ServiceNow Inc (NOW) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ServiceNow Q4 2015 earnings conference call.

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

(Operator Instructions)

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

I would now like to turn the conference over to your host for today, 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, forecast, vision, addressable market or similar phrases to convey that information is not historical fact.

These statements are subject to risks, uncertainties and assumptions.

Please refer to the press release and risk factors in documents filed with the Securities and Exchange Commission, including our most recent quarterly report on Form 10-Q and our 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.

With the close of FY15, ServiceNow became the second enterprise SaaS company in history to report more than $1 billion in annual revenue.

This milestone was driven by solid execution across the board.

Total revenues for the fourth quarter grew 44% year-on-year to $286 million, and we continue to see strong demand from our customer base with a 99% renewal rate and a 39% up-sell rate.

The fourth quarter set a record for net new ACV.

We now have 230 customers with ACV in excess of $1 million, a net increase of 24.

Additionally, we have 638 Global 2000 customers, a net increase of 26.

New Global 2000 logos include Michelin and the Hershey Company.

Our average ACV per Global 2000 customer was $868,000, a 6% sequential increase.

At the beginning of 2015, we restructured our sales effort to increase focus on the commercial market.

As a result, we grew our commercial business 48% in the quarter.

In addition to robust growth, the commercial sales team also booked multiple transactions in excess of $1 million throughout the year.

Our total addressable market continues to expand and is now estimated at $60 billion.

With our latest software release in December, known as Geneva, we launched two major new services that expand our scope in the service management market, customer service and security operations, adding more than an estimated $13 billion to our addressable market.

Our customer service offering provides a holistic approach that integrates customer engagement with the underlying engineering and operational processes.

We already signed five deals for customer service including Fiserv, a leading global provider of financial services technology.

In addition, we signed four customers for security operations, including Raymond James Financial, a leading diversified financial services company.

This new offering connects security events for market-leading technologies with our advanced workflow capabilities.

A key value proposition is the institution of a shared workflow between IT and security teams.

Our focus is not on the tech team, but on processing security incidents in a highly structured, expedient and transparent fashion.

This has been sorely missing in the battle for cyber security.

In 2016 our focus on helping customers transform their businesses using a service-centric approach is intensifying.

In this vision, everything becomes defined and operated as a service and every enterprise will increasingly manifest itself as a software cloud.

To help customers achieve this outcome, we stood up on the lead consulting team to map out their journey.

This new team, which we call Inspire, is currently working with a large customer to develop a long-term strategy around the Industrial Internet of Things.

This customer plans to roll out a range of internal and external phasing cloud services that will more than triple their segment revenue by 2020.

This is an existing customer, but this new engagement changed the scope of an operational discussion to a strategic one.

Another customer was in the midst of a corporate transformation along with the integration of a major acquisition.

Instead of focusing on just on an ITSM rip and replace, the Inspire team showed them how IT could support the company's long-term transformation.

As a result, we worked alongside the customer stakeholders to build the strategy, roadmap, and architecture for IT and a new business process service center.

That roadmap will have us replace seven systems in total, starting with IT and moving throughout the business.

Finally, I look forward to seeing you all at the Knowledge 16 the week of May 16, in Las Vegas at Mandalay Bay.

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

Thank you, Frank.

During today's call we will review our fourth quarter financial results and discuss our financial guidance for Q1 and full year 2016.

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 fourth quarter were $286 million, increasing 44% year-over-year and 51% in constant currency, a negative impact of $13 million.

Our average contract terms for new customers, upsells and renewals were 31.9, 26.1 and 23.8 months respectively.

Total revenues based on geography were $199 million in North America, $67 million in EMEA and $20 million in Asia Pacific and other representing 70%, 23% and 7% of total revenues respectively.

Our calculated billings were $366 million in the quarter, increasing 33% year-over-year and 39% in constant currency, a negative impact of $16 million.

Our weighted-average subscription billings term was 11.9 months for the quarter, compared to 11.8 months in the prior year.

Combined backlog and deferred revenue at the end of 2015 was approximately $1.9 billion, increasing 35% year-over-year and 40% in constant currency, a negative impact of $65 million.

Subscription gross margin in the quarter was 83% compared to 80% in the prior year.

Professional services and other gross margin was 15% compared to 16% in the prior year.

Overall gross margin was 74% compared to 70% in the prior year.

Operating margin was 14% compared to 6% in the prior year.

We ended the quarter with 3,686 total employees, a net increase of 284 in the quarter and 860 in the year.

Net income for the fourth quarter was $33 million or $0.20 per basic and $0.19 per diluted share compared to net income of $5 million or $0.03 per basic and diluted share in the prior year.

Our basic weighted average shares outstanding was160 million, and our diluted weighted average shares outstanding was 171 million.

During the fourth quarter we generated $105 million in cash flow from operations, and we used $25 million for capital expenditures, resulting in $80 million in free cash flow.

This compares to $39 million of free cash flow in the prior year.

We ended the quarter with $1.2 billion in cash, short term and long term investments.

Let's turn to guidance for the first quarter and full year 2016 based on FX rates as of the end of Q4.

For the first-quarter of 2016 we expect total revenues between $298 million and $303 million, representing year-over-year growth between 41% and 43% and between 42% and 44% in constant currency, a negative impact of $2 million.

