ServiceNow Inc (NOW) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2018 ServiceNow Earnings Conference Call.

(Operator Instructions) As a reminder, this call will be recorded.

I would now like to introduce your host for today's conference, Mr. Michael Scarpelli, Chief Financial Officer.

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.

During today's call, we will review our third quarter financial results and discuss our financial guidance for full year 2018.

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.

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 and 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 on today's call.

We had a strong third quarter, continuing our global momentum and accelerating our role as a strategic partner enabling digital transformation.

Our teams continue to execute well, and our focus and commitment to customer success is evident in our results.

We closed 25 deals in the third quarter, with ACV greater than $1 million, and we now have 614 customers doing more than $1 million in business with us.

11 customers are doing more than $10 million, almost triple the prior year, including 4 U.S. federal agencies.

And we ended the quarter with more than 5,000 enterprise customers.

The U.S. federal government represented our biggest deals in the quarter, accounting for 1/5 of our total net new ACV.

This was our largest federal quarter ever.

For example, the U.S. State Department is now our largest platform customer.

We're becoming a critical strategic partner to the U.S. federal government as it modernizes its IT infrastructure and moves to cloud-based services and platforms.

And further strengthening our public sector capabilities, we just announced an alliance with Microsoft to deliver digital workflows through the Azure government cloud.

This alliance is designed to help federal agencies move faster and securely to cloud-based solutions.

Just as we've seen in the private sector worldwide, digital transformation is becoming a public sector imperative, and we are deeply committed to being a preferred strategic partner, helping governments modernize, drive efficiency and deliver better experiences for employees and their citizens.

I spent much of my time in Q3 traveling the world and meeting with our customers in Australia, Japan, France, Sweden, the U.K. and all across the U.S. In every discussion with CIOs and CEOs, a few common themes emerge, most importantly, the business imperative for digital transformation, the need for trusted technology partners and the challenges of driving cultural change.

And in more and more conversations, we are being seen as a strategic partner of choice.

Our core focus is on delivering digital workflows that create great experiences and unlock productivity.

We make work, work better for people, and our powerful platform and diverse product portfolios give us great opportunities.

We're well positioned to play a broader strategic role in digital transformation journeys as our customers embrace this part of their future.

Product innovation is essential to our success and continues to be a top priority.

Our London release went live in the quarter, delivering customers exciting new product capabilities, such as virtual agents that we announced earlier this year at Knowledge.

Our London release demonstrates our ongoing commitment to delivering innovative, intelligent capabilities across our Now Platform and product portfolio.

And looking ahead, we're investing heavily in more intuitive consumer-like user experiences and building more mobile-friendly, mobile-first capabilities.

We expect to be launching significant enhancements in our mobile capabilities and user experience over the coming year.

Customer success is also a big priority for us, and we continue to make good progress.

We're driving customer success to be a natural extension of our sales motion and are committed to both landing new customers and expanding our existing customer relationships in a healthy and sustainable manner.

And our customer success approach is paying dividends.

For example, our customer success team helped land a significant deal with a European Fortune 200 financial institution in the third quarter.

This team showed how we can help enable and deliver key elements of their transformation initiatives and drive successful business outcomes.

And we continue to focus on supporting a strong partner ecosystem.

For example, Accenture just announced deeper investments with us in Europe to give their European customers a full range of implementation services and expertise in ServiceNow.

And following on the heels of our recognition in May as Forbes #1 World's Most Innovative Company, it was equally gratifying to be recognized this month as a top 3 company on Fortune's Future 50 list.

The Future 50 identifies companies that are "firmly focused on the long term." And that's us.

In addition, Forrester recognized us as a leader in enterprise service management, and Gartner named us as a leader in their Magic Quadrant IT Service Management tools for the fifth consecutive year, citing our completeness of vision and ability to execute.

In closing, I'm very pleased with our strong quarter.

We have strong momentum, and we're continuing to make progress against our strategic priorities.

At the end of the day, digital transformation is about delivering great experiences and unlocking productivity, and our digital workflows enable both.

With our Now Platform and our 3 workflow clouds: IT, employee experience and customer service, our customers can create intelligent and intuitive experiences to make work, work better for people, and that in turn unlocks productivity, both for the employees who can now focus on higher value-added work and for the entire enterprise by making work simpler, easy and faster.

That is the future of work, and we're committed to helping our customers create it.

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

Thank you, John.

Our first half momentum continued into Q3, and we delivered another quarter of strong performance, setting us up for a great finish to 2018.

Subscription revenues were $627 million, representing year-over-year growth of 39% and constant currency growth of 40%.

And subscription billings were $674 million, representing year-over-year growth of 35% and constant currency and duration growth of 34%.

Our strong top line performance was driven by bookings outperformance, coupled with accelerated revenue recognition from self-hosted deals.

