ServiceNow, Inc. (NOW) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the ServiceNow Third Quarter Earnings Conference Call. My name is Bree, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. [Operator Instructions] I would now like to turn the conference over to Mr. Mike Scarpelli, CFO. Please proceed, sir.

Good afternoon, and thank you for joining us. On the call with me today is Frank Slootman, our Chief Executive Officer. Our press release and a simultaneous broadcast of this call can be accessed at our website at investors.servicenow.com. We may make forward-looking statements on this conference call such as those using the words may, will, expects, beliefs or similar phrases to convey that information is not historical fact. These statements are subject to risks, uncertainties and assumptions. Please refer to the press release and risk factors in documents filed with the Securities and Exchange Commission including our most recent quarterly [indiscernible] 10-Q for information on risks and uncertainties that may cause actual results to differ materially from those set forth in such statements. In addition, we will reference non-GAAP financial measures on this call. 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. To see the reconciliation between these non-GAAP results 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 on our website at investors.servicenow.com. I would now like to turn the call over to Frank.

Thanks, Mike. Good afternoon, and thank you for joining us on today's call. Q3 was another strong quarter for us, reflecting significant growth and continued execution across the board. Revenues grew 73% year-on-year to $111 million and billings grew 56% year-on-year to $127 million. Our installed base of customers is now at 1,900 accounts with approximately 360 Global 2000 customers. Global 2000 accounts added in the quarter included AbbVie, Daiwa [ph] Securities, Diageo, Elskabunk, Enbridge, General Motors and Honda of America. Our IT applications portfolio continues to be the core driver of growth. We continue to see a steady rate of legacy system replacements. Nearly half of all new logos in the quarter came from displacing BMC and HP. For example, AbbVie who recently spun out of Abbot Laboratories, is relying on a highly outsourced IT model to serve their 20,000 employee base. ServiceNow was selected to rapidly stand up a modern platform for enterprise IT and deliver a consumerized service experience for employees. In another win at a large consumer-products company, a 2 phased deployment will begin with service catalog and CMDB, then continue with the replacement of incidents, problem change and asset management services. The same time, other departments are evaluating ServiceNow for enterprise-wide request management. We are progressing in the global system integrator channel. In the quarter, we worked with Accenture to win a multimillion dollar contract at Enbridge, an oil and gas services company based in Canada. Accenture was a catalyst in the sales cycle, helping build the business case, roadmap, recommendations and customer plan to implement. In addition, our managed services providers are expanding our global reach. For example, customers who outsource their IT function to HCL are, in fact, standardizing on ServiceNow. During the quarter, HCL expanded its relationships with 2 prominent Nordic companies, driving significant value to ServiceNow. In another recent MSP win, Infosys will leverage ServiceNow to overhaul a large customer's IT applications and infrastructure as they transition to a new service automation platform. While ITSM modernization triggers the majority of new engagements, broader adoption of ServiceNow's product portfolio is evident. First, Orchestration, our automation framework is becoming a more significant contributor in new projects and upsells. The number of Orchestration customers has grown by over 50% in the past 2 quarters, as users seek to automate more tasks with ServiceNow. In one example during the quarter, a financial services customer acquired our Orchestration product to provision and decommission virtual machines, allowing the customer to standardize, automate and report on cloud resources and activity. Second, a recently introduced performance analytics products based on the Mirror42 acquisition contributed to a handful of contracts including CERN, National (sic) [Nationwide] Building Society and Scripps Network Interactive. Third, usage of applications that serve both IT and the line of business such as custom application development and service catalog, use it to continue to increase on a same-store basis. We see more energy and excitement in our customer base to develop applications in ServiceNow. In the quarter, a major airline put ServiceNow to the test during a 24-hour internal development contest with over 100 developers. Competing against numerous other development platforms, the ServiceNow team won by creating a mobile app store using our service catalog and knowledge management applications. A large home improvement company recently chose ServiceNow for work order management in addition to ITSM in its initial purchase. This customer plans to create, manage and assign work orders, schedule service events, transfer parts between warehouses and manage the service levels of those requests with ServiceNow. A prominent healthcare imaging company is about to go live for the global customer-facing support system that records all their deployed medical imaging equipment in the ServiceNow CMDB and enables doctors and nurses to initiate service requests directly to the company. This application does not involve any IT management, it supports customer-facing and mission-critical business processes. Service management is becoming an enterprise discipline. In a notable customer win this quarter, Diageo, a consumer goods company and number 242 in the Global 2000 chose ServiceNow as its service relationship management solution for 25,000 employees in over 80 countries. Starting with the IT service domain, they will replace their legacy ITSM system and also deploy Orchestration for cloud provisioning, password resets, employee on-boarding and software distribution. They will use ServiceNow for HR case management in conjunction with Workday. The industry analyst community is also catching on to the enterprise service management trends. According to IDC's Robert Young, "IT service management processes and workflows have become better defined and more automated within most IT organizations. However, they are often inefficient or nonexistent in most other business units. ServiceNow's advanced automation and process workflow capabilities aim to provide a single platform to serve as the de facto standard for managing service relationships, not only within IT, but also across the enterprise." With that, I will turn the call over to Mike Scarpelli, our CFO, to go over the numbers in more detail.