We expect subscription revenues between $261 million and $265 million and professional services and other revenues between $37 million and $38 million.

As a reminder, we are increasingly focused on deploying our internal professional services organization as a strategic resource and relying on our partner ecosystem for service delivery.

We expect billings between $360 million and $365 million, representing year-over-year growth between 34% and 36% and between 36% and 38% in constant currency, a negative impact of $3 million.

We expect subscription gross margin of approximately 83%, professional services and other gross margin of approximately 9%, and overall gross margin of approximately 73%.

We expect an operating margin and free cash flow margin of approximately 5% and 21% respectively.

We expect diluted weighted average shares outstanding to be approximately 173 million.

The full-year 2016, we expect total revenues between $1.34 billion and $1.37 billion, representing year-over-year growth between 33% and 36% and between 34% and 37% in constant currency, a negative impact of $6 million.

We expect subscription revenues between $1.18 billion and $1.2 billion and professional services and other revenues between $160 million and $170 million.

We expect billings of approximately $1.6 billion, representing year-over-year growth of approximately 33% and 34% in constant currency, a negative impact of $7 million.

We expect an operating margin and free cash flow margin of approximately 12% and 24% respectively.

We expect diluted weighted average shares outstanding to be 177 million for the year, and we expect to add approximately 1,000 net employees in 2016.

As a reminder, our financial forecasts include anticipated attorneys fees and expenses for outstanding litigations with BMC and HP Enterprises, but not any forecast related to their outcomes.

The trials are currently scheduled for March 2016 and May 2017 respectively.

Before closing, please note our Financial Analyst Day will be held in conjunction with Knowledge 16 on Monday, May 16, in Las Vegas at Mandalay Bay.

After the event, we will open up our Partner Expo Hall early to Financial Analyst Day attendees, giving them an opportunity to see and speak with more than 100 ServiceNow partners.

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

For those who cannot join in person, we will hold a webcast of the event accessible on our IR website.

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

(Operator Instructions)

Michael Turits, Raymond James.

Very strong margins but a little light relative to the billings guide, granted with a little bit more FX headwind.

Anything that happened similar to last year in terms of restructuring around the sales force?

And then I have a follow-up question, just a housekeeping question.

Michael, this is Frank.

We don't have any restructurings planned for this year so the realignment that you saw last year on the commercial organization, which by the way we highlighted in our prepared remarks, has really worked out excellent for our business.

We are not planning on doing anything like that coming into 2016.

And then, Mike, anything further on that relative to the billings at the low end of the guide, granted a little bit more FX headwind?

Well, there's a number of things go into billing, that are both positive and negative, when you're doing the forecasting.

But I will say that there was an error in our forecasting.

And if that error did not occur, we would've ended, we would have landed within the midpoint of our range.

Okay.

And then I just have a housekeeping question.

Can you let us know what your expectations are for the non-GAAP tax rate for 1Q 2016 and 2016?

For Q1 and all of 2016 we are anticipating that it's going to be somewhere around 35%.

Okay.

Thanks very much.

Brent Thill, UBS.

Thanks.

Mike, just not to dwell on the billing, but just related to the error that you just mentioned, what was that?

And also can you just talk a little bit about how you're factoring in the macro condition for how you look at the billings guide?

I think everything is obviously obsessed with that metric.

Was there any more conservative view that you put into that or are you not seeing the macro at all show up in the pipeline in terms of the forecast that you gave to the Street?

The error had to do with looking at the system for what was our renewal opportunity that we had, and it was clearly an error that we captured and identified on December 15.

So once again, if we had known that we would've guided lower and we would've ended within the midpoint of that, of the guidance we would've given.

And I will just say, our guidance is based upon where we see the business for 2016 right now, and we're comfortable with the guidance we are giving.

Okay, so no extra macro cushion that you've factored in?

This is Frank, Brent.

We're not really seeing any macro effect yet.

We're such a secular business.

We have not really felt any effects up to this point, nor can we see it sort of down the road that is affecting our business so that's not in our guidance.

Okay, just one clarification.

Sales headcount accrued, total headcount in this last year, do you anticipate your 1,000 net adds [will deliver] the growth rate in sales hiring out, continued to outpace the rest of the headcount?

Yes.

So we added roughly 405 people into the sales and marketing organization in all of 2015.

And we expect in 2016 we're going to add about that same absolute number give or take, depending on the quality of people we find.

Great thanks for the clarification.

Keith Weiss, Morgan Stanley.

Thank you for taking the question.

Two questions, one on the top line and one on the bottom line.

On the top line, if we look at your guidance for the full year, particularly the billings guidance, you guys have a very good sustainability of growth throughout the full year, stating mid- to low-30s growth throughout the full year.

Which isn't too much different what you have done in the most recent quarter on a constant currency basis.

What gives you confidence in the sustainability of that growth?

What you seeing in your pipeline in terms of the opportunity that could help you sustain that high level growth despite the fact you guys are coming to a pretty big scale out year at over at $1 billion.

And then on the bottom line, really nice free cash flows this quarter.

Anything one time in nature or anything we should keep in mind in terms of forecasting cash flows on a going forward basis that might need to be caught up at some point?

