ServiceNow Inc (NOW) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ServiceNow Third Quarter 2017 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference call is being recorded.

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

Sir, you may begin.

Good afternoon, and thank you for joining us.

On the call with me today is John Donahoe, our President and Chief Executive Officer.

Our press release, investor presentation and 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 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, for information on risks and uncertainties that may cause actual results to differ materially from those set forth in such forward-looking statements.

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

Thanks, Mike.

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

We reported another strong quarter today.

We closed 22 deals with ACV greater than $1 million and performance was strong across every geography.

Each region achieved or outperformed their target for the quarter and all are tracking ahead of plan for the full year.

Our consistent performance underscores our strengths.

ServiceNow is a leading cloud-based platform with a strong portfolio of applications.

Our innovative technology and expanding set of product capabilities enable customers to accelerate their digital transformation and simplify and streamline the way people work.

Our customers also value and recognize our strong customer-focused culture and our commitment to ensuring their success.

This continues to be reflected in our strong renewal rate.

And we have a diverse global footprint and strong partner ecosystem.

We now serve more than 800 G2K customers, representing more than 40% of the world's 2,000 largest public companies.

And we added 35 customers in the quarter, doing more than $1 million in ACV with us.

And this includes our largest federal deal ever at $7 million in ACV.

Federal represents a significant growth opportunity for us in addition to our continued G2K expansion.

Throughout the quarter, I continued to spend much of my time engaging with customers around the world, listening and learning.

And whether at a dinner with CIOs in Tokyo or Frankfurt or at the NowForums I attended in Amsterdam, London and New York, the conversations are consistent.

CIOs are grappling with intense digital disruption and the need to accelerate the digital transformation of their companies.

They're seeking the right partners to go with them in that journey.

For our current and future customers, we intend to become a trusted cloud partner in creating the future of work.

We're investing in our customers' success capabilities, building skills and processes to be a strategic partner for our customers along every stage of their digital transformation journey.

Our customers love our products and our platform.

Experiencing the benefits of ITSM and other applications their companies have implemented, they see the potential of our platform to do more.

And as I've shared with you before, our customers want us to continue to lead and innovate with best-in-class out-of-the-box integrations and configurations and consumer-like end user experiences.

And they want to hear more from us about our roadmap and product vision.

And those are exactly our priorities: creating best-in-class customer experiences and driving customer success.

In the quarter, we saw strength of our platform and product portfolio.

Our flagship ITSM product had a very good quarter, with ITSM being included in 17 of our top 20 deals, and our platform was included in 15 of those deals.

In HR, our employee services experience product led 3 of our top 20 new customer deals, and our employee services product is now being used by 119 G2K customers.

And customer service is also seeing great momentum.

Our Customer Service Management product landed 2 $1 million-plus deals.

And we're excited to roll out machine learning capabilities for Customer Service Management in our upcoming Kingston release.

Last but not least, our Security Operations product landed its first deal over $1 million.

Underscoring our commitment to delivering best-in-class experiences, we announced during the quarter the acquisition of design firm, Telepathy.

Adding this talented team significantly enhances our design capabilities, and they're already partnering with our existing software development teams to create great customer experiences.

And offering great end user experience not only means delivering great design but also requires delivering great mobile experiences.

Strengthening our mobile capabilities is a priority for us, and we're already good at delivering enterprise mobile experiences.

But the standard today is no longer an enterprise mobile experience, the new standard is delivering the same kind of great consumer mobile experiences that we enjoy in our everyday lives.

So we aim to give customers these great mobile experiences at work, and I'm delighted with the announcement today of our intent to acquire SkyGiraffe.

This acquisition gives us a world-class team to make mobile native to our platform in 2018 and to deliver amazing consumer-quality mobile experiences to our enterprise customers.

All of our packaged applications, including ITSM, will be available in a native mobile format.

And so ServiceNow customers and partners will be able to easily build mobile apps in days, not months, with our tools and templates.

Our acquisitions of Telepathy and Sky Design (sic) [SkyGiraffe] for design in mobile, along with our acquisitions earlier this year, of DxContinuum for machine learning, and Qlue for virtual assistant technology, demonstrate our strategic approach to M&A.

We will continue to invest in teams and technologies that enhance our product and platform capabilities and accelerate our ability to deliver world-class consumer-light experiences.

In closing, I'm pleased with our continued progress and momentum and proud of the extraordinary focus of our company to listen to our customers and deliver the products they need to transform the way work happens.

We're committed to our customers' success and are focused on finishing the year strong.

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

Thank you, John.

During today's call, we will review our third quarter financial results and discuss our financial guidance for Q4 and full year 2017.

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, except for revenues and revenue growth.

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.

Subscription revenues for the third quarter were $455 million, representing year-over-year growth of 43% and adjusted growth of 41% or an impact of $6 million.

PS and other revenues were $43 million, representing year-over-year growth of 10% and adjusted growth of 8% or an impact of $1 million.

Subscription billings were $500 million, representing year-over-year growth of 38% and adjusted growth of 37% or an impact of $2 million.

