ServiceNow Inc (NOW) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ServiceNow Q3 2015 earnings conference call.

My name is Steve, 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 call over to Mr. Michael Scarpelli, Chief Financial Officer.

Please proceed.

Good afternoon, and thank you for joining us.

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

Our press release, our quarterly IR deck and the simultaneous broadcast of this call can be accessed at investors.servicenow.com.

We may make forward-looking statements on this conference call, such as those using the words may, will, expects, believes, pipeline, prospects, 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, and good afternoon.

Our third-quarter results were strong across the board.

Total revenues for the quarter were $261 million, a 46% increase over last year.

Landing new logos, renewing contracts and upselling existing customers continues to be our formula for growth.

We now have 605 Global 2000 customers, a net increase of 39 during the quarter.

New Global 2000 logos include Humana and Alexion Pharmaceuticals, Express Scripts and the Dow Chemical company.

Additionally, our upsell rate was 37%, and our renewal rate was 98%.

There are three observations to the quarter worthy of note.

First, CIOs increasingly view ServiceNow as an enterprise platform, not a portfolio of point products.

We have been successful providing customers a single platform solution with many options to help them transform a variety of service domains.

Many of those services are within the realm of enterprise IT, but the scope has no limits and can be internal or external through the enterprise.

We gauge our progress by tracking revenue per customer, not revenue per product.

In the third quarter, our ACV per Global 2000 customer was $816,000, a 28% increase over last year.

We now have 206 customers with more than $1 million in ACV, a 62% increase over last year.

And on average, our customers increased their initial ACV by more than 50% every year.

While this trend of growing dollars per customer is being driven by success across the entire ServiceNow platform, we were pleased to see strong contribution during the quarter from our ITOM products.

Which represented 14% of our net new ACV, and grew 170% year-over-year.

And from performance analytics, which represented 5% of our net new ACV and grew 179% year-over-year.

Second, our partner ecosystem is becoming a substantial vector of growth for our business.

We believe CSC's acquisition of fruition partners and its centers acquisition of cloud surplus during the quarter will fuel service transformations across a much broader range of businesses around world.

In addition to global system integrators, managed service provides are increasingly choosing ServiceNow to replace legacy solutions for their customers.

Among them, Dell substantially stepped up its commitment to the ServiceNow platform during the quarter.

ACV from managed service providers grew 84% year-over-year, and now represents approximately 10% of our total ACV.

Finally, Q3 was our strongest federal government quarter to date.

We signed 15 new federal partners, and closed 58 deals.

Representing 9% of our net new ACV this quarter, compared to 39 deals representing 6% of net new ACV last year.

Additionally, net new ACV from federal increased 86 year over year.

We were award of contracts with the US Army, the Air Force, Homeland Security, Veteran Affairs and the Department of Justice.

We also expanded our relationship with existing customers, including agencies within the intelligence community, the state department, health and human services and the treasury department.

This quarter also marks the Company punching through the $1 billion revenue run rate.

And ServiceNow is increasingly well positioned to achieve the long term objectives we outlined at our financial Analysts Day in April of this year.

With that, I'll now turn the call back over to Mike.

Thank you, Frank.

During today's call, we will review our third-quarter financial results and discuss our financial guidance for Q4 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.

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 third quarter were $261 million.

Increasing 46% year-over-year and 55% in constant currency, a negative impact of $16 million.

Our average contract terms for new customers, upsells and renewals were 31.6, 27.8, and 22.9 months respectively.

Total revenues based on geography were $181 million in North America, $62 million in EMEA, and $18 million in Asia-Pacific and other.

Representing 69%, 24%, and 7% of total revenues respectively.

Our calculated billings were $286 million in the quarter.

Increasing 38% year-over-year and 46% in constant currency, a negative impact of $16 million.

Our weighted average subscription billings term was 11.8 months for the third quarter, compared to 11.9 months in the prior year, or a negative impact of $3 million year-over-year.

And compared to 12.2 months in the prior quarter, or a negative impact of $9 million sequentially.

Subscription gross margin in the quarter was 83% compared to 79% in the prior year.

Professional services and other gross margin was 21% compared to 13% in the prior year.

Overall gross margin was 74% compared to 69% in the prior year.

Operating margin was 15% compared to 6% in the prior year.

We ended the quarter with 3,402 employees, a net increase of 215 from the prior quarter.

For full year 2015, we expect to add approximately 825 net new employees.

