer count methodology, and was 2,872 under our previous methodology.

Our upsell rate was 32% for the quarter under our new customer count methodology, and 25% under our previous methodology.

Our total revenues per customer for the trailing four quarters were $345,000 under our new customer count methodology, an increase of 21% from the prior year.

Our total revenues per customer for the trailing four quarters under our previous methodology was $298,000.

We now have 168 customers under our new customer count methodology that pay us more than $1 million in annualized contract value, up 75% from 96 in the same period last year, and up 10% from 153 in the previous quarter.

Under our previous methodology we have 143 customers that pay us more than $1 million in annualized contract value.

Our average contract terms for new customers, upsells, and renewals were 29.7, 22.5, and 23.6 months, respectively, under our new customer count methodology; and 29.6, 20.3, and 26.3 months, respectively, under our previous methodology.

Our annualized contract value per Global 2000 customer was $746,000 for the quarter, up 34% from the prior year and up 4% from the prior quarter.

Total revenues based on geography were $149 million in North America, $48 million in EMEA, and $15 million in Asia Pacific, and other representing 70%, 23%, and 7% of total revenues, respectively.

Our non-GAAP billings, calculated as revenue plus change in deferred revenue from the statement of cash flows, was $268 million in the quarter, increasing 48% year over year and 59% in constant currency.

As a reminder, we price and invoice in local currencies.

Approximately 30% of our first quarter billings were in foreign currencies.

Our weighted average subscription, billings term, was 11.8 months for the first quarter compared to 12 months in the first quarter of 2014.

In the first quarter, subscription gross margin was 81% compared to 76% in the prior year.

Professional services and other gross margin was 9% compared to 10% in the prior year.

Overall gross margin was 70% compared to 66% in the prior year.

Operating margin was 3% compared to negative 5% in the prior year.

We ended the quarter with 3,047 total employees, an increase of 944 from the same period in the prior year, and an increase of 221 from the prior quarter.

Full details of our quarterly headcount adds by department are available in our quarterly IR presentation.

Net income for the first quarter was approximately $2 million, or $0.02 per basic and $0.01 per diluted share, compared to a net loss of $11 million or negative $0.08 per basic and diluted share in the prior year.

Our basic weighted average shares outstanding was 152 million, and our diluted weighted average shares outstanding was 166 million.

During the first quarter we generated $67 million in cash flow from operations, and we used $27 million for capital expenditures, resulting in $40 million in free cash flow.

This compares to $13 million of free cash flow in the same period of the prior year.

We ended the quarter with $999 million in cash, short-term, and long-term investments.

Our total deferred revenue balance was $463 million at the end of the first quarter, up 10% over the $422 million reported at the end of the prior quarter.

Let's turn to guidance for the second quarter and full year 2015 based on current FX rates.

For the second quarter 2015, we expect total revenues between $237 million and $242 million, representing year-over-year growth between 42% and 45%.

We expect subscription revenues between $192 million and $196 million, and professional services and other revenues between $45 million and $46 million.

Our professional services and other revenues outlook includes $11 million related to knowledge, with the related expenses of $23 million recorded in sales and marketing.

We expect billings between $260 million and $265 million, representing year-over-year growth of 38% and 41%.

We expect subscription margins of 80%, professional services and other gross margins excluding knowledge of 15%, and overall gross margins of approximately 70%.

We expect an operating loss of approximately $5 million, including net expenses of $12 million related to our Knowledge conference.

We expect free cash flow of approximately $40 million.

For the full year 2015, we expect revenues to be in the range of $970 million to $1 billion, representing year-over-year growth between 42% and 47%.

Our total annual revenues estimate consists of subscription revenues between $820 million and $840 million, and professional services and other revenues between $150 million and $160 million.

We expect approximately 5% operating margin for the year and to end the year with approximately 180 million fully diluted gross shares outstanding which includes all basic shares, stock options, and RSUs outstanding before applying the treasury stock method.

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

(Operator Instructions)

Jennifer Lowe, Morgan Stanley.

Mike, the first question I had was for you, and in particular I wanted to look at the billings calculation methodology a little bit.

I think a lot of us in the past have been looking at it as a change in deferred off the balance sheet, and I think that was what was in guidance, too.

This time around it looks like now you're switching to look at it on a cash flow basis.

So one, I just want to verify that's how you're going to be thinking the about it going forward.

And two, can you talk a little bit about why you look at that as being a more appropriate way to calculate billings?

Sure.

So this quarter, FX really impacted us quite a bit given the movement you saw.

I think the euro was around 1.21 at the end of December.

It is down to 1.08 now.

And we saw a lot of movement, remember, 30% of our billings are in foreign currencies as well.

Our international operations, our functional currency, is the euro so that really impacts us quite a bit.

And as a result we think it's more meaningful to factor in that FX, and you pick that up in the cash flow statement that way.

And going forward that is the way that we will do it.

Okay, great.

(Multiple speakers)

Historically, [there's not that] much of a difference between the two.

Okay, and then maybe just rolling that forward a little further, I know in the past when you have given the full-year guidance, you have talked a little bit about the assumption of FX headwinds on revenue.

Can you just give us a little bit more color on what you think the FX impact is baked into the billings guidance for Q2 and then the full-year revenue guidance?

So, in terms of we took down our internal plan for the balance of the year, approximately an additional $6 million based upon just our backlog in deferred revenue for revenue, that doesn't -- there's also, remember, a big chunk of our new business is in foreign currencies, and that's reflected as well in the guidance that we gave.

But specifically for backlog and deferred revenues, about another $6 million as of March 31 that we took out of our revenue plan.