Or do you think these sort of cash flow margin improvements are durable on a go forward basis?

So, I will answer the cash flow first, Keith.

You are going to get some variability in cash flow on a quarter-to-quarter basis and the two quarters where we are going to generally have our lower cash flow is going to be Q1 and Q2 and a lot of that has to do -- or Q1 and Q3, and that has to do with our ESPP plan and the way that, that gets funded.

You can see that on the cash flow statement.

But, we feel pretty good about showing some more leverage in our cash flow this year and hence why we're guiding to 24% for the full year.

There's nothing big that's going to happen there.

CapEx, as a percent of revenue, is going to be somewhere in the, slightly down from last year, I think we are about 9.5%, 9.4% in 2015.

I'm expecting it's going to be somewhere around 8%, 8.5% in 2016.

And then in terms of your other question, in terms of what we're seeing in our pipeline, I will let Frank talk about what gives us the confidence there.

The confidence, this is Frank, the confidence comes from the fact that we now have quite a few years of operating history under our belts, so we have seen, those patterns are very persistent in terms of the way our renewals are working, the way our upsells are working, the way we land new logos, our average deal sizes, the whole cohort analysis.

When you take all of that into account, we really have quite strong visibility and how the business plays out from one quarter to the next>

It's a nice thing about a SaaS business where you have also big [backlogs in the first].

It's really rock solid that way.

We really don't depend on one quarter or another being an outlier either to the positive or the negative.

So it's really a function of our history in the business and the persistence of the patterns that we've been able to observe.

Excellent.

Thank you guys.

Matt Hedberg, RBC Capital Markets.

Thanks, guys.

I guess I am wondering into year-end, I know there's always some deals that move in and out of the quarter, but was there anything abnormal, guys, this quarter in terms of large deals that may have slipped into 2016?

There's always deals that slip from one quarter to the other.

Likewise, you are always pulling deals in.

I will say, like most Q4s, it was a very backend loaded quarter.

But as Frank mentioned, we had record net new ACV in Q4 and we're very pleased with what we saw.

Okay.

And then in terms of the full-year guide.

Services revenue, I think, was about $30 million light of consensus in our number and obviously you're having some success this quarter.

Is that accelerating to the SI channels and is that something we should sort of continue to bake into our model longer term?

Yes, it's definitely something you should bake into your model.

As we've been saying for a while, the SIs are becoming more important to us for doing service delivery, and we don't want to be seen as competing with the SIs.

As I mentioned, we're trying to make our own internal PS resources kind of more strategic and we would like the, kind of the basic implementation work to be done more and more by our partners.

And, hey, that's why the guys like CSC bought Fruition and Accenture bought Cloud Sherpas.

And we're going to let those guys continue to grow their businesses.

We're more interested in the long term subscription revenue from our customers.

We just need to make sure that our partners are doing a good job of standing up our customers and we're going to really focus on that.

Maybe just a quick follow up to that then.

With this offloading to the SIs, is there anecdotal evidence that your seeing an acceleration then in that SI business due to Cloud Sherpa or Fruition or things of that nature?

Yes, this is Frank.

There is an acceleration.

Our SI business used to be opportunistic, in other words, when the opportunities presented itself, they would bid on these opportunities, but it's different now.

Because these organizations, they have bought companies, they have made investments and they now have real plans around the ServiceNow business and they're driving it to target.

So they are much more disciplined, much more methodical, much more goal driven in the way they go about pursuing the ServiceNow business.

And that's very, very different from the way it was in years past.

As Mike said, we really want to make room for them, make sure that we enable them, they also play a strategic role with our customers.

And that's really important.

We want our customers to have really a broad variety of choices and often times we partner with these SIs as well.

In other words, we will sub them or sometimes they sub us.

So it's a very collaborative relationship that we have with them, with our customers.

Thanks, guys.

Walter Pritchard, Citi.

Mike, I just wanted to dive into the question, or the statement you made in the release and you just mentioned on new ACV being at record levels, which I guess we'd expect given it's a Q4 and you're a growing company.

I am wondering, if I look at deferred commissions on that cash flow statement, it looks like the cash impact of that was roughly flattish year-over-year and your billings, I think we talked about, forecasting, but your billings definitely benefited from the 99% renewal rate, which I think is an all-time high for your company.

So just wondering how we kind of quantify the new ACV, and it grew, but did it grow at the rates it had grown earlier in the year because it seems like maybe it slowed down a bit right there?

Well, I guess the first thing, Walter, is we don't disclose the actual net new ACV but you can see in looking at our deferred revenue and backlog that we just signed, you can see the gross increase in backlog in deferred revenue.

And doing a apples-to-apples comparison of 2014, deferred commissions to 2016 is not an -- or 2015, is not an apples-to-apples because the 2015 comp plan was not nearly as rich as the 2014 comp plan.

I will say in our guidance going forward for 2016, we're making our comp plan a little bit richer next year.

And that it all depends, I would say in 2014 we had a lot more, we had a lot of reps who really, really blew their number away with acceleration.

This year we had guys into acceleration, but they weren't blowing the numbers away as much in acceleration.

So you didn't have as much, as big a commission payments being paid out, but net net or net new ACV was up quite nicely year-over-year quarter.

Got it.