Net income for the third quarter was $25 million, or $0.16 per basic and $0.15 per diluted share.

Compared to a net income of $6 million or $0.04 per basic and $0.03 per diluted share in the prior year.

Our basic weighted average shares outstanding was 157 million, and our diluted weighted average shares outstanding was 169 million.

During the third quarter, we generated $63 million in cash flow from operations, and we used $21 million for capital expenditures.

Resulting in $42 million in free cash flow.

This compares to $7 million of free cash flow in the prior year.

We ended the quarter with $1.1 billion in cash, short term and long term investments.

Let us turn to guidance for the fourth quarter and full year 2015 based on foreign exchange rates as of the end of Q3.

For the fourth quarter 2015, we expect total revenues between $277 million and $282 million.

Representing year-over-year growth between 40% and 42% and between 44% and 47% in constant currency, a negative impact of $9 million.

We expect subscription revenues between $239 million and $243 million, and professional services and other revenues between $38 million and $39 million.

We expect billings between $370 million and $375 million.

Representing year-over-year growth between 35% and 37% and between 39% and 41% in constant currency, a negative impact of $12 million.

We expect subscription gross margin of approximately 82%, professional services and other gross margin of approximately 15%, and overall gross margin of approximately 73%.

We expect an operating margin of 9%, and free cash flow of approximately $60 million.

Based on Q4 guidance, the implied full year 2015 guidance for total revenue is approximately $1 billion.

Representing year-over-year growth of approximately 47% and approximately 55% in constant currency, a negative impact of $56 million.

The implied full-year 2015 guidance for billings is approximately $1.2 billion.

Representing year-over-year growth of approximately 41% and 49% in constant currency, a negative impact of $71 million.

The implied full year 2015 guidance for operating margin and free cash flow is approximately 9% and $207 million respectively.

We expect 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.

As a final reminder, we've included a high-level reconciliation of constant currency for Q3 results and guidance in the appendix of our Quarterly Investors Deck posted at in investors.servicenow.com.

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

(Operator Instructions)

Walter Pritchard, Citi.

Your line is open, Walter, please go ahead.

You may be on mute.

Brent Thill, UBS.

Please go ahead, Brent.

Thanks, good afternoon.

Mike, there was just some open questions on the billings this quarter, and the deceleration from Q2.

I'm just curious if you could comment, and I know you don't give out the backlog.

But I know billings only paints a smaller picture of the overall momentum of the Company, but if you could comment, that would be great.

Well, if you're looking at it from Q2 to Q3, as a reminder, Q2 was abnormally high because of the 12.2 weighted average billings which we disclosed last quarter.

And we said that's not normal.

We're normally running in the 11.7 to 11.9 months.

We're at 11.8 months this quarter, and as a result, that actually cost us about $9 million in this quarter billings.

However, we were expecting that to come down, and hence, why we're just slightly ahead of where we guided our billings.

Okay.

And just as a quick follow-up on the operating margins.

You exceeded expectations pretty handily this quarter, 15% operating margin, yet your bringing the margin guide down for Q4.

Just maybe a walk through why you saw such overage this quarter, and why it will contract by 600 basis points in Q4.

Yes, so this quarter, a lot of it was because of the timing of expenses and a lot of our hiring was back-end loaded in the quarter.

What is really driving though the Q4 coming down is more so, as many people know, we're moving our head office.

There is a provision in our Q4 guidance where we still have yet to sublease our space here.

And the move cost us about $10 million in one-time costs associated with moving out of our facility here to our new facility that's running through our forecast.

On top of that, we're also running our NOW forums in Europe in Q4, as well as in Asia-Pacific and our federal NOW forum which are mini knowledge conferences where there's about $2 million in expenses running through that as well.

The new lease and some other leases that we have that are full quarters next quarter that are partially came on this quarter, and will come on next quarter into the future.

Thanks, Mike.

Keith Weiss, Morgan Stanley.

Thank you, guys, for taking the question.

I just wanted to ask a little bit about professional services.

It looks like as you're ramping up the partner ecosystem, the growth that we're seeing on the professional services line seems to be coming down and definitely seems true in Q4 as well.

Is this a concerted effort on your part to push out more professional services to the partners, and then maybe take some of that off the income statement for you guys?

Yes, this is Frank.

It is a concerted effort.

And we've talked about this consistently over the years that we were not driving out professional services revenue to big numbers.

Obviously, professional services is always a drag on the margin profile, on the overall business.

And it really exists as a strategic resource.

