ServiceNow Inc (NOW) 2018 Q4 法說會逐字稿

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

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

I would now like to introduce your host for today's conference, 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 Chief Executive Officer.

During today's call, we will review our fourth quarter financial results and discuss our financial guidance for the first quarter and full year 2019.

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 finished 2018 with our strongest fourth quarter ever, continuing our momentum as the leading digital workflow company shaping the future of work.

Our role as a strategic partner to the world's largest enterprises continues to accelerate, enabling their digital transformation by making work, work better for people.

Our teams continue to execute well, and our continued focus and commitment to customer success shows in our strong results.

Expanding our existing customer relationships will drive much of our growth going forward, and we have ample opportunity.

We are now helping to enable the digital transformation of almost 5,400 enterprise customers, including almost 75% of the Fortune 500.

We now have 678 customers doing more than $1 million in business annually with us, and we have 74 customers who are doing greater than $5 million, up 54% year-over-year.

And the number of customers doing greater than $10 million has more than tripled year-over-year to 18, including 3 above $20 million.

Our renewal rate for the quarter was a strong 98%.

Our formula is clear.

When we land our platform and products with a new customer, we begin delivering great experiences and unlocking productivity.

That, in turn, is what drives our expansion.

And our focus is on building long-term strategic partnerships with our customers that enable their success.

And I'll point out that we still represent a small percentage of IT spend for most of our customers.

That gives us tremendous opportunity to grow and deliver the business outcomes that our customers want and need.

Strong performance across our portfolio and across every geography drove our momentum, led by accelerating year-over-year growth in EMEA.

Our teams exceeded their plans for the fourth quarter and for the full year.

All of our products performed well.

Both our HR and customer service products, for example, now have more than 20 customers doing more than $1 million, and 19 of our top 20 deals in the quarter included 3 or more products.

Even more importance, net new business in our core IT workflow products reaccelerated in 2018.

This underscores the strength of our flagship product, the strategic partners we're building with CIOs and the continued market opportunity to expand the impact of our core IT workflow products.

We are very well positioned.

In the fourth quarter, I had an opportunity to meet with the 50 of the world's most respected CIOs.

They reiterated common themes I shared with you before, and that I continue to hear in my customer conversations worldwide: the business imperative for digital transformation, the need for trusted technology partners, and the challenges of driving cultural change.

These leading CIOs understand the power of our Now Platform and products.

They view ServiceNow as a strategic partner.

But as one CIO put it, he doesn't view us as just another cloud partner.

He sees ServiceNow as the platform that creates a multiplier effect in his cloud ecosystem.

Our enterprise capabilities link together other systems and platforms, enabling seamless digital workflows that create great experiences and unlock productivity, and that's what every C suite executive I speak with is looking for.

Ongoing product innovation is essential to enabling these business outcomes and continues to be a top priority for us.

I feel very good about the progress our product organization is making in improving our user experience and user interface, creating simple, intuitive mobile experiences, and making our platform and product easier to deploy and upgrade.

We're getting great feedback from beta testers in our upcoming Madrid release, and we expect to be launching significant enhancements in our mobile capabilities and user experience later this year.

I also feel very good about the progress driving customer success, another top priority.

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

We're entering this year with strong alignment across our pre-sales and post-sales teams.

And we're driving a consistent approach to creating value for our customers and delivering their desired business outcomes.

Leading this effort is David Schneider, who was recently promoted to be our President, Global Customer Operations.

Dave is an exceptional leader who's deeply committed to driving successful customer outcomes.

So as we enter 2019, we're also investing in increased awareness of our company through the launch this month of our first ever brand campaign.

While many decision-makers already know us well, this campaign is designed to increase awareness of ServiceNow more broadly with C suite executives.

The campaign highlights our focus as a digital workflow company, creating great experiences and unlocking productivity.

That is what digital transformation's all about, and that is the future of work.

The intelligent and intuitive capabilities of our Now Platform and our IT employee and customer workflows make work simpler, easier and faster across the enterprise.

Simply put, we make the world of work, work better for people.

That's our focus and our commitment.

So in closing, I'm very pleased with the strong quarter and year and our continued momentum.

We are making continued progress against our strategic priorities, led by our focus on product innovation and customer success.

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

Thank you, John.

Q4 was our strongest quarter ever, and we have a lot of momentum as we begin the new year.

During the quarter, we booked $1.5 billion in total contract value, and our total backlog, including deferred revenue as of December 31, was $5.1 billion, representing 38% year-over-year adjusted growth, including $112 million of foreign exchange headwind.