Our U.S. federal business highlighted the quarter.

Government agencies are increasingly looking for strategic partners to help them digitally transform their businesses.

While IT is a key driver of this initiative, we're also seeing federal customers look to our emerging products, including our platform offering, which drove our largest deal in the quarter.

Our investments in our federal sales force and FedRAMP-certified data centers are paying off, and we view this sector as a large opportunity going forward.

In Q3, the U.S. federal sector represented 20% of net new ACV, up from 18% in the prior year.

We also saw strong profitability in Q3, including 24% operating margin and 17% free cash flow margin, driven by some marketing expenses shifting to Q4, back-end hiring linearity and lower-than-expected professional services partner fees.

Due to the strong performance through the first 3 quarters of the year and expectations going into Q4, we are raising revenue, billings and free cash flow guidance in 2018.

We now expect subscription revenues between $2.415 billion and $2.42 billion, representing 39% year-over-year growth and 37% constant currency growth.

We expect subscription billings between $2.83 billion and $2.835 billion, representing 33% year-over-year growth and 31% to 32% constant currency and duration growth.

We are maintaining 2018 subscription gross margins of 85% and operating margin of 20%.

We continue to see strong productivity from our sales force, and we will continue to hire aggressively after adding a record 500-plus net new employees in Q3.

We are increasing our 2018 free cash flow margin guidance to 28%.

Finally, we expect 188 million diluted weighted average shares outstanding for the year.

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

(Operator Instructions) Our first question comes from Rob Owens with KeyBanc Capital.

I'd love to drill down a little bit more into the success you've seen overall in the federal markets and kind of the breadth of the portfolio, which I think you touched on a little bit.

But is the take typically around ITSM, and then further add-ons?

Number one.

And number two, is this more of a greenfield opportunity you're seeing within Fed?

Or a brownfield opportunity at this point?

Would love to get some color.

Sure, Rob.

I'll tell you, the -- in my travels over the last year, I've met with governments now in all 3 continents, multiple countries, federal, state and local.

And a couple of things are clear.

I think initially, when cloud came around, governments were a little bit suspicious and maybe a little bit slow to embrace it for security concerns, for the newness factor.

I will tell you that's changing, and governments are under pressure to deliver efficiency and deliver better citizen experiences, and they now recognize cloud -- and to do that in a safe and secure way, and they now recognize cloud is an important enabler of that.

So we are seeing strong demand from governments, again, federal, state and local, really around the world.

Now in the U.S. federal sector, the good news is ServiceNow has been investing in this sector and in this team over the last several years.

We have a dedicated sales team in Washington, with a lot of resident expertise there.

And the demands -- I was in Washington for a full week.

It's probably end of Q2, early Q3.

Literally, across multiple federal agencies, they're looking for their own equivalent in digital transformation, and they view our platform -- what's fascinating is they -- they, perhaps even more than the commercial sector, start with our platform and the power of the platform.

And so the state department deal that we talked about in the script was fundamentally a platform deal, and then ITSM and other products on top of it.

One of the military services is using our platform in some very creative ways to look at how they onboard their soldiers, how they move their soldiers around, how they off-board over time.

And so we're very excited about the opportunity with both the U.S. federal government and governments more generally, because obviously, they have big budgets, they have big needs, they're under pressure to deliver and they're turning out to be some of our more innovative customers on how aggressively they're embracing the platform.

One final story.

You can sort of hear my excitement on this.

In Australia, and the same thing is true in the U.K., some of the state and regional governments are using our platform for some really creative ways.

For instance, one of the port authorities that also oversees a bus -- the busing system is talking about how they're delivering better end-to-end experiences, both for the packages and for the people, using the ServiceNow Platform.

So again, I think there's an enormous opportunity here.

And obviously, the reason federal is so big in Q3 is the U.S. federal budget cycle ends at the end of September 30.

So this is obviously their equivalent of what commercial business will be at Q4.

And our next question comes from Jennifer Lowe with UBS.

First, I just had a question for Mike.

If I look at the outperformance that you had in Q3, sort of normalizing for duration and currency, it looks like, from the slide deck, it was about $21 million of outperformance relative to the midpoint of guidance.

Certainly, you're taking the full year numbers higher for non-GAAP subscription billings, but maybe by a little less than the outperformance you saw in Q3.

Is there any sort of -- did you see things that you thought would be in Q4 pull forward?

I'm just trying to contextualize what looks like sort of an implicit guide down for Q4 relative to what sounds like pretty bullish commentary on the environment.

Yes.

No, we actually raised Q4 when you look at what we did.

$8 million for billings was deals that we we’re expecting in Q3 that happened in Q4 -- or sorry, we expected in Q4 that were pulled into Q3.