And we're sizing it to where it needs to be for us to be able to deliver on our core mission.

The good news is, is that our partner ecosystem which we have very aggressively fostered over the years, has grown enormously.

Both in size as well as in capability.

There were a bunch of inflection points during the quarter, and we highlighted that during the prepared remarks, where CSC made a big acquisition in the space, essentially made a big acquisition in the space.

So a lot of our big GSI partners are really putting their money where their mouth is.

They're doubling and tripling down their business.

That is very, very positive for ServiceNow, because we can retreat from the primary pole position, if you will, in terms of delivering services and really yield to our Partners.

And it doesn't mean we're going to be exiting the business, it just means that in relative terms that that contribution will be coming down gradually.

Excellent.

Thank you very much.

Kirk Materne, Evercore ISI.

Congrats on the quarter.

Frank, actually just to follow-up on your point earlier about the acquisitions we've seen and some of your bigger Partners.

Longer term clearly having cloud service and fruition on bigger platforms would seem to be a huge benefit from you guys.

Is there any concern as they get integrated that some of the deals that they might have been working on get caught up or delayed?

I think the longer-term benefit clearly outstrips any near term noise.

But I was just curious how about how you think about that in the near term, and if that impacts your near-term guidance at all?

I don't think so.

We really have no reason to believe that.

I think our market has really very positively embraced that news.

We're very happy with these very large integrators stepping up the way that they are.

This is really good for our customer base.

We highlighted the fact that we have an enormous presence in Global 2000 accounts, and of course that is where Accenture, and CSC and all the others, that's where they are.

So this increases the confidence of our customers to really invest more broadly, more deeply in the ServiceNow platform.

Because the ecosystem, just growing in size and prominence.

So this is all good.

And if I could ask a quick follow up from Mike.

On cash flow, obviously, incredibly strong cash flow this quarter.

And I assume some of that drops down from the margin out-performance.

But as we think out 2016, how should we thinking about cash flow relative to revenue growth next year?

Does that come back into line with revenue growth?

Or are there anything we should contemplate as we are building our models on cash flow for next year?

Thanks.

I expect that 2016 cash flow will outpace our revenue growth for next year.

And in January, we'll give you formal guidance around where we're seeing cash flow for 2016.

Perfect.

Thanks very much.

Matt Hedberg, RBC Capital Markets.

Thanks, guys, for taking my questions.

I wanted to ask another question on the SI movement this quarter.

Certainly we like to see that, the mix shift here.

Frank, can you talk about the composition of some of these winds coming from the platform?

Are they -- do they look more like your classic ITSM, or are they more HR or finance?

What do some of the composition of those deals look like?

Are you asking me about platform deals specifically what they look like?

Maybe more specifically, with cloud [sherp] or with fruition, what is the mix of those deals look like?

I would assume it would look more like HR, more like a non-core ITSM deals.

But just wanted to get a confirmation of that.

Those guys are definitely core ITSM.

They've really grown up in the business with us, just the cloud [sherpas] obviously.

They got into the ServiceNow business through an acquisition as well of one of our long-term Partners.

And these are all folks that have been in the service management business with ServiceNow, going all the way back to the mid-2000s.

So they're very much meat and potatoes type of Partners in the core business.

It's really the [Accentures] of the world that are branching out into the higher levels of process design business, business process optimization things like that are not core service management type applications.

That's great.

And maybe just a quick one for Mike, a follow on onto the services offloading again here.

Is there a way to quantity the impact to your Q4 billings guide if you were to not be offloading that revenue component?

Well first of all, professional services is not that big a component of our overall billings.

As you can see last quarter, we're guiding $38 million to $39 million in professional services.

And pretty much what the billings -- what the revenue is, that's equal to the billings, because everything is done on a time and material basis in general.

So I think from where consensus is for the full year, we're taking down our PS revenue.

But we're increasing our subscription revenue relative to consensus.

And I think subscription is going up to the top end of the range by close to $7 million, and PS is coming down about $2 million to $3 million.

As a result, you could say that $2 million to $3 million of our billings is coming out of professional services.

Got it.

Helpful.

Thanks, guys.

Michael Turits, Raymond James.

Hey, guys.

A couple quick questions.

First, Mike, are we now at a point where that 11.9, does that look stable for the future?

In other words, should we see any change?

You're always going to see some variability.

But on average, we have been running at around 11.7 to 11.9 months, is what our weighted average billings.

I'm not going to say we'll never be above or below that, but in general, we should there.