Q4 subscription revenues were $666 million, representing 35% year-over-year adjusted growth, including $7 million of foreign exchange headwind.

Our Q4 subscription billings were $952 million, representing 39% year-over-year adjusted growth, including $11 million of foreign exchange headwind and $4 million of duration tailwind.

And our Q4 total billings crossed the $1 billion mark for the first time ever.

I'd also like to note that Q4 billings continues to grow seasonally stronger.

It is our largest new bookings in renewals quarter each year, which compounds into larger Q4 billings over time.

We expect this dynamic will continue, and therefore, will impact the seasonality of billings in other quarters throughout the year.

Our strong top line performance was driven by 51 new transactions greater than $1 million, 6 of which were new ServiceNow customers.

IT transformations continue to be the catalyst for new customer relationships.

We reaccelerated growth across our IT workflows throughout 2018, underscoring the massive opportunity remaining for ServiceNow's lead customer through their digital transformations.

The remaining 45 transactions greater than $1 million were expansions of existing customer relationships across our full suite of enterprise workflow solutions, highlighted by every one of our products outperforming expectations.

Moving to Q4 profitability.

Operating margin was 21%, and free cash flow margin was 34%, which was driven by strong Q4 collections and improved DSOs.

Now let's turn to guidance.

For Q1, we expect subscription revenues between $715 million and $720 million, representing 35% to 36% year-over-year adjusted growth, including approximately $21 million of foreign exchange headwind.

We expect subscription billings between $790 million and $795 million, representing 30% to 31% year-over-year adjusted growth, including approximately $23 million of foreign exchange headwind and $18 million of duration headwind.

We expect a 16% operating margin and $190 million diluted weighted outstanding shares outstanding for the quarter.

For 2019, we expect subscription revenues between $3.215 billion and $3.235 billion, representing 34% to 35% year-over-year adjusted growth, including approximately $41 million of foreign exchange headwinds.

We expect subscription billings between $3.705 billion and $3.725 billion, representing 31% to 32% year-over-year adjusted growth, including approximately $45 million and $22 million of foreign exchange and duration headwind, respectively.

We expect 2019 subscription gross margins of 86%, operating margin of 21%, free cash flow margin of 28% and 190 million diluted weighted average shares outstanding.

To conclude, our 2018 performance, we are very pleased with our top line returns from investments made throughout the year, and we'll continue to invest in the priorities John outlined in his prepared remarks.

Our goal is to build an enduring company, and we couldn't be more excited about the opportunity in front of us.

Before closing, please note, our Financial Analyst Day will be held on Monday, May 6, in Las Vegas, in conjunction with our annual users conference, Knowledge18.

In person attendance will be limited, so if interested, please send an e-mail ir@servicenow.com.

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

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

(Operator Instructions) And our first question comes from Kirk Materne with Evercore ISI.

John, just given the strength you're seeing in really big deals and the upsell momentum you're having in the G2K, I was just curious, are you starting to face off with different buyer sets in the customer base?

Meaning, I think one of the opportunities has been to expand or take ServiceNow to be more of an enterprise platform, not just serve an IT platform.

I'm just kind of curious where you think you are on that journey based on who you're speaking with these days?

And then Mike, to your point on seasonality in billings and the fourth quarter getting bigger, as we think about the full year as we model billings, is there anything else we should take into account in terms of just seasonality as we get past the first quarter?

So yes, Kirk.

I think what's happening is, frankly, largely driven by what's happening at customers, that as customers are embracing digital transformation -- and digital transformation, I can't emphasize this enough, there's -- even the time I've been here, it's not a business buzzword in these companies anymore.

It's actually core strategic reality; in fact, survival, in some companies.

It's forcing them to think in a more cross-functional way.

And so I'll just give an example.

There's a lot more focus on the end-to-end employee experience for 2 reasons: One is that everyone wants to digitally connect with their employees in a world where you've got to recruit millennials and retain them; and everyone wants productivity.

So that requires -- and employee experience is, by definition, cross-functional, where an employee doesn't really care if they're dealing with IT or HR or finance or facilities.

And so we're seeing more and more customer initiatives, where they're looking for cross-functional support to drive a better employee experience.

So IT is involved, but they're partnering with their CHRO or HR.

They're partnering with facilities.

They're partnering with finance.

And so I can give you several examples where I was with major Fortune 100 customers, and all those people are in the room, and they're turning to us, saying, we want to build an end-to-end employee experience, and we believe your platform connects effectively in with many of the other core systems of record, be it a Concur for T&E, or an ADP for payroll, or Workday for an HCM or many others, and they look to us to stitch the workflow together.

