ServiceNow Inc (NOW) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2019 ServiceNow Earnings Conference Call.

(Operator Instructions) Thank you.

I would now like to hand the conference over to your speaker today, Lisa Banks, Vice President of Investor Relations.

Please go ahead.

Good afternoon, and thank you for joining us for ServiceNow's Fourth Quarter and Full Year 2019 Earnings Conference Call.

On the call with me today are Bill McDermott, our President and Chief Executive Officer; and Gina Mastantuono, our Chief Financial Officer.

During today's call, we will review our fourth quarter and full year 2019 results and discuss our financial guidance for the first quarter of 2020 and guidance for the full year 2020.

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, net income and remaining performance obligations.

To see the reconciliation between these non-GAAP and GAAP results, please refer to our press release filed earlier today, our investor presentation and for prior quarters' previously filed press releases, all of which are posted at investors.servicenow.com.

A replay of today's call will also be posted on the website.

We may make forward-looking statements on this conference call, which are subject to risks, uncertainties and assumptions.

Please refer to the press release and risk factors in our SEC filings, including our most recent Form 10-Q and our Form 10-K that will be filed for the year ended December 31, 2019, for information on risks and uncertainties that may cause actual results to differ materially from those set forth in such forward-looking statements.

Before I pass it on to Bill, please note, our Financial Analyst Day will be held on Monday, May 4 in Orlando in conjunction with our annual users' conference, Knowledge 2020.

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

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

ServiceNow is also pleased to announce that we will be participating in the upcoming Goldman Sachs Technology and Internet Conference and Morgan Stanley TMT Conference.

With that, I would like now to turn the call over to Bill.

Thank you very much, Lisa, and good afternoon, everyone.

Welcome to our Q4 earnings call.

As you've already seen from our earnings release, we finished 2019 very strong, beating the high end of our guidance for Q4.

Allow me to share a few observations.

We had 76 deals greater than $1 million in the quarter.

Our performance underscores the strength of our core IT workflows.

We had 16 ITSM deals topping $1 million.

That's our biggest number ever.

And we signed our largest ITAM deal ever with the U.S. Department of Veteran Affairs.

IT is where digital transformation begins, and we are a powerful strategic partner for CIOs all over the world.

CIOs are struggling with fragmented legacy technology instead of delivering the experiences their employees and customers really need.

Our IT workflows provide a single platform from planning to operations to service management.

We're modernizing IT, enabling high-performing services with modern experiences.

That is enabling us to not only enhance the core of how IT works.

But also extend the perimeter of IT itself.

We're doing this across the entire enterprise, and that's driving momentum in our vast portfolio of products, including our fast-growing HR and CSM products.

Customers are realizing the strategic value of combining ServiceNow IT workflows with everything from HR, CSM, security, GRC, financial close and DevOps to deliver greater value across the entire enterprise.

And best of all, everything is powered by the Now Platform, one platform, one data model, one architecture.

There is a very deep sense of pride in engineering here at ServiceNow, and that distinguishes us in the enterprise software industry.

And it shows in the results.

We landed 9 HR deals greater than $1 million, our largest number yet within a quarter.

And in CSM, we now have over 1,000 customers using our technology to deliver better experiences for their customers.

In most companies, customer service systems are set up only to answer questions, not to solve problems.

This is why customer service agents rarely get to the root cause of the problem.

That really frustrates customers.

With ServiceNow CSM product, companies can drive end-to-end resolution.

Instead of solving problems in an ad hoc way, they can now focus on delivering great experiences.

And great experiences drive powerful employee engagement, fierce customer loyalty and significant productivity gains.

This is what every CEO and every company we talked to, this is what they want.

Both HR and CSM are now over $200 million businesses for us, and we're just getting started.

Let me share a few examples of how the power of our platform and products translated into strategic customer wins in the quarter.

With a focus on CSM, we expanded our relationship with one of the largest global content companies in the telecommunications, media and technology industry.

You see, they needed one solution with one platform to serve their customers.

Using our workflow and integration capabilities, they are now consolidating all customer-related processes into streamlined workflows.

In Latin America, we expanded our relationship with one of the region's largest banks.

After seeing tremendous returns on their initial ServiceNow investment, the bank is implementing the Now Platform and our IT workflow products across its entire employee base, replacing more than 10 siloed legacy systems.

Earlier, I mentioned our largest ITAM deal ever, which was part of a bigger IT portfolio deal with the United States Department of Veteran Affairs.

ServiceNow is the core of the VA's enterprise service desk, which supports more than 0.5 million full-time employees and contractors.

With our IT portfolio and the cross-functional capabilities of the Now Platform, the VA is streamlining processes, saving time and money, improving productivity and better managing technology assets and, of course, delivering better experiences.

Bristol-Myers Squibb purchased 3 IT products plus HR to enable a world-class onboarding experience for all employees.