In terms of the billings, I don't have that exact number.

That's based upon current FX rates today, the billings guidance that we're giving.

Great.

Thank you.

Walter Pritchard, Citi.

Hey Mike, just questions for you here.

Wondering, similar to Jennifer's question on Q2, one kind of rule of thumb I might use is that the currency impact for billings on Q1 would sort of roll into Q2 and you'd see a similar impact Q2.

First of all, does that make sense?

If the FX rates stay where they are without moving such that our weighted average exchange rate and our balance sheet rate at June equals what it is at March 31, there will be no impact.

There will be impact on a year-over-year basis, though.

A year-over-year basis, but I mean in terms of the guidance that we're giving.

Okay.

And then, Frank, for you, just on the app store and ISVs monetization, or I guess as a customer of your platform and so forth, can you talk about how you're thinking about how important that app store is to getting ISVs on the board and generally how important ISVs are as you think about developing your platform as a revenue opportunity in the future?

So they're very important because we view the ISV strategy as a way to really increase the breadth and depth of our platform deployments in large enterprises all around the world.

I mean we've been pretty good at really spreading our platform through the sale of our own applications and a lot of our partner activity and so on, but we need -- content is what drives platform adoption.

We always say we're applications led, we're platform driven and enabled, so content is really, really key.

One of the ways we really think we're going to unleash that torrent of content is through the ISV community.

So the Store is really a monetization feature.

I think we have very good routes to market for ISVs in terms of our conferences and our programs and so on, but they have to have the ability to get their content in front of our customer base, and then be able to monetize.

In terms of revenue, yes, there is a revenue component in terms of selling through the Store, but that is not principally how we're going to get paid.

We're going to get paid on the platform licenses; effectively, you can think of them as run times.

Every time a third party [piece of] content is sold, either that will trigger in most situations incremental platform licenses as well, so that's how we're thinking about it.

Okay, great.

Thank you.

Michael Turits, Raymond James.

Michael, thank you very much.

Mike, I just wanted to come back to the currency question.

You told us what the incremental was but can you just be specific about what is the year-over-year revenue headwind total that you expect for 2Q and for the year that's baked into guidance?

And then the way I calculated it, this current quarter, you came in maybe twice what I would have expected.

So is there something that would have caused that to be?

So remember, going into Q1 guidance, we had already told people that we took our revenue down for FX.

Cumulatively, from when we started planning in the end of Q3 2014, we've taken out almost $40 million out of our 2015 plan because of FX.

But that was based upon where the rates were back in September.

Specifically, when we went into the Q1 call, we -- at that time the rate had already dropped to 1.12, and we had already lowered our guidance for 2015 partly on that.

And as I just mentioned, we just took another $6 million out of our number for the balance of this year as a result, specifically FX associated with our backlog and deferred revenue we have, but there's an incremental piece based upon the new business that we plan on bookings because we quota people in local currencies as well, too, around the world.

Okay.

Is it possible to just tell us what the revenue headwind is total year-over-year?

Not where you were, but versus -- where you were versus what the revenue head wind was?

(Multiple speakers)

Year-over-year it is going to be about $40 million.

Ballpark.

Which is conservative, I think it's actually a little bit higher than that.

All right.

We'll take more offline.

Thanks.

Brent Thill, UBS.

Mike, just for Q2 on the billings guide, is there anything else other than FX we should keep into mind in terms of these sequential Q1 to Q2 guide down on billings?

I'm just curious just as it relates to the big deals.

You were down year over year on the deals over $1 million.

Is there anything that you are seeing that's different this year in terms of how those deals are coming through?

And I would assume the pipeline is pretty good for the large deals, but if you could give us a little more color that would be helpful.

You know, as we've told people before, these are very long sales cycles, and they tend to be lumpy.

We saw our linearity in Q1, it was very back end loaded.

There were a number of deals that slipped, as we always have, that slip from one quarter to the next, and we're off to a fast start this quarter but we like to see a little bit more into Q2 before we change our outlook going forward for the balance of the year.

We're comfortable with the guidance we gave.

Okay.

Thank you.

Kirk Materne, Evercore.

Mike, just maybe to follow a little bit back up on Mike Turits' question just on the year-over-year hit from FX, if I think about, obviously [3 million's] about 4% headwind, obviously this quarter is almost a 10% headwind on revenue.

So is the assumption that the gap between reported (inaudible) currency should close over the course of the year assuming that the euro doesn't get materially worse?

Is that a fair way of thinking about it so that we didn't see as big a gap between, say, reported earning -- or reported revenue, reported billings and constant currency?

So you're still going to have constant currency headwinds when you do the comparison for future quarters.

But our guidance that we're giving, if we don't see deterioration in the euro, we should be more in line.

Okay.

And just in terms of you guys obviously had an incredibly strong finish to the year, you mentioned the first quarter was a little more back end loaded seasonally, was there anything that -- did you guys get off to a slower start, or is it just as you [coming out] it's just more as you guys get into longer, bigger deals, just the deal cycles extend and just have quarters that might be more back end weighted?

This is Frank.

We definitely -- as Mike said, we were off to a slower start because we had a hyperbolic Q4, which is great but unfortunately we hit January in a lot of business gets pulled forward, and it just takes time for the sales teams to build the pipeline back up so that starts pushing the business all the way to the back end of March as well as past it.

We had quite a bit of deals slip but the good news is actually that, literally when we turned the corner into April, that all started to close in rapid fashion.

We've already closed more than half in the first two weeks of April [of what pushed] and we expect to get most or all of it before this month is out.

So we're not terribly concerned.