PS and other billings were $46 million, representing year-over-year growth of 12% and adjusted growth of 10% or an impact of $1 million.

As mentioned in recent quarters, our professional services organization is sharpening its focus on partner training, enablement and advisory services while our partner ecosystem drives most of our customer implementations.

Q3 was the first quarter PS and other revenues represented less than 10% of total revenue, and we expect subscription revenues to increase as a percent of our total revenues in future periods.

Subscription gross margin was 85%.

Professional services and other gross margin was 10% and overall gross margin was 78%.

Operating margin was 20% and free cash flow margin was 19%.

Let's turn to guidance.

Fourth quarter guidance is a difference between full year 2017 guidance and our actual performance through Q3, so I'll just mention updated 2017 guidance in our prepared remarks.

The resulting Q4 guidance can be found in our earnings release and IR deck, both of which are available at investors.servicenow.com.

We are increasing subscription revenues to between $1.728 billion and $1.733 billion, representing 41% to 42% year-over-year growth and 41% adjusted growth or a $6 million impact.

We are revising professional services and other revenues to $190 million, representing 13% year-over-year growth and 12% adjusted growth or a $1 million impact.

We are increasing subscription billings to $2.080 billion and $2.085 billion, representing 38% year-over-year growth and 37% to 38% adjusted growth or a $3 million impact.

We are revising professional services and other billings to $194 million, representing 8% year-over-year growth and 7% adjusted growth or a $1 million impact, as more of this work is shifting to our partners.

So due in part to that positive impact our training and enablement is having across our partner ecosystem, we removed $1 million and $9 million from professional services and other Q4 revenue in billings, respectively.

We are increasing our gross margin guidance across the board and expect subscription gross margin of 85%, professional services and other gross margin of 16%, and total gross margin of 78%.

We expect operating margin and free cash flow margin to remain at 16% and 25%, respectively, due to an increase in 2017 net employee additions to 1,400 and additional Q4 marketing initiatives.

Finally, we expect diluted weighted average shares outstanding of approximately 179 million for the year.

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

(Operator Instructions) Our first question comes from the line of Kirk Materne with Evercore.

Mike, I guess, just to follow up on that last point.

When you look at the guidance and the results this quarter, clearly, subscriptions outpacing your expectations and even when you account for the third quarter beat, it looks like you're actually taking up what the implied fourth quarter guide was.

I guess, how should we think about this going forward in terms of the split between subscription and professional services as we think about fiscal '18 because if you just combine it together, it looks like you're not really raising but clearly, on a subscription basis, you're taking up your expectations pretty meaningfully?

Yes.

So this is all part of our plan, first of all, is we're shifting more of that business to our partners.

And by the way, that's low-margin business as well too.

We're really focused more on the subscription, which is the recurring.

I'm not giving guidance for '18 right now, but I will say I do expect PS and other as a percent of total to be kind of 8% or less of our total revenue with subscription obviously being the bulk of that.

Okay, great.

And then just one follow-up for John.

John, obviously, a much bigger presence from ServiceNow at the HR Tech show this year.

Can you just talk about sort of the brand recognition in that part of the market and how you see the HR side of your opportunity unfolding as we look at maybe your next 12, 24 months?

Well, sure, Kirk.

I think what's behind the really what's very strong demand for our HR product is a real focus on really across almost every company around the employee experience, really driving an improved employee experience.

I think that's on every CEO's agenda and increasingly, on every CHRO's agenda.

And the thing to keep in mind is that employee experience is not just an HR issue.

Employees experience cuts across IT, HR, facilities, finance, all parts and that's what our products really do.

They drive a cross-functional improved employee experience.

In fact, we're thinking about even relabeling it not so much as HR but employee experience.

And so that demand is quite strong.

It's coming both from IT and HR, frankly driven by, as I said earlier, overall company-wide initiatives to improve the employee experience.

And so the business is quite strong.

And I think there's a growing awareness to really deliver those experience as you need a cross-functional platform, and that's the role we're playing.

So the demand's strong.

3 of our top 10 new customers were led by the employee experience product.

We've now got almost 119, 120 G2Ks who are using our employee experience product.

And we think there's ample opportunity.

I'll also just say one more thing, which is we do not compete with what Workday or SuccessFactors do.

They are outstanding HR systems and for instance, we use Workday internally, and our goal is to partner very effectively with Workday, SuccessFactors and other HCM products to help deliver enterprise wide great employee experiences.

And our next question comes from the line of Raimo Lenschow with Barclays.

Actually, I wanted to stay on that topic.

How do you see that market evolving because if I -- at Workday, a couple of weeks ago, they actually start to seem to think that they need an employee portal.

They wanted to have something around onboarding, which is kind of something where you kind of have a big advantage, given your platform.

Can you see how kind of you see your kind of position in the HR market playing out going forward?

Sure, Keith.

Again, I just look at it through the eyes of the customers.

I've probably now spent time with close to 500 customers in my first 6 months.

And what they -- the way they talk about it is employee experience.