As we get bigger as a Company, you should see less variability.

But there could one day be a very large customer that wants to prepay multiple years in advance that will skew that.

And unfortunately, we don't have much visibility, hence, why every quarter we disclose what our weighted average billings are and we normalize for that.

Two other quick ones.

One, it looks like you did upside on the subscription gross margin, and also, it looks like your headcount target headcount add target might be a little lower than it was.

Can you just address that?

Yes, we have taken down part of our numbers for hiring.

Most of it is coming out of our support and cloud infrastructure, as well as our G&A functions.

Our sales and marketing and R&D are pretty much the same from where they were at the beginning of the year.

Professional services is one from the [D&E] of it we talked about before.

That we've taken quite a bit out of that headcount add, but that matches with what we're taking down on our PS.

Because we want our Partners to being doing more of the PS work.

(Multiple speakers).

Sorry, what was that?

I didn't mean to interrupt you, Mike, sorry.

But I was just going to ask on the upside on the subscription gross margin.

That's really timing on certain assets within our data center starting to depreciate them.

As well as we're starting to see a little bit more scale in our data center, and timing with some of those headcount starts.

Okay.

Great.

Thanks a lot.

Sarah Hindlian, Brean Capital.

Thank you for taking my question, guys, and congratulations on the quarter.

I think looking through the numbers, it's pretty clear there is a nice mix shift away from professional services.

Which looks like we didn't take full account for in our numbers, but is certainly a good thing.

I was wondering if you could talk a little bit about the ITOM business?

Which I heard you comment has grown to 14% of new billings.

What are you guys seeing there, and how is that shaping up?

This is Frank, Sarah.

We've had a pretty good focus on the ITOM business really since the beginning of the year, since we reorganized our product organization, and got a lot more dedicated focus in terms of building and supporting and marketing those products.

So we've gotten a lot more deliberate in terms of our outbound go-to-market motion with these products.

And you've seen the last couple of quarters, as a percentage of the mix, these things are moving in leaps and bounds.

ITOM is a very strategic component of our business, because operations management and service management share the underlying CMDB, the asset repository.

They're sort of like two sides of a coin.

It is absolutely imperative for us that we are present and that we compete in that business.

And we're just pleased that we're making the kind of headway that we are.

It is exactly the same buyers, the same budgets.

So it is extremely compatible with the business that we were already in.

It's, if you will, the closest cousin of our core service management business is what the ITOM business is.

And the moving parts there are discovery, orchestration, obviously the service mapping technology that we acquired last year, are all in the mix.

We've created ITOM portfolios.

And one of our customers are consuming whole portfolio now, rather than just some of the individual components.

So we're looking to put more fuel on the fire in this business, and our sales organization is pretty charged up about having these products to sell.

Great.

Thank you so much.

Walter Pritchard, Citi.

Hello, thanks.

Actually a follow-up there on the ITOM question, I'm wondering, given your success, Frank, so far this year and late last year or this year with those ITOM products.

Does it make you look at potentially expanding the product line more aggressively in ITOM into what we've considered in the past some of the manager managers, event management, APM type areas that you're not in today?

And then I just had a follow-up for Mike.

Yes, so, Walter, we are in event management because our acquisition Neebula of last year actually has an event management component that we actually combined with our own capabilities.

And our next major software release, which is now imminent, has a full-blown event manager in it.

And we already recorded very substantial ACV in Q3 to the event management category, so we're in it.

But to answer your question more specifically, absolutely, we are evaluating assets continually in terms of things that we want to build, things that we want to buy.

As you know, we are an acquirer of assets but we're not ultra aggressive.

Because we have a hard time convincing ourselves that we want to own something.

But when we do, we move, and I think so far our track record on buying assets and converting them to yield has been quite good.

But this is a focus area, and when we see opportunities we'll absolutely be pursuing them.

Got it.

Mike, I'm not sure how much you're willing to talk about this.

But from a Q1 seasonality perspective, back in 2014, you had a strong Q1 with billings actually up sequentially.

And then last year, or this year, you had more of a normal Company getting bigger, seasonality in there.

I'm wondering if you could help us think about Q1 the right way, and just so we're not surprised in three months as you guide.

Q4 to Q1, historically has been pretty -- you would expect it to almost be flat.

Don't expect it to go up.

It's really Q4 every quarter when you look at this historically that has the big jump.

Remember a lot of the deals we sign in Q4, have January 1 start dates, and hence, that becomes part of our January 1 billing.