And then you also see on the revenue side as well, too, there was about $4 million of the beat in Q3 was associated with Q4 deals that were self-hosted, that happened in Q3.

And you can see that, by the way, in our IR deck.

We do a reconciliation on Page 4.

Okay, great.

And maybe just a bigger-picture question.

I think you and others have had a pretty phenomenal calendar '18, and we're not at the point yet to get calendar '19 guidance.

But I guess, sort of 2 questions.

One, there was a question earlier in the year whether tax reform and sort of -- would create sort of a high -- better-than-normal spending environment.

Now that we're sort of closing out the year, I'd be curious to get your thoughts on whether that had as much of an impact as maybe you thought it would.

And two, as you talk about these digital transformation projects with customers, what's sort of the time duration attached to those?

Are people talking to you about multiyear deals that would carry over into future years?

Or is it sort of tactical around tax reform in 2018 that maybe fueled a little more than normal activity?

Yes.

I'll start, Jennifer.

I don't think we've really seen any big impact to tax reform.

I'm not hearing customers spending more specifically on the ServiceNow due to tax reform.

I definitely don't think it's hurt us, but I would say, we weren't expecting a big uptick as a result of that.

And I'll let John talk about more of the length of a digital transformation with customers.

Well, Jennifer, the thing that's striking to me -- and I'd say this has evolved even in the 18 months I've been here.

Digital transformation is no longer a business buzzword.

Digital transformation is an essential strategic need for virtually every customer that I'm meeting with.

And it is just stunning, the consistency around that.

And in simple terms, you think about it, software is disrupting every company in every industry in every geography.

Every company wants to digitally connect with their customers.

They want to provide a better digital experience to their employees and they want to use digital technology to drive productivity and efficiency, so they can dedicate their scarce talent, their scarce capital, their scarce resources to innovating for their customers and not getting consumed in the global -- the complexity of running a global enterprise.

So I hear that literally in every interaction.

Actually, commercial and governments.

And so digital transformation absolutely is at the top of the investment priorities for companies, and I don't think it's driven by tax reform or even macroeconomic factors.

I think it's more strategic spend.

And so we feel ourselves in the middle of that strategic spend, where -- I'll give an example.

I was at a large Fortune 50 consumer products company, where they've identified -- and growth in consumer products companies are not huge, so productivity has become very, very important.

And they've identified -- they said, we've done the easy cost reduction.

We've done the easy, now we need to drive productivity, healthy productivity.

And this is the head of their shared services, their business shared services group, which is a highly empowered group across their divisions.

And he said, automating workflows, we view -- streamlining, simplifying and automating workflows across our large global entity, we view as a source of highly positive, highly healthy productivity that improves employee experience and helps reduce costs.

And he said, we've looked around and we view ServiceNow as a core strategic partner and core strategic platform in helping us do that.

And so what I find encouraging -- so yes, is it multiyear?

It's absolutely multiyear.

But increasingly, we're getting pulled into the strategic initiatives of companies and tied to real business outcomes, economic outcomes around employee experience and around productivity.

So I think that's what's fueling our demand.

Obviously, cloud is a phenomenon.

We're still early in the cloud world, I believe.

And cloud is one of the few investments you can make that can provide better experiences, faster speed and lower cost.

And that's really driving the demand.

I would add, too, Jennifer.

The one thing that we have seen -- and I remember from 5, 6 years ago, a lot of the analysts used to say that the role of the CIO was going to be diminished because of cloud.

If anything, we see with the digital transformation, the CIOs are becoming more strategic in their companies and it helps that we have a relationship with the CIOs.

Absolutely.

Our next question comes from Kirk Materne with Evercore ISI.

John, I was kind of curious, just you mentioned sort of the 3 workflow clouds, I think, in terms of IT, employee onboarding and Customer Service Management.

I was just curious, are you guys doing anything around the go-to-market to try to take those kind of concepts into the market more directly?

Or are there things you're thinking about?

You may have mentioned that before, but that's the first time I've heard you sort of talk about them in those 3 buckets.

And then Mike, I was wondering if you could just touch upon -- well, a big hiring quarter for you guys where you're adding people maybe, and where you're focused on with those hires for next year.

Yes.

Great question, Kirk.

And to be honest, it's sort of funny.

Mike and I are sitting in the room right now where we did our end-of-summer product reviews and looking about our strategy.

And I had just come back from a month on the road, meeting with customers, CJ Desai just come out of all his product reviews.

And what we sort of realized that -- we've been describing our product portfolio in what I would describe as inside-out terms: HR, security, customer support, ITOM, ITSM.

And the reality is, those aren't the words the customers are using.

And so, this move to the 3 -- or the Now Platform and 3 clouds is, to some extent, adopting the same language that customers are using when they think about it.

So let me just sort of describe each.

Customers almost inevitably talk about our platform first, not our products.