And so often, these sales are joint sales.

It's not like we're only in IT or only in HR or only in customer service.

Increasingly, you're seeing kind of a shared services mindset.

And I think we're benefiting from that because our platform really does help workflow around each of the other systems of record in a way that allows the customer to get the benefit.

So -- and I think our sales teams and our POS teams are responding well to that, but it's, in many ways, the cross-functional message that is most powerful and distinct in our customers.

And Kirk, on your question in billing, Q1 is seasonally our lowest billings quarter.

In 2018, we did see our billings increase.

The growth rate was increasing every quarter.

I will say a lot of that was driven by the strong outperformance we had, especially in the second half of the year last year.

And I do expect that our billings will continue to get stronger as we go, but I'm not forecasting it to be as strong a growth as last year, just much bigger numbers.

And our next question comes from Matt Hedberg with RBC Capital Markets.

John, obviously, your billings guidance was great.

When you talk to executives, can you give us a sense of what's sort of the overall view of tech spending in 2018?

And then how do I think about prioritizing your avenue of digital transformation versus other areas of spend?

And then maybe just a quick follow up.

You commented that ITSM reaccelerated in '18.

I wonder if you could put your finger on sort of what drove that reacceleration this year.

Yes, Matt.

On outlook, I'm not sure that we had anything unique to say on that, in that most of our customers are onto the gun, to be honest, to deliver strong digital transformation results.

And digital transformation results, as I said a few minutes ago, include better employee and customer experiences and productivity.

And so we still -- as we look into 2019, we can't really forecast macroeconomics, and we're not going to try to.

But we see companies continuing to invest in technology as a core enabler of digital transformation, and then our focus is very much on demonstrating business value, demonstrating economic value.

The fact is we automate workflows.

And automating workflows, yes, provide better experiences, but they also drive productivity.

And so even in an environment if spend gets tougher over time, we want to be at the top of the list as a productivity enhancer, and we believe that we are.

And so without being able to predict the future, we're kind of going full steam ahead.

And I haven't seen any major changes in customers yet, but obviously, none of us don't know -- we don't know what we don't know.

But focus on productivity, focus on business value.

That's the long-cycle view.

And then on ITSM, this is, to be honest, I think we -- the narrative got ahead of the reality around our ITSM when we started publishing we're in 75% of Fortune 500, that the reality is, we frequently land in a division or in a geography or in a part of a company.

And so with even with ITSM, we may have landed only one part of the company, and so there's absolutely the opportunity to expand across the enterprise.

And increasingly, I think, as companies see the power of the ITSM product and see the power of automating and providing self-help for IT Service Management, that you're seeing more enterprise-wide initiatives.

So existing customers, that's driving expansion, where we already won enterprise-wide initiatives.

And in new customers, you're seeing they're starting off with more enterprise-wide initiatives, and that's sometimes in centralized companies, but it's also increasingly decentralized companies where you may have 5 or 6 different branded divisions that are saying, you know what, there's only one way to do IT Service Management.

And let's get to a common way, so we provide better -- I'm saying the same things, better employee experience, better productivity, and it's kind of real.

I'll also add, Matt, that I think we're seeing the benefit of the investments we've made over the last few years, on really improving our overall IT portfolio and some of the focus we've had around the whole user experience and other things that's really driving that with both the existing customers and new customers.

And we're both really excited about the next step of that's coming here in mobile.

The kind of mobile experiences, consumer-grade mobile experiences we have coming out in the next -- a little bit in the next release, but then in New York this summer, awesome mobile experiences.

And our next question comes from Sarah Hindlian with Macquarie.

John, congrats on your 2-year anniversary, and that to you both on the $50 million of outperformance.

On that point, John, I'm looking at the top 20 data and all the regional data, and it looks very broad based, but it's also the biggest beat you've had in, it looks like 7 quarters.

So can you help just hone in a little bit on exactly what drove that?

And then second, actually, I'd like to squeeze in 2 for you Mike.

But given the growth you're seeing, are you thinking at all differently versus your last update on margins given the significant growth?

And then I need to ask about federal.

I haven't heard it come up.

With the shutdown in your recurring model, can you just give us a little bit of color as to if anything and what you guys did see within your business?

Sure, Sarah.

I'll start that out.

So the performance this year, we really just saw strength across-the-board, as we said, in all of our products.

But all of our geos as well too.