And they're recognizing -- as I just said a minute ago, employees don't think in terms of what function they're acting with.

They don't want to think, "Oh I have an IT problem or an HR problem or a facilities problem or a legal problem." They just want to have a good experience.

And so our enterprise portal allows to have one single portal where you can get any of your problems resolved.

And it connects into all the systems of record of the various functions.

And so through the eyes of the customers, the customers want our platforms to work effectively together to deliver that great customer -- end customer experience and that great employee experience.

And so you saw during the quarter, we announced an agreement with SuccessFactors.

We're trying to more deeply integrate our products and the data across the products to help deliver seamless experiences for our customers and their employees, and that will continue to be our focus.

Okay, makes sense.

It's funny actually we are using it and it looks like it's working really well.

And our next question comes from the line of Keith Weiss with Morgan Stanley.

This is Sanjit Singh in for Keith Weiss.

I had 2 questions.

One, just the -- a question on AI and virtual agents.

John, how do you see that sort of impacting the market, particularly your ITSM service offering?

And just the impact of virtual agents in general as you sort of play this market forward over the next couple of years, what would you see -- what would be the impact in terms of the delivery model?

And then maybe what would be the impact on your monetization strategy over time?

Well, Sanjit, the -- we're thrilled about the potential of this machine learning.

As you know, we bought DxContinuum early this year and did as we do with all acquisitions.

They rebuilt their code, recoded their capability into our core platform.

And it's going to enable all of our applications and all of our customers to access that machine learning for specific use cases.

It's not AI for AI's sake or machine learning for machine learning's sake.

It's to deliver specific use cases.

And let me give you an example.

We were our first beta customer ourselves.

And so this summer, we turned on the machine learning to our own customer support center, right?

We've got a customer support organization that takes all inbound problems or calls or contacts from our customers.

We turned it on with no additional implementation on whatsoever, turning on the capability.

Within 2 weeks, the intelligent agent was outperforming human accuracy on incident categorization and incident routing.

And what that means is 2 things: one, that our customers are getting their problems delivered to the right person as -- in a more quick and accurate basis; and secondly and I'd say as importantly, roughly, we estimated 8% of our customer support engineer time used to be incident routing, incident categorization, that's now freed up to actually solve real problems for our customers.

And so that capability we turned on in our Customer Service Management application in the Kingston release.

It'll be turned on in ITSM at the same time.

And we think there is just an enormous number of use cases where the machine learning capability can take some of the more redundant, repetitive parts of work that people are working on, handle them in a more automated fashion, which drives greater efficiency or productivity and also enables the IT professionals, the HR professionals, the security analysts, the customer support agents to focus their energies on higher value-added activities and really delivering great experiences for customers and employees.

So we think there's going to be a real positive opportunity.

Our customers are very interested in it.

And again, our focus will be taking it use case by use case.

Great.

And if I had one follow-up, if I could.

Just sort of on the traction outside of ITSM.

Obviously, the percentages of UACB has come up pretty significantly over the last couple of years.

I guess, what's interesting is that if we track some of the earlier progress, we saw modules like ITOM contributing pretty significantly, Security Operations Management coming online.

And now it seems the flavor over the last 6, 9 months has been employees/HR.

So I wanted to get a sense of what's causing some of these dynamics in terms of some of these modules percolating up in terms of net new ACV contribution?

Is there a discovery process going with customers?

Or is this more of a go-to-market sales motion that you guys are focusing on?

This is more of our go-to-market.

If you recall, in 2015, we realigned our business to have various GMs to focus on the HR, the customer service and security.

We've always sold ITOM with ITSM.

And I would say that the HR customer service and security continue all to do equally well.

We've mentioned before the one thing with security ops in the past, they're a large volume of deals but not big deals.

It was very -- or very positive this quarter as we did our first $1 million-plus net new ACV deal with that.

We've always done that with HR and customer service.

And we expect that in Q4 and going forward, we'll continue to do these larger deals as we're seeing these opportunities.

But it's really the go-to-market, how we have a dedicated sales support with the different product lines that's driving this.

And our next question comes from Keith Bachman with Bank of Montreal.

Mike, I was going to direct these towards you if I can.

In Q3, the mix was a little bit different if we look at the ACV slide, where ITOM as a percent of total and then the other category, if you will, actually declined a little bit sequentially.

Now they're up, to be fair, year-over-year quite nicely.

And then I was just wondering why was the mix a little bit more weighted frankly back to the legacy products.

And the corollary question is on the duration contracted a little bit -- or the average contract terms across the board on new customers' upsells and renewals all came down pretty meaningfully but mostly on the new customers.

Is there any color you could give us on those 2 items?

Sure.

I'll deal with the term, first of all.

As you know, Q3 is a big federal government quarter, both in new business federal government as well as renewals for our federal government customers.

Most federal government agencies only sign a 12-month contract.

That's across the board with anyone and that's what skews it down.

If you take out our federal business, we're normalized back to our normal duration for new business.

And renewals, you see it more in new business because this was a record federal quarter for us.