Thank you, Frank. During today's call, we will review our third quarter financial results and our financial guidance for the fourth quarter and full year 2013. Before we begin going through the numbers, I'd like to point out that all financial figures we will discuss today are non-GAAP, unless we state otherwise, with the exception of revenue numbers, which are GAAP. You can find a reconciliation of GAAP to non-GAAP results in our press releases on our website. Total revenues for the third quarter were $111.3 million, representing 73% year-over-year growth and 9% sequential growth over our second quarter revenues of $102.2 million. Subscription revenues for the quarter were $93 million, representing 68% year-over-year growth and 16% sequential growth. Subscription revenue growth was driven by strong bookings in prior quarters coupled with a renewal rate of 97% in the current quarter. Our average new business contract length was 35 months and our average renewal contract length was 25 months compared to an average of 33 and 25 months on a trailing 4 quarter basis, respectively. Professional services and other revenues were $18.3 million for the quarter, growing 101% year-over-year and down 16% on a sequential basis. Excluding registration and sponsorship revenue of $5 million recorded in the second quarter from Knowledge, our annual users conference, professional services and other revenues increased 9% on a sequential basis. Professional services and other revenues are generated primarily from fees related to the implementation and configuration of our subscription service, as well as training fees. We added 122 net new customers, including 22 of the Global 2000 enterprises in the quarter. Our trailing 12 months revenue per customer was $219,000, an increase of 21% from $181,000 in the third quarter of 2012, and up 5% from the $209,000 last quarter. In the third quarter, we booked 3 new deals in excess of $1 million and our average deal sizes for both new logos and upsells increased notably on a year-over-year basis. The past 2 quarters, we have seen a high percentage mix of deals with annual contract value over $250,000. As evidenced by the growth in revenue per customer and deal size, our business has consecrated towards larger opportunities for several reasons: first, our sales team was incented to achieve certain dollar targets as opposed to logo count; second, the rebalancing of our sales team at the beginning of this year led to increased focus on upsells, larger accounts tend to yield more predictability and higher dollar value opportunities. In addition, our channel strategy emphasizes partners that can help penetrate large enterprises and deemphasizes partners that focus on smaller accounts. Total revenues based on geography were $76.9 million in North America; $27.6 million in EMEA; and $6.8 million in the rest of the world, representing 69%, 25% and 6% of total revenues, respectively. By comparison, in the third quarter of 2002, we recorded revenues of $45.5 million in North America; $16.1 million in EMEA; and $2.7 million in the rest of the world, representing 71%, 25% and 4% of total revenues, respectively. Our total billings were $127 million for the third quarter compared to $81.2 million in the third quarter of 2012 and $117.5 million in the prior quarter, representing 56% year-over-year growth and 8% sequential growth. Our deferred revenue balance was $225.8 million at the end of the third quarter, up 8% over the $210 million reported at the end of the prior quarter. Approximately, 4% of our billings in the quarter were for periods greater than 1 year compared to 12% in the third quarter of 2012 and 12% in the prior quarter. We still expect 5% to 10% of future billings to be for periods greater than 1 year, but we also expect to see variability from quarter to quarter that may go outside this range. Our typical billing terms remain 1 year. Before we turn to expenses, I'd like to point out that we ended the quarter with 1,654 employees, an increase of 691 employees from the same period in the prior year, and an increase of 211 employees from the prior quarter. Please note that we recorded a pretax amount of $17.9 million related to stock-based compensation expense. This impacted our earnings per share in the third quarter by a tax adjusted amount of $0.12 per basic and diluted share. Our subscription gross profit was $71.8 million, representing a gross margin of 77% compared to 70% in the same period last year and 77% in the prior quarter. During the quarter, we added 33 employees to subscription cost of sales, ending the quarter with 299 employees. Our professional services and other gross profit was $1.3 million, representing a gross margin of 7% compared to a negative 1% in the third quarter of 2012 and 33% in the prior quarter, which included $5 million from our Knowledge event with all expenses related to the event running through sales and marketing. Excluding Knowledge, our non-GAAP professional services margin in the prior quarter was 13%. During the quarter, we added 39 employees to professional services and other cost of sales, ending the quarter with 278 employees. Our total gross profit was $73.1 million, representing a gross margin of 66% compared to 60% in the prior year and 68% in the prior quarter. Excluding the $5 million in revenue from our Knowledge event, non-GAAP gross margin in the prior quarter was 66%. Moving to operating expenses for the third