And historically, there is a lot of backlog that gets billed in January as well too, which impacts our Q1 billings.

So flattish more than down is what you're saying.

Yes, and you'll get more detailed guidance in January.

Okay.

Thank you.

Karl Keirstead, Deutsche Bank.

Hello, Mike.

I just wanted to ask a question about the fourth quarter billings guide at 39% to 41% constant currency.

It assumes more moderate growth.

I think we understand the 3Q, just given the tough compare and that $9 million hit.

But on 4Q, it's a slower growth, yet it feels like the momentum of the business is pretty solid.

So I'm wondering if you could help reconcile that and let us know whether the Geneva release, assuming it is coming in 4Q, has any impact at all on your guide?

Thank you.

The Geneva release has no impact on our billings at all.

And we are guiding $370 million to $375 million in billings, which is up from the $286 million that we just did right now.

So we think that is a reasonable guidance.

I really don't have anything else to add to that.

The consensus right now is that $370 million for this quarter for Q4.

Okay.

Thank you, Mike.

Abhey Lamba, Mizuho.

Thank you.

Frank, can you share some success stories of outside of IT, maybe you've had the most success in?

And how's your buy plan looking for that?

I didn't catch that.

Try me again.

Success stories in regards to what?

Outside of IT, in HR.

Outside of IT.

Yes, and areas where you are having the most success, and how is your pipeline looking for those types of implementations.

So one of the things to remember, and we keep reminding people every quarter of this notion.

We don't manage our business IT, non-IT.

Because most of the time, we don't even know when people are inside of IT or outside of IT.

There are application areas that cross the boundaries of IT.

For example, purchase requisitioning apps involve IT, because they process IT purchase requisitions that can also relate to non-IT.

The same thing is true with project management, those work flows are IT and non-IT.

So we don't manage the business that way.

These days, we talk about service management.

And the contacts will indicate whether that service management for IT, that are known as ITSM, or whether it is service management for customer service, whether it is service management for human resources.

Or any other global service domain that you find in the enterprise.

It is becoming much more accepted in large institutions, large enterprises, to view service management in the context of global business services.

A lot of big companies now have global business service executives that are peers of the CIO.

Sometimes the CIO is the head of the global business services.

So we're addressing the service domain in a much more global manner versus having systems for IT, systems for HR, and so on.

So, we've come a long way in the last four years in really moving the market in terms of how they have to think about service management.

As I said in my prepared remarks, we're really not so much trying to measure every single variety of the service management.

We're really looking at what is the overall investment that customers have in ServiceNow, that really indicates what's their degree of commitment to our platform is.

And it varies a lot, where it is coming from.

Because some people are very heavy on the ITOM side.

We have customers that start out with us in HR, and end up on the IT side much later on.

We had one customer this quarter who bought one of our Partners' applications solutions that was built on our platform.

That actually dragged a platform deal for us, but then downstream, is going to yield opportunities for IT.

So our business arrives in many forms and flavors.

And sorry for your long answer, but I just don't have an answer to your question.

Because that is not the way we think about the business, not the way we manage and report it to ourselves.

No, thanks, that was helpful.

Frank, and I'm sorry, Mike, I know you're not talking about 2016 yet.

But can you give some qualitative color on how we should think about your need for investments versus margin expansion?

You have a 20/20 target of 30% margin, how we should expect the trajectory of your margin from the current level?

Thanks.

So at a very high level, and we'll give more detailed guidance later on.

As we mentioned, we expect about 9% operating margin this year, and I would expect that to be in the at a high level right now somewhere in the 11% to 14% margin, 13% margin.

We're still planning our 2016 investments right now.

Thank you.

Rob Owens, Pacific Securities.

Hey, guys, thanks for taking my call.

This is actually Ben McFadden on for Rob.

I wanted to start with a question on what you're seeing with the broad macro environment.

Was there any -- I know you guys are still seeing healthy growth, but was there any verticals or geos where you saw a slippage in deals in the quarter?

This is Frank, Ben.

One area that really immediately jumps out and I've been in the recent months to Houston, Calgary, the oil patch is brutal.

It has come to an very abrupt halt, and basically businesses that are dependent on those sectors are hurting in a huge way.

So we felt that, as well, as is everybody else.

It doesn't matter what you do or who you are, you're not going to escape that trend.

So that one is first and foremost.

We don't have too much macroeconomic overhang.

Sometimes it's even hard for us to know whether something is macro or micro or secular, or whatever it is.