Every geo hit their targets, but what really stood out was EMEA had a fabulous year and a fabulous quarter.

Americas, which were the most penetrated, had a fabulous year and quarter as well, too.

And APJ performed for the year.

So I can't call out any one thing.

I just think it's really the fruit of all the investments we've been making over the last number of years, and in particular, some of the things we're starting to see with customer successes, driving customers to buy more from us.

In terms of the federal business, the federal shutdown, I think, that's where you're getting to.

That, potentially, will have an impact, but we think it will get resolved before the end of the year.

Q3 is obviously our big federal quarter.

So defense is our biggest customer within the U.S. government, and the shutdown really isn't being impacted at all, from what we see in talking to our federal sales team.

But as I said, it's really Q3, and that's our big federal quarter.

In terms of our operating margin guidance, we set that out at our Analyst Day, and what -- the results of what we've seen in 2018 give us the confidence that we should invest more because of the opportunity we're seeing.

And hence, why we're giving the 100 basis points operating margin expansion for the full year, is what we said was the minimum.

We would do it in our Analyst Day, and we're keeping our free cash flow margins flat to start the year out.

And we're really focused on growth, and I think you've seen the growth in 2018.

And I didn't think anyone thought we could grow at the size we are at the rates we've been doing.

Our next question comes from Brad Zelnick with Crédit Suisse.

Really impressive results for the quarter and for the year.

And it was quite impressive hearing every product outperformed expectations in the quarter.

But specific to emerging products now representing 30% of net new ACV versus 25% a year ago.

Can you maybe drill down a little bit into which one of these products are seeing the most adoption?

And I've got a follow-up.

I mean, it's all of them in many ways.

There's not massive variability across them.

Interestingly, one of the things, and we've began talking about this in Q4, we are refining how we're sort of positioning our platform and products to be more in terms that align with how customers think about it.

And you heard me talk about this in Q4 where we're saying -- in essence, we're the digital workflow platform, that's what we do.

That's our unique role in the sort of modern tech stack of the future.

And we're a platform with 3 workflows, right?

And we are, first and foremost, a platform.

We have an IT workflow, and what that's all about it's helping the CIO create the IT department of the future, help them move into a future, and that includes ITOM, IT Business Management, IT analytics and many of our IT-related products.

Our second major bucket, if you will, is employee experience workflow, and this gets to what I was talking about earlier in the call, where customers are thinking about is how do they deliver a strong end-to-end employee experience.

And so frankly, we put ITSM in there, along with HR case management, employee onboarding and our other products that tie together to enable that IT experience.

And then last is the customer service workflow, and that's where a growing number of customers want to replicate for their customers what we enable them to do with their employees.

Namely, get to the root cause of a problem, fix it so it doesn't happen again, and when a problem -- a customer does contact them, enable self-help and automation wherever possible.

And so by grouping the 10, 12 products we have into those 3 groups, if you will, or those 2 workflows, it aligns more of how customers think about the business problems that they're trying to address.

And CJ kind of refined his product organization in Q -- the beginning of this quarter to align with that.

And so I think it's going to enable us to continue to, in some ways, simplify our message and get to the right decision makers at the right strategic level.

I want to stress though that this is really -- will not change external reporting for us.

This is really just the way we deal with customers and talk to customers, so don't expect changes there.

And we're not reorganizing the sales teams or product line specialists because that go-to-market motion is working.

So this is just a matter of sort of simplifying and ensuring the various products stitch together in an effective way.

And just a follow-up, I get a lot of questions from investors as we look out on the horizon to achieving $10 billion and beyond.

Can you give us any update on how you're thinking on progress has evolved on corporative development and M&A since we talked about this topic at Analyst Day?

Brad, as I said in Analyst Day, priority 1, 2 and 3 is to execute against our organic growth opportunities which continue to be enormous.

And so shame on us if we take our eye off the ball against our organic growth opportunities.

Priority 2, is to invest in additional organic innovation and with our formation of our NowX group, which is when -- during 2018, this is one of the areas that we're investing in, as Mike talked about earlier.

We've gone from 2 engineers in NowX to 20 engineers -- or I'm sorry, 50 engineers in NowX 100% focused on developing new products that will come out in 2, 3 years.

And so at Knowledge this year, I think we'll launch 1 to 2 new products, and we'll try to do that routine.

So organic innovation has been one of the remarkable hallmarks of this company, and is one we're committed to continuing to pursue.

And then as we look forward, as I said, in the spring, and we did more work on it later in the year, to $10 billion and beyond, often, you have -- you can selectively use M&A to create other growth engines.