The quarterly patterns are sometimes difficult in our business because our sales cycles are long, and it's much easier to sort of view things in six month increments because it normalizes out this kind of aberrations.

Our customers don't really care whether they do it in March or April.

Obviously our sales teams do because that's how we incentivize them.

But obviously we can't get too excited about it.

We think that structurally, our business is very, very sound but sometimes things bounce on this side of the line versus that side of the line.

Our deals, we don't lose them, they don't go away, and we do close them, but sometimes they just bounce outside of the quarter.

So we're feeling good about the way our business is developing but we definitely saw quite a bit of friction in Q1 and it's kind of hard for us to know is it because we were a little light on the mature pipeline, or whether that was due to other factors, and we're reading the tea leaves a little bit looking at other companies, what they were experiencing, but on the whole, especially what we saw in April, we're feeling quite good about it.

Thanks very much.

Greg Dunham, Goldman Sachs.

I guess following just up on that statement, how would you characterize the pipeline today looking towards the end of the year versus what it was a year ago?

This is Frank.

Actually feeling much better about it going into April versus going into January.

So from that standpoint, Q1 is, as those of you that followed us ever since the IPO, it's always a tough quarter because Q4 is so strong, and that's just the nature of our business.

But yes, the June quarter is our historical Q4 when our fiscal year was June.

So both the Q2 and Q4 have always been our strong seasonable quarters, so we're feeling good coming into this quarter as well as the back half of the year.

And then Mike, just one more from me.

I think what's a little confusing is the FX, the constant currency adjustment.

30% of your billings, or revenues, excuse me, or both, actually, are international.

Even if I look at the euro, the depreciation was less than 20%.

So I don't get how you get a 10-point headwind in the quarter given 30% mix and given less than 20% move in the euro.

Can you help walk through where the delta is?

All I know is the detailed calculation that we have to support that.

And you can see that coming through the cash flow as well, too, by doing the movement there.

And the cash flow is at the average rate.

Okay, well we can follow up offline on that.

Thank you.

I'm happy to.

Raimo Lenschow, Barclays.

Frank, it's the first quarter where you kind of show up like a normal software company, and everyone is now kind of a bit confused, but I would say it's kind of quite okay to be normal.

Just quick question: if you think about the change in the momentum in Q1, is it really like plain vanilla?

You had a massive Q4, and so the sales pipeline was a little bit empty so everyone [stratted] again, or did you do any changes in terms of getting the sales guys off to run 10% faster or focus more on different deal sizes or whatever, or is it really like this is Q1, let's get on with it?

I appreciate you asking that question, because we also had a fairly sizable sales realignment rework come into the new year.

That happens every year but this particular year, more than half our reps ended up with new account assignments and what that does is it really dramatizes the effect that we already talked about because people knew they were going to lose their accounts, so they're closing like there's no tomorrow.

But they're also not billing the pipeline because they don't know what they're going to get.

So the lower you go into the organization, the more they will point to this particular dynamic as being very impactful to the Q1 dynamic, but it's sort of one-time.

The reality of our business is we go through a lot of sales reorgs because the organization expands so rapidly.

We have to subdivide territories, we've really dramatically increased the focus on the commercial markets.

So there were a lot of moving parts between December and January.

And the net effect of that was definitely that we were like the mature pipeline coming into the quarter so that was an additional factor that was at play.

And sorry, one follow-up there, Frank.

So if you look at the normal sales org and reorg, it's kind of one quarter looks really ugly and then the next quarter it kind of comes back together and then you're back on track in Q3, Q4.

Is that kind of the right way to think about it?

Well, it wasn't really ugly.

This is still our third best quarter ever.

I wouldn't consider that ugly at all.

But I do think that effect of the reorg is a one-quarter event.

And in that part I'm agreeing with you.

Okay, well I'll call it messy, whatever.

Okay, sorry.

Okay, thank you.

Matt Hedberg, RBC Capital Markets.

Frank, I've got a product question on performance analytics.

When we talk to customers and partners it seems to be resonating as a killer app or feature.

Is there a way to think about the ASP uplift of that product and maybe where you're seeing some adoption?

Our standard pricing for PA is 20% on our subscription per user fees.

It is an important capability for us.

Strategically, we're really moving performance analytics away from standard business intelligence, data warehousing approaches where people forklift the data to another data structure, and then do the reporting over there.

We're really focusing that technology towards real-time reporting.

We think that's going to be super differentiated for us because we are sitting on the data as it changes, and be able to represent that in real time or near real time is going to become a very, very important part of our strategy going forward, so performance analytics is a key component.

We acquired that technology about a year and a half ago now, almost two years ago.

We have had good take up but we're just in the beginning stages of really running this play.

It is going to get much more significant going forward for our customers and the type of applications people are implementing.

That's great, and then maybe just a quick follow-up, maybe I missed it but did you give the number of HR or facility wins in the quarter?

No, we didn't.

One of the things that we did coming into the year is that we didn't change our pricing.

We do have different SKUing now.

We are now just selling one service management SKU, and regardless of whether it's IT HR or any other flavor of enterprise service domain, it's all the same price.

So we don't have the same visibility in the number that is specific to HR facilities because our customers are buying them, and they want to have the ability to assign them to whatever department they're going to be using them for.

So we don't know precisely how they're using them, whether it's HR or IT or any other flavor.

I think I talked about in this previous calls, but it's a very important part of how we go to market is to sell it as service management and not specifically to IT or HR or any other flavor.

We really want our customers to embrace service management for the enterprise, and then they can decide how they allocate it to different service domains.

All right, thanks (multiple speakers).