They say, your platform is powerful.

We recognize the power and value of your platform, both your out of the box and our ability to build applications on it.

And it's becoming one of the core platforms, one of our core -- if I've heard this once, I've heard it 25 times in the last 60, 90 days.

You're now one of our core strategic platforms going forward.

So the Now Platform is the sort of foundational element.

And then the 3 clouds are really describing our products, our existing products around the business areas that they're addressing.

So our IT work -- we call it 3 workflow clouds.

Our IT workflow cloud is helping the IT run their business as if -- run IT as a business.

So that's IT Service Management, ITOM, that's IT analytics management, IT Business Management.

And so the CIOs are increasingly looking at our capabilities to help them run their own function better.

The employee workflow cloud or the employee experience cloud is how they're describing their desire to automate workflows to deliver better end-to-end employee experiences and drive better efficiency.

And so that's where ITSM, HR case management, HR onboarding and off-boarding, those all tie together to help build end-to-end employee experiences.

And they're asking us around facilities and finance and other functions that -- can we automate workflows.

And so you'll see us -- our product development and NowX focus will be on building out some of those workflows to deliver the end-to-end experiences and help them drive greater productivity across that.

And then the last cloud, the customer support, the customer service workflow cloud, is really driven by a subset of customers, frankly, more B2B customers, who are increasingly using our capabilities to serve their customers.

And I think about the whole customer support market or customer service market as 2 broad segments.

One, a B2C segment, where customer service platforms seem to be more CRM-based.

That's not our sweet spot.

But B2B environments, where the inbound customer contacts need to get to the root cause of what's causing the problem, get that root cause addressed, and then getting back to the customer with resolution.

That -- our platform is very well suited to that, and that's really when you look at our growth in customer support, where it's driving.

So these, I think, 3 -- grouping in these 3 areas -- I was at the major CIO organization a couple of weeks ago -- I think allow us to more critically describe who we are, we're the digital workflow company, and help drive our incremental innovation investment and link it to their business outcomes, link it to the goals that they've established for themselves.

So I think you'll see us drive a little more of our marketing and how we talk about the company in these terms.

And then Kirk, on your question with regards to headcount, where we're putting these people.

Most of these people, the -- #1 is R&D, #2 is our sales organization, and that kind of flows through the rest into the others.

And we think that R&D and sales will be the big investment areas as well, and actually in our next 3 years is what we're planning on hiring most of our people in those 2 groups as we see the opportunity in front of us.

Our next question comes from Kash Rangan with Merrill Lynch.

I just wanted to get your thoughts very quickly.

Do you see any tailwinds or headwinds to IT spending in 2019 based on, John, your conversations with customers?

And secondly, when I look at the way you categorize your clouds, you've got a play in HCM broadly, being [industrialized] HCM.

You've got a play in the CRM market.

Also, I cannot help but wonder, but as you look at your plans to be a $5 billion, $10 billion revenue company, it appears to me that there could be other major markets that you'd have to participate in a pretty big way.

Because, obviously, companies like Salesforce.com worked -- made some significant acquisitions along the way, en route to trying to be large companies.

So I just wonder how you think about the acquisition road map and your potential of playing in markets in a much bigger way, that you have to if you were to become a multiple of your current size.

And it's meant to be worded in constructive way rather than a critical way.

Well, Kash, let me -- on IT spend, as I said earlier, to be honest, it's digital transformation investment that every company is needing to make.

They're embracing software, they're embracing cloud and that's, therefore, driving IT spend.

So we see continued strength there.

I appreciate your question because I think it's a really important one.

And again, I'm going to answer this through the eyes of the customers about what I hear consistently and how we understand where we play.

What I consistently hear from CIOs, COOs and, in some cases, CEOs, is as they embrace cloud at the infrastructure level, they're consolidating their infrastructure needs, and they're figuring out what their public cloud, hybrid cloud, private cloud strategies are.

And then at the software layer, they're adopting 4 to 6 strategic cloud platforms.

And typically, those would be -- often, it's a Salesforce for their sales cloud and sometimes their marketing cloud, Adobe for their marketing cloud, a Workday for their employee or HCM cloud, Office 365 or Microsoft, often, for their productivity.

If they have a supply chain, you'll hear SAP frequently.

And ServiceNow is both the IT cloud, but also the workflow cloud, the cloud that helps enable the workflow all around these other systems of record.

And they say 2 things.

One, they want 1 plus 1 plus 1 plus 1 to equal 10.

So it is not a zero-sum game in their minds.

They view each of these core strategic platforms as additive, and they want us to work effectively together, which I believe we can do and are doing.

And two, our particular role is not just IT, it's workflow.

And so we view our market opportunity is digitizing and automating workflows all across the enterprise.

So we will never be an HCM system of record.

We don't need to be, and we use Workday internally.