It's not out of needing to buy growth or out of defensive necessities, about how do we, in a very strategic way, find additional growth engines over time.

We're not in any rush to do it.

Interestingly, our customers are pointing us to some.

Our customers are saying, man, if you guys, we'd really like if you can help transform IT.

If you can take a look at these kinds of companies or those and we see some others.

So we'll continue to monitor.

Nothing's imminent.

But when we see something that we think is additive to our portfolio and positions us on that path to $10 billion, we won't be shy about pursuing it.

Our next question comes from Raimo Lenschow with Barclays.

Can you talk a little bit, because we are starting a new year, about the changes or no changes to the sales organization?

Maybe kind of double-click on Dave Schneider getting a bigger role as well and how that will play out for you.

And then, I have a follow on for Mike.

Maybe I'll just talk a little bit about Dave and then, Mike, you can put changes in the sales organization, the contacts compared to previous years as well.

So I'll just say -- first thing I'll say is Dave Schneider is just a spectacular leader and he's known for, along with Kevin Haverty, to be kind of the godfather of the ServiceNow best-in-class go-to-market organization.

I heard about that before I joined this company.

I've had the privilege to see that up close and personal since I've been here and seeing Dave's incredible leadership and followership he engenders.

And Dave has always been someone that cares a lot around the customer results, not just selling in, but understanding that if our platform and product help customers get results, then expansion becomes a healthy and sustainable opportunity.

And so what we are doing is not trying to do sales and customer success in 2 different parts of the organization, but Dave is stitching together the full end-to-end customer life cycle.

And we think there's a real opportunity to do it differently and do it well.

And so we made -- Dave and the team made nice progress in 2018.

And we're very excited.

We just held our sales kickoff last week.

It was the most aligned end-to-end customer sort of mindset we talked about, formula for success for our customers.

And we're excited about taking that forward in 2019 and beyond.

And you want to answer how specific changes to the sales team?

Yes.

What I would say, Raimo, is there's no material changes at all to the structure of our sales organization going into 2019.

If you recall, the last major change was in Q1 of 2015.

It will be just the normal tweaking of the sales organization.

We're going to continue to invest in enterprise because that's where our focus is.

We're still investing in commercial, so that will involve splitting territories, but not moving reps from one class to another.

And we will continue.

We continue to look at verticalization, real -- no decisions there.

We're going to kind of try a few things, but no major changes at all to our sales organization-wide because it's been working and we don't want to mess that up.

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

John, I want to ask about the ISV community you guys are building.

I think the platform is clearly a powerful part of your story and always has been, but my sense is, is that it's still sort of an untapped opportunity in terms of building out the store and monetizing it.

So I was wondering if you could maybe give a sense for how big you think that opportunity could be for you when you look out over the next 5, 7 years.

And is there any reason why you think, longer term, it couldn't be something like it's become for Salesforce?

Or do you think of it in a different way?

Let me start with platform.

We are fundamentally a platform company and a significant -- and our customers recognize that.

That was one of the things that struck me most when I first joined the company, how many customers led with it.

They say things like, well, I love your products, but I really love your platform.

It's easy to build on, it's fast and it's extensible.

And so already we have many developers and our customers building on our platform and that -- and so we're continuing to make investments in the platform to enable that.

Our -- we call it platform-as-a-business.

Josh Kahn took over that product earlier this year.

And it's an important area of investment because when customers build their applications on our platform, the propensity for them to buy our prepackaged applications and to expand is simply higher.

And so -- and it provides a growing, really, product development laboratory for us because we see where our customers are building and where they want us to build something out of the box.

And then our ISV programs, you said it's still relatively in its early stages.

We've got a good strong leader there, Avanish.

And I characterize it in early days.

We're trying to encourage people building vertical solutions.

We think that's one of the real sweet spots where our platform is fundamentally horizontal.

As Mike mentioned, we're kind of verticalizing our go-to-market a little bit, but there's certain industry use cases that, to be honest, we're never going to build a specific use case for that industry.

And so we're trying to find and encourage partners who can build something that's customized to specific end use case and that creates a win-win for the end customer, for the partner and for us.

And so I think the analogy you talked about earlier is very much possible and achievable, maybe even more so in a world where platforms are becoming more and more important.

And the number of apps in our store grew 100% last year.

The number of ISV partner transactions grew 124%.

So the metrics are good, but it's still a pretty small base and we want to continue to focus on it.

We think it's one of those organic growth opportunities that we think is still in its early days.