That business more than doubled year-over-year for us.

In terms of your other question, which was around, and I apologize, remind me of your other question that you had.

Yes, no worries.

It was on net new ACV mix.

Yes.

What I will say is this past quarter was a great quarter overall for net new ACV for us.

And we saw some very large federal government customers with ITSM that brought us more back to that 50% of our business coming from ITSM.

And I wouldn't call it legacy because it still is modern technology.

And as I want to stress again, that's what gets us in the door with our Global 2000, and then we quickly follow with upsells in our other businesses.

I would say we've said in the past, ITOM tends to be bigger deals, they tend to be lumpy.

Last quarter was a little bit light but it was made up for in other areas and we see that kind of -- you will see that variability, but we were very pleased across the board with the strength in all of our products.

And I'd just build on that, Mike, that I couldn't agree with you more with the legacy product comment in that.

There's a lot of runway left for ITSM, both within our existing customers and then, as Mike said, in large federal agencies and other large customers.

So it's a product that has a lot of runway left, and I think we're focused on really going after that.

And our next question comes from Walter Pritchard with Citi.

Two questions.

First, Mike, just make sure we understand on the expense side.

I think you talked about some items that come back into expenses in Q4.

You had a very strong margin performance this quarter.

I'm just wondering what didn't come into the quarter that drove that upside and then consequently, the reversal next quarter, and then I just had another question.

So part of the improvement on the quarter in operating margin, part of it was because of our shift in professional services going more to our partner, so that took out about $2.9 million in cost actually in the quarter.

But on top of that, it was hiring linearity, was very skewed towards the back half.

There was some FX benefit that we had flowing through there.

And there was some -- we started some of these initiatives, as we talked about last quarter, around kind of some of the marketing initiatives and customer success that got delayed until Q4.

We've -- as we mentioned in the script, we're increasing our hiring guidance for Q4 because we see the opportunity in front of us here.

And as a result, we're sticking with the 16% operating margin guidance that we gave at the beginning of the year for the full year.

We're reiterating that, it's on a higher revenue base now as well, too.

And then Mike just on sales hiring.

I guess, we're -- as we look into next year, can you compare sort of your capacity build into 2018 and then any sort of different allocations around the folks that you're bringing in on the sales side?

So we have seen increased productivity this year and we're very pleased with that increased productivity.

We were forecasting that and it's paid off.

We are going to continue to invest heavily in our product sales specialists as well as reps and SC ratio around the world.

Don't anticipate any major changes to our sales organization and how we go to market.

It's going to be -- we've seen what we've been doing in 2017 has been working and we'll continue with that.

Our next question comes from Matt Hedberg with RBC.

It was great to hear about the $1 million security deal, I think we've been waiting on that.

I assume that was for an existing customer but maybe a little bit of color on that.

And then maybe can you talk about the sales cycle for that particular component of the deal?

So that was to an existing customer.

Actually, one of our largest customers that we have.

Actually, our largest customer.

The sales cycle, I can't.

John, are you...

I think the sales cycles take a little bit longer.

As the CISOs and CIOs are -- they have a growing portfolio of security-related products, and one of the things our product does is works in a very complementary way with the other security products.

Just like I said in HR, how our employee experience, we work in a very complementary way with the world-class cloud applications in HR.

And we're trying to work in a very complementary way with just as we work with Workday in employee experience, we'll work with a Splunk, a Palo Alto Networks, a FireEye in the security world.

And so that makes the sales cycle a little bit longer.

But I think there's strong demand for the incident response capability that we can bring to that portfolio that leads to a good solution for CISOs.

Great.

And maybe on an geo perspective, I think EMEA was the largest we've seen as percentage of revenue for a while.

Was there anything unique about that from a large deal perspective?

Was it particular strength in Europe or was it something in America?

Just sort of curious on the mix there.

So more than half of our G2K add this year were -- or this past quarter were international.

EMEA was very strong.

We now have touched 50% of the G2K in EMEA and it was just strength across the board internationally.

And as John mentioned earlier, all of our regions are ahead of plan for the full year right now.

Matt, in Q3, I was in Asia, Australia, Japan and I was in Europe a couple of different times and met with several leading companies and CIOs in all of those markets.

And I can tell you what's striking is what they're looking for is highly aligned globally.

This whole concept, and maybe an overly used word but it's a word they're using, digital transformation.

And what's clear is several leading -- some of the largest and most respected multinationals in Europe are considering ServiceNow one of their core partners and the same thing in Japan and Australia.

So the demand, when you listen to the words of the customers is very similar and very strong.

Our next question comes from Sarah Hindlian with Macquarie.

Apologies if I'm breaking up, I'm having a hard time with the new iOS update.

Just a couple of quick questions for you guys.

You're rolling out a lot of automation and machine learning and today, you acquired mobile capabilities.

How do you think about these?

Do these functionalities really drive improved ASP?

Or is it more about customer capture or is it simply just feature set?