We think they're terrific.

We'll never be a CRM system of record.

We think there's -- we think Salesforce and Adobe and others do that quite well.

We'll never be a financial system of record or a financial ERP.

What we do, do better than anyone is the workflows around those platforms.

And if we look at that opportunity, that market opportunity, we think it's an enormous TAM and offers tremendous growth opportunity to $10 billion and well beyond.

So the point I just want to make is, I do not see this and nor do customers see it as a zero-sum game among the major strategic cloud platforms.

They want them to work together.

I believe there's plenty of growth for all of them.

And in particular, I think us, as the digital workflow company, we have a huge market opportunity that's additive to the others, and that's what we're pursuing.

And to be honest, again, these 3 clouds, everything I'm talking about, has not been thought up here in some windowless conference room.

It's based out of hundreds and hundreds and hundreds -- or conversations with hundreds and hundreds and hundreds of customers.

And that's what they're saying to us.

I'll make one final comment.

You can hear a little of my passion on this.

As I said, I was fortunate enough to be able to speak to the top CIO group a couple of weeks ago.

And a CIO of -- again, in this case, a different one, but about -- a major industrial company, Fortune 25, Fortune 50 company, said, hey, this is his algorithm.

He called it 1 plus 1 plus 1 plus 1 times ServiceNow equals 10 times.

He talked about that he has -- in his tech stack, he has a Salesforce, a Workday, an Office 365, in his case an Oracle for financial ERP.

And he said, and we at ServiceNow, [that instead of it] being plus 1, it's times 1, and the multiplicative impact we can have, not just in IT, but when workflow around all those other clouds gives the 10 times impact.

And that's directionally is what we're hearing and that's directionally what we're pursuing.

Our next question comes from Alex Zukin with Piper Jaffray.

Our next question is Raimo Lenschow with Barclays.

Quick, John.

Can I stay on that subject?

And as you kind of move over to be -- and talk more about platform and be more the workflow platform, how do you -- as you think about 2019, how do you think about your go-to-market with your sales guys in terms of how they are positioning it?

What you do with your sales guys in terms of, are they able to kind of get that message across?

What needs to change there to kind of do kind of even do a better job there?

And then for Mike, you gave the cash flow margin kind of framework at the Analyst Day.

I see now we've kind of upgraded that a little bit.

Can you talk a little bit about the drivers for the upgrade this year and if that changes your overall framework?

Yes.

Raimo, on your first question, I believe this allows us to even focus the sales teams even more.

So obviously, our platform and IT cloud is our historically sweet spot, the CIO.

And as Mike mentioned, the CIO is increasingly playing a strategic role.

Describing things as the employee experience cloud or employee workflow cloud is a better description, I think, of what we do because employee experience is not just an HR issue or just an IT issue or just a legal or just a finance.

That increasingly, you're seeing as companies try to embrace the end-to-end employee experience and automate workflow.

The CIO has to work with the CHRO, who has to work with the CFO.

And we often are sponsored or introduced into that equation by the CIO, but we find ourselves working with that triad, that team more frequently.

Because there is a -- and sometimes you have a shared services, a shared business services person that often reports to the CFO.

But it's that triad -- as companies are trying to say how do we digitize our internal processes and digitize our internal employee experience, it needs the CIO, CHRO and CFO or shared services, and so we're calling on that group.

And then in the customer service or customer support world, by being even sharper and clearer that B2B is our focus, in many cases, customer service in a B2B environment reports either to the CFO or COO.

And so again, that's an area that's a natural -- and the CIO is often involved, so it's a more natural adjacency for us.

And so I think if Dave Schneider or Kevin Haverty were here, they'd say this kind of way of thinking about and describing what we are, which it actually reflects what we're doing, mirrors what we're doing in a more focused way.

And again, the CIO, as Mike said earlier, is increasingly involved in almost all of those situations.

So it's a -- our strength there is, I think, an asset.

And then, Raimo, on cash flow, I thought you'd be happy that I was giving -- we were giving a good cash flow margin increase for the year for free cash flow.

No, I am.

I am.

But before...

But it's driven by a couple of things this year.

Part of it is Q4 is off to a very good start in terms of the billings associated with the number of customers, that I expect collections to be very strong this quarter, more than what I was thinking earlier on in the year.

And it's really a timing issue.

The other thing is there's a bunch of CapEx projects that we're initiating that I don't think the payments are going to happen until next year.

So that's really pushing some of our spending from a cash flow perspective into '19.

As a reminder, at Financial Analyst Day, we did say you will get greater than 1% operating margin and greater than 0% free cash flow margin expansion.

I'm not giving guidance for '19 right now, but I do think operating margin and free cash flow will converge a little bit to growth.

And then longer term though, I just want to remind people, cash taxes will kick in, in around 2023, 2024, which will have an impact on free cash flow.