quarter, sales and marketing expenses were $41.4 million or 37% of revenues compared to $25.2 million or 39% of revenues in the third quarter of 2012 and $47.5 million or 46% of revenues in the prior quarter. As a reminder, sales and marketing expenses in the second quarter this year included $8.3 million related to our Knowledge event. During the quarter, we added 69 employees to sales and marketing, ending the quarter with 581 employees. Research and development expenses were $16.6 million or 15% of revenues compared to $8.9 million or 14% of revenues in the third quarter of 2012 and $14.2 million or 14% of revenues in the prior quarter. During the quarter, we added 45 employees to research and development, ending the quarter with 296 employees. We expect research and development expenses to increase on a dollar basis, as we continue to make significant investments in our services, primarily in the areas of application platform and cloud development. General and administrative expenses were $11.8 million or 11% of revenues compared to $9.6 million or 15% of revenues in the third quarter of 2012 and $12.1 million or 12% of revenues in the prior quarter. During the quarter, we added 25 employees to general and administrative, ending the quarter with 200 employees. We expect general and administrative expenses will continue to increase as our business continues to grow, but we expect these costs to decrease as a percentage of our revenue. Our operating income in the third quarter was $3.2 million compared to an operating loss of $5.1 million in the third quarter of 2012 and an operating loss of $4.5 million in the prior quarter. This equates to a positive operating margin of 3% compared to a negative 8% margin in the third quarter of 2012 and an operating margin of negative 4% in the prior quarter. During the quarter, we recorded a non-GAAP tax expense of $2.2 million. Net income for the quarter was $1.6 million or net earnings of $0.01 per basic and diluted share compared to a net loss of $5 million or a net loss of $0.04 per basic and diluted share in the third quarter of 2012, and a net loss of $7.8 million or a net loss of $0.06 per basic and diluted share in the prior quarter. Our basic and diluted weighted average shares outstanding for the quarter were approximately 137.5 million and 158.3 million, respectively. Fully diluted shares at the end of the quarter were approximately 169.3 million. During the quarter, we generated $20.7 million in cash flows from operations. We used $16.8 million for capital expenditures, resulting in positive $3.9 million in free cash flows. This compares to negative $2.9 million of free cash flows in the third quarter of 2012 and negative $2.1 million in the prior quarter. We ended the quarter with $352.8 million in cash, short-term investments and long-term investments and we had no debt, an increase of $6.6 million over the prior quarter, even after paying $13.3 million in cash for Mirror42. Before turning to guidance, we want to mention that we recently updated packaging of our service portfolio with 3 major objectives in mind: first, we wanted to enable customers to consume ServiceNow at various levels of functionality, not all our customers have the same appetite for application and functionality at the same time; second, we wanted to make it easier for customers to purchase our service management applications for non-IT purposes, deployment of ServiceNow and the broader enterprise has become a major trend in our customer base; and finally, we wanted to offer a more flexible licensing model for deploying custom applications with ServiceNow. Let's turn to guidance for the fourth quarter and full year 2013. Please note that our margin and EPS guidance is on a non-GAAP basis and excludes stock-based compensation expense and the related income tax effect. For the fourth quarter of 2013, we expect total revenues between $119 million and $121 million, representing year-over-year growth between 58% and 61%. Revenues are expected to consist of subscription revenues between $100 million and $101 million and professional services and other revenues between $19 million and $20 million. We expect subscription gross margins of approximately 76%, professional service and other gross margins of approximately 8% and overall gross margins of approximately 65%. We expect our operating margin to be approximately breakeven and a net loss per basic and diluted share of approximately $0.02 with weighted average shares outstanding of approximately 140 million. For the full year 2013, we are raising our outlook and expect revenues to land within the range of $418.4 million to $420.4 million, representing year-over-year growth between 72% and 73%. Our total annual revenues estimate consist of subscription revenues between $344.9 million and $345.9 million and professional services and other revenues between $73.5 million and $74.5 million. Before turning to Q&A, we'd like to mention that we will be holding our second annual financial analyst day on Monday, April 28, 2014, at the Intercontinental Hotel in San Francisco, California. This event will be held in conjunction with our annual Knowledge Users Conference, which will take place April 27 through May 1 at the nearby Moscone Center. Please mark your calendar accordingly. Registration details will be available in early 2014. We hope to see many of you there. With that, operator, you can now open up the line for questions.