We don't have too many excuses, because I think we have the ability to drive our business and regardless of what's going on in the macro.

Because we're driving transformations and optimizations that people are going to need, no matter what is going on out there.

So when we think of linearity in the quarter, was it pretty linear, or was it -- or did you see a shift as far as how that was weighted?

We thought that it was very similar to most quarters.

Remember, as I've said many times at conferences, this is no different than any other typical enterprise software company.

There is a majority of businesses in month three of any quarter, and there is a lot of business that's booked in the last two weeks of the quarter.

And we continued to see that this quarter, like we've done every quarter.

Sure.

And I just wanted to follow up real quick with just any metrics that you can give us as far as what you're seeing with CreateNow and the ServiceNow store.

Just it's something -- any metrics you can provide as far as what you're seeing with developer traction there would be great.

Thanks.

This is Frank.

I think we've given metrics in the past on our cohort analysis about 85% of our customers, have custom applications billed on average there, I think it's about six to seven apps now that they have.

So that's still something that continues to move up and to the right.

In terms of our store, we see the amount of content in terms of number of entries growing sequentially in the 20% to 25% range.

Those are some things that come to mind that gives you some character to that.

Philip Winslow, Credit Suisse.

It is actually [Joanne Camian] on for Phil.

Thanks for taking my question.

I was wondering if you could comment at all on the customer uptake of discovery and orchestration, and if you could give any feedback from customers?

Thanks.

Yes, this Frank.

It has been very good.

Certainly, it has helped that we really have combined discovery with our service mapping technology, which has made that a more integral solution.

That's made actually both products more marketable.

Orchestration is something where we have built some out-of-the-box applications for in terms of provisioning.

That's actually made that easier to sell and more marketable.

They are a pretty good size component of the overall ITOM component.

So it's going well, and we're pushing on that they are foundational to the ITOM suite.

Great.

And congrats on the quarter.

Thank you.

Kash Rangan, Merrill Lynch.

Hello, thank you very much.

I'm trying to get a better handle on the guidance.

Mike, I appreciate the fact that contract duration came down to 11.8.

It was 11.8 months Q4 of last year.

So I'm assuming you're using 11.8 for your Q4 forecast.

The contract duration is not going to hurt you.

And I'm looking at ACV for your G2K, it's been steadily going up 10% sequentially.

So no problem there.

And I'm looking at your customers paying more than $1 million in ACV.

And the average ACV per customer paying you more than $1 million is up from $2 million to $2.1 million.

And you added more new customers paying $1 million in ACV this quarter than you did in Q2 or in Q1, for the past four quarters.

This is the record high.

So help us understand why you're guiding to a reported deceleration in billings terms?

Are you just assuming some conservatism, which I completely respect, given that we're living in uncertain times?

But otherwise, outside of that, I had a question for Frank, if you get the time to get through my questions on the financial side.

Thank you very much.

First of all, we're not guiding to a deceleration in billings term.

Because we're still assuming that we're going to be somewhere in that 11.7 to 11.9 months weighted average billing term.

That's not changing.

And the billings that we are giving guidance for, we think is a reasonable amount of $370 million to $375 million.

As we said last quarter, we expected the number to be in the $1.2 billion for the full year.

When you apply that to what we just did, I think it comes in at around $1.207 billion is what our full-year billings guidance is.

And we'll see December 31 what our actual billings was.

Got it.

And, Mike, did I catch it right?

That we said from Q4 to Q1 you think billings will be flat and not down, just to clarify Walter's question?

Right now, based upon where we're looking without me giving full guidance.

Because once again, it depends a lot on the terms of what we sign right now.

But I expect that Q1 will be roughly equal to what Q4 is, and you saw that last year.

We were slightly up actually last year.

Got it.

Question for you, Frank.

Adjusting for FX.

Got it.

ITOM significant, fantastic statistics here.

Are you going to have a specialist sales force and go-to-market changes next year?

That's it for me.

Thank you.

We have established a sales team with -- it is essentially an overlay function to have.

We have hired experts for not just for ITOM, but for a whole series of product lines.

We also do it for performance analytics, we do it for human resources, and we have it around financial management in DRC.

So we have embarked on really overlaying our sales force with sales experts in all these categories for some time now which is one of the reasons why we're having really, really strong traction in a lot of these emerging product areas is because of the focus that we've had on it.

And we're having really good success cross-selling, up-selling, these products right behind our core platform.

Thank you very much.