But I will tell that you HR continues to be a very robust, very, very high-activity area for us, and that's going to continue.

That's very exciting for us.

Thanks.

Steve Ashley, Robert W. Baird.

Matt Lemenager on for Steve.

I had just a quick question on the Express product.

How quickly does that product deploy versus the flagship product?

And maybe could you give us a general sense between the mix of larger companies and smaller companies that are adopting?

This is Frank again.

We sort of view Express as a days and weeks order of magnitude, versus weeks and months for what you call the flagship product.

That's really the enterprise product.

Express can really go in very, very quickly, because all you have to do is really populate your users and establish their credentials, and you're off to the races.

There's really no design, no process workshop, all those concepts, they're not there.

It's probably supposed to be used out of the box so the moment you're defined in the system, everything is on, and you can start using it.

That's why the product is called Express, because it's really an order of magnitude faster in terms of standing it up.

The vast majority of Express users really are, obviously are smaller enterprises.

There's some mobility between the enterprise products and Express.

We've seen customers go both directions, which is actually a really good dynamic for us, because we've seen a bunch of them graduate into the bigger product.

We've also seen some of them fall out and needing to go to the smaller product so we're really happy to have it.

Thank you, Frank.

Kash Rangan, Merrill Lynch.

This may be a bit of an ignorant question since I'm relatively new to your stock, but it looks like there is a changing seasonality to your business.

I'm going back over the last three years, if you just look at the deferred revenue sequential increase in Q4, it has been getting better and better.

So 2012 to 2013, to 2014, particularly in 2014, although the currency moved pretty severely against you.

You had well north of 20% sequential growth.

That's like 400, 500 basis points better than where you have been in Q4 in other years.

So consequently it's only natural to expect some seasonal -- some more seasonality going into Q1.

Is it really that, or when you look at -- of course, you don't share with us billings forecast for the year, but as you look at your billings target for the year on a constant currency basis, are there any changes to your expectations, even within a range, albeit?

Thank you.

Well, I will say that we, as I mentioned before, it was a very back end loaded quarter and a number of deals slipped into Q2 and we've closed a number of those, as Frank mentioned.

And so as a result there's two things impacting that.

There is the deals that got pushed as well as the FX, which is impacting us.

But absolutely our plan going into the quarter was to be a down quarter.

You don't see it as much in billings because we have a lot of contracts that we signed in Q4 that start January 1 which don't get reflected in our billings or deferred revenue but are in backlog going into Q1.

And I definitely expect as we get larger we will be no different than any other software company, and you will see the typical seasonality.

This is Frank.

Given the dynamic you're talking about, I said earlier we used to be a June quarter fiscal.

And obviously we changed that a couple years ago.

So that obviously means that Q4 is going to gradually become more prominent if you look at it from an historical standpoint.

(Multiple speakers)

I'm looking at your Q from 2012 to 2014.

There's a clear trend where the sequential growth near deferred revenue used to be 14%, 15% in 2012.

Now it's -- this Q4 of 2014 was 20% although the currency moved against you, so there's clearly a huge shift in you seasonality, it sounds like.

That's why I'm trying to dovetail into what you have been saying.

And I appreciate the detail you guys have been giving, but mainly (multiple speakers)

We also had such a record Q4 where a lot of deals were pulled from Q1 into Q4 with guys closing.

So no change with respect to your plan as a business for calendar 2015, I take it, assuming currencies hypothetically did not change, so you would not have changed your plans is what you saying.

For the year.

Okay, got it.

Thanks.

Wonderful.

Jason Maynard, Wells Fargo.

Hey, guys.

Can I ask maybe one thing?

And I'm sure you probably want another couple more billings questions I'm sure on this call, but if you can indulge me for one second.

Is there anything else going on, Mike, in terms of seeing some of the trends towards the add-on sales just ended up getting billed later in the year?

I think you guys spelled that out on Q2 last year if I recall correctly.

But I'm just curious, is that trend sort of normalizing, or do you see that as you increase cross-selling of additional products, continuing to push more and more?

And is that the seasonality, effectively, that you're talking about?

Thanks.

No, I think, once again, I think what's being reflected in Q1 and the seasonality you are seeing is that Q4 was such a big number, and we -- our sales reps knew they were losing a number of accounts getting redistributed so they pulled in every single upsell and deal.

That's really what happened, and there were a number of deals as well that pushed from Q1 into Q2 because of the linearity in our quarter, which we have closed a number of those already.

Okay.

And then, Frank, just a question for you.

Your comment around HR case management now, having a single service management SKU, I'm just curious from your standpoint, you guys have been talking about, I'd say a broadening out of the use cases, you called that marketing, obviously HR.

How are you feeling about just sort of the broader applicability into other areas, even like in the service -- external services, [tech support], things like that where it's not just the traditional internal help desk ideas?

Thanks.

That's a central theme of our entire strategy is to really drive service management to an enterprise approach.

That's also one of the reasons why we didn't want to sort of segment our business in terms of all these domains, because there are tons of other service management applications that really don't sort of fit squarely on a functional department or function.

It can just be a single service that's being provided.

One of the things that we've also included, we're going to show that next week at our conference, is a template for customers to actually build their own custom service applications, and it's so highly abstracted and templated that you can auto-generate most of the service management application because there is tons and tons of use cases out there, and we cannot support that all.

We're just picking some of the big service domains out of there to prime the pump because we know they're sizable, and there's a lot of opportunity there.

But there's lots and lots of use cases, which is why we went through this templated automation approach, to sort of help people with the tooling to do that with really no coding skills whatsoever to be able to stand up those kind of services, why you have case management, knowledge management, requests, you get a catalog, and everything is we stand that up automatically for our customers.

