ServiceNow, Inc. (NOW) Q2 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 ServiceNow Earnings Conference Call. My name is Denise, and I'll be the operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now hand the conference over to Mr. Michael Scarpelli, Chief Financial Officer. Please proceed.

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, believes or similar phrases to convey that information is not historical fact. These statements are subject to risks, uncertainties and assumptions. Please refer to the press release and risk factors and documents filed with the Securities and Exchange Commission, including our most recent annual report on Form 10-K, for information on risks and uncertainties that may cause actual results to differ materially from those set forth in such statements. 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. We are very pleased with our performance during the quarter. Revenues grew 63% year-on-year to $167 million, and billings grew 59% year-on-year to $187 million. This quarter was marked by strong demand from the customer base, with renewals at 98% and upsells at 33% of annual contract values signed in the quarter as well as strong new account contributions. Our installed base is now 2,364 accounts with 455 Global 2000 customers. Some of the Global 2000 accounts added in the quarter include Eni, an integrated energy company; HGST, a Western Digital company; QBE Insurance Group, one of the world's largest insurance and reinsurance companies; Avago Technologies, a leading semiconductor company; and CONSOL Energy, a producer of natural gas and coal. Our strategy to enable the service-oriented enterprise continues to gain traction with customers and prospects. We're seeing good momentum [ph] of our platform in service domains outside of enterprise IT. Our HR service automation application has seen good uptick since we released the product last year, totaling 23 transactions in the second quarter alone. One of these was an upsell to a North American insurance fund. Their lack of a centralized HR service model inundated the group with questions and requests by phone and email. Advocated by the IT team, ServiceNow was selected to implement HR case and knowledge management for their 5,000 employees. Another case in point, a Global 2000 insurance company chose ServiceNow to provide their 25,000 users with a modern HR case management solution. This deployment was driven by a broader initiative to improve business process efficiency such as reducing the thousands of inbound calls to Human Resources. The IT team at this company advocated the use of ServiceNow and drove the first platform demonstration and assisted in the campaign from start to finish. In other service areas, a global rental car company built a custom application on ServiceNow that allows the IT team to align and prioritize business demands with required resources, budgets and overall strategy. The IT team is now working with our finance counterparts to automate and track their supplier interactions with a modern and consumer-like service experience using ServiceNow to manage things like invoice and order issues. A recent CIO survey by Morgan Stanley further illustrates our platform momentum as approximately 30% of the CIOs polled plan to use ServiceNow as a platform by the end of 2015, a nearly 50% increase from their previous survey in January 2014. A few things propel our business more than customer success and community. Our Knowledge conference this year in San Francisco broke all records, with more than 6,500 attendees, including more than 100 CIOs from global enterprises. It is a true industry event with more than 90% of the content delivered by customers and partners. Earlier this month, we acquired Neebula Systems for approximately $100 million in an all-cash transaction. Neebula's flagship product, ServiceWatch, automates the discovery, mapping and monitoring of IT-enabled enterprise services. It is a fundamental transformation from component-centric management to one that puts the service portfolio front and center. This solution will become a centerpiece of our IT operations management strategy and it strengthens our position to capture more of the $19 million ITOM market. Thus far, we have received strong positive feedback from customers, partners and investors on the acquisition. And finally, we welcome 2 new members to our Board of Directors, Sue Bostrom, most recently the Chief Marketing Officer at Cisco; and Anita Sands, recently the Group Managing Director, Head of Change Leadership and a member of the Wealth Management Americas Executive Committee at UBS Financial Services. Both bring significant corporate leadership, industry and management experience to our board. With that, I want to turn the call over to Mike.