In a competitive sales process, Bristol-Myers Squibb recognized that our cross-functional enterprise capabilities are exactly what was needed to accelerate productivity, reduce new higher turnover and win the war for talent.

In a strategic C-suite win, Roche, the world's largest biotech company, has signed an agreement with ServiceNow to support its digital transformation strategy.

ServiceNow will be the global solution to service project and portfolio management across the entire Roche group.

This strategic partnership will help Roche transform its internal business processes end to end, simplifying and improving the user experience.

This will enable Roche scientists and researchers to work in a more agile way so they can redouble their focus on their business, which is creating innovative health care solutions.

These customer examples demonstrate the enterprise value that ServiceNow delivers.

Our customers know that behind every great experience is a great workflow.

The power of the Now Platform combined with the quality of our IT, employee and customer workflow products are expanding our addressable market dramatically.

Digital transformation is the biggest opportunity of our time, and ServiceNow is exceptionally well positioned to seize this opportunity to compete and to win.

We are a game-changer company for our customers and shareholders.

The opportunity to scale ServiceNow is right in front of us, and we have our sights set on achieving $10 billion in revenue and beyond.

To continue driving our growth, we are focused on 5 clear priorities for 2020.

They include: one, being a trusted innovator for the C-suite.

This starts with our brands, making every C-suite leader aware of ServiceNow and what we can do for them.

You may have noticed, we launched our new brand campaign across all channels this week.

We are receiving rave reviews.

I personally love our brand.

It's so human, personal and inviting.

We'll keep it going.

Number two, we're engaging customers with a world-class go-to-market machine.

The company already has a strong go-to-market organization, and we are now taking it to the next level.

Number three, we will force multiply ServiceNow with a strong industry and partner ecosystem.

The ecosystem is going to become more strategic and more powerful.

Our partners tell me they see ServiceNow as the cross-platform integration engine of the modern enterprise.

Going after industry verticals and building strong partner relationships will force multiply ServiceNow's coverage by 10x.

This will happen across geos, industries and across buying centers.

As you saw on Monday, we announced our new industry solution strategy and our expanded partnerships with Deloitte in banking and Accenture in telecommunications.

Number four, we're creating product experiences that people at work will love.

The Now Platform is ServiceNow's secret sauce.

We are a platform company.

In fact, we are the platform of platforms.

And we are committed to excellence, delivering an innovative, scalable, secure, highly available platform and products that digitize workflows and deliver great experiences.

Number five, teamwork.

As you all know, teamwork does make the dream work.

And it happens with trust, collaboration and communication at mass scale.

Our culture is our ultimate competitive advantage.

All 10,371 and growing ServiceNow colleagues are committed to our purpose of making the world of work, work better for people.

ServiceNow is hungry and humble, and we have an unwavering focus on serving our customers.

We are so honored to have been added to the S&P 500 and to be recognized this month by Fortune as one of the world's most admired companies.

The strength of our team and our culture is a culmination of the great leadership ServiceNow has benefited from for the past 15 years, starting with our Founder, Fred Luddy, an incredible man and product visionary; to Frank Slootman, who successfully scaled Fred's vision; and a big heartfelt thank you to my great personal friend, John Donahoe, who set a rock-solid foundation for the future.

I'm truly fired up to lead the next phase of ServiceNow's journey as we scale to $10 billion in revenue and beyond.

We will accomplish this by delivering exceptional business value to our customers.

We will do so across every geography, every industry and, of course, every buying center.

We will continue to create workflows that deliver great employee and customer experiences.

It is our dream to become the defining enterprise software company of the 21st century.

This is the limitless opportunity I saw in ServiceNow.

It is why I chose to come here.

And in my first 3 months as CEO, my belief has only become deeper, my commitment stronger and my passion greater.

Before closing, I want to thank our outstanding global finance organization supporting a CEO and CFO transition.

This team demonstrated extraordinary commitment, which leads me to my final note.

We now have a world-class CFO in Gina.

Asking Gina to join our team was absolutely the best first decision I could have made as CEO.

I'm thrilled that she is here.

I'm excited about this team and this company, and I cannot wait to deliver on our dreams for all of you.

Thank you, and now I'll turn the call over to Gina.

Gina, over to you.

Thank you, Bill, for the very kind words.

Before we dive into our financial results and guidance, I would like to express my personal excitement to join Bill and the entire ServiceNow team.

I'm incredibly impressed by the product portfolio, our focus on our customers' success, the extraordinary talent and the hungry and humble culture that drives us to deliver world-class outcomes for our customers and strong results for our shareholders.

I could not be more impressed by what the company has accomplished over the past 15 years, becoming a strategic partner to the world's largest enterprises as they digitally transform their businesses.

Even though we've already come so far, I'm fired up by the enormous opportunity still in front of us.

I'm confident that we have the products, the talent and the passion to reach our $10 billion revenue aspiration and, more importantly, to make the world of work, work better for people.

I'm completely aligned with Bill on our 5 priorities, which I believe will enable us to reach our $10 billion revenue goal.