So the whole notion of managing service is very, very broad-based inside the enterprise.

It's absolutely not limited to the categories that we've mentioned.

Great.

Appreciate it.

Thank you.

Brent Thill, UBS.

Just a quick follow-up as it relates to what happened with the sales force.

I had a number of questions from investors that were asking me to what degree are this quarter -- the change to this quarter similar to what you've done in the past, and in terms of the changes that you've made, are those now all settled in, and you're set for the year?

This is Frank.

We're certainly set for the year, but it's very unlikely that we're set for years, because of the rate of our business growth.

The rate that we're bringing on people, the service areas are getting denser and denser, meaning that the whole commercial market, we're much more aggressive in covering that now whereas previously we're very much skewed and biased towards the very large enterprise.

Now we have a whole organization now dedicated to the commercial accounts, the non-large enterprise accounts.

So this was, as we said earlier, this was a fairly -- this is a very large reorg, and the net result of it was that a lot of people changed their account responsibilities, more than half of them, and that's just big.

It creates a measure of discontinuity in the overall process of generating activity and building pipeline.

Frank, is there a percent that you could put on, just ballpark what percent of the sales force you actually changed this quarter?

Yes, more than half ended up with new account assignments.

In just net new, and then overall that would equate to --

No, so if you look at all the accounts that we had, 50% of those accounts had new sales people covering them, not necessarily new people we hired, but we reorganized and moved accounts around within both our existing sales people and new people that we hired.

The effect of that is that when people know they're losing accounts, they're going to take whatever they can off the table.

They'll leave nothing behind for the next guy.

That's natural behavior.

And obviously once that happens, the new guys have to start all over again, because nothing was left behind.

And when you do that at the change of the fiscal year, it's exacerbated because everybody is in accelerators, and they're putting everything and anything into it to make sure they maximize their yield on the investment that they've made in prior months to develop that business.

So that's the dynamic at play, but as I said, it's a one-time thing.

Some measure of that we have every year because of the rapidly growing nature of our business, but this was very pronounced in this particular transition.

Okay, so if you just roll that forward, then you would anticipate maybe a quarter or two for that to settle in before you feel like you've got -- you're back to full capacity?

Yes, we're past that now.

Everybody is locked and loaded, and so as I said, we feel much better about the way the pipeline has been developing coming into April versus coming into January, as you related to the numbers that we have to generate.

Great.

Thank you for the additional color.

Abhey Lamba, Mizuho Securities.

Mike, not to beat a dead horse here.

Just going back to the currency question for a minute, based on what you used for your guidance for the quarter, how much was the additional impact on 1Q revenues and billings?

So first quarter revenues themselves were impacted by -- it's actually, if you look at the December 31 rate, our revenues were down $2.7 million in the quarter as a result of where the rate ended up being.

In terms of billings, we don't really try to forecast our billings based upon a forecast currency other than the existing -- other than the rate it is when we give our guidance.

And so I can't give you that number, specifically what you are asking for on the billing side.

And unfortunately, the billings is based upon the timing of your invoicing to customers as well, too.

And so that can skew quite a bit as well.

If we had a lot more billings the beginning of the quarter, before the rates fell, it would have been a much -- it would have been a higher number, and if they're skewed towards the end of the quarter when the rates had fallen quite a bit, you would see a lower billing number.

Got it, thank you.

And really quickly, the deals that have slipped from the quarter, were they in any particular region or industry [work co], or have any [part of] macro take-aways from those, or was it all related to your sales force reorg?

And a follow-up to that is essentially what are you modeling for your close rate for second quarter?

I understand your pipeline is very strong, but what are you thinking of close rates versus historical Q2s?

That's it for me.

In terms of the deal slip, that's really an immaturity of pipeline.

Customers don't really care whether it's March or April.

And we do not want to resort to unnatural acts to force these things to happen inside March because they're going to cost us a lot of money, and as we proved to ourselves in the first two weeks of April, we've already closed more than half of them, and under normal conditions.

So that's all fine, because our relationship with customers are 10, 15, 20 years.

So a couple of weeks is not going to make a whole lot of difference and we're really happy with the way that is going.

And it's very much a function of how much mature pipeline we have coming into the quarter.

[And tertiary you're close] I don't have an answer for you on that question because that's not something that we typically discuss to call.

The deals that kind of slipped, though, were both in North America and Europe than the ones that have subsequently closed, so there was no specific industry.

They were kind of spread across a number.

What I will say about close rates is we have an exceptionally high close rates in general.

What happens to us, our biggest number one competition is always the push, because these are large transactions.

It always depends on whether a customer has the resources and the priority organization to undertake it.

That is often the driver of why a deal doesn't happen in the quarter when a customer just isn't ready.

We don't lose them to competition.

The deals are not going away.

But it's not untypical for us to see transactions not just move one quarter, but move two quarters and sometimes even three quarters because they have to be ready to engage on the overall deployment.

And it's not a small commitment.

These are really, really big rollouts and go-lives.

So that really is the nature of our business.

And then you add to that that the March, April dynamic is not super compelling compared to December, January, and this is how it plays out.

We're actually kind of surprised how strong April started, because it was almost a complete reversal of sentiment from where we were in late March.

So that was kind of a nice thing to see.

Greg McDowell, JMP Securities.

Two quick questions.

First for you, Frank, since we're only three to four days away from the kickoff of your user conference, I was just hoping you could preview some of the main themes and messages you want to get across to the user base.

And then, Mike, I have a second part question for you.