Thank you, Frank. I'd like to point out that the company reports non-GAAP results in addition to and not as a substitute for financial measures calculated in accordance with GAAP. All financial figures we will discuss today are non-GAAP, unless stated otherwise. 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. Total revenues for the second quarter were $166.8 million, growing 63% year-over-year and 20% sequentially. Subscription revenues for the quarter were $132.7 million, representing 65% year-over-year growth and 13% sequential growth. Our average contract term for new customers, upsells and renewals were 31.9, 25.6 and 28.5 months, respectively, compared to an average of 34.0, 24.0 and 26.7 months on a trailing 4-quarter basis, respectively. Professional services and other revenues were $34.0 million for the quarter, growing 56% year-over-year and 57% sequentially. Our second quarter includes $8.2 million in registration sponsorship revenue from Knowledge, our annual users conference. This compares to $5.0 million in revenue from Knowledge in the second quarter of 2013. Our average total revenue per customer was approximately $262,000, an increase of 21% from the prior year and up 5% from the prior quarter. Our average annualized contract value for Global 2000 customers was $583,000 at the end of the quarter, up 67% from the prior year and up 13% from the prior quarter. Total revenues based on geography were $114.3 million in the Americas, $42.2 million in EMEA and $10.3 million in Asia Pacific, representing 69%, 25% and 6% of total revenues, respectively, compared to 70%, 24% and 6% of total revenues in the second quarter of 2013. Our total billings were $187.1 million in the quarter compared to $117.5 million in the prior year and $180.8 million in the prior quarter, representing 59% year-over-year growth and 3% sequential growth. Additionally, approximately 3% of our billings in the quarter were for periods greater than 1 year compared to 12% in the prior year and 4% in the prior quarter. In the future, we expect less than 5% of our billings will be for periods greater than 1 year. One year is our typical billings term. Our subscription gross profit was $103.3 million, representing a gross margin of 78% compared to 77% in the prior year and 76% in the prior quarter. During the quarter, we added 24 employees to subscription cost of sales, ending the quarter with 405 employees. Our professional services and other gross profit was $11.6 million, representing a gross margin of 34% compared to 33% in the prior year and 10% in the prior quarter. It is important to note that professional services and other revenues include $8.2 million from our Knowledge event with all expenses related to the event running through sales and marketing, providing a boost to gross margins that we will see once a year on the quarter we hold in the event. Excluding Knowledge, our non-GAAP professional services gross margins were 13% compared to 10% in the prior quarter. During the quarter, we added 33 employees to professional services and other cost of sales, ending the quarter with 370 employees. Our total gross profit was $114.9 million, representing a gross margin of 69% compared to 68% in the prior year and 66% in the prior quarter. Excluding $8.2 million in revenue from our Knowledge event, non-GAAP gross margin was 67% in the quarter. Our operating margin in the second quarter and in the prior year was negative 4% and a negative 5% in the prior quarter. Sales and marketing expenses included $15.3 million related to our Knowledge event. During the quarter, we added 76 employees to sales and marketing, ending the quarter with 806 employees; 60 employees to research and development, ending the quarter with 470 employees; and 32 employees to general and administrative, ending the quarter with 277 employees. Net loss for the second quarter was $9.8 million or a net loss of $0.07 per basic and diluted share compared to a net loss of $7.8 million or a net loss of $0.06 per basic and diluted share in the prior year and a net loss of $11.7 million or a net loss of $0.08 per basic and diluted share in the prior quarter. Our basic and diluted weighted average shares outstanding were 144.5 million. If we had operated at a net profit in the second quarter, diluted weighted average shares outstanding would have been approximately 161 million. Fully diluted shares at the end of the quarter, assuming the treasury stock method, were 169.8 million, excluding any potentially diluted shares from the conversion of our convertible notes. During the second quarter, we generated $42.1 million in cash flow from operations. We used approximately $16.4 million for capital expenditures, resulting in $25.6 million in free cash flow. The strong free cash flow in the quarter was positively impacted one time by collections, which slipped from Q1 into Q2, and the delay of payments at the end of Q2 into Q3 due to timing of our check run. This compares to a negative $2.1 million of free cash flow in the prior year and positive $13.2 million in the prior quarter. We ended the quarter with $957.1 million in cash, short-term and long-term investments, an increase of $32.7 million over the prior quarter. Our total deferred revenue balance was $328.9 million at the end of the second quarter, up 7% over the $308.5 million reported at the end of the prior quarter. We ended the quarter with 2,328 employees, an increase of 885 employees from the same period in the prior year and an increase of 225 employees from the prior quarter. Let's turn to guidance for the third quarter and the remainder of the year, which includes the impact of Neebula. Please note that our margin guidance is on a non-GAAP basis, which excludes stock-based compensation expense, acquisition-related expenses and amortization of acquired intangibles. For the third quarter 2014, we expect total revenues between $173 million and $175 million, representing year-over-year growth between 55% and 57%. Our total third quarter revenue estimate consists of subscription revenues between $147 million and $148 million and professional services and other revenues between $26 million and $27 million. We expect Neebula to have an immaterial impact on our third quarter revenue results. We expect billings between $190 million and $193 million, representing year-over-year growth between 50% and 52%. We expect subscription gross margin of approximately 77%, professional services and other gross margins of approximately 8% and overall gross margin of approximately 66%. We expect an operating margin of approximately 1%. As a result of Neebula, we expect a negative 1% impact to our operating margin and to pay up to $15 million in capital gains tax to integrate Neebula into our global tax structure in the third quarter. For full year 2014, we expect revenues to be in the range of $668 million to $657 million (sic) [$673 million], representing year-over-year growth of 58%. Our total annual revenues estimate consists of subscription revenues between $558 million and $560 million and professional services and other revenues between $110 million and $113 million. We expect Neebula to have an immaterial impact to our full year 2014 revenue results. As a result of the Neebula acquisition, we acquired 29 employees and expect to add another 30 employees by the end of the year. With that, operator, we can now open up the line for questions.