And together, we are committed to driving strong top line growth along with disciplined investment as we scale to get there.

Now let's turn to our financial results.

We delivered another outstanding Q4 and full year, and we have a lot of momentum as we begin the new year.

Q4 subscription revenues were $899 million, representing 35% year-over-year growth.

Q4 subscription billings were $1.298 billion, representing 36% year-over-year growth, and our first quarter ever exceeding $1 billion in subscription billings.

As Bill mentioned, our strong top line performance was driven by 76 new transactions greater than $1 million, our largest quarterly number ever, representing 49% year-over-year growth.

We now have more than 6,200 customers, of which 892 of them are doing more than $1 million of business with us annually, representing 32% year-over-year growth.

And our renewal rate for the quarter continued to be strong at 97%.

Remaining performance obligations, RPO, ended the year at approximately $6.6 billion, representing 34% year-over-year growth.

Current RPO was approximately $3.3 billion, representing 34% year-over-year growth.

These outstanding results continue to demonstrate our strong product portfolio, our focus on building deep customer relationships and our commitment to enabling customers' digital transformation.

Moving on to profitability.

Q4 operating margin was 22%, and free cash flow margin was 36%.

For full year 2019, operating margin was 21%, and free cash flow margin was 28%.

Additionally, I would like to note that our Q4 GAAP net income was favorably impacted by a $574 million onetime income tax benefit from the release of the valuation allowance on our deferred tax assets in a foreign entity.

We have indicated in our recent quarterly financial reports that we believe that, due to our international expansion and improved operating margins, we could potentially conclude that evaluation allowance on these deferred tax assets would no longer be necessary.

We reached that conclusion in Q4.

As a result, we are reporting GAAP net income of $599 million and $627 million for Q4 2019 and full year 2019, respectively.

This is a onetime benefit and will impact year-over-year comparisons in future quarters.

Importantly, excluding the impact of this onetime benefit, 2019 was our first full year of GAAP profitability.

Now let's turn to guidance.

For Q1 2020, we expect subscription revenues between $975 million and $980 million, representing 32% year-over-year growth.

We expect subscription billings between $1.040 billion and $1.045 billion, representing 28% to 29% year-over-year growth.

We expect a 22% operating margin and 195 million diluted weighted outstanding shares for the quarter.

For the full year 2020, we expect subscription revenues between $4.22 billion and $4.24 billion, representing 30% year-over-year growth.

We expect subscription billings between $4.805 billion and $4.825 billion, representing 27% year-over-year growth.

We expect 2020 subscription gross margin of 86%, operating margin of 22%, free cash flow margin of 29% and 196 million diluted weighted average shares.

We are very pleased with our Q4 and full year 2019 results, and we are excited to continue our momentum into 2020.

We're also extremely proud that our full year 2020 subscription revenue guidance of $4.2 billion exceeds the $4 billion total revenue target that was set back in 2015.

I would like to conclude by expressing my sincere appreciation for my predecessor Mike Scarpelli.

During Mike's time at ServiceNow, he built outstanding relationships with our employees, our customers and shareholders.

And I'm inheriting a well-managed and super talented organization.

I look forward to meeting all of you at the upcoming conferences and our Financial Analyst Day in May.

Operator, would you please open the lines for questions.

(Operator Instructions) And your first question comes from Kash Rangan with Bank of America.

Congratulations, team and Bill.

The messaging and the positioning of ServiceNow is exceedingly, brilliantly clear.

So congratulations on that.

My question for you, as I listened to your prepared comments, it appears that ServiceNow is firmly pivoting towards being more of an applications provider away from being just purely IT.

You talk about HR, CSM, et cetera.

I'm wondering how do you go about organizing the go-to-market strategy, well, given that you ran one of the biggest applications companies in the world.

What are some of the experiences from that role that you can bring to bear as ServiceNow embarks on a different chapter on its way to being a $10 billion revenue company?

Congratulations.

Thank you very much, Kash.

I really appreciate your kind remarks.

I think the most important thing I wanted to convey is business continuity, stability and scale are the things that I'm most in front of right now.

We have an excellent team.

The go-to-market has been well thought through, and the team itself is highly stable, and we intend to keep it that way.

There are no plans to make coverage changes.

What we have is what we want.

What we will do is we will take a bolder position on the role that this incredible system of engagement, this system of action called workflow can take in the modern workplace.

If you think about the problems that customers are having today, they have many systems of record, and unfortunately, when they try to think about how people work and how people want to work, they don't have the workflow that enables a team to really set on a course of executing a simple business process.

With ServiceNow, that all changes.

And you can see the impact that we've had on the employee with employee service delivery.

You can see the impact that we've had on customer service management.

And many of the big companies in the world today are figuring this out pretty quickly.

So we will go to market as we are today in the various geographies.

We can expand our footprint.

We clearly are going to focus on industries such as banking and telco.