Yes, I don't know how I can do that in 30 seconds or less.

We are going to record our keynote presentations.

And I really would encourage you to go and watch those, because we're really laying out our case for what's possible and what you should aspire to.

And the biggest thing about ServiceNow, the platform of fortune opportunity to really change the way people work away from unstructured messaging approaches, which is really e-mail and voice and so on, getting to systems, structured data, structured work flow type of approaches.

The opportunity is just immense there in terms of productivity.

We really find there is an incredible productivity frontier in large institutions and enterprises.

One thing you will also see us do next week is release a research study that we've undertaken that has attempted to quantify what the effect of that is in terms of time lost and time wasted in organizations.

And it is of such an order of magnitude that we believe that CIOs and senior executives in general will get a high level of priority around dealing with this.

And so much of the money also flows to the customer side of the organization, where we touch customers on the inside, we tend to be generations behind in terms of the opportunity to automate and streamline and really achieve huge productivity gains.

So that's what the conference is about.

There's going to be a lot of announcements.

We're going show a ton of new product in all our categories, in operations management, on the platform, as I mentioned, where we have the Store.

We have a brand-new developer IDE coming out.

And of course in service management, the financial management app that I talked about in the prepared remarks.

So there's a lot of product that is going to be released and previewed at the conference.

But the mega theme is always around how service management is really changing the way people work in institutions and enterprises.

That's helpful, Frank.

And one quick follow-up for you, Mike, is I think a question we're going to get a lot tomorrow is if all these slipped deals have already closed in Q2, or early in April, why does the Q2 billings imply such a slowdown on a constant currency basis?

I mean, you grew billings 59%, constant currency in Q1, and I know on an as-reported basis you're guiding to 38% to 41%, but even assuming another 10-point currency headwind, we're talking about 48% to 51%.

So it would seem like there would be the potential, with some of these slipped deals already closing, that there could be some acceleration on a constant currency basis instead of the decel that you have guided to.

So I was hoping you could expand a little bit on that.

Well, the billings guidance, you remember, a lot of the billings that we give guidance for is coming out of what's in our contracted backlog today as well as the renewal cycle that we have with our customers.

That's where the bulk of it comes versus new business.

And so even if you have deals that push from one quarter to the next, that doesn't move the billings as much as our backlog billings and renewals.

And the guidance we gave is based upon what's in our backlog renewals, and it factors in those deals slipping into this quarter.

Okay, thank you.

Justin Furby, William Blair & Company.

Frank, I wanted to back to the reorg.

You mentioned that more than half of the accounts saw more change in terms of assignments.

But what did that look like a year ago in terms of percentage?

Was it 10%, 20%, 30%?

Just trying to get a sense for the magnitude of how pronounced it was.

And maybe you've said this, but why was it so pronounced this year versus last year?

And then, Mike, I've got a follow-up.

I really can't quantify what the difference is because I just don't know.

I just know that this was viewed by our sales organization as huge in terms of the effect that it had on sales activity development and so on.

Why was it huge?

It's a very profound reorganization in terms of us allocating our resources much more deeply and much more broadly in places where they hadn't been before.

We have an entire commercial account organization now.

A lot of people have been moved around.

A lot of global account organization.

Because we have added so many people, there's far fewer account names behind our reps [names them] were there before.

So we have narrowed their focus considerably, whereas before they might have had 15, maybe they now have five, for example.

So those are really, really, really big changes in an organization.

It obviously has a good-sized effect on activity development, but we don't want to dwell on it either, because the way salespeople operate, that's going to take care of itself in fairly rapid order because they've got to eat.

Okay, and then, Mike, the billings guidance, if rates would have frozen when you gave guidance in late January, would you have still beat your guidance, your billings guidance for the quarter?

I'm just trying to get a sense --

Yes.

Okay.

And is there any change, when you look to Q2, is there any change in how you're approaching the guidance?

No, it's the same approach, how we established our guidance going into Q1.

We're applying the same methodology.

Okay, great.

Thanks very much.

(Multiple speakers) the rates in effect now.

Got it.

Thank you.

Tim Klasell, Northland Securities.

Yes, just a quick one here.

As we look forward, do you plan that given the growth rates that you will do the sales force reorg at the same magnitude next year and following year so we should sort of plan in that sort of seasonality, or was this year a little bit of -- a little more exaggerated than (multiple speakers)?

So what was really new this year is that the end of 2014 we hired a new VP of Commercial Sales for the Americas, and this reorg is moving a number of those people directly underneath him, where in the past all of that was rolling, the commercial and the enterprise, was rolling up under one person.

We also have, halfway through last year, we did hire a head of America's enterprise sales.

Both those two leaders report into our VP of Worldwide Sales.

That's what created the big reorg that was telegraphed out to people that was going to be happening in January of 2015.

And so I don't expect it to have that big of an impact in future years.

Great.

Thank you very much.

That's great color.

Karl Keirstead, Deutsche Bank.

Just a couple of cleanup questions.

Looks like there was a little outperformance on the gross margin side relative to your guide.

Could you talk through that?

And then also it looked like CapEx as a percentage of revs upticked a little bit.

Maybe could you offer a little color there.

Thank you.

CapEx, what helped with CapEx was actually the -- or I mean in the subscription margin was the exchange rates, one thing, and the other thing, just kind of delays and some expenses that we had within our data centers.

Remember, one of the reasons why we bill in foreign currencies is we operate data centers around the world, and we have expenses in foreign currencies, so we have a pretty good hedge in place there.

But a lot of our data centers, where they were kind of -- some of our international data centers are not even close to being at capacity.