[Operator Instructions] And your first question comes from the line of Walter Pritchard with Citi.

Talk a bit about platform and in your pricing there and sort of how that's settling out. And as you look into the fourth quarter and next year, how you expect that to contribute to your billings or your revenue?

Walter, it's Frank. As you know, we've been telling the capital markets that we were going to be communicating in more definitive terms about exactly what the contribution of platform is. Really, starting in January, after the Q4 quarter, there's a lot of work that we want to make sure that we're authoritative, we're consistent the way we do it and that we don't have any false starts about it and it takes a fair amount of preparation. Now that said, we continue to make really good progress in the business. I think that last quarter, we reported that we had somewhere around 76% of our production instances having built custom applications on our platform, that number has continued to inch up during the September quarter as well. And we just have tons of anecdotal evidence, some of which we try to highlight in our prepared remarks, that message is spreading. So all I can say about in terms of pricing, we have evolved our pricing model to make sure that we can not only sort of strip platform out the overall bundle, we've done that all throughout 2012. But we've now created a more flexible model that lets people get started at a smaller price point and they don't have to sort of buy in wholesale to start using the platform. So it's really a pricing strategy that makes it more granular for customers to get started without immediately being confronted with all kinds of pricing consequences with ServiceNow. So that's really the change that we've made to our pricing model, our pricing model has been in transition in October. We've really rolled out a fairly significant sort of changes to that and it's really the best we feel about our pricing model to date. So we're in the midst of really rolling that out and implementing that throughout our operating territories.

And Mike, just on the sales hiring side, your -- I just wanted to get a sense of what sort of productivity you're seeing on the cohort that you hired earlier in the year and how we should think about -- last year, you definitely ramped up your sales hiring in the beginning of the year, how you're thinking about that as you look towards your plans in early 2014.

Yes. So when we look at our reps, we look at our reps in a few different ways. And one of the ways when we look at ramped reps, our productivity per ramped reps have actually stayed pretty consistent which is good. The new reps that we hired, the sales cycle, as we mentioned before, is a 9-month sales cycle. People are still ramping with all the hires we've done in the year. And on average, it takes 9 months to ramp a rep, we said, in a developed territory and new territories. And remember, a lot of our hires we've put into new territories internationally as we're really trying to expand internationally. That's a 15-month ramp on average. And we're pleased with what we see. We wouldn't continue to hire at the rates we're doing if we didn't see the productivity coming out of these people.

And your next question comes from the line of Michael Turits with Raymond James. Michael Turits - Raymond James & Associates, Inc., Research Division: Couple of questions. One is I may have missed it, I'm not sure, did you give the upsell percentage? And also maybe you can drill down a little bit more on the licensing change to multiple SKUs. And what you -- if there's any near procurement [ph], that we expect with the longer term impact may be? And maybe that as it relates to any changes as your target market is expanding and some weight that addresses?

So the upsells was 29% in the quarter and that was inadvertently missed by me, but you'll see that that's actually in our investor presentation on our website, which will be up later today, if it's not up already. And then on the pricing, Frank?

In terms of pricing, what we've done is we've really created a much more granular way for our customers to buy into our services portfolio, which is pretty broad these days. We've historically operated with a one size fits all, one price for everything else. As you know, we started to strip out this year, the licensee, the used license for platform development. But the things we've now also done is we've really segmented the application portfolio itself. We've always sort of been confronted by customers who, on the one hand, like the fact that 1 price buys all. But then we also have the dynamic where customers say well, I'm not going to use everything so therefore, I don't want to pay for it. So eventually, we started to really sell on a pricing model where our customers can buy in on a limited set of applications and then expand that functionality to sort everything that we provide. Also as we said, the use of our platform for non-IT uses, and we have that now skewed and priced separately. And getting started on the platform itself in terms of building custom applications on a very limited basis, we have a price for that, as well as an all in, all out, all you can eat kind of thing. We have a price for that as well. So it's a much more fine-grained pricing structure and model from what we've had in the past. And this is a natural evolution from what we've started with in January of this year. It's still early going in terms of -- in sort of measuring all the impacts because we're literally in the midst of rolling it out for new customers. This will be a very positive change for existing customers in renewal situations and upsell. We'll probably take a little bit more work on our part to really transition it from the old to the new. Michael Turits - Raymond James & Associates, Inc., Research Division: And if I could just get one follow-up. As we go into the fourth quarter, how should we look at billing seasonality, which is obviously you've got some nice billing seasonality in 4Q '12, 20%. Is that a reasonable benchmark or is that seasonality changing in some way?

We expect that billings in Q4 will be north of $150 million.

Your next question comes from the line of Nandan Amladi with Deutsche Bank.

You acquired Mirror42 recently. Obviously, you're selling that as part of your broader portfolio. Is that priced separately or is that priced among one of the new tiers that Frank just mentioned?

It is priced separately but it's also -- it can also be purchased as part of the bundle, but it is a chargeable item.

Okay. And then one quick follow-up. Is there a risk of customer sort of downsizing as a result of this more granular pricing scheme where they maybe had bought the whole package before and now they think they need less?

Well, there's always the -- that's always true. And in the case of renewal scenarios, there's always the opportunities for customers to true up, as well as true down. But the history has been is that our customers have had to true up both in terms of users, as well as the extent of their utilization of all the services and functionality that we provide. So it does go both ways, that's always been true.

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

This is actually Chris Hogan on for Raimo. Guys, I apologize if I missed it, but did you give a sales and marketing headcount? I know we got total headcount.