I referenced a few partner examples.

You know we're doing very well in regulated.

You can see that in the public sector in the United States.

You can see that in Australia, where we're bringing in large deals.

And I'm really encouraged right now with what we're doing in buying centers because, as you know, Kash, to expand as an end-to-end solution provider in the enterprise, the backbone is IT, which is unique to ServiceNow because every company wants to be a tech company.

Actually, every company would ideally like to be a software company, but it all starts with that tech backbone.

And we can carry that.

We've proven it to HR.

We've proven it to customer service management.

We can prove it with the COO.

We can prove it with the risk and compliance folks, and of course, we can also now prove it with CEOs.

And I'm, in particular, excited about that because the Rolodex that I have has been calling on me, asking me for new and innovative ways to help them, either take cost out with better workflow or bring in more revenue and growth because they can manage their business more effectively.

So good news for the shareholder, no territory changes, no disruption.

It's only on top value add for growth.

Your next question comes from Michael Turits with Raymond James.

Congratulations, and welcome to both Bill and to Gina.

Bill, I wonder if you could talk about some of the directions that you might be thinking in terms of the platform.

You said the strength in this is a single platform, so I think there's been some thoughts about how you might expand over time in areas like data, monitoring, a wide variety of areas.

Just how you conceptualize that would be helpful relative to that platform.

Sure.

Thank you so much, Michael.

Well, first of all, the platform is very unique in the sense that, as you mentioned, it's one architecture, one data model.

This is a really a pristine platform that's fully integrated on our own code base.

In fact, even when M&A moves took place, they were replatformed onto the Now Platform.

So we have a really, really very, very clean company here.

And as an example, even in the tuck-in M&A moves that we made, it was all about strengthening and making the platform even more robust for our customers.

For example, in natural language capabilities or in AI operations, business continuity, it's all strengthening the argument of that strong platform.

We have to make that an easy platform to consume for business analysts and technologists alike.

So that's one aspect of the growth strategy.

And the other is to build applications on top of that platform.

I was working with one CEO, who was very interested in having a rewards program built on the platform, but he wanted to do it in a couple of days or a week as opposed to years.

And he didn't want a team of consultants to have to do it.

He wanted his own business analyst people to do it.

And of course, we were able to do that for him in a few days on the Now Platform.

So think of it as expandable on many dimensions.

If you think about technology people, you think about analysts, if you think about business people, they're all going to build magic workflows on this magic platform to create immense productivity and growth in their digital transformation strategy.

The other thing that's kind of interesting is Kash mentioned the kind of system of record players that are in the marketplace.

And one of the very large systems integrators told me, and I did mention that in my remarks, that we view this as this unbelievable cross-platform integration engine for the modern enterprise because there's so many disconnected workflows and processes that this can be the glue that puts it all together.

So all those dimensions spell growth.

We've actually even simplified it.

We made the consumption of it easier, the pricing of it easier, and we just left our -- all company Sales Kickoff meeting in Las Vegas, and people are more fired up than ever before about the growth prospects on the platform.

Your next question comes from Jennifer Lowe with UBS.

I'm sitting in for Jen Lowe.

This is Rakesh Kumar.

I wanted to dig a little more around your industry solution announcement that you made a couple of days ago.

I was curious if there will be more products tailored for these vertical use cases.

And also outside of partner efforts, what sort of internal go-to-market motion is being put in place?

Yes.

So one thing that's kind of interesting just on the partners, in general, we have had numerous meetings with CEOs and chairmen of the largest partner firms in the world.

In fact, they've been very kind.

They've actually even come to Santa Clara.

And most of them that come in with very robust ideas on what's possible, and none of them have left without at least adding $1 billion to the numerator of what they think is absolutely achievable with ServiceNow.

So some of these investments are in industries.

For example, think about workflows that are industry-based that are focused on specific domains of the industry or the subvertical, and then think about how that could be personalized to the various personas in the operation.

Again, the Now Platform comes shining through here because of its capabilities and the IT backbone and the nature of connecting workflows across various buying centers.

And they're very interested in the industry, the subindustry vertical and the buying center approach.

And we're trying to do a very good job of giving partners the ability to innovate, co-innovate with us and the customer and to grow.

And we're doing this across all the geographies of the world or we might have a certain partner in a certain geography in a certain industry and we could be very specific.

But again, it's all about growth.

It's all about opportunity.

It's all about honesty, open collaboration and real trust with the partners.

And the good news is they all know me, so they know we don't break promises around here, which is very helpful.

And if I could add a follow-up around this, the recent acquisition of Loom Systems, does this acquisition signal your intent to move into complementary segments like APM or AIOps and some other infrastructure segment?

Yes.

I mean, first of all, regarding Loom, right, so this is really extending our core.

So if you think IT service management, IT operations management, this is essentially giving ServiceNow customers the ability to prevent and resolve IT issues before they actually become problems, right?