So when the FX rates do strengthen the US dollar, you will see improvements in our gross margins, just due to some of those international data center costs coming down in US dollars.

And, sorry, what was your second question you asked, Karl?

Just on the CapEx, the percentage of revs looked like it upticked a little bit this past quarter.

It's really just timing of things happening.

As I said, for the full year we expect it to be roughly, I think we said about 9% of revenues for the full year is what we're expecting.

Got it.

Okay, thanks a lot.

Derrick Wood, Susquehanna.

So Mike, when I look at the 59% constant currency billings, and I think you said it was 66% last quarter, that doesn't look like much of a hiccup, but it sounds like there's a difference between bookings and billings, and bookings growth was probably, you know, lower than billings.

Is that the right assumption?

I haven't done the math to try to figure that out, and I'm trying to understand your question more.

Well, I mean you didn't see much of a slowdown in billings growth versus Q4.

But you're talking about deal slippage so I'm just trying to, you know, put the two together.

But a lot of the billings that we have has nothing to do with our current bookings, because a lot of our billings, as I mentioned, come out of our backlog which we've booked already.

Okay.

And then, I mean, Frank, as you gear up at kind of getting more aggressive and moving outside of IT, and maybe this is alongside the changes, some of the changes you're making in the sales force, but are you doing anything different in the go-to-market approach where you would look at maybe more specialist overlays, or working with partners in a different way to really help move outside of IT?

One of the things we've done in December is we changed our organization away from a functional single product, single market approach to a product line model where we really now have organizations that can move with multiple products against multiple products, multiple markets at the same time.

So we now have -- you can call them BUs, or product lines, that now have product leaders on them, and we really did that to be able to increase the focus on markets that otherwise would not get the quality of attention and focus and resources.

In particular, that's for things like IT operations management, a product like Express, they have their own resources, the platform now has its own organization.

So all those teams are going to be developing their own go-to-market kit with all these really driving the sales organization across a much broader front.

So that was a substantial change in how we internally operate.

But that will begin rippling out to the outside as well over time.

This is just starting on the inside and how we work on a day-to-day basis.

But then it won't be long because they are responsible for the go-to-market motions, and all the marketing programs, all the partner strategies, et cetera, that are associated with these individual product lines.

So we -- this is really a fairly substantial change, because it really broadens the approach for ServiceNow as a whole.

Before we were very much led by our service management product, because that's so dominant in the overall mix.

In order for us to make sure that the other products are getting adequate resources, that's why we went to this model.

Okay.

Thank you.

Katherine Egbert, Piper Jaffray.

Thanks for taking my question.

With respect to FX, if I can, is it just a direct FX impact?

Or are you seeing any areas where you price in US dollars, and maybe people are downsizing deal sizes because it's more expensive?

As I said, we pretty much -- in most international locations, we're pricing in local currencies.

The major places where we play in are EMEA is euros and pounds.

Australia is Australian dollars.

Canada is Canadian dollars.

Asia, in Singapore and others, it's principally in US dollars, but the bulk of our business internationally is Europe, and Australia would be number two.

Okay, thank you.

And then I'm just -- without giving any color on HR and facilities and some of the other areas, it makes your addressable market a little bit less clear.

What can you tell us about that?

Does your addressable market stay the same now that you have all one SKU?

How do we look at that?

Well, we view service management really as one market.

That's sort of the net that you should take away from this.

Certainly we can size this marketplace by looking at how many HR people there are in the world, and we've done that, and some of that you will find on our investor pages, exactly how we arrived at that.

But these are not structural changes.

These are really positioning changes.

Our customers are saying, look, I'm adopting service management, I don't know how many people I will have in IT versus HR versus any other service domain.

So for us to be able to buy one set of service management licenses and for us to be able to deploy them as our needs develop is much more attractive than having them segmented and fragmented into categories.

So that's why that happens.

It really has no effect on our addressable market, it's just how we approach it.

Okay, thanks.

And then one last quick one.

The acquisition you made, did it add any revenue this quarter?

No, that's really a professional service organization, and they came on with about -- I think there was $500,000 in backlog, but that's still to be performed.

Got it.

It was more getting the people with domain expertise for our product management to further strengthen our GRC application.

Got it.

Thank you.

Sarah Hindlian, Brean Capital.

Thanks for taking my question.

Actually a couple I would like to ask you.

I was hoping you could give us a little bit of an update in terms of what you are seeing right now in terms of ITOM adoption.

I know you discussed last quarter seeing about 10% of the business coming from that market, which is still largely unsupported by the sales force.

And then two, I'm hoping, and not to beat a dead horse either, but I'm trying to understand the guidance in terms of seeing half of these deals close that were slipped, and the assumption of a consistent FX rate from this point on.

I'm hoping you could give a little bit of color in terms of the conservatism around this outlook.

Thanks.

So in terms of the ITOM, we're seeing roughly about 10% of our business is ITOM that we're seeing, and that was consistent with what we were seeing in Q4.

In terms of our guidance, our guidance is based upon, as I mentioned before, there is the FX headwind on our existing backlog, but 30% of our business is denominated in foreign currencies.

And so our pipeline of opportunities and where our plan was for new business this year is coming down as well because of the FX associated with that.

And the guidance we've given is based upon kind of where we're seeing things right now.

And we're a little bit cautious with how we saw Q1, the linearity.

Yes, we're off to a strong start right now but we'd like to see a little bit more of that.

What I will say is this is the strongest start we've ever seen at the beginning of a quarter.

But does that mean that's going to continue throughout the rest of the quarter?

We're going to kind of take a wait and see.