And then I have a quick follow-up question for Mike really in regards to ITOM, which has had, let's call it, lumpiness -- or actually, maybe seasonality is the better word.

Are we expecting to see similar seasonal trends in Q4?

Well, Sarah, on the first part of your question, I'd just say our customers are looking to us to incorporate leading technology, leading innovative technology into our platform so they can access it, leverage it.

And they don't have to integrate it.

They can use it out of our platform in a seamless way.

And so the acquisitions of DxContinuum, Qlue, Telepathy and SkyGiraffe are ways we can accelerate our progress in that capability.

We have good engineers and capability organically, but this, by adding additional teams and in some cases, incremental technologies, it simply accelerates our ability to deliver value for our customers.

In some cases, we may monetize that.

In other cases, it will be part of our core standard offering.

But the focus is not monetization.

The focus is on delivering really strong value in our platform.

And that's ultimately what will get wider adoption of our platform and make it even stickier.

And then your question on seasonality, Sarah.

So obviously, Q4 is a strong quarter for us.

It's seasonally the strongest quarter for us.

We don't guide products by quarter.

But what I will say is given that Q4 is such a strong quarter for us and ITOM is a relatively high percent, you will see an increase in absolute net new ACV from ITOM.

But I will stress and we've been saying this for years, history has shown that our ITOM deals tend to be bigger and they tend to be lumpier.

Our next question comes from Adam Holt with MoffettNathanson.

The first question I have, Mike, I guess, is for you.

The explanation of durations for Q3 makes a lot of sense around federal and would be to, obviously, expected.

I was a little surprised by the duration impact on Q4 in the guide.

It looks like it's going to be a bigger headwind than I would have expected.

Can you maybe walk us through why that would be and just remind us of the mechanics on that?

And then I had a quick follow-up on expenses.

The duration impact for Q4 is really -- it's only one, it's very small actually.

So I'm not quite sure where you're seeing that on the subscription side, Adam.

I was just looking at the appendix for the duration, for the Q4 guidance.

I'm looking at Page 9 and I'm happy to walk you through that after but I don't see it.

Okay, we'll hit that afterward then.

And then secondly, on the expenses.

To the extent that the shift on the revenue side around push services is maybe happening a little bit faster certainly than we modeled, would we expect to see the incremental benefit from expenses flow through in next year or we expect to see that reinvested?

You will see the gross margin as our business shifts more to a subscription mix versus professional services.

The overall gross margin will increase.

But part of that Q4, keeping the full year at 16%, remember, we just did the Telepathy acquisition at the end of last quarter.

We just announced today the SkyGiraffe acquisition.

That's adding 50 more people that wasn't in our plan at the beginning of our year.

Plus we did 2 other acquisitions with Qlue and DXI earlier in the year.

That's why we're keeping in that 16%.

We have laid out the framework for 2018 in our overall framework in terms of our long-term target, and we'll give guidance in January for next year.

Our next question comes from Michael Turits with Raymond James.

Two questions.

One, just on billings.

There's a bit of a decel in the billings between this quarter and next.

How much of that is just a function of -- as in revenues that shift away from professional services?

And then my second question is just an update on the commercial market.

Any change in competition there and are you hitting the targets you're looking for?

So the first thing on the billings, Q4 of 2016 was such a big beat.

And so you're at a much higher comp or tougher comp you're looking at.

We're still at the numbers we're at.

There's not too many companies that are giving that type of subscription billings guidance growth rate as what we just gave for Q4.

In terms of the -- and professional services overall does impact the billings but I can't stress enough, we focus more on subscription.

That's the recurring piece of our business.

The professional services is very low-margin business.

The piece that kind of helps us on professional services is training but it's such a small piece of the overall.

In terms of the commercial business, commercial continues to do well for us.

It was maybe a little bit light last quarter, but I think that's just timing of things.

Based upon the pipeline we're seeing for Q4, commercial looks strong, along with all of our business.

What I will say is we're off to a very strong start in Q4, and we're pleased with what we're seeing in our business.

Our next question comes from Justin Furby with William Blair.

Maybe 2 quick questions.

I guess, first for John.

I was hoping to get an update on the Inspire team in terms of what the pipeline growth looks like there and maybe kind of give a sense for the percentage of the bigger $1 million-plus deals that it's influencing.

And then second for Mike.

This quarter, for Q3, the 37% subscription billings, it's obviously a very healthy result but I think it was in line with your guidance on an FX-neutral basis.

So I'm just sort of trying to align that with commentary that sounds like you guys had a really strong new ACV quarter that was ahead of expectations.

And I'm just wondering if there was something around bill terms or renewals or something that impacted Q3 sub billings.

Sure, Justin.

On your first question around Inspire, what I would tell you is there's absolutely excess demand for our Inspire team resources.

And as I think everyone knows, what our Inspire team does is go in and work with a customer in a presales or an upsell environment to build out a blueprint, if you will, an implementation of strategy, an implementation blueprint of how they pursue digital transformation.

And as I said earlier in my remarks, there's massive -- virtually every customer is doing digital transformation.