So IT departments today want to proactively pinpoint and resolve operational issues.

They don't want problems.

They want predictive analytics.

The other thing is, if you look at Gartner, and I do value very much what they say, they thought it was a very, very giant step forward in really making our ITSM platform, that AI operations engine of the enterprise, and we received a lot of positive commentary.

But we also made moves, as you know, with natural language capabilities and business continuity, and we're doing this all with the intent of strengthening the platform.

But our core is our core.

I gave you an outline of our strategy.

And for now we'll leave it at that.

Your next question comes from Sarah Hindlian with Macquarie.

First off, congrats to you both on your first quarter.

Welcome, and way to hit it out of the park.

Thank you, Sarah.

I have a couple of questions.

First, Bill -- same.

Nice to meet you.

First, Bill, you mentioned that you were growing quite sizable on HR and CSM, which was really nice to hear, but I was wondering if you could give us some color around how big ITOM is getting and even how large you could see it growing as you start to integrate Loom and other such technologies given how big the TAM is.

And then I have a follow-up for Gina when you're finished.

Yes.

So I mean I think it's very, very good question actually.

So if you look at this company, first of all, let's just baseline the company.

If you take a look at some of the data I saw from Morgan Stanley as an example, if you were just to automate kind of the manual or paper-based processes in the enterprise, you have a TAM in the United States alone of more than $225 billion.

If you think about that on an international level, you can climb up to $400 billion pretty quickly.

So all of these businesses can be really, really big businesses.

And we don't think of any business right now in terms that are less than $1 billion.

So as you think about our mentality in just running the company, if we look at something, it's got a $1 billion tag on it.

And ITOM, what I'm impressed with this, in particular, is it's growing so fast.

So in each year that you think of us, it'll much more than double, so anything that much more than doubles within a year gets us super excited.

We're also seeing very large deals.

In the quarter, we closed 5 that were bigger than $1 million.

And essentially, within the ITOM category, 15 of the top 20 deals that we did had ITOM in the bill of materials, so this one could be a biggie.

All right.

That's very helpful.

Good to hear.

Gina, nice to meet you and welcome.

We were really curious about your new verticalization strategy.

And I know Bill touched on it a bit on the call, but we've really seen this be a critical tipping point to growing very large industry businesses for SaaS vendors in the past.

So I was wondering how long we should expect the ramp of your new vertical practices to take and maybe if we should even expect somewhat of a small or concurrent rise in S&M along with this move.

Sure.

Thank you so much, and I'm looking forward to meeting you as well in person.

So first of all, to reiterate what Bill said, industries are critical to our growth, and the vertical strategy is something that we're very focused on.

We do not expect, however, to be adding huge overlay types of sales folks throughout the organization.

So we do not expect there to be a huge increase in sales and marketing as a percent of sales -- as a percent of revenue.

We do expect that we will invest here.

We will invest smartly and disciplined, and we do expect that with the material and with our workflow products, that this will ramp.

But from a timing perspective, we haven't modeled that out.

But it's something that we're very focused on.

We are investing, but we do not expect to see significantly higher investment as a percentage of revenue to total sales and marketing.

Your next question comes from Brad Zelnick with Crédit Suisse.

And I echo my congratulations on a stellar Q4.

Welcome to you, Gina.

And Bill, if I can start out with a question for you.

Now that you've had some time in the cockpit flying the plane and we've seen you standing in front of giant dream big signs in the Wall Street Journal full-page ad, what are the biggest positive and negative surprises so far relative to what you intend to accomplish?

And specifically on company culture with teamwork being your fifth priority this year, and I imagine every year ahead, and something that we all know is very enduring for any company, what are your observations on ServiceNow's culture?

And perhaps, how can you improve upon it to take things to the next level?

Well, it's a really great question, Brad.

Thank you very much for your very kind words.

First, I'd like to acknowledge Fred Luddy because our Founder did an amazing job of not only building a platform with the customers' interest in mind and that true empathy for the customer but that became a pervasive culture in this company.

Everybody shows an enormous empathy for the customer regardless of the department that they serve within the company.

So that is really positive.

And I mentioned my 2 predecessors in my remarks.

I give Frank Slootman a lot of credit for taking Fred's invention and scaling that at an important time in the company's history.

And I give my great friend, John Donahoe, amazing accolades for the job that he did in scaling it yet again, post Frank, to get it to where it is at this point.

And my job is to take it now and scale it to be the defining enterprise software company in the 21st century.

And I intend to do just that as we go for $10 billion and way beyond.

So what did I pick up along the way?

Number one, culture, culture, culture.

This culture is amazing.

It's exciting.

It's humble and it always wants to keep getting better.

Nobody here is looking for a pat on the back for too long.

They want to know what they could do to get better, and I love that.

The second thing is the customers love us.

I mean it's amazing not only in the loyalty rates that you see, which are the best in the business, but literally, I went to several cities, met so many customers.

I'm now going on a world tour.