Our next question comes from Michael Turits with Raymond James.

Guys, you did a great job of going at a very high level.

And John, you answered it great.

I wanted to drill downwards a little bit and ask you about 2 product areas.

One, in ITOM, how much do you think about going down the stack, down closer into monitoring and actually touching the infrastructure?

And then one subsegment that's been active in M&A in the industry lately has been around IT notification, where it seems to be -- or there's been some acquisitions there.

I was wondering if that is in your sweet spot and if you're investing there.

So down the stack towards monitoring and touching the IT infrastructure and IT notification.

Michael, again, the way I'll answer that is we're listening intensely to the customer and listening intensely to how CIOs, how VPs of Infrastructure, VPs of Application envision running and leading IT over the next 5 to 10 years.

Because there's just no doubt that the role of IT is shifting in the company and the way they're running IT is shifting and growing.

And so there's -- we have very strong demand for ITOM this year, and that can be discovery, service mapping, just as they're trying to get a robust CMDB.

And I think there is some appetite for us to explore, as you described, moving down the stack or to have our platform continue to broaden and expand so that they have -- I don't want to say one-stop shop, but they have -- they can build more -- have fewer applications, and then more applications on our platform, is the way I would say it.

And so when you look at our road map, when you look at any M&A we may do, we're simply listening to our customers and saying, all right, how do we continue to build out our ITOM and other IT capabilities to help ensure that CEO -- I'm sorry, CIOs can run IT in a modern way?

That's -- because they've got this -- they have this -- the barbell effect, where they have -- a lot of this is legacy stuff.

And the legacy stuff is not going away overnight, and yet they have modern platforms, like ServiceNow and other modern applications and modern mindsets around agile and DevOps.

And the CIOs want our platform to bridge -- help them bridge both.

And so they can't walk away from the legacy.

We help them address that.

But also, we're increasingly helping them run IT in a modern way.

And so that will continue to drive not only the organic growth -- organic road maps, rather, that -- for IT-related products, but also our M&A agenda.

When we can add incremental capabilities to our company and our platform that match those needs that CIOs want, we'll continue to do that.

And then IT notification, to be honest, I haven't really -- that may be -- I haven't heard that specific request, and CJ's not in the room with us.

It's very well could be on the road map, it's just not -- do you know, Mike?

Yes, there's a lot of people that play in that market.

There was -- you've got -- Atlassian bought OpsGenie.

You have -- Zendesk bought that [Zenskill].

You got VictorOps, that was acquired.

It's not something -- there's a lot players down there.

Splunk is playing in that space.

We're going to more partner down there right now.

Our next question comes from Justin Furby with William Blair & Company.

This is actually Vinay on for Justin.

And continuing on the product theme, if you look at the HR services or case management market specifically, just kind of wondering, how do you see the pace of spending or deal sizes trending there?

And how would you characterize the competitive environment?

Well, the HR -- or what we have been describing as our HR product -- increasingly, I consider it a component of our employee experience -- has performed well.

We've got 20 -- you asked magnitude.

We have -- I think it's something -- 20 customers over $1 million.

And again, where we tend to get involved is when there's an employee experience initiative.

And that's when you want to combine the -- many of the finance system records, the HR HCM system of record, things like payroll, T&E and other things into a seamless experience for employees.

And increasingly, companies are realizing that they want what I would have called a shared services portal.

But they want to have their employees go 1 place where they can report problems, get knowledge, get their questions answered and get things resolved.

And if you have to go into a different place for an IT problem, as you do an HR problem, as you do a facilities problem, employees are going to pick up the phone.

And that's what -- employees don't like that and increasingly, organizations don't like it because it's high cost.

And so our shared services portal, both web and increasingly mobile, allows companies to tell their employees, go one place for all of your internal problems and questions and get them resolved.

And if you can use self-help, that's what employees love, that's far more productive and efficient for the company, or an automated response through Knowledge.

And so that's the pull, that the underlying business pull we feel, and that's the situations where our platform, our workflow platform is relatively unique.

So that may start with HR case management, that may start with our onboarding and off-boarding, it may start with the shared services portal.

We had a customer, a large top 5 U.K. bank, it's a global bank based in the U.K., and they went live with our -- an end-to-end employee experience that we were fueling, in this case, alongside SuccessFactors, for -- with 173,000 employees.

And I think from start to finish, they got it live in something like 6 months.

It might have been a little more than 6 months.

And so -- and again, that was a CEO-, COO-sponsored initiative that HR's partnering with IT, partnering with finance to drive a strong end-to-end experience.

And our platform is a cross-functional workflow platform, was sort of a foundational element and the fact that we worked well with all the other supporting platforms.

It's really -- and so that's what's driving our -- that's why calling it employee experience, I think, is a more accurate depiction and will also drive our incremental road map priorities.