Congrats.

Thank you.

Greg McDowell, JMP Securities.

Great.

Thank you very much.

Just one quick question.

Obviously, the 29 new Global 2000 customers is really impressive, and that's even more than what you added in your last Q4.

My question has to do with the ACV per G2K customer, it looks like it was up 3% sequentially.

And on a sequential basis, that's lower than it traditionally is.

And I was just wondering what drove that?

Is that a function of just the sheer amount of customers you added, or does it have to do with the mix of what was sold, or was it something else?

Thank you.

It is a number of things.

But one of the things is if you look at the average ACV from those net 29 Global 2000, it was a relatively low amount relative to what our average Global 2000 is.

It was somewhere in the mid $250,000.

We've [seated] a lot of Global 2000 accounts.

There were a couple of big ones in there.

But what I will say is then we had a couple deals we're stepping in.

As an example, we have one Global 2000 we landed now which was well below our average, but they have a contractual upsell of $4.5 million on December 31.

So we did some of those deals that aren't reflected now that you'll see next quarter.

So I'm not concerned about the long term 4% sequential growth.

We need to see out of our Global 2000, as a reminder, we did 7% last quarter.

So you will see some variability, but long term, we think that 4% is very reasonable.

If you look at our cohort slide that is in our Investor Deck, you can continue to see that our customers that we brought in in 2014, we've already grown the ACV in those on average by 50%, and we still have another quarter to go of upsells to those.

Great, thank you.

Steve Ashley, Robert W. Baird.

This is Jason Valkemar on for Steve.

Thanks for taking my question.

I was hoping you could talk about the Fuji release, what has customer response has been to that?

And how actively is that being adopted versus past releases?

It's Frank here.

Fuji is already ancient history for us, because we're literally on the eve now of our Geneva release.

So we're about ready to start upgrading our internal systems and all of this kind of stuff.

So Fuji has been out there and people have moved very aggressively towards it.

Because the contents have been very compelling.

It's been a very good release.

We expect the same thing out of Geneva.

We have even higher hopes for it because there is just a lot of reasons for people to want to move to Geneva.

So because our organization has grown so much, there is ever more and more compelling content in these releases which keeps our customers moving from one to the other.

So it's all been good.

Great.

Thanks.

And then just one follow-up to dig into the ITOM a bit more.

Just in general, have you seen your customers, your IT opt customers, been able to reduce headcount in the wake of adoption of your ITOM products?

I don't have any real authoritative evidence to say yes, no, anecdotally, sure, we hear about that.

But a lot of it has to do with organizations really trying to lighten up and modernize this kind of portfolio of tools.

I think as many of you know, the tools in the ITOM space are just like they used to be on the service management side.

They're quite old.

They date back to the 1980s and the 1990s.

They're often very expensive, they're really not well suited for modern platforms and architectures.

So this is often driven by organizations that really want to go through tool consolidations, tool modernizations.

And the big advantage that we have is the single platform orientation and the complete integration with CMDB.

It is an extremely compelling way of going about modernizing this portfolio of capabilities.

So that's really what it's about.

People are saving money on the software side.

And obviously they're after automation in the process as well, and lightening up on staffing along the way.

Great.

Thank you.

Alex Zukin, Stephens PH.

Hey, guys.

Thank you for taking my question.

Maybe the first one, can you guys talk about the number of new seven-figure deals, and also mention it there were any elephant sized deals in the quarter?

Sure.

I think we did nine deals that were north of $1 million, three were new customers, six were upsells.

And there were no elephant deals in the quarter, defining what I'm assuming what you mean by elephant is more than $3 million in net new ACV.

There were none of those in the quarter.

Got it.

And then are you seeing any change in the closing -- in the cadence that you're closing some of your larger deals or upsells?

And maybe also just talk about sales rep productivity, and where hiring came in versus your expectations for sales reps.

So in terms of the cadence of closing deals, as we've said before, this is a very long sales cycle.

This is a nine-plus month sales cycle for large deals.

I haven't really seen any change there since the time I've been with the Company.

In terms of productivity, we saw pretty even productivity in the Americas and Asia-Pacific.

It was down quarter-over-quarter in EMEA, but remember Q2 was very high in EMEA, unusually high because we had one deal in particular that was very large that skewed that.

Nothing that gives us any concern this quarter, the pipeline looks good.

And staffing, we don't talk about sales reps themselves.

We're a few headcount behind in our sales and marketing organization, but nothing that has us concerned there.