We'll hit 3 continents in the next 11 days, and I'll see many, many more customers.

In addition, I will have, at that point, then touched every single person personally in the company, which is cool, because that's more than 10,300 people.

And what you find is the customers, they just love this company, and the products work, and we do what we said we do.

They just want us to keep doing more.

And in fact, one of the things that I learned and that I think I can help bring to the equation, because you asked me for observations where I could also perhaps find something that wasn't perfect or add some value, it's really in this maneuver to the C-suite because if you meet the CEOs -- I'm very used to meeting them -- they would say, "I haven't had a call from ServiceNow." But that's after I just got done meeting with the CIO, with the COO, and they told me how much they love ServiceNow.

So I think we can really broaden the perimeter with the buying centers.

I think the expansion geographically is still there for us.

There's a big opportunity in the Middle East.

We have plenty of opportunities to expand in Europe.

Latin America is still young.

Japan is a big market for us.

We're just going into Korea in a big way.

So all of that is there and more.

So I would say of all the things I've ever seen, I'm so impressed with the culture, the idea of getting better, having an incredibly loyal customer base, and now we're moving to the C-suite and industry and buying center.

And we're doing that with the ecosystem in mind because I think it's an amazing force multiplier that comes ServiceNow's way with the expansion of our partners.

And being a good partner is essential to being the defining enterprise software company of the 21st century.

So that is kind of where I'm going.

And finally, please let me say one thing on behalf of my colleagues, the engineering pride in this company, the focus on products, when I talk to CJ or I talk to anybody on the P4, even when we get in front of the Board of Directors, we're talking product.

We're showing demos.

We're looking at the next generation of what's possible.

We're rethinking the way work is done in enterprises because we know people have so much to improve upon, but we do that not with PowerPoints, not with big slide shows, but we do this with product.

I'm a big fan of the way Winners Dream and look forward to your continued success.

I'm honored.

Thank you very much, Brad.

Thank you.

Your next question comes from Keith Weiss with Morgan Stanley.

This is Sanjit Singh for Keith Weiss.

And congrats on a really strong end to 2019.

Bill, in your script, you mentioned the momentum you're seeing around CSM and HR.

But when I sort of look at your top 20 deals, what's striking to me is sort of the number of IT deals across ITSM, asset management, IT business management, all over the top 20 grid.

Can you sort of give us a sense about the IT portfolio overall in terms of the durability of growth that you're seeing in the IT side going into fiscal year 2020?

Absolutely.

So first of all, Keith, thank you very much for noticing that because I, like you, have never seen a truly great company that doesn't have a great core.

And we're proud of the core.

We like who we are very much here.

And if you look at kind of the path of this, 14 of the top 20 deals included 3 or more IT products in the sale.

ITSM is really on fire.

I mean 16 deals were $1 million or more in the quarter with ITSM, and 17 of the top 20 deals included ITSM.

We talked about ITOM earlier.

And of course, ITOM, I made comments of it.

I mean, like, we're growing that business like 51% in a quarter.

So it's going extremely well.

We had 5 ITOM deals that were greater than $1 million, and there were 15 of the top 20 -- 15 of the top 20 deals had ITOM in it.

So then I said to myself what about ITAM.

I mentioned, as you know, the Veteran Affairs situation, and we closed 2 deals that were very, very sizable in the ITAM category.

So what's the point of all this?

The point of all of this is our solutions are better together, and everything pivots from that backbone IT core.

And when we carry that backbone IT core into the other domains of the enterprise, everything gets better.

And that's why I even explain to other enterprise software companies that are systems of record out there, we just make you better because what we do in our core emulates across all the buying centers on an end-to-end workflow level, and that just makes all of the partners that we have, whether they're technology partners or systems integration partners that much stronger.

The growth in front of us with ITSM Pro and all the value add that we're putting into the platform will keep this company's core growing solid for years and years and years to come.

That's very encouraging.

If I could do one quick follow-up if I may.

You mentioned, Bill, about the importance of partners and the ecosystem going forward, calling out the recent strengthening of that partnership with Accenture and Deloitte.

I was wondering if you could hit upon Microsoft.

That was another strategic partner -- strategic partnership that was signed this summer around federal.

But what do you see as sort of the partnership opportunities, the joint opportunities with Microsoft going forward in terms of strengthening that ecosystem play?

Right, right.

Well, actually, in July, we announced a new partnership with Microsoft, in which we'll be hosting ServiceNow instances in Azure.

And the initial focus there is on public sector in the U.S., specifically, but also Australia.

So we believe other highly regulated industries globally could also benefit from this focus, but of course, it's early days.

I consider Satya a personal friend.

I consider Azure an amazing platform and Microsoft, a great company.

I can tell you that I'm convinced we'll do big things there.

I'm also convinced that my phone has been literally ringing off the hook with other very large companies that want to do more with ServiceNow.

So we're open for business.

We're opening for partnerships, and my advice to the partners out there is don't waste too much time.