Yes. The total sales and marketing headcount was 581.

581. And then, I mean, from those levels, obviously, really strong hiring for this -- through the first 9 months. What are -- any change in plans going to year end or can you just give us a little bit more detail on your thinking there?

So our original planning for the year was to end the year with 600 and as we've mentioned before, that if you find good people, we may pull that in and all that would be doing is pulling in some of the hiring we're going to plan on doing in Q1 2014. But remember, Q4 is one of the tougher quarters to hire sales people because most good sales people, they're into acceleration in their fourth quarter and they're going to stick around through the end of the year.

Got you. Okay. And then just one quick follow-up. As you look at sales and marketing, the leverage that -- you actually got a little bit of leverage there. Even when I adjust for the Knowledge revenue in Q2 that flowed through sales and marketing. Looks like you picked up a little bit of leverage there. Anything going on outside of just normal -- getting normal leverage in the model or how would you expect that to trend? Should that stay on a downward trajectory from here or maybe just talk us through that a little bit?

No, I'm not expecting Q4 to be down in terms of sales and marketing again, as a percentage. One of the reasons being is I expect Q4 marketing to increase. We're holding these now, forums that are kind of like mini Knowledge events we held in Europe in 3 cities, so that added to the spend. Our long term, we do you think sales and marketing will be 29% to 31% of our revenue in our long-term model and we're not changing that. But I think it's going to be a while before we get there, given the growth opportunity we see in front of us. We're going to continue to add pretty heavy. And keep in mind, too, we added 66 people into our sales and marketing organization. We're going to have the full impact of that in Q4 coming in. So I do expect our sales and marketing to continue to be increase in dollar terms.

Your next question comes from the line of Brent Thill with ServiceNow.

Just, Frank, on the platform, when you look at the number of live customers that are now in production versus effectively maybe playing with it in the lab or some simple apps that they're building up, I mean, where do you see the number of referenceable customers that then can talk to other customers? It sounds like you've given us a lot of great wins in the past and that base is very diverse but I'm just curious if you could, at a very high level, walk us through what you're seeing from that perspective?

I actually believe that the absolute vast, vast majority of our production customers are actually referenceable. If you know -- that I'm saying that on the basis of the fact that on an ongoing basis, a number of escalated accounts that we have, and those are accounts that are in some form of distress for whatever reason, is extraordinarily small. And many times, it's actually at 0. If you have attended our Users Conference Knowledge this year in May, you'll get a sense of what the referenceability of our broader customer base is, which is extraordinarily large. Our net promoter scores, which many of you are familiar with, are also exceptionally high for our industry. So that part of our business is just excellent.

Okay. And real quick for Mike. Just on the sales hiring, is that, from your perspective, the biggest capacity constraint right now to your growth there? Is there something else that we should be aware of that could potentially idle any moves on the revenue and bookings?

The biggest constraint to our growth is getting good people on board, but it's also getting our system integrators as we are focused on large customers. The system integrators are key to that growth as well to accelerate our growth. But at the end of the day, it still takes time to ramp people and this is an enterprise software sale and it is a long sales cycle.

This is Frank. The only thing I would add to that is our business does encounter a considerable amount of friction due to the fact that we are replacing legacy systems that have been in place for 10, 15 years. They're highly customized, they're highly back-end integrated. It's not a trivial exercise to just sort of turn those things off and move onto a new platform, it's a real undertaking. So it's not a matter of you can just throw unlimited people at it and the growth will just go on from there, because it is a considerable campaign both from a sales standpoint, as well as from an implementation standpoint to get customers fully deployed on service. Now in spite of all that, you've seen extraordinary growth but I think that is due to the compelling nature of the platform. But it is a transition in industry that is going to take years and years to fully play out. And that's why the penetration numbers that we report are still actually relatively small.

Your next question comes from the line of Jason Maynard with Wells Fargo.

Frank, I got one question on the platform. Obviously, you gave some great examples of use cases by customers. Can you maybe help us understand how much of that platform adoption is actually driven by customers in effect just doing it themselves and having the understandings of your capabilities versus a ServiceNow rep educating them about what they can do? Do you have a sense on sort of the puts versus pull dynamic?

Yes, we do, Jason. I mean, I'd like to say that it's all our doing but that's just not the reality. I mean, our customers are the ones that are fully understanding the capabilities that they have in-house. And the IT organization is still the central advocacy point for our broader adoption. IT organizations have tremendous influence in the other lines of business and the other functional areas in these enterprises, whether it's human resources or facilities or procurement or whatever it is. They typically go to HR when they have challenges or need help or advice. And that's really how ServiceNow spreads throughout the enterprise. We have maintained a lot of discipline. We're really staying focused on the IT organization as our core constituency. And we have really, sort of spread through the enterprise through the IT organization. Now in the future, we have every intention of becoming a much more effective and much more literate, if you will, in the broader enterprise and being able to speak the language of human resources and facilities and procurement and so on. But so far, this dynamic has really played out very much virally through the IT advocacy in the enterprise.