And so the demand for our Inspire team to help lay out a very specific plan that taps the best practices of our full customer base is high.

And when I go into many of our most successful wins and our largest wins, almost invariably, Inspire was part of that sales process.

What we're adding to that now is more systematic post-sale coverage to help with implementation.

We talked about our PS strategy.

One of the things -- refinements we're making in our PS strategy is to have our PS teams do more advisory work where they're advising the customer and advising our partners on how to actually achieve that blueprint, which was often developed by the Inspire team.

So we'll continue to make investment in Inspire and in that post-sale coverage in 2018.

So Justin, in terms of your question on subscription.

So our billings, we did $500 million as we talked about.

There was a currency benefit in that number.

And even when you strip it out, we still beat by $3 million.

I can't stress enough that, that $500 million or -- when you look at our subscription billings, less than 30 -- or less than 30% of that is really coming from net new ACV.

The bulk of that comes from our contracted backlog and renewals, as we laid out on Page 19 in our investor deck and we talked a lot about at our Investor Day.

So we did have a strong net new ACV.

But remember, we do have a strong gross down that goes into Q4 that gets reflected in Q4.

And you may say, "Well, why then aren't you reflecting that in your full year Q4?" Because Q4, many of our contracts start in January 1 that get booked in Q4, and that's why we are one of the SaaS companies that you generally do not see a big decrease in billings in Q1.

Okay, got it.

And so when you think to Q1 of next year, then that should hold as well where you won't see a massive sequential growth decline in billings?

Correct.

Our next question comes from Alex Zukin with Piper Jaffray.

Maybe just 2 quick ones, maybe one for John.

You gave an interesting statistic on your last earnings call.

Your top 2 customers represented over $15 million in ACV.

As you get further down this path of becoming kind of strategic digital transformation partner for your customers, where do these numbers ultimately go in your mind?

And what happens -- have you sold all of your products wall-to-wall from these customers?

Are they fully penetrated?

How much upside is there within those customers?

And I have a quick follow-up.

Sure, Alex.

So the short answer to your question is no.

We absolutely are not fully penetrated in these customers.

And I see significant opportunity in expanding our relationships, particularly our G2K relationships and our federal relationships.

In most cases, they're only using -- they may be using ITSM in 1 division, in 1 geography.

And we have potential to expand our ITSM usage across the entire enterprise.

A large number of our new customers are buying ITSM for the whole enterprise but some of our existing ones don't yet have ITSM for the full enterprise.

So I see upside in ITSM.

Even our largest customers' only using 3 of our products: HR, ITOM and ITSM.

So I think we have upside to grow more and more of these large relationships.

It's a natural evolution.

They are -- many of them are saying we're an important strategic partner.

Our platforms, one of the -- they're picking 3 or 4 or 5 core cloud platforms they want to work with.

We're one of those.

And we see growing usage, both of our -- the prepackaged applications we talk about in these earnings calls, but also of our platform.

We don't break out the platform growth but the platform is also growing very attractively as they're building -- using our capability to build other workflows that we don't have out-of-the-box functionality for.

And so this whole theme of digitizing the enterprise, automating workflows wherever possible is creating strong demand.

And I think you'll see that in larger and larger customer relationships over time.

Got it.

And maybe just one follow-up.

As you shift more work to partners, can you talk about how you expect them to increase as the percentage of deals serviced by partners are driven by partners, and kind of how that should play through for next year?

Well, we're -- all I can say, in general, and maybe Mike, you can put it in specifics but I will say, we've been sitting down with several of our largest partners and doing what I would characterize as joint account plans.

It's really the first time we've done this where we sit down and we're becoming an increasingly large, relevant, in many cases, the highest growth part of their service offering.

The ServiceNow practice at leading places like in Accenture and at DXC is a very high growth part of their portfolio.

And so we're sitting down and saying, "How can we work most closely, both in implementation delivery as well as in new prospects and opportunities to go to market together in a more seamless and effective way for customers?" And so those plans, I think, will lead to even greater role of the partner ecosystem in our overall business.

And I think that's a win-win for us and for our customers and for the partners.

Yes, I see our partners really more helping accelerate deals as well.

I don't think our partners are going to be selling a lot independently.

Our sales force will be in there with the partners, and those partners will help within their customer relationships get deals done quicker for us.

The other thing is that work is shifting to partners.

So partners have been doing a lot of our work for quite some time.

There was also a big piece of our business where we would be the contract with the customer where we would outsource a big chunk of that work to partners.

That outsourcing where the partners are doing majority of it, we're not doing that anymore.

We are only going to be involved in deals where we're doing most of the work.

We may sub some out to partners.

But in cases where the partner's doing the bulk of the work, we want to focus on an advisory work where we may be a sub to the partner or we may engage directly with the customer as well as the partner engaging directly.

Our next question comes from Rob Owens with KeyBanc.

You guys have touched on it several times throughout the call, but I'd love for you to elaborate somewhat on the success you saw in the federal vertical, types of agencies you're seeing that with.