Our next question comes from Rob Owens with KeyBanc Capital.

While you're on the topic of partners, maybe you could share some of the success you saw this year with what was partner influence.

And it ticked up, I think, over the first 3 quarters relative to percentage, but it still is modest overall.

So I would just like an update, I guess, relative to fourth quarter contribution, what's partner influence and how we should think about 2019 relative to that metric.

Yes.

What I would say, Rob, is there's a partner involved in almost every one of our large deals that we do.

In terms of -- as you know, very little of our business goes through the channel, but our deals are heavily influenced by our partners.

And we think it was somewhere, for the full year or for Q4, you look at our top deals, it was 79% influenced and sourced was 29% that's worked through the channel.

Sure.

But what I would say, we're getting better.

Again, we have a nice new strong leader in our partner ecosystem, David Parsons, who's joined us in the fourth quarter.

And just in the last 60 days, we've had top-to-tops with 3 of our top 4 at size.

And I can tell you that the -- they're all saying comparable things to us, namely that ServiceNow is one of, if not the largest practice -- or I'm sorry, one of, if not the fastest growth practice.

We want to go comb the largest practice, that's the aspiration, but we're getting better in partnering with them, and that's on both sides.

I might say 12 months ago, we might have had alliance people talking to alliance people.

And today, we have, I'll say Philip van der Wilt, who runs our European business, he has made a real effort to ensure that our U.K. leader and specific account execs on U.K. accounts are talking to their partner counterparts on those accounts.

So there's more joint planning at accounts.

There's more joint sales campaigns.

And so I think we are, in some ways, I'd use a reference inside that on a scale of 1 to 10 where 10 is world-class, we've gone from a 2 to a 4 in the last year.

We're twice as good than we are a year ago, but we're a 4 and we want to be 10 and world-class, and the partners feel the same way.

So it's getting increased attention.

I think strong leadership from Dave Parsons and our aligned organization is now embracing partners, recognizing that you can't get to digital transformation, which is software, just a platform.

You need a really strong partner to help reengineer the processes and ensure that the implementation is done in a high-quality, out-of-the-box manner.

So partners are very important to our success and we are going to continue to get better and better at making sure we operate strategically and effectively with it.

Great.

And then, John, since you provided the segue again for me, I guess, on the international front, you talked about the acceleration.

Any changes behind that international acceleration?

Is it just maturation or is it more in your go-to-market efforts?

I think on Philip -- there's no simple answer to that, but I'll just make maybe one or 2 observations that -- these are not silver bullets, but they're among things.

Our European team has done a really nice job of being innovators inside of our company.

And so Philip and team were the first that they identified the top 35 strategic accounts in Europe and they did the best account planning.

One of our leaders, Michael Maas, there has a template that we just rolled out at our sales kickoff.

Michael ran Northern Europe and he has a template of how we build a strategic plan with the customer, a shared strategic plan around the -- around their company's strategic priorities, around the CIO's priorities, around the business outcomes they're trying drive in digital transformation and how the Now Platform is helping them achieve those outcomes to achieve the results.

And so, I guess, I don't look at the math of those exact 35 accounts, but I think the kind of account coverage and dialogue and elevating their way into the strategic -- into the C-suite, they've done a really nice job in Europe and as well on the frontline, how our CS people partner -- our customer success people are partnering with the product line specialists who partner with the Inspire team.

In some places, in the U.S., we're different buildings from one another.

Often in our European offices, they're on the same floor.

And so it really has helped us lead the way in some ways internally about best practices, about how we can have a real strategic conversation with the customer and drive toward customer value and outcomes and then that leads to the expansion.

And that is -- it's not rocket science, but it's a formula that it's proving its way out.

Anything you'd add, Mike?

I would add to that.

I think a lot of the investments that Philip has made over the last few years in new sales leadership in Europe is really paying off as well too because remember, this is a long sales cycle.

When you change the leader, many times, they change people out.

And I think we have a very stable sales organization in Europe.

We made some big investments in Germany in 2018 that I think are going to pay off big time in '19 and '20.

And so I think leadership is really what's been driving a lot of the outperformance in EMEA.

Our next question comes from Samad Samana with Jefferies.

So I wanted to ask about the 6 $1 million-plus deals that were new customers to ServiceNow in the quarter.

A couple of questions.

First, of those deals, were any of them driven by noncore ITSM where the customer came in because of either HR or CSM?

And then the second question I have on that is, was there any change in who ServiceNow is competing against and/or what they are replacing in those deals?