Thank you.

That's very helpful.

Alex Zukin, Stephens.

So I was wondering, with the sales reorg, is there any change in focus between focusing on new accounts versus kind of existing opportunity, considering you've broadened the product set so much?

This is Frank.

We've had that orientation since the beginning of 2013.

And those of you that have been with us that long, that's when we introduced the separation that we have between existing accounts and new accounts.

And we have carried that theme through in this new organizational model.

So both on the commercial side and on the enterprise side, there is the delineation between people that take care of existing accounts and the people that are hunting for new logos.

So we've had that now -- this is now the third year into it that we are organized that way.

It's really important for a SaaS company because we rely so heavily on renewals and upsells.

So that's how we are and that's how we've been, and that's certainly what we will be going forward.

As you know, SaaS companies will become increasingly dependent over time on existing customers.

That's just the nature of the way the model eventually works.

So we're really well set up to be able to run that the way we're currently organized.

Got it.

Thanks.

And Mike, can you just talk about what drove the upside to cash flow in the quarter?

You know, we had some really, really strong collections in the quarter.

We had a number of customers who paid us earlier than we were expecting.

That's one of the things that we noted.

I was surprised at some of the large payments that came in in sub-30 days.

Still annual, there was nothing because of longer-term -- or multiple-year payments, but I can give you one example of one customer that should have paid us in April on 30 days.

It was Two point something million, I was shocked, they paid us in March within 22 days or something like that of the contract.

So it's just the timing of cash collections is the biggest driver that we saw.

Got it.

Thanks.

And maybe just sneak in one more.

Are you guys seeing any more evidence of leading with applications outside of IT and HR, in finance and facilities this quarter?

Well, it's Frank.

That's part of our go-to-market thrust.

Our organization is directed and instrumented to campaign our platform, not just in IT.

Obviously we're going after IT, but there's many situations where IT, for whatever reason, is not up for grabs, could be contractual, for whatever reason.

So it's really great that we can go after a Human Resources Department, or sometimes just pure platform applications.

So we don't easily strike out.

If we can't go through the front door, we go in through a side door.

We have many arrows in the quiver, many clubs in the bag, so to speak, to pursue business.

Certainly our sales people like that a lot.

We don't easily strike out.

Got it.

Thank you, guys.

Phillip Winslow, Credit Suisse.

Thanks, guys, for taking my question, and I promise not to ask any FX or accounting riffraff questions because we have actually read your K. And so I actually want to focus on the business here on the new customer acquisition from the newer applications.

Last quarter you gave some color of some wins outside of your traditional IT customers, folks that weren't using the IT services product.

Wonder if you could give us some color on that, what you saw this quarter, what the pipeline looks like for the rest of the year, then I just have one quick follow-up.

This is Frank.

That information is all anecdotal for the reasons that I mentioned earlier, which is now we're just selling one service management SKU and we let our customers decide how to use them.

Over time they may actually move them around between one service domain, like IT, to another service domain, like facilities.

The downside of that, of course, is that we don't have precise data anymore, whether the uptick is one discipline or another.

But the anecdotal evidence is very, very strong that the uptake in HR is very, very good.

And the thing about human resources, we're not just getting involved in HR on the service management side, either.

We're involved in compensation planning applications, we're involved in on-boarding and off-boarding applications.

We're actually going to share some of that with one of our partners at the conference next week.

So HR is becoming a whole domain of service management applications, not just the traditional case management, knowledge management, request management, which is what people most associate with what we do.

So these areas are getting much more deeper, much broader than they are historically have been understood.

The same thing is true in facilities areas as well.

There's capital request planning.

It's not just all the usual request-oriented type of applications.

So the nice thing about getting timing market for these apps is that we're getting past the standard service management capabilities into a lot of other interesting areas.

That's just how our business develops.

People start understanding what the platform can do for them, and then the new services are being discovered that are interesting to be stood up on our platform.

Got it.

And then just obviously, building on the anecdotal side, because obviously you guys do have that single SKU now, but when you think about sort of the near- and the long-term of the end-user side here, especially the newer user bases that you're going after, you obviously talked about HR field service, facilities management, GRC, you even made an acquisition in GRC, which do you think is a bigger near-term opportunity that drive revenue for you faster, versus what's the bigger longer-term market for you?

Well, I think that IT operations management, especially under the influence of our Service Watch product which we acquired last summer, I think it's a super important product.

There is a ton of interest in the product.

There's a lot of proof of value concepts going on.

So we're very excited about that, because it's the tip of the spear, if will you, for our entire operations management strategy, and it just leverages the service management side absolutely perfectly.

So we see that as an important area for us.

Service management is such a big area.

We got started in IT, obviously.

Everybody understands that part of the business.

Then we're getting into adjacent service domains, sometimes referred to as business services.

But increasingly we're getting involved into -- with services now that actually run the business, not just support the business.

And I mentioned this in the prepared remarks as well.

Next week at the conference, we have somebody speaking on how to run an admissions process inside a university which is really more like a CRM application.

In other words, a lot of the boundaries that we've traditionally seen between CRM application and service management applications are becoming much fuzzier.

We're now involved in take-offs against Salesforce and Oracle and companies like that.

Well, you never saw that a few short years ago.

So that's all very exciting for us.

That's why I mentioned the product line reorganization we did last December, because our organizations are really getting in position to drive us down those paths.

Great.

Thanks, guys.

And at this time there are no additional questions.

Thank you.

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

Thank you.

As a reminder, a replay of this call and the broadcast of our financial analyst day will be available as a webcast in the Investor section of our website.

Thanks for joining us today.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.