Our next question comes from Matt Hedberg with RBC Capital Markets.

I wanted to ask about FriendlyData.

It looks like it's bringing natural query language or natural language query to the platform.

It seems like that could resonate well with some of your nontechnical users.

I think you guys mentioned that you're replatforming it.

Can you comment a bit about what this means to the platform?

And maybe any feedback from customers when this acquisition was announced?

Yes,, Matt.

This is -- I think it's now our fourth, I'll call it, AI-related acquisition, starting with DxContinuum.

And look, here's what customers are saying.

They're saying 2 things.

One, they want to build experiences that are really easy to use and -- or really easy to build, so low code, no code kind of capabilities for the developers inside the company.

And they want to have experiences that their employees can get automated or self-help kind of functionality.

And so what this particular acquisition does, as you said, sort of language processing, it just helps you translate -- just helps you -- natural language search helps you translate voice or voice text, would be my simple way of saying it, but with natural language and receive responses and charts or graphs or text.

And so it's a form of chatbot, is the way I think about it.

But you make a request in one mode, whether that's voice or text or verbal, and it responds in the mode you want back.

And so it's a nice team, it's a good team of engineering talent and a good platform, and we're doing what we do with every acquisition we make, that they're recoding it into the core ServiceNow Platform.

I'll remind you, of one core platform driving all of our applications and customers.

And we think it accelerates our road map significantly.

It will be used across all products and will help drive platform adoption.

And we're thrilled to have the team, really, really, really strong team, nice team.

And we're excited to have them part of our overall organization.

Our next question comes from Walter Pritchard with Citi.

A question, I think, for Mike or if Dave Schneider is in the room there.

Wondering on the sales capacity build as we look at that headed into 2019.

Could you maybe contrast or compare how that ramp and the composition of that ramp compared to what we've seen in the last couple of years?

I expect it to be pretty similar in terms of what we're looking to add going into next year.

I'm not expecting major changes to the sales organization next year.

I will say, most of our revenue, as you know, comes from large enterprise.

As we've said before, around 20%, 21% of our revenue is commercial, and the other is G2K and large enterprise and public sector.

So obviously, we're very focused on public sector and geographically, we think there's a large opportunity continue to grow in Asia with new logos, but there's lots of opportunities still within the U.S. and EMEA to further penetrate our existing accounts.

And we still find that reps have too many accounts they're covering, and we need to hire more people.

And so we're going to continue to [hire] as well.

We're going to continue to add more product sales specialists as well to support our emerging products within our sales organization.

And then on the product side, relative to security, I'm wondering if you could update us on success there and your thoughts on it.

You're sort of a fairly narrow player in that market, if you have any ambitions in terms of expanding your addressable offerings in that area.

Well -- I mean, I'll take this, Mike, and you can add on.

So inside what we characterize as security are really currently 3 use cases.

One is GRC, which by the way, there's a lot of demand for.

You'd call that security or not security.

It's often driven by the audit committee.

And it's -- there's a growing focus on governance, risk and compliance.

And I might even add privacy to that in this day and age, too.

And so we think that product -- we know that product is getting a lot of demand.

And increasingly, audit committees -- CIOs are being brought -- CIOs and CFOs are being brought to audit committees and they want to have automated ways of monitoring all of the various tools and all the various platforms and all the various products that go into governance, risk and compliance across an enterprise.

And the ServiceNow Platform is a great way to get one source of truth for that.

So that's driving that piece of the equation.

And then we have incident response and vulnerability response.

And it's the 2 core use cases in our security suite.

And we see, I'd say, strong demand for both.

And I view it, consistent with your question, as complementary to the many other security platforms and tools in that space.

And so we may incrementally -- I don't think it's going to be a major area of expansion for us, simply because I think it's being well served by others.

And it's a fairly fragmented space.

It's a space that's changing rapidly.

And so I think the workflows around security, that's going to be our sweet spot, and that's, in essence, what we do.

That's why this workflow mindset, these workflow clouds will be -- will help do workflow around security.

But I don't think you'll see us become one of the core security platforms, like a Palo Alto or a Splunk or a FireEye or some of the others.

Our next question that comes from Sarah Hindlian with Macquarie.

So a quick question for both of you.

I'll start with you, Mike.

Mike, how are you thinking about the professional services segment going forward?

Because we've heard from some of your SI partners that one of their biggest issues is really a high-class problem, and it's that there's essentially not enough ServiceNow experts out there in the field to meet the demand in their ServiceNow practices.

So do you think about needing to reinvest in that business?

And then a quick one for you also, John.

It seems to me that you guys are likely really starting to see some brand recognition for ServiceNow in the market.

I imagine you would have to be given the size of some of the deals you're signing.