So what I would say is, in those deals, there was a -- some CSM and HR in there, but IT was in all of those deals as well too and it's still IT which is the main driver.

One there was HR that helped drive it, but as I said, this is the biggest product.

There's other things as well.

It's the regular people that we're replacing all the time.

It's still, in these larger accounts, it's a pretty big -- they tend to be HP or BMC depending on what the company had chosen, and we're still seeing those replacements.

And then some of those lower accounts, we're seeing CSM, right?

There's a -- down in the -- certainly in the commercial segment, there are a number of new customers starting with the CSM product and then migrating their way.

And that's often because the Chief Operating Officer who oversees all elements of that, but not as much as the upper level.

And then maybe, Mike, just one follow-up.

In terms of -- was there any on-premise revenue in the quarter?

I think you called it out last for the third quarter.

I know federal tends to drive more of that than your enterprise customers, but just how much was the on-premise revenue this year in the fourth quarter versus last year?

In the fourth quarter -- the fourth quarter was $29 million in comparison to $26 million in Q4 of '17.

That's actually down from Q3.

Q3 tends to be our biggest on-prem because that's a big federal quarter and a lot of our federal customers are on-prem due to security requirements.

Our next question comes from Walter Pritchard with Citi.

A question for Mike.

Just wondering on the metrics here as we look forward now, you've had about a year and some time to look at the backlog number and help maybe just understand how to think about that would be helpful.

I think we've become accustomed to looking at billings as a sort of a leading indicator.

How are you thinking about billings and backlog now as you've had more time under your belt, just looking at how those play out?

We will continue for 2019 to give guidance around billings and you will see the backlog in our Qs when we file our Qs as required under 606.

And just maybe a follow-up to that, Mike.

Just in terms of managing the business, how do you think about sort of managing on those 2 metrics then?

And as we orient our models going forward, should we be (inaudible) or not?

The way we manage the business and how we have managed the business is net new ACV.

And you see that annually in the proxy and you will get a proxy for it by now, seeing the backlog on a quarterly basis and the disclosures around what's going to roll off over the next 12 months.

That's how we manage the business.

Our next question comes from Michael Turits with Raymond James.

One for Mike and one for John.

First, for John, how do you think about expansion strategically in 2 areas: One, security; and 2, in ITOM?

And then for Mike, just a clarification with IT, up 58% of new ACV this quarter.

Is that only because everything else grew so fast?

Or if we did the math, would we come out with less growth in the fourth quarter?

I know you said you did well for the year.

Michael, I mean, I'll say what I always say.

We start with the customer in mind and we listen to our customers.

And as we think about the IT workflow, that group of products, what we're asking CIOs and what they're asking us is how we can help them build the modern IT shop of the future.

And so our ITOM business, our ITOM product, which had a very strong year, is increasing.

Whether it's service mapping or some of the other products within ITOM, they view it as important and so we're investing in that and we're trying to ensure that we have both modern -- we have both legacy ITOM capabilities and modern ITOM capabilities.

And so I think that will continue to be an area of investment and focus.

And then in security, it's -- to be clear, we play a, I'll call it, a fairly narrow role or a specific role in security.

We do infinite response and vulnerability response.

And in many ways, that should take in the core competence of what our platform does and applying it to IT use -- or sorry, security use cases.

And so I don't see us getting into fundamentally new areas of security where there are already solutions existing.

If they're a natural extension of our platform that help a CIO or a CISO build a better overall security experience or better overall security portfolio, then we'll look at them, but it's not a market segment per se and we're going to say let's pursue it because they're -- it's a very crowded and, frankly, fragmented arena.

An area that we do see, and we initially had this in our security organization, but it's really -- it's partly security-related, but it's, I think, somewhat distinct, we see a lot of demand for GRC, government risk and compliance -- governance risk and compliance.

And as audit committees and CIOs, CISOs, CFOs look for greater scrutiny around those 3 separate but related areas, our GRC product and our platform, we think has enormous opportunity.

And so the GRC product grew very aggressively in 2018.

I think it will continue in 2019.

I'll just tell one small story of the kind of thing, I think, we can see more of.

I had a CIO of a -- probably a global 20 company call me last year and he said, "You know, John, ServiceNow is my one source of truth for our GRC and how we -- and I have to report to the audit committee every quarter on our enterprise risk.

Why can't I just show the ServiceNow dashboard to my audit committee as the authoritative dashboard, authoritative source of the enterprise-wide risk data?