And just a quick clarification on what Matt asked on the impact of services.

I guess if we look at the delta between where you guided pro-serv revenue and where we were at, I am wondering, is the delta, the impact on the lower pro-serv to pro-serv billing the same?

In other words, the impact that, that $1.6 billion number, just trying to get a sense as to how the services may have impacted that number.

Well, the services is, pretty much any services revenue that is recognized flows through immediately into billing.

There is nothing upfront with that.

Okay, just wondering if that is still the case.

Yes.

Thank you.

Kirk Materne, Evercore ISI.

Hi, this is actually Ted Lin on behalf of Kirk.

Just wanted to ask, can you guys talk about whether you saw any extension of deal cycles or if you saw the initial size of deals change over the course of the quarter?

No, really didn't see anything different in terms of deal cycle and deal sizes was pretty consistent from what we've seen in the past.

We had about 10 deals that were north of $1 million and that's been pretty consistent in that range.

Okay thanks.

Just a quick follow up.

Can you talk about any sort of momentum trends that you are seeing with respect to your app store?

This is Frank.

That continues to grow quite nicely quarter-to-quarter.

I don't have the numbers right off the top of my head.

But the number of apps that have been contributed to the store, number of downloads, all those metrics, they move sequentially quite a bit.

So I think there's about 140, 150 applications up on the store now.

And it's getting to be quite active.

So good progress there since we introduced it in the summer.

Great, thank you.

Alex Zukin, Stephens.

Hey, guys, thanks for taking my question.

Just two quick ones.

Maybe one for Mike first.

Was there anything that you were disappointed by in the quarter?

If I look at the net new customer adds in 4Q versus 3Q, they were down a little bit, 176 to 174.

If I look at the Global 2000 adds, they were also down sequentially a little bit.

And obviously deferred revenue sequentially, the growth was a little weaker than the last two years.

Is there anything at all that you were disappointed by outside of kind of the error around billings guidance?

Really just the error in the billings and I take full responsibility for that.

Okay got it.

And then, Frank, maybe just a question about product.

One, we've heard a lot about verticalization in the industry, particularly from Salesforce mostly, but as you look at the global SI channel and how important certain verticals are for you guys, can you talk at all about the strategy around verticalization?

Either from a product perspective or from a go-to-market perspective in 2016?

Yes, so you are correct that the SIs of course have a very strong verticalized go-to-market motion.

We have not had that.

The changes that we introduced during 2015 is that we went to a business unit structure.

I mean ServiceNow used to be single-product, single-market, mostly single-channel type company.

Last year that all changed.

We have broken our whole organization into business units.

They are not verticalized, we are organized by product.

And we've seen the effects of that quite dramatically because the emergent products have taken off very, very strongly over the year.

The business mix is changing very, very rapidly for ServiceNow because these new products are taking off with a lot of momentum and that is in part because of the organizational structure and the resources that are behind it.

So we're executing in that mode right now.

I'm certainly not excluding the possibility that we will have a vertical vector to our go-to-market motion as well, but we're still in the middle of going through the transition to product which is working out really, really well for us.

Really, really happy with the progress we made in 2015 because that was really a big transition for the company to execute in that mode.

I did talk about customer service.

That's certainly something that initially is going to get really focused on technology-type businesses because we have very, very strong fit with the product there.

But in the fullness of time, I think that will take on a vertical focus as well because that business is very different from one vertical to the next.

Got it.

And then maybe on competition, as you go, as you look at, as you launch customer service and the adjacencies between you and Salesforce grow, how often do you see Salesforce in deals?

What's that competitive a framework look like, going forward?

Well, we see Salesforce in a number of places.

Obviously, we feel we've had sort of a border skirmish around a product that they call Remedyforce, which is really a product by BMC that Salesforce also markets that's based on the Force platform.

That is not been a big competitive factor between us and Salesforce.

Where we have seen them more is in platform opportunities where customers are standing up custom applications and they're trying to figure out whether they're going to do it on Force or are they are going to do it on ServiceNow.

What I will tell you is, that with our entry into customer service management, that's a head on collision with Service Cloud.

And I said in the prepared remarks we have done five or six major transactions already, and most of them were contentious with Salesforce and there's no hiding from that reality.

So it's going to become more intense between us and Salesforce as we get further into 2016.

Got it.

Thanks, guys.

Abhey Lamba, Mizuho Securities.

Thanks, this is Partha standing in for Abhey.

Are you seeing customers implement the Geneva release for any new use cases?

And, any color on the possible effects of the release on ACVs would be very helpful thanks.

Well, Geneva just came out and December, so all new projects will be, that have gone live since that time, they're going live, hopefully most of them will be on Geneva.

Typically our customer base shifts gears quite rapidly and from, in terms of new applications and Geneva, the two that I mentioned, security management there is a huge amount of interest in that new product because it's such a no-brainer to layer that onto the platform strategy that our customers have with ServiceNow.

And then the other one that is a little bit further afield positioning-wise, around customer service.

And we were quite sort of surprised how rapidly that took off as well because that's a different sales motion for us traditionally then selling to a core IT.

But IT has always been a conduit and something that we can leverage very strongly to get into these new use cases.

But we have very high expectations to continue on selling a lot of operations management software applications.