And it seemed like from some of your commentary, that might have been ITSM-related, would just like more color there.

We can go to John first.

Sure.

Well, as you know, we've been focusing on ITSM for several years, and now -- or I'm sorry, on federal and now have a dedicated federal sales force, which I think is really, really helpful in this.

And so what's happening is across the U.S. government and frankly, I talked to governmental leaders in Australia, the U.K, The Netherlands, where governments are starting to have to go through the same digitization process that companies go through.

And so governments are now embracing cloud.

And one of the first people they're turning to as they begin that journey of how they embrace cloud is ServiceNow.

And so the largest federal deal we did in history, the $7 million ACV deal was largely ITSM, fundamentally an ITSM deal.

And these are big opportunities for us.

One of the undersecretaries of this department said that it was their first enterprise-wide SaaS solution.

It's going to support 500,000 end users and almost 5 million contacts per year.

And so these are large organizations that are under pressure to streamline and automate how they operate, both to lower cost and to serve their employees and citizens better, and our platform is a natural starting point.

Also said -- I had some interesting conversation with some of the security agencies looking at our security offering as a way to augment how they provide security at the federal and state levels.

I will just add, Rob, that $8 million of our $22 million net new ACV deals in the quarter were federal.

18% of our net new ACV in the quarter was federal, up from 10% in the year-ago quarter.

So federal was very strong for us.

And a lot of that was based upon the investments we've made in our federal sales organization over the last couple of years.

Great.

And then secondarily, Mike, if you look at the variables you've thrown out to kind of achieve your $4 billion spreadsheet exercise, you've been tracking well ahead on the Global 2000 customer additions.

But if we look at, sequentially, the trends in ACV within the G2K, this year quite hasn't paced with where it was last year or even gotten to that 4% bogey yet.

Is that a function of a law of large numbers or is there something else that might be weighing that down throughout the first 3 quarters of this year?

No, a lot of that is we've landed a lot of new Global 2000.

Especially, you saw half of those were international this quarter and a lot of Global 2000 customers start out small.

I am expecting -- or I should say, we are expecting based upon what we see in our pipeline, Q4 will be a very strong upsell quarter to the federal government.

We have a number of large deals in the pipeline that are upsells.

And so I feel pretty good about that number.

But I just want to remind people, in 2015, when we set out that 20 Global 2000 per quarter, 4% growth to get to that 1,000, that was just a framework.

You can see our numbers have been tracking.

We feel good about getting there, whether it's 3.8% average growth or 4.1%, we feel pretty good about that.

We're well ahead on the 1,000 G2K.

We only need to add 14 a quarter now to get there.

And our next question comes from Abhey Lamba with Mizuho Securities.

This is Parthiv on for Abhey.

Just following up on a prior question around international.

Can you give us a sense of maybe differences in buying trends in those geos?

I guess, which use cases are most apparent to new customers and which ones do they need to be cautioned to drive further adoption?

Abhey, I'll just maybe start on that just by saying -- reiterating what I said earlier, which is I'm really struck by the similarities rather than the differences.

And probably the biggest difference is cloud adoption.

Certain countries are more ahead on cloud adoption, the U.S., the U.K., Australia, really Northern Europe.

Interestingly, Japan is really coming on where cloud adoption is getting stronger.

And that's partly driving our strong Japanese growth.

And Germany is probably a half step behind on cloud adoption and dealing with more some of the German security and data localization issues.

And so I think that offers real growth opportunity in the coming years as Germany begins, and many of the large multinationals in Germany begin, to embrace cloud more fundamentally.

And so we're positioning ourselves to be able to take advantage of it.

And then last thing I'll just reiterate is from the -- as I said a few minutes ago, the governments -- state, regional, local and federal governments in literally Australia, the U.K, other parts of Europe, the U.S. are adopting cloud more aggressively, and that's generating underlying demand for our platform and frankly, the other cloud platforms.

Our next question comes from Brad Zelnick with Credit Suisse.

So we're hearing really great things about your security ops product.

And I wanted to ask you a bit about the long-term strategy.

If you take -- if you talk to a lot of the traditional security vendors, they're getting increasingly vocal about the need for consolidation just to make the problem go away and reduce the number of disparate point products that they're having to deal with.

So how do you see yourself competing in a consolidating environment?

Well, I'd say, Brad, that it's -- again, I'll go back to how I answered the previous question, which is kind of through the eyes of the customer, right?

And CTOs increasingly have 3 categories of issues to deal with.

They've got to prevent problems, they have to detect problems and then they have to respond when there are events.

And they're getting in a growing number of event signals, and they have to sort through, really, an exploding number of event signals, if you will, potential event signals coming from.

And so it's in the latter category that our product is so valuable to help them sort through those.

I think the burden is on us to work with the other cloud platforms as seamlessly as possible and as effectively as possible.

And frankly, in the last -- really, in the last couple of weeks, I've met with the CEOs of a couple of the leading security cloud platforms about how we can integrate our products most effectively.

And we're good at what we do.

We are good at the workflow, the incident response, the predict and prevent.