So the logical follow-up then is as you start to talk more about SRM and customers really believe in that, in conjunction with the pricing, changes that you're going to put in place for next year, are you going to come out with 2, 3, 4 common, if you will, use cases or sales motions that you're going to have your reps run as they talk about SRM and talk about the platform or do have plans to sort of marry, if you will, the go-to-market messaging and sort of the stuff they need to have in the field along with the pricing changes?

Yes. That's in effect, already happening. I wouldn't say that it's sort of universal across the board but there are certain countries and certain markets for some of our more aggressive and progressive representatives have -- they're really been running the HR play very, very effectively and really, sort of acquired the go-to-market lingo and be effective in starting up that conversation with customers. We certainly are going to come out with a lot more content in terms of applications to support that effort, so there's a better starting point than just the platform itself. So you're going to see more and more of us really priming that pump and doing a lot more than just waiting for customers to figure it out on their own.

Your next question comes from the line of Kirk Materne with Evercore Partners.

Frank, just a question on the pricing side. When you talk to clients or some of your customers especially on the platform side, there's a lot of interest, obviously, around that but pricing was one of the things sort of not necessarily holding it back but it was a little confusing, especially as it relates to non-IT users. I guess, how much do you feel that -- obviously, you guys are making the changes so I guess, how much of that was driven by the desire to get your platform in the hands of more and more people? I guess, did you see that at all as sort of a gating factor that the growth or I guess, adoption of that at all this year? And, I guess, what does that mean for you guys as you head into next year in terms of having even more adoption?

Well, I think that the transition in terms of pricing that we've been going through, really for the better part of the last year, is just some necessary ones because the sort of the set of services and capabilities is so broad, we have to make it more granular. So it's an adjustment for customers but we're going to never let pricing stand in the way of meetings customers' needs and dealing with the ambitions that they have in terms of deploying the platform. It just takes a little bit of getting used to. It just takes time for them to sort of fully get their head around how it's going to go, how it's going to work going forward. Perhaps we've been in the middle of that for the better part of this year, we will still be in it for the next 3 to 6 months. But as you can tell, it's not holding the business back, it's just more work on that part to help the transition along.

Right. And then just along Mike's comments earlier about the sort of the system integrators. I guess when you guys think out to 2014, I guess what are you all building in, in terms of additional capacity to train more SI partners? I guess, what's sort of the thought process about how many SIs you have trained today versus where you'd like to be in perhaps a year?

Yes, so we have a lot of incentive for our SI partners to certify their people. And we've made an enormous amount of progress also during the last quarter. And there are incentives in place for our FI partners to certify more and more people because they will receive preference in the field from ServiceNow in terms of getting plugged into new engagements. So as you know, strategically, about 70% of the Services business around ServiceNow is executed by partners and the balance is done by ServiceNow. We really have to expand and build our ecosystem in order to continue to enable the growth that we've seen historically. So getting some of the really large integrators onboard is extremely helpful because they're able and willing to make the investments ahead of the curve. And that's what they need to in other, just to be opportunists and wait for business to fall on their lap. So it's a big focus area for us to expand the capacity of that ecosystem, not just in terms of people but in terms of trained people.

And your next question comes from the line of Richard Davis with Canaccord.

So every kind of high quality cloud software company I talked with is having a good problem of a lot of demand and that you've kind of touched on it with regard to hiring a lot of people in sales and marketing. So focusing on that side because you just talked about the service side, where are you finding these people? Because what I've heard from some people, some firms was like, well, we've kind of picked the bones clean of the traditional enterprise firms and stuff like that. So where are you finding them? Are there common traits for those who have become successful and how do you think about modulating it or keeping your forecast opinion so you have a conservative cut with regard to assumptions on how fast these new hires come up to full productivity?

This is Frank, Richard. One of the advances that we have is that people can be trained pretty quickly on our platform. Our platform is not a super demanding environment in terms of programming skill sets and so on. So a lot of feeds that we get into our ecosystem actually come from our customers. That's not necessarily always a positive thing for our customers because our customers sometimes see clear paths working for our system integrators and moving along that path. But it's possible to actually make that transition on the ServiceNow platform. So we have a very large pool of talent to plug into, but that pool of talent needs to be trained and needs to be focused on this type of work. And obviously, it takes the concerted effort of a firm to make that happen, right? So I really feel good and I think we've shown, over the last couple of years, that we've been able to grow our ecosystem even though, as you point out, that the kind of growth that we have, we're never living in the surplus situation. It always feels like there is tension that we could use a lot more and I do expect that to continue until sort of the growth moderates a little bit more.

Your next question comes from the line of Steve Ashley with Robert W. Baird.

This is Chaitanya Yaramada for Steve Ashley. You released the App Creator tool last quarter, just wondering if you could comment on what kind of traction you're seeing with that tool in terms of helping the adoption of the platform?