This was very strong in 2015 and will be very strong in 2016, and we have great expectations of these new services with Geneva in 2016 as well.

We just had our global sales kickoff in Orlando last week and they were introduced to our sales organization for the first time.

So there is a lot of energy brewing behind those initiatives.

Great.

Thanks.

Raimo Lenschow, Barclays.

Thanks for taking my question.

Two quick questions.

Frank, you talked about IT also in your last answer, can you talk a little bit about how do you see that evolving in 2016 with Geneva in terms of how meaningful will that be for you guys?

Is it just a first foray, first step for customers to go in there or do you think that's going to be already meaningful and then I have one follow up for Mike.

Well, IT operations management, and I think last year it went from 10% to 12% of our business, and it's not easy to do to grow your share of the pie, considering that the whole pie is still growing at a blistering rate as well.

IT operations management is an ideal add-on opportunity for our sales organization.

It's just a natural leverage of the core platform.

We are only, for example with ServiceWatch, which is a product that we acquired about a year and a half ago, we just got done in the Geneva release with completely re-platforming that acquisition.

That means that it runs on our clouds, it's re-implemented in our platform, our UI framework.

It is a completely native ServiceNow service, that you can't really tell that it was acquired or that it has origins from another company.

We only have penetrated 5% of our customers with our product so far.

And it's a red hot product, so there's an enormous upside for us to not just sell that but it leverages everything else.

It's used by our security product.

It's used in event management applications.

So operations management is -- there is an enormous amount of runway for us there, and we're going to be building other assets and potential acquiring assets in that area as well.

Okay, perfect.

Interesting.

And then a question for Mike.

Mike, if you keep the hiring on sales and marketing constant, in a way that kind of means is, unless sales productivity for the existent guys keeps going higher, that basically means you have a glide path going down.

What's the puts and takes on your plan for 2016 to kind of say, or keep it constant, because it's difficult to find new people versus I need to increase this if I want to keep the growth rate higher for longer.

Thanks.

The driving factor behind adding roughly 400 plus people into our sales and marketing organization in 2016 is, we still truly do believe we're more market constrained, or I mean distribution constrained than markets.

There's a lot of markets, especially in Asia Pacific, where we're just starting to go into China and some of the other emerging markets in the world.

And South America, we actually had a very good quarter in South America last quarter, and we have high hopes.

Remember this is a long sales cycle.

So it's going to take a year when we hire these people to really see were we able to get these people productive.

And based upon the opportunity we see, we think that's the right number to continue to add people at that pace.

Yes.

So the acceleration can only -- like a lot of these are in greenfield markets we have to kind of seed the market and grow the market and then you could do something more is that the way we should think about it?

Well, that's part of it, but remember we are as well continuing to split territories in North America and EMEA because we're not saturated with salespeople.

Listen, we still don't even have 50% of the Global 2000 in North America.

There's a lot of those that still aren't covered yet.

We need to have more people.

Okay.

Perfect.

Thank you.

Karl Keirstead, Deutsche Bank.

Thanks.

One for Mike, one for Frank.

Mike, just to be clear, and I think it's a question that Walter was trying to drive at a little bit earlier, if you look at your billings guidance for 2016 of 33% to 34% in constant currency, is there any way for you to sort of quantify what the slower growth in services and narrowing your services focus is having on that constant currency growth?

And if you would encourage the Street as a result to focus a little bit more on subscription billings?

And then for Frank, I will just throw it in now.

Investor interest in AWS, Azure and the public cloud shift is very high.

It's probably very early for you guys, but I'm curious, among ServiceNow's customers that are making that journey, have you seen any impact and are there any ITOM or other tools that could actually see a demand lift as customers move workloads?

Thank you, both.

So I guess, Karl, I will answer first.

The bulk of our billings comes from subscription, not from professional services.

If you look at where our professional service guide in revenue, that is pretty much dollar-for-dollar what our total billings is going to be for subscription -- or for professional services.

Now, when you look at the balance which is left there, which is the bulk of the $1.6 billion, the subscription, most of that is actually coming out of billing our contracted backlog then renewals and then new business.

And our guidance is the $1.6 billion and that's what we're comfortable with right now.

Karl, this is Frank.

Your question about public hybrid cloud.

We actually think that, that trend is very beneficial to ServiceNow.

And the reason is, we have never really focused on managing deep infrastructure, that's more been the legacy focus of companies like BMC and HP and IBM and CA.

What we've always done, we've always focused on the service orientation, understanding the operational characteristics and availability performance of the services.

That is just as important, actually it's even more important in the public cloud type of environment because customers will be deploying and redeploying constantly between these different platforms and understanding what services are affected by what cloud is what we do, and it's going to be really important.

Secondly, I would tell you that our focus on service integration which really means, is that we can really create a single service experience for all these different cloud resources, right?

All the requesting of these resources, the provisioning of these resources, that's becoming an intense focus of our business as well.

We are the company to provide that service integration infrastructure for the public cloud.

So these are things that are going to help and fuel our business as opposed to become an impediment to our business because we're really not focused on deep infrastructure.

That's been where the legacy companies have been, that's not where ServiceNow has been or where we are going.

Okay.

Great color.

Thank you, both.

Mike Casado, Pacific Crest

Yes.