Is there some kind of a strategic shift behind marketing to the enterprise that you're undertaking that you can share with us?

So Sarah, I'll start with professional services.

That is absolutely true.

We do hear from partners that they can't find enough ServiceNow trained people.

And as a result, and we started this over the last year, we hired a new head of training.

We've been investing extremely heavily in training, where we're trying to roll out a lot of free content for our partners and others.

That's why -- you see that reflected in our professional service margin, where training rolls up in there.

And in terms of -- we do think our professional service organization is strategic, but we are there to support our partners doing implementations as well as our customers, where they want us there.

Our preference is for partners to be doing the implementations.

We want our partners to be investing in their ServiceNow business.

Because if they do that, they're going to help sell ServiceNow.

And we think that is the right thing to do, and we'll continue that way.

And John, I'll let you talk about brand.

Yes.

I'll just -- to piggyback, Sarah, coincidently, and Mike mentioned, we hired Cath Lang, who is just a fabulous leader of our training certification.

She joined us about 1 year ago.

She happens to have her team -- her global team in town today, and I was down with them this morning.

And one of the things that we're actively engaging with the partners on is how do we work with them to turbocharge the number of certified resources.

And so big effort to certify their existing employees.

But whether it's in the Europe or the U.S., we're trying to work with a Deloitte, with an Accenture, with a DXC, with a KPMG, with an IBM, going to campus and training generations of ServiceNow-certified people that they then -- that then join these firms.

And so I think we're -- I hope 2019 is a year we go from defense to offense on that, to help fill the void, to have a large enough pool of certified professionals.

And then, thank you for the recognition on the company brand.

Alan Marks, our Chief Communications Brand Officer, happens to be sitting next to me.

He was with me for 10 years at eBay and joined ServiceNow 18 months ago, and he's got a smile on his face because of your question.

And he and our Chief Marketing Officer, Dan Rogers, are working really well together to try to raise our profile as a company in addition to our products.

Our products are well known in IT.

But we just haven't really ever focused on raising our awareness as a brand.

And it helps to be named the most innovative company in the world by Forbes.

It helps to be one of the Fortune's top 3 companies of the future.

That's raising our visibility.

But we're also -- if you happen to live in San Francisco, you may notice that we actually have a few billboards, a few wraparound buses.

We're wrapping up our digital marketing a little bit.

And so still, I think, relatively early days, but it is an area that we feel like it's both appropriate and the time is right to ramp up our investment in brand.

And again, the way we think about it is there's product brand and company brand.

Product brand is geared to decision makers.

And to be honest, with IT, we're well known and increasingly, with other parts.

Company brand is more focused on recruits, employees and getting some C-suite awareness outside of IT, and so that's why we think it's an important and complementary area of investment.

And we're still -- I think Alan would say we've begun our path on that journey, and we still have a long way to go.

But we're excited about the brand and we're excited about the opportunity.

Our next question comes from Sterling Auty with JPMorgan.

This is actually Ugam Kamat on for Sterling.

So just to dig deeper into the Fed traction that you saw in the quarter.

If you were to rate which are the products that have been -- has seen the highest adoption amongst the Fed customers, how would you rate them?

ITSM and ITOM, IT, in general, is still the predominant product in the federal government.

With that, we did mention platform is becoming increasingly more important.

And I'd say our largest platform customer is now a government agency, but by and large, IT and ITOM are still the bulk of what's in the federal government.

We have seen some CSM as well and platform.

I don't really think we've seen -- I'm looking at HR.

Have we seen any HR in the federal government?

What we're thinking -- I mean, the use case I referred to earlier, I don't know if they're using the specific HR case management product or they're building their own applications because of their -- this is a military service -- because of the specific use cases.

Similarly, this is not the U.S. federal government, but ironically -- I don't know if ironically, several airports use ServiceNow to help manage -- again, it's a municipal, a more local government or regional government.

And the government, they're using ServiceNow to help drive the airports, which include customers and employees.

Sometimes it's with out-of-the-box applications, and sometimes they're just frankly using the platform to be configured to the specific use case of an airport.

Got you.

That's helpful.

And as a follow-up, if I were to follow on the contract land that we saw in the quarter.

I mean, the new customer contract land and the upsell contract land actually shortened for the last 2 quarters.

Anything that needs to be read into that?

Or is it just a normal course of business?

It's a normal course of business.

Q3 is a big federal quarter.

Federal government signs 1-year deals.

That's what skews that.

The other thing in Q3, upsells is such a big piece of our business, and a number of our customers co-term their contract at the end of the year, and many are on a calendar year invoicing cycle for when their contract started because Q4 is such a big quarter.

So that's just normal seasonality.

And that's all the time we have for questions.

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

Thank you.

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

Thanks for joining us today.

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

This concludes today's program.

You may all disconnect.

Everyone, have a great day.