We're on the move.

Your next question comes from Sterling Auty with JPMorgan.

In your prepared remarks, 2 of the tenants that you pointed out were kind of brand marketing and the go-to-market machine.

I'm just curious how we translate that into what we should think about as the marketing spend for 2020 and the sales count hiring for 2020.

Sure.

Maybe I'll start big picture, and then Gina, I'm sure, would love to add some value to this.

So we're at the point now where we're investing in engineers, and obviously, we're investing in channels that grow our company.

And we're trying to keep it as lean as we can on the G&A side and let our great workflow technology keep us simple, keep us highly productive.

So the margin expansion story can obviously be there.

But we've been adding headcount commensurate with growth, and we're not going to get headcount in front of growth.

So that's just kind of big picture.

It's a pretty disciplined company, and we're going to keep it that way.

For example, as I look at margin leverage and how we can improve, I think about keeping the company simple and simple things.

Like we're a bigger company now.

We got unbelievable customer loyalty.

How do we make a frictionless company possible for our customers so renewals are smooth?

Upsell and cross-sell is simple.

And everybody in the company, no matter what job it is, we can look at the revenue per employee scorecard and say we keep getting better.

And in particular, we'd like to see that in sales.

So for example, you're very aware of what we do with very large enterprises and large enterprises and how we cover our commercial space, but we're doing more and more with account development reps to drive pipeline.

We're doing more and more on the inside sales level, so we can have a better return on our investment with sales headcount and really drive, not just loyalty, but net new logos, which remains a very strong focus for this year.

So count on us to get to top line and make sure, while we're doing it, the revenue per employee scorecard keeps going up.

And I'll just add to that.

We will continue to invest in the right places, but it's a very disciplined approach to investing.

From a sales and marketing perspective, we will absolutely expect to see some leverage from productivity and sales, but we'll be investing in other areas.

We'll also invest in brand.

From an overall perspective, we expect some leverage.

And obviously, we've guided to the total overall OI margin for the year.

Got it.

And then maybe one quick follow-up.

Renewal rates, 97%, is still very, very high, but it did tick down a little bit compared to the last several quarters.

Were there any onetime items or things that we should look at that impacted it in the quarter?

No, I'll say, listen, 97% renewal rate remains industry leading and very strong.

We're really proud of that.

The most common reasons why a customer doesn't renew is usually through M&A and consolidation.

We're not seeing more customers choose not to renew because of anything with respect to pricing or lack of value at all.

Your next question comes from Tom Roderick with Stifel.

And again, congratulations both.

You had a great start to your respective tenures.

Bill, would love your perspective given your unique background here with respect to the back office.

And thinking about the integration points with financials, ERP more broadly.

ServiceNow has had a nice product in the market for under a year now for close management.

Would love your take on sort of where that product is in terms of readiness and your thoughts on where this company can go next in the back office.

How do you think about that?

Yes.

Well, thank you very much, Tom.

So first of all, I want to acknowledge that the systems of record that are out there need not worry about ServiceNow not being a good friend and a good partner.

I think there's plenty of acknowledgment that customers have made substantial investments in these systems of record, and we respect that fully, and we feel very strongly that what we do with workflow and the end-to-end nature of that can really add significant value, actually, to the system of record.

So specifically, there was a very large airline that I called upon, and they were trying to do some very unique things, which if they were going through an upgrade cycle on a back-office system of record, it would have been a very time-consuming endeavor.

But it was something that was mission critical.

It was a real system of action they needed.

We were able to provide that in less than 30 days.

So that's just adding value to the system that's already there, not taking anything away from it, very important.

As it relates to the financial close product, we have to have a leader on that and focus on that.

It is an outstanding product.

We have a very large pipeline for that, and we intend to pursue that vigorously in the marketplace.

It's early days in terms of the math on that, though.

Fantastic.

Bill, a quick follow-up just on the VA deal.

I think we've gotten accustomed to the third quarter or the September quarter being very strong federal, but it seems like the demand is sort of pacing itself out over the course of the year.

Can you just talk a little bit more about how the federal and broader public sector opportunity is shaping up now that the product portfolio continues to get wider and wider?

Yes.

I think this is going to be a huge opportunity.

The word is going around pretty quickly because what's happening is these leaders of very important departments are capital constrained.

And when they look at their operating expenses and the fact that they have so much legacy and so much inefficiency -- and it's not like I'm telling a secret.

Everybody knows that, and they shout that from the mountain tops.

So the question is what platform, what company can go in there with a very limited time to value and a very affordable solution to truly make a massive difference.

I spent 1.5 days there in December in Washington and visited many of the agencies.

One agency who had 75,000 people also had 75 legacy systems that was designed to do one thing.

Probably, they could have gotten away with 74.

So we went in there with a workflow solution that literally acted as the enterprise portal to aggregate the data from the system of record, put it on a mobile platform with gorgeous user case where people, by job type, could click twice and achieve their mission.