Hi, guys.

Rob Owens at Pac Crest.

Couple of questions around the ITOM opportunity.

You much about a 5% penetration rate at this point.

Can you help me understand just with those customers what it's done to ACV overall?

And I think the 2016 was pointed to as kind of a critical year and inflection point for ServiceWatch.

What metrics should we expect to see out of that portion of the business?

Thanks.

So the only new thing that we're going to start to disclose with our K, which is going to get filed, is as we've told people, is now we are, we started tracking ITOM revenue separately because it is licensed different than the rest of our products, it's done on a per-device or per-script basis.

And so for 2015, ITOM revenue was 8% of our total subscription revenue.

I think for the quarter it was actually 8.2%.

For Q4.

And so that's the one new metric that you're going to start to see, and you will see that in our quarterly numbers as we go forward for 2016.

So if we think about that from a bigger picture, what it's typically add to a customer that's taking it, in terms of ACV?

You know, it depends upon the customer's environment.

We have some customers that have almost doubled their ACV.

We have others that are -- and these are -- we have a number of $1 million plus deals and it's really, ServiceWatch has been a key piece of that, but it's not just ServiceWatch, there's other things as well too.

We have another customer who is paying us over about $6 million and almost 2/3 of that is ITOM.

So it depends upon the customer.

Thanks for the color, Mike.

This is Frank, Rob.

We believe that the ITOM business is, from a revenue standpoint, a booking standpoint, is easily equivalent to what we have had in service management and over time will be bigger than that.

Thanks, Frank.

You bet.

Greg McDowell, JMP Securities.

Thank you.

Just one question for you, Mike.

We only get that backlog number once a year or so I wanted to drill a little bit into that for the full-year, up 40% constant currency.

I just want to ask, I mean there has been a pretty close historical relationship between the backlog and deferred and next year's revenue, and it does suggest again that it could be, your 2016 revenue could be higher than your guidance you just provided.

So I was just wondering is there anything different about the components of backlog this year than previous years, and maybe how FX is impacting what's in backlog?

Thanks.

So as we did mention that our backlog, our reported backlog, as of December 31, is $65 million year-over-year just because of FX is down.

And once again, our guidance, we're comfortable with the guidance we gave for both our billings and revenue for 2016.

Okay, thanks.

Justin Furby, William Blair & Co.

Questions first on ITOM, Frank.

I might have missed this, but could you call out, in terms of new ACV in Q4, what that was and what it grew year-on-year.

And just curious when you think about FY16 and your billings guidance and the different areas of potential upside, what you think maybe is the biggest opportunity, whether it's platform, ITOM, certain geographies, different packaged Apps, just anything that may surprise you to the upside?

And then I've got a follow up.

Yes, I think ITOM for the full year grew around 66%, somewhere around there.

So that's that number.

As I said earlier, I have huge expectations of our efforts.

We're doing very large transactions in this area.

I think the market for ITOM, you know, is bigger, will be bigger, than for IT service management and the combination of these products, especially with the way we're approaching it, which is very different from what historically has been done.

It is super compelling and ServiceWatch is a very catalytic technology because it helps customers understand what opportunities they have to really advance how you manage services in an enterprise versus just managing infrastructure.

So that's a big one.

Obviously we have a lot more irons in the fire right now so we know our business is just becoming very exciting because we're just pushing on a number of different areas and they are all moving.

And it's just, we used to be a business that was driven primarily on the replacement of legacy help desk businesses and we have come an awful long way since that time.

We are just becoming a very strategic platform for our customers.

Got it.

And then, Frank, just a follow up.

You talked a little bit about it, I think maybe Mike did, about the different comp plans.

I'm curious if you can give a little more color on terms of the thought process of FY14 versus FY15 and FY16 and why it sort of changes back and forth there?

You are always trying to tweak your comp plan.

And through our sales organization there were decisions to change the plan and coming into 2016 now, we decided we wanted to make our plan a little bit richer because that will help attract people and retain people in our sales and marketing organization.

This is Frank.

The one thing I can add to that, you're probably wondering, why don't these plans all get cheaper consistently over time.

Again it's not a spreadsheet.

Sometimes when we're adding territories where people are going to need more time to get productive, we're not going to have an aggressive -- we are going to have an aggressive comp plan there, right?

So the bigger you get, the more you're in nascent territories, you have to tweak your plans to make sure that people have an opportunity to make money.

So depending on what phase we're in, what territory we're in, you are going to see that move around.

So I think we are being just very thoughtful that we are doing it the right way rather than taking purely a spreadsheet-mentality to that.

Got it.

Thanks.

And then if I could ask one more just on Q4 billings, and I hate to go back to it but, services revenue, Mike, I'm just curious if the difference between you being the midpoint of guidance versus beating it, does it have to do with services?

I guess did it surprise you in terms of the deflection to the partner ecosystem or was it in line with what you thought for Q4?

It was in line with what we thought for Q4 and it was purely a subscription renewal error.

Got it.

Thank you.

Jesse Hulsing, Goldman Sachs.

Thanks for taking my question.

Frank, when you look at the mix of opportunities on the service management side of the house, how is the mix trending between what you might call traditional ITSM and finance facilities, HR, kind of the newer platform opportunities?