Others are good at collecting data, parsing through the data.

Others are good at creating firewalls and other things.

If it was all in one company, you wouldn't have best-in-class capabilities.

And the power of cloud should be that each of us do what we are best-in-class at and then use the flexibility of cloud to more seamlessly pull together solutions for the customers.

That's what they want and that's what we're focused on delivering.

John, it's clear you're coming at it from a really unique angle and that's resonating really well in the market.

If I could turn just to the platform-as-a-service opportunity.

I noticed an award that you'd won for PaaS recently.

I just wanted to understand how much of this is standalone opportunity in the future that can be monetized independently versus a way to customize and add on to core apps?

It's a great question, Brad, because -- and it's frankly one where we're talking a lot about right now because there is growing demand for our platform.

And the 2 things I hear from customers and Mike hears it, we all hear it when we're with them, they want out-of-the-box functionality from our core applications and they want the flexibility of our platform because they want to expand it and use it in other workflows, in other situations.

And so we're trying to invest -- as CJ Desai, who's our Chief Product Officer, his #1 investment priority is our platform and strengthening and investing in our platform, building mobile capabilities, machine learning, bot -- or chat functionality, mobile capability.

And so that our platform, both for applications and for the more customer-driven use cases, is strong and robust.

We're monetizing it currently.

We'll continue to monetize it.

We're going to look at different ways.

That could be one of the first areas, we'll look at things like transaction pricing.

So the demand is strong, and we're going to, first and foremost, invest in making the platform strong.

And then continue to try to make sure it gets as widespread adoption as possible because that, frankly, creates the kind of sticky and value-added customer relationships that will be the foundation of our ability to go from $4 billion to $10 billion.

I'll just add, 15 of our top 20 deals include the platform this past quarter.

Our next question comes from Jesse Hulsing with Goldman Sachs.

John, a couple of questions for you.

The first, partners has been a big part of the ServiceNow story, and all of them have had a lot of success with ITSM.

And some of them are starting to have success with some of your newer product lines.

I'm just wondering how do you -- how you think partners are versus where you'd like them to be on some of your newer products?

Are there things that you can do to get them more involved in HR and customer service and secops that sort of thing?

And then I have a follow-up as well.

Well, as you said, Jesse, partners are critically important.

And in the meetings I referred to earlier, one of the areas, for instance, that in addition to ITSM and ITOM, our partners are getting very involved in the employee experience efforts that we described earlier.

I was at one of the leading banks in the U.K. 2 weeks ago, meeting with their COO and their Chief, I'll call it, Transformation Officer around employee experience.

And they were talking about how they, along with us, in this case, Workday was their HCM provider and a third-party partner, can work together to deliver the kind of great employee experience.

And so partners around employee experiences are working with our customers and with us to help deliver that seamless experience that taps our capability as well as that of our -- the other cloud platforms.

And so one of the things we're working with the partners on is how can they build the expertise in each of our product lines in each of the geographies so that we can jointly ensure that the customers get -- are able to get our products implemented with the maximum speed and maximum effectiveness.

So we're trying to work more closely together with that.

And it also ties to what Mike mentioned earlier with the training and certification.

We're ramping up our training and certification capabilities to help them train and certify a growing number of people in our non-ITSM products.

Got you.

That makes a lot of sense and it's good to hear.

And then last question for me.

How is the -- how's your thinking evolving regarding M&A?

The ServiceNow strategy of acquiring tuck-ins and replatforming them and integrating them tightly with your core platform has worked really well.

Would you consider something more transformative down the road?

I guess, the old adage, "If it ain't broke, don't fix it," comes to mind.

So I think the approach we're using currently makes a lot of sense.

And we have organic growth opportunities that are so strong that, that's going to be priorities 1, 2 and 3. It's executing on our organic growth.

Now that requires us, wherever possible, to do tuck-in acquisitions of talent and capabilities to accelerate our ability to deliver on that organic growth.

But the opportunities we have organically are so strong that, that is -- absolutely executing on that is fundamental priorities 1, 2 and 3.

And our last question comes from Karl Keirstead with Deutsche Bank.

For Mike or John, I'd love to ask about pricing trends, especially as you add new features in Jakarta and soon, Kingston.

I'm wondering if it's fair to say that pricing, either per fulfiller or per user, has an upward bias these days and is likely to have that throughout '18 as well.

So I will say, Karl, our kind of philosophy around pricing has not been to increase the price per user per se, it's to drive more users at our customers on our products so we're extracting more dollars over time.

I will say that as we are selling today our latest versions to new customers, those products or those applications have a lot more features and functionality than it did 2 years ago, so we are able to extract more on a per user basis and show customers real value.

So yes, over time, I do expect our pricing with what we're extracting out of customers to increase, but I wouldn't say it's a big increase per user at our customers, slight.

And that concludes the Q&A session for today.

I would now like to turn the call back to Mr. Scarpelli for any further remarks.

Thank you.

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

Thank you for joining us today.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes the program.

You may disconnect.

Everyone, have a great day.