And it was so stunning.

It was a huge cost savings, and no matter what time of year you would propose something that transformational, someone's going to say, "Where do I sign?"

Your next question comes from Samad Samana from Jefferies.

And as others have said, congrats on a strong start to your tenure at ServiceNow and close to the year.

So maybe, Gina, one for you.

I just am curious, Mike had provided in the past recently just the dollar-based net expansion rate.

I'm curious if that's a metric that -- now that you're in the role, if you plan on giving that going forward, and maybe just how that looked in the fourth quarter and then just a follow-up for Bill.

Sure.

We will be providing the expansion rate at Analyst Day in May, and it was very strong in Q4.

Okay.

Great.

And then, Bill, I know you've touched on this as the call has gone on, and I think -- but I think M&A has been something that people have thought a lot about.

So one, I guess, just out of curiosity, was there any contribution to 2020, the numbers from the 2 small deals that you guys just announced?

And then I guess as a dovetail to that, how should we think about the M&A philosophy, will it mirror what you've -- what we've seen in terms of smaller tuck-ins?

Or how should we think about bigger deals?

Yes.

Samad, thank you very much for your question.

First of all, there was 0, 0 contribution from any of the small tuck-ins to the revenue numbers that Gina and I reported to you today, 0.

Secondly, the company has benefited and will continue to benefit from organic growth.

There is a very large runway in front of us, organic growth, and when you consider the unique platform that we have, its ability now to move throughout the globe and into industries and new buying centers, there's just so much runway on an organic basis.

So therefore, the tuck-in strategy, something that adds technology and value to the customer relationship, creates a larger moat for our best-in-class platform, is the kind of thing that you should expect.

At this stage, there are no large deals that are on the table.

And if we were to consider something of that nature, I give you my word.

I would spend enormous amount of time with the committee on that, with our strategy folks, with our engineering folks, and we would pressure test that with finance and look at that from every single angle before we actually even seriously considered it.

So we are really an organic growth company with small tuck-ins as our preferred option at this stage.

And it wouldn't change unless there was something dramatically interesting that would greatly benefit our customers and shareholders.

And at this time, there are nothing of that kind on the table.

Your last question comes from Alex Zukin with RBC Capital Markets.

This is Dylan Reider on for Alex.

Bill, in thinking about the CSM segment, clearly, from the $200 million figure you mentioned in your prepared remarks, you guys are seeing success there.

When we consider ServiceNow's evolving vision, mission in this category, what's the right way for us to think about how you guys supercharge that product segment in CSM?

And then just given the different competitive environment relative to other parts of your portfolio, how should we think about the company's growth prospects in CSM more broadly?

Thank you very much, Dylan.

I'm really excited about CSM.

I'm excited about it because I like swimming in big ponds, and that's a big TAM.

What we're extremely good at is -- think of it this way.

There's really 3 layers within customer service management that matter to the customer.

One is the engagement layer, do you know who I am, and can you have a multi-channel strategy around creating value with me.

The second is really huge operational things that go on in the mid- and the back office as it relates to workflow and providing the customer an excellent service.

For example, we work with one health care agency this quarter that had 50 million claims that we're managing for them with service management.

On the service management layer, if you think about field service, for example, there's a high-tech company that has thousands of field service personnel in the field that are working with the Now Platform on a mobile level with a gorgeous user experience, so their technicians can get the job done.

And what I see, especially with large workforces, especially if they're not extremely digital, they really benefit from how simple and consumer grade and mobile our application is.

So think of us as field service with service management more broadly because we can get to the root causes of things like no other company can.

That's what our platform is built to do.

Think of operations.

We have unique levels of complexity in the mid- and the back office, where we can bring real value to that.

And on the engagement layer, there's some -- a lot going on in the media industry.

And there's one example where we have 20 million users engaging us.

And we actually had 100,000 concurrent users touching on our -- one of our applications within the first 5 minutes that they went live.

So we scale.

So we could do engagement.

Other people are there, too.

We could do operations like no one else, and we can do service management like no one else, or we can do all 3.

My opinion, the folks that are doing engagement should try to team up with ServiceNow because, in the operations and the service management side, we're the best.

We could do it all, so you're probably better off partnering with us if you're having any doubts about what you should do with ServiceNow.

That's all the time we have for questions.

I'll turn the call back to the presenters for closing remarks.

Closing remarks, I'd just like to thank, everybody, for joining us.

Exceptionally proud of the 10,300-plus professionals at ServiceNow for the job that they did.

I'd like to thank Gina for her leadership, and I'd like to thank especially my great friend, John Donahoe, for the wonderful handoff that he gave me in coming into the company, for the Board's support, especially our Founder.

And I would just like to thank all of you for the confidence that you've demonstrated in our company.

We're just getting warmed up.

We're fired up.

We're ready to go.

This concludes today's conference call.

Thank you very much for joining us.

You may now disconnect.