Yes, I don't have any sort of hard data to sort of characterize that in a very fundamental way.

But more in a qualitative sense, the vast majority of our customers are now looking at service management really as an enterprise initiative, as an enterprise platform.

They are looking at service integration strategies.

They really don't want their organization to have to know that you have to go to IT for this thing, you've got to go HR for that thing.

People shouldn't have to know what the boundaries between organizations are, especially when it comes to procurement.

Does this go through IT, does this go through facilities, does this go through purchasing?

So that's where organizations are looking to put a service cloud infrastructure in place where nobody needs to know what happens behind the curtain.

That's the whole nature of cloud is you obfuscate the whole backend infrastructure and you just don't need to know.

You just submit your request and it gets automatically provisioned.

It works the same way as Federal Express and Amazon, information will find you.

You don't have to keep checking back.

That's really what our customers are after.

Yes, oftentimes IT is the starting point.

I think that will be the case for a long time to come because IT tends to be the leader in the organization that's really bringing the service model to the other service domain in the enterprise.

But we probably have 300, 400 customers now that are on HR service management.

That's growing in leaps and bounds.

We have a whole business unit around that.

Customer service also ties in facilities management.

That's a big area because that's now the external facing side of service management.

So we just think that we have just tons and tons of opportunity.

The days that this was strictly an IT function, they are well in the past at this point.

And a quick follow up.

I am looking at your investor deck and you've broken out your addressable markets and provided a lot of granularity about how you're arriving at those numbers.

But a lot of them are outside of traditional ITSM.

Outside of ITOM, which you have broken out metrics for, which one of those buckets, whether it's customer service or PPM or another bucket, do you expect to have the most growth in 2016 into 2017?

Well, I don't have a crystal ball.

All of those things are hot.

They really are.

They are on the move.

Depending on who you ask, you will get a different answer.

Security is red-hot.

Customer service surprised the hell out of us.

The deals were very large.

They were very rapid.

They came from places that we did necessarily expect.

So we are learning all kinds of things.

The combination of PPM, which is project management, and financials is becoming a very hot commodity as well.

We have such a nice opportunity upselling from our platform with all these different services.

So it's great to be in sales at this company.

Thanks.

Steve Ashley, Robert W. Baird.

Thanks so much.

Wonder if you could just comment, first of all on ELA activity in the period, if there was much.

And if you're seeing an increase in that.

No, we really didn't see ELAs in the period at all.

It was our typical licensing.

Great.

And then lastly, ITOM, everyone has been drilling on it and you guys have pointed out that really there's a great enterprise opportunity.

Is there also a commercial/mid-market opportunity with the ITOM products?

Absolutely there is.

I don't know if we've ever said something to the contrary but that really doesn't stop at the large enterprise doors.

Our products scale down very nicely.

Even in Express, one of the things that we had to add to Express was our discovery capability.

That was one of the things that was glaringly missing in the first incarnation of that product.

People had to have that.

You are talking about really small shops now that want to be able to discover all the laptops and desktops and servers that they have and be able to manage the operating histories.

So, no, ITOM is integral to any service management deployment whether it's huge or whether it's small.

Perfect.

Thanks so much.

Kash Rangan, Bank of America Merrill Lynch.

Hey, guys.

Thank you.

I'm just looking at the stock down about 15%, big move, and I'm wondering to myself, as solid as your growth is, there is a bit of deceleration in billings.

Relative to where you were at the start of the year where you look at ACV of your G2K the growth rate there, the sequential deferred revenue growth rate.

Now on the flip side, you are turning way the hell more profitable than anybody expected about a year back or so.

So clearly your cash flow, [not] income generation, are significantly ahead of people's expectations.

But the growth, it did decelerate a little bit.

And I do completely appreciate the point that you, had you known what you knew on December 15, the numbers would've been right in line, mid-point or even high end perhaps.

Is this merely a conscious decision on your part to slow down the rate at which you're, not slow down the rate at which your hiring, but the second derivative sales headcount, you're adding 400, you added last year 400.

Is this a conscious decision that as you progress being a larger company, going through a revenue deceleration, that you get the [natural] margin expansion.

Or is it, is it that the market itself is somewhat limited that you have to slow down the growth rate and not necessarily keep up that billion-dollar business, growing 50%, as you have been at the start of this year?

This is Frank.

Maybe again, I can put a little bit of an angle to this.

We went, and we are still going through a bit of a transformation in the sense that we are becoming a multi-product, multi-market and even a multi-channel type company.

Before we were literally scaling on the single-product, single-market single-channel, and by the way that went exceptionally well for us, but the transformation as I just described it is not a trivial one.

Over a year ago we completely changed our product organization to be able to drive on multiple fronts at the same time.

And we have gradually implemented that focus throughout the organization in the solution consulting teams, which is a pre-sales organization and the sales organization itself, so that we can bring that multi-product orientation to the entire company.

That's not an easy transition to go through.

You just don't keep sort of random bodies and maintain the same momentum because they're different kind of hiring profiles, skill profiles, different organizations that absorbed these people.

But we went through a ton of that transition and 2015 and we feel we are in a really, really good place to be able to grow and expand with the structure and the model that we have.

We will be able to buy assets, we're able to build assets and really add on to our model.