And could you work with our accountants, and in this case it was Pricewaterhouse, to see if you could get it blessed and validated?" And so that -- whether that happens exactly or not, we're working on it, but more it's the kind of customer demand where they're saying, "We've got so much going on in governance risk and compliance.

If I can pull it together into a coherent set of metrics and dashboards, I can run my business, manage and avoid risk and ensure that we're compliant." That's an area, I don't know if you call that security or not, but that's an area we think there's a lot of opportunity for ServiceNow.

And our platform is uniquely positioned to help you [have] a strong solution on that.

So on your question with regards to growth, IT was very strong for the full year.

It was a strong in Q4, but emerging growth was very strong in Q4 that shadowed that and you can see that in the IR deck.

Our next question comes from Keith Weiss with Morgan Stanley.

This is Sanjit Singh.

I wanted to revisit some of the topics that were addressed a little bit earlier.

I guess, which of these opportunities do you feel is going to be most impactful to the business?

On one hand, you have -- John, as you said, you mentioned helping CIOs reinvent IT.

And then on the other side of the equation, you're seeing -- you're helping customers digitize the front office.

And maybe a way of framing it, if Michael came to you, John and said I need a grant.

We found another $100 million in the budget, where would you deploy that $100 million in terms of those 2 -- in terms of the various opportunities you have in front of you first?

Characterize those 2 again for me to make sure I understand.

Yes.

So just if you think about just at the core IT business and helping customers reinvent the IT department or IT operations and then in areas like HR and customer service where you guys are seeing large-sized deals, which of those sort of opportunities broadly do you think are -- is going to be the most impactful to the business, whether it's in ROI or durability of growth, any way that you want to frame it.

The answer to your question is yes.

I would just state that IT will continue to be extremely impactful to our business for a very long time.

That is the core of our business.

And as we've said before, we're very excited about CSM and HR because they land new opportunities for us without being in IT and -- but we're excited about all of our emerging products.

And then your question around if we had another $100 million, where would we invest it?

Where would you?

Double down on Customer Service Management.

That's a massive opportunity.

I mean, yes, we have -- just one other comment I'd make.

Software, for the last 30 years, has been very functionally defined and functionally bought.

And that may have improved operations and functions, but it didn't really drive great productivity and better experiences at work because, actually, most business processes at work for employees and for customers are fundamentally cross-functional in nature.

And what a cloud platform like ServiceNow does is that it enables a cross-functional -- using software, using platform to drive cross-functional processes.

And so I think what we're seeing is even the distinctions, the historical -- it's back to the first answer I gave in this call around the end-to-end employee experience.

When you think digital transformation inside a company, you've got to think cross-functionally.

Even our Customer Service Management product is -- when a customer has a problem, you're getting to the root cause of that problem.

The root cause often touches product, legal, compliance, engineering, marketing.

And so it's cross-functional in nature and our platform is uniquely positioned to drive cross-functional workflow.

And so you won't see IDC or Gartner [Marimekkos] cut like that, but I do think it is one of the things that's fueling our growth is that unlocking that kind of productivity.

As for the incremental $100 million, we've got 5 priorities, and the 5 priorities remain in 2018.

We're investing in our product and platform, #1.

It's priority #1 in our investment.

Organic innovation, ensuring we don't take our foot off the gas in innovation.

Number 2, we're investing in a end-to-end customer -- or end-to-end go-to-market motion.

I would put both sales and customer success in it.

I guess these are 4. Number 3, talent.

We're growing out our talent globally.

Talent is the lifeblood of any company that wants to build and endure for long-term.

And then investment priority #4, which we just really, for the first time, are doing -- is our brand and doing things to elevate our company brand.

I hope you've seen the fabulous ServiceNow TV commercial that we've been running on CNBC and the Golf Channel as I mentioned in my remarks.

There's another way we can raise our visibility with C-suite executives.

I appreciate the thoughts.

Maybe just one quick follow-up maybe for Mike.

As we head into the Madrid release, how should we think about pricing and potential price increases as a driver in terms of your organic growth in 2019?

Price increases are not a driver of our growth at all.

They never really have been.

Our -- we've never tried to really optimize for price per user.

We've always tried to get more usage by our customers and drive what we're extracting out of a customer.

That way when they see value in what they're getting out of ServiceNow.

So that does not play into 2019 at all.

Our last question comes from Kash Rangan with Merrill Lynch.

Okay.

I guess, Kash has dropped off the line.

So thank you, operator.

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

Thanks for joining us today, everyone.

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

This does conclude today's program and you may all disconnect.

Everyone, have a wonderful day.