I think the App Creator is not a onetime thing, it's a development environment that we will continue to evolve and invest in and to essentially really productize the development platform for ServiceNow. They will help the platform become more approachable for more people and become more productive. As we said on previous calls, I mean, our platform was originally developed for ourselves and maybe for other professional services developers. The big focus for ServiceNow has been and will continue to be to really bring the platform to people really with minimal skill sets and really embrace what the Gartner Group refers to as the citizen developer contest where people actually built their own applications as they, for example, do on Microsoft Excel. It's no longer a professional staff, if you will, but it does all the work on the applications that then is used by a separate group of people. So you will continue to see a continuous new functionality, new features, new deliverables from us to make our platform and our development environments more attractive, more compelling, more approachable for very large numbers of people.

This next question comes from the line of Phil Winslow with Crédit Suisse. Sitikantha Panigrahi - Crédit Suisse AG, Research Division: This is Siti Panigrahi for Phil Winslow. My question is about your newer product beyond platforms such as Discovery, your Orchestration and your ram book automation. So I'm just curious what you're seeing in terms of adoptions from the installed base for this product? And also if you could say what percent of your revenue of bookings of some of these new products?

As we said during the prepared remarks, the automation is undergoing quite a lot of growth in terms of adoption in our customer base. And the reason is we're really emphasizing the use of the automation framework with ServiceNow. Now automation is really the key to driving an really enormous benefit and returns on investment. That's really where the big payouts are. I mean we talked to a very large financial institution that is very heavily scaled on ServiceNow and they told us they see the opportunity with our automation framework, to really dramatically reduce the level of staffing that they historically have had in their IT environment. That's really what it's all about. So our emphasis in terms of automation and really using that as an integral part of the overall platform is really leading to increased adoption there. We've also done a lot of template applications, new applications on our automation framework to help customers really understand what the potential is of the framework, the types of automation that they can undertake with the technology. So expect that to continue, it's a very important part of the overall strategy. In terms of Discovery, that's really a companion product in terms of the CMDB. So we really view that more as part and partial of our configuration management database.

Your next question comes from the line of Tim Klasell with Northland Securities.

A quick question on the selling into the non-IT departments. You've touched on a little bit that, that's obviously growing. Do you see yourself specializing your sales force, i.e., maybe having a sales force that sells into the non-IT departments, maybe into HR or to procurement or something like that or do you think you'll continue to have mostly generalists in your sales force?

Yes, it's a good question. That's a question that we ask ourselves as well. I think that's probably a more a question of timing. In other words, a question of when rather than if, and it could a be considerable time in the future when we do this. But I think that eventually, if we really are as successful as we think we will be in time in terms of penetrating all the other dimensions of the enterprise, it could well lead to that kind of a structure. We're obviously not ready to project that right this minute but it certainly is a consideration and we're not excluding it at all.

Okay, good. And then a quick follow-on. On the new pricing model, roughly speaking, how many of your current customers have that current pricing model? And how long do you think it will take to flow through to all your existing customers for the remaining existing customers?

All our new customers are getting the new pricing model, period. So that's a given. In terms of existing customers, it's really the renewals that we do every quarter. And that's just a subset of our overall customer base. Of course, to every quarter that goes through in the renewal process with us as they're going to get confronted with the new framework and structure. They all take quite a bit of time because our average contract is about 32, 33 months. So it takes time to cycle through that.

So just to clarify, this new pricing, we just rolled it out in October into our field and so it's going out in all new quotes right now. You do have some in-flight quotes that had our original platform pricing from early on in the year, as well as some upsells that don't have it, but we expect in 2014 as you're requoting all new customers, will be completely on that new pricing. And we continue to push with renewables to get on this new pricing, too.

And your next question comes from the line of Brad Sills with Maxim Group.

Just one on the platform. I know you've given us a lot of great color on how it's doing in service support type applications and lines of businesses like HR, procurement, et cetera. Do you see it evolving where it's more applicable to heavy-duty transactional type custom applications down the road? And if so, what do you think needs to happen? I know there's plenty of opportunity in the near term, it sounds like on those other scenarios but do you see it evolving further up the stack down the road?

Yes, this is Frank. That's actually a very good question. We're not a generic application development platform that you would attempt any type of application on. As we said many times, our platform is ideally suited for tackling request response, workflow-oriented applications. And then when I say requests, these are applications where the users are in need of product, service, help change of information. And the provisioning of these requests goes through a particular type of workflow in terms of the people that actually have to do the work. Sometimes that's heavily automated as it involves approvals, escalations and so on. So it is a very pervasive, very, very common service model that are actually today, a lot it actually lives in your email inbox. But that's why there's so much opportunity here. But if you're going to ask us, are your going to attempt an ERP suite of applications on your platform, that's lot less likely, right? Because we really will be looking for partners to do exactly that on our platform but we ourselves, wouldn't necessarily try to attempt that level of complexity of logic because that is not our core business.