So that's probably the best explanation that I can give.

Obviously, there is large numbers as well.

We just cruised through the $1 billion full-year revenue.

We haven't been there yet, right?

And, so we are also getting used to the scale and size of everything that's going on in this company.

We have offices in 64 different places around the world.

It's becoming a good sized business and we are growing into it and we are pushing hard.

So feeling good.

Feeling very good about where we are in our evolution.

Got it.

And one for Scarpelli.

No change to close rates in Q4 relative to Q4 last year or was there any change sequentially or year-over-year?

And if yes, what kind of close rate assumption are you using for your billings forecast, Mike, for 2016.

That's it for me.

Thank you.

So first of all, we never disclose close rates.

Directionally, at least.

There was nothing unusual about this Q4 in comparison to last Q4.

And I am comfortable with the guidance we gave for 2016.

Thanks guys.

Derrick Wood, Susquehanna International Group.

Thanks.

Frank, you mentioned in your prepared remarks the strength out of the commercial business and the productivity you've seen there, but didn't hear any commentary on the enterprise side.

Could you just characterize the, kind of the level of productivity tracking out of that segment?

Yes, one of the reasons I mentioned the commercial business is because you guys got so rattled a year ago and it took several quarters to shake that off so I thought I'd just, make a few, put some color around that business because it's been a very successful transformation for us.

The reality is, our business is 50/50, large enterprise globals on the one hand and then the commercial business the other half.

So we have to really drive both sides of that business equally hard.

Our growth assumptions are based on both those businesses being able to sort of maintain that 50% share of the overall pie.

But there is no doubt that if you left everybody here to their own devices we would gravitate towards the very large enterprise because those are the most productive, most lucrative business relationships that we have in this company.

And that's the reason why we created the commercial organization because we knew we were not going to let that happen.

We were going to make sure that we would have dedicated focus on these other markets.

It's more fragmented, deals are smaller, but still outstanding business for us and we like it.

And, Derrick, just to support the strength in enterprise, we did add 26 Global 2000 in the quarter.

It was actually 33 with adjustments with acquisitions and stuff.

So we now have 638 Global 2000 and you saw that we now have over, or we have 230 customers that pay us over $1 million a year each.

I think the average is right around $2.1 million.

Okay.

That's helpful.

And that continues to grow.

Okay.

And then, Frank, you mentioned the CSC and Accenture having acquired two of your biggest partners.

Just be curious to hear how those relationships have evolved.

Has there been any disruption or vice versa, are you seeing more tail winds with kind of resources and pull through?

Just to hear about how those evolved would be helpful, thanks.

Yes, it's actually made our relationships with those folks, you know, more intense, more strategic.

We have just become more important, in relative terms, to them as a platform than we were before they make these acquisitions, right?

So the fun and games is over with.

We now have real live investments in it and they're real businesses, they have managers, they have plans, they have targets.

Accenture was a premier sponsor at our global sales kickoff last week.

This is a really big growth opportunity for them and we are happy to be partnering with them.

We were, the nice thing about having folks like CSC and Accenture is they have transformational capabilities that they can bring to our very large customers.

We are really raising the expectations on what outcomes people really should expect from a ServiceNow deployment.

So we're thrilled to have these people in our business and our customers are happy as well.

They have real good variety of choices.

Very broad pool of talent to engage.

That's been a complaint that we historically have had, is that we grew very rapidly and we were always exhausting the resources in the marketplace.

So this is one of the reasons why we have carefully cultivated our ecosystem.

We didn't want to crowd out our partners because we would really constrain our own growth if we did that.

So I think these relationships are great and they are going to be growing and more important, become more important as we go on here.

Thank you.

Phil Winslow, Credit Suisse.

Thanks, guys, for taking my questions.

You know, Frank, you mentioned this in continuing sort of increasing TAM or just applicability of your guys' services: security, customer service, et cetera.

When you think about just the go-to-market strategy here, is there anything changing as you just continue to expand the applicability in 2016 versus 2015?

I know you touched on the comp plan but anything sort of structural to the sales force or the go-to-market strategy?

And then a quick follow up, too, just for housekeeping items.

Wonder if you can just quantify the billings error there, was it $4 million, $5 million?

Just how much lower would have guidance have been?

So billing error was $5 million.

On your question, Phil, this is Frank.

The structural difference that we started, that we have embarked on, that's still going on, is that we have a high degree of product specialization in the various organizations, and we started that on the pre-sales side.

We have it on the sales side.

We have it on the professional services side.

Obviously this all started in the, with the product team.

So our whole organization has a fully built-out product dimension to it.

But not all deals have the same amount of product specialization so that investment will be ongoing as we scale.

We will be having more and more dedicated resources that relate to the specific areas.

You can imagine security management, we are not a security company by our DNA set if you will, but we stood up a product organization with nothing but security people in there.

We have always had security people in the field because, being a cloud company, security is a really big topic of conversation with our customers.

But we have to have very dedicated, very specialized people to be very effective and credible with our customers to drive those kind of businesses.

But the opportunity is so great that for us to make those investments is a no-brainer and that's what we are doing.

Got it.

Thanks, guys.

There are no further questions, thank you.

I will now turn the call back 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.

Thanks for joining us today.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.