Thank you, guys, for taking my questions.

Derrick Wood, Susquehanna International Group.

Thanks.

You guys had 35% growth in new customer wins, it looks like that's the highest in three years and obviously you had a strong uptick in Global 2000 as well.

Could you talk about the new coverage model?

How that's playing into driving broader new customer strength, and what the key ingredients in the segmentation strategy are right now?

This is Frank.

I don't have too much to add to this.

You remember that at the first of the year we split our Americas organization up in commercial, and in enterprise, which I think people are still trying to get over.

But that actually was a very good thing for us to do.

Because we've made really good progress in the commercial market that is trending really, really well.

But it's also made our enterprise organization a lot more focused at the same time.

So a lot of the progress that you're seeing that we're making is because our deployment model is just much more precise, much more fine-grained.

And I actually think we have quite a bit of room up in 2016 in really optimizing the deployment model.

In our taking resources and where we're putting them in, is really one of the key things that drives growth and productivity in our organization.

So I think we have a bit of runway there to see more benefit.

That's great.

And then, Mike, what's the channel contribution right now?

And do you have any longer term targets for indirect?

So first of all, very little of our business goes directly through the channel.

It's under 15% of our business goes through the channel.

However, the channel does heavily influence our deals.

The problem is, it's hard to track to what extent they influence.

And we definitely do not have any target for what amount of our business needs to go to the channel.

I don't think it's going to go -- I think it will be for quite some time below 20%.

Okay.

Thank you.

Justin Furby, William Blair Company.

Thanks, guys.

Frank, I was wondering if you look at the remaining Global 2000 that you don't count as customers today, what percent of them do you think are using MSPs?

And how important are some of these acquisitions like CSC and the Dell announcement and Accenture in terms of further penetrating that opportunity?

It is not the MSPs, that is the GSIs is probably what you mean, they're global system integrators.

They're super important.

These -- the Accentures and KPMGs and EY Deloitte, are enormous influencers of these kind of transactions.

So that's why -- what's going on in that part of the business is very, very good for us.

So it's -- we too, have a long ways to go.

We have 30%, but there is a ton of them out there.

The degree of saturation that we have and the ones where we have footprints is still a long ways in terms of being [assertive] as business.

So the GSIs are very, very important in our business.

I can't overstate the importance of it in the Global 2000 segment of our business.

Okay.

But I guess what I was getting at is like CSC, for example, a big MSP provider.

They acquired fruition, and it sounds like they have aspirations now going into a lot of these [BMC] accounts and ripping that out and putting in service.

I'm wondering how much of that Global 2000 that's not today a customer are using outsourced ITSM, and what you think some of these deals [in developed] stuff does for you to penetrate that opportunity?

I don't think they're using outsourced, that's what I meant to say.

They're not MSPs, they're not using so much outsourced ITSM.

They have and own their own systems, but they use the GSIs to do process design and do the general consulting and implementation around it.

So when it comes time to change systems that have been sitting there for 10, 15, 20 years, having a very trusted global system integrator in the account, is very important to give the account the confidence to go on that journey.

It is not easy to turn off systems that have been around for that long, and replace them.

These are knife point transitions.

They've got to turn one off, turn another one on.

And having a GSI on the account to hand hold the account through it is a big part of making this business happen.

You are correct, Justin, in that a number, CSC has a very big MSP practice, but they also have a very big GSI practice as well.

But most of the Global 2000 use the GSIs.

There are many Global 2000s who use the MSPs, but the vast majority are running their own systems.

They may augment their staff with some of the GSIs, but it is the Global 2000 we're making the purchase decisions, not the MSP for them.

Got it.

That is helpful.

And then just quickly on the pipeline.

If you look at it today, just curious what the mix of ITSM versus non ITSM looks like maybe versus a year ago?

And then if you think about ITOM and platform those two together, what do you think will be the more meaningful of the two as a growth driver getting you to the $4 billion number over the next several years?

Thanks.

Justin, as Frank said at the beginning, when our customers are buying and the way we sell, we really manage our business by the dollars we extract out of our customer.

And most of our customers are buying service management, not necessarily distinguishing between ITSM and the different service management applications we have.

Long term on that road to $4 billion, yes, ITOM will become a more meaningful piece of our business.

But the majority of that revenue will still be coming from service management, which ITSM is a part of.

Got it.

Thank you.

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

Thank you.

As a reminder, a replay of this call will be available in the Investors section of our website.

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This concludes the presentation.

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