Your next question comes from the line of Derrick Wood of Susquehanna Financial Group.

This is Rakesh Kumar for Derrick Wood. I was just hoping if you could talk about cloud provisioning and management market? Is this a market that you're looking at getting into more aggressively? And how do you see the competitive dynamics play out?

This is Frank again. One of the really important things to sort of keep in mind when you look at ServiceNow is that we're not approaching the marketplace in terms of separate markets like, for example, cloud provisioning, looking at it as a separate market. Because we are a very comprehensive IT management platform, provisioning is just one of the services that we deliver. It benefits a great deal from being on the platform because of user administration, a common data model, a single code base. The fact that it's operationally all hosted in a single environment, it makes it very compelling for our customers to say, look, instead of going one-off for cloud provisioning, I'm just going to do this on ServiceNow. So the strength that we derive from our platform is very important in terms of how we go-to-market. And it's true for many of our other applications. When you look at project portfolio management, that actually is a standalone market, but we don't approach it as a stand-alone market because we have unique value that we deliver to it opportunities through our platform. The same is true for governance, risk, compliance, asset management and so on. So AOM, another area, right? So we always go-to-market not on the one-off basis against pure play competitors but we're really trying to leverage the strength to our platform. And that's how we do it and it look exceedingly well because we have value in these categories that nobody else can replicate. So we just want to just emphasize that, that is really important understanding our business and not look at us as a collection of separate products and businesses, because it's not.

And just a quick follow-up, any specific verticals where you see most strength from?

Yes, we're pretty strong across the board. I mean, we're obviously very strong in financial services, we're very strong in big pharma, we're very strong in technology and big retail, the entire managed services provider. In other words, it's across the board. I don't think -- the only area that I think we wish we would be doing better in is the public sector. We've been doing well in state and local, the federal government is probably an area where we have a lot of room of, which is a good thing.

And your next question comes from the line of Yun Kim with Janney Capital Markets.

Along with the last question, just where are you in terms of cloud provisioning product and sales momentum there, especially for those scenarios where you have to manage external cloud resources and even managing third-party SaaS applications?

So we do post -- frankly, we do provide cloud provisioning capabilities in our product. I mean, we've demonstrated that at Knowledge13 over this year. They have been shipped and actually, I think, referenced one example in our prepared comments there, a customer that specifically bought our Orchestration product to do cloud provisioning. So that's actually -- we believe that's going to become a very popular use of our platform. So cloud provisioning through our Orchestration framework, I mean, it is a lot of stuff we provide right out of the box but because of the platform, there's no limit to how far customers can take this in terms of resilience, resources, both by the public cloud and other cloud applications.

Is there any way to kind of give us a sense on how much of that product represent in terms of revenue or billings?

I think we have in the past, given numbers on Orchestration in general, but not specific to cloud provisioning.

And then also, Frank, we are seeing a nice uptick in deal size and even you mentioned in your prepared remarks that you are pursuing larger deal sizes out there. Can you just talk about where you are seeing the deal size increase? Are you seeing that in the initial deployment or are you seeing that increase in upsells as well?

It's actually both. Both, our initial transactions are getting larger and that's because we're aiming for larger entities but also because we just are casting a much better message. I referenced 1 transaction that was actually much larger than originally envisioned because it included a lot of non-IT objectives that the organization had. Our upsells are also getting bigger because of the -- and the entities are large that we're selling to and the overall scope of the projects that we're undertaking is getting bigger. A whole organization due to all our channel strategy has evolved, the staffing that we've done in terms of our sales organization, these are all people that are very, very capable in dealing with larger enterprises. So that's why you see that trending in that direction.

And, Mike, I've got one last question for you. Can you talk about the pace of headcount growth in your professional services business? How should we think about just more strategically longer term, do you expect that headcount growth to align with the subscription revenue growth or do you actually expect that to be a little bit higher as you see the term and maybe trend below that?

No, we're going to continue to add people into our professional service organization. But as a percentage of the total people in organization, it's not going to grow that fast. And the reason being is we are not out to do all the professional services. We want to create an environment where our partners can be successful in professional services. And we also don't want to staff up to do 100% of the professional services that we have sold. We will outsource some of that work to third parties. And so it depends but I don't expect that to grow at a very fast pace in terms of headcount growth. Training is the area within professional services that we will be investing very heavily in, and that's for training both our partners and our customers.

Ladies and gentlemen, this will conclude the question-and-answer portion of today's conference. I would now like to turn the call over to Mr. Mike Scarpelli for closing remarks.

Thank you. As a reminder, a replay of this call will be available as a webcast in the Investors section of our website, as well as through the dial-in instructions contained in today's earnings release. Thank you for joining us today. This concludes our call and we look forward to our next update in January, following the close of the fourth quarter. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.