[Operator Instructions] Our first question comes from Michael Turits with Raymond James.

It's James Wesman sitting in for Michael. Mike, a quick question on the Neebula acquisition in your billings guidance. Any impact from Neebula on the $190 million to $193 million figure for the third quarter?

No, Neebula is really an immaterial acquisition from a revenue perspective in 2014, including billings.

Got it. So immaterial to billings for 2014 as well, I heard you right?

Yes.

Great. And then just a follow-up for you and Frank. Just a housekeeping question. What percent of the net new annual contract value is from non-ITSM this quarter? I think it was 34% in 1Q. Did you guys give that figure this quarter?

I think I described -- yes, I think the figure is 32% this quarter. So it's substantially in the same area as it was last quarter.

But we'll reiterate again, that is not a metric that we manage the business on because we still have a lot of legacy contracts where there's upsells, where they buy under our old licensing model. So that doesn't accurately capture all of that business.

Yes. We believe it's an understated metric.

I'd also like to correct, when I was giving the full year guidance, the correct number is $668 million to $673 million. I believe I got that wrong.

Misspoke, yes.

Yes.

Our next question comes from Jason Maynard with Wells Fargo.

I'd like to focus my questions a little bit on this HR case management opportunity and some of the wins you had in the quarter. Frank, maybe talk a little bit about how you're seeing that materialize in your pipeline and frankly, how repeatable and consistent do you think your sales motions in this area can be over the coming year or so.

It's actually -- Jason, it's Frank. It has become a pretty substantial sort of pull of activity for us. We highlighted in the prepared remarks how many transactions we've done. But one of the other things we noticed is that the pipeline on HR case management is now larger than what we have around PPM, which is our Project Portfolio Management applications. So it's really sort of rocketing up the pecking order, if you will, in terms of the hot applications that are in demand out there. And it's definitely a sales motion that is becoming more predictable because of the activity, but it's also something that makes a ton of sense. We're learning a lot more about why HR organizations are interested. We know -- we learn how to talk about it. We learn the language of HR better. We're able to point to a lot more references and successes we've had. And it's another one of those areas that is just wide open. HR has lived with email and voice messaging-oriented systems to execute on the service model, and this is just an area where they can book gains in terms of service experience and efficiency really quickly. So we expect this to continue. And the same thing is going on at facilities procurement. Those are the service domains where the IT organizations typically are driving these kind of service efficiencies.

Is there any way to sort of think about initial order size with HR case management and how it would compare to some of the other product areas? And do you anticipate it being bigger or smaller in relative size? Or -- and then I guess would you see a similar ramp in terms of how big these projects can get over time?

Yes. We probably have to do a little bit more work to attach some authoritative data on there. I'm sure there's data that's there to be had. I just don't have it at my fingertips. I don't want to do a characterization that doesn't reflect what it really is. Anything you want to add to that, Mike?

Yes. What I would add is that what the HR case management does for us now, it gives our sales people an opportunity when a customer isn't ready to do an ITSM switch, it's another sales front into those organizations to get our beachhead at HR case management, and we're seeing more and more of that.

Yes. The other thing I'd tell you is that HR case management is different from IT service management. It tends to be very much focused on knowledge. HR is a very information-centric service model where employees are looking for answers to questions, whereas IT tends to be very defect-oriented. Something's broken and people need help mitigating a situation. So even though the concepts are similar, where it focuses and the type of techniques and approaches they use are actually quite different. And these are the types of things that we're learning, which is really, really helpful when we go into new accounts and we try to explain what this is going to do for them.

Our next question comes from Rob Owens with Pacific Crest Securities.

Sorry about that. Maybe a little bit more around Neebula. And I understand it's immaterial to the remainder of the year, but just a sense as to what the revenue model look like, maybe how much revenue preexisted at the company, what you're looking to do in terms of integrating into your process. And then I know you're not giving any guidance on the out year, but how excited should we be getting about this opportunity?

Rob, it's Frank. We're super excited about Neebula, not just because of Neebula as a standalone technology and what it can do, but we think it's going to really help charge the overall ITOM strategy that we have. I mean it's going to help a lot with our Discovery, with our CMDB because it's extremely value added to those technologies. So it's not just an asset and a revenue opportunity in its own right. It will help all the other products that we have in our ITOM portfolio today as well as the ones that we are going to have in the future. This is really a leapfrog. It really tries to sort of set aside what we've been doing for 30 years in this marketplace and sort of fast track to what enterprises are really looking for and is understanding what the service availability is and how to analyze this up in terms of its component parts. So it is an exciting thing. I mean, the reason that we are still projecting it is not material is we don't have any history yet with the product and it's going to take us a quarter or 2 to start developing that history. Same thing that happened last year when we acquired Mirror42. We now have some good history on that, but we're excited about it. This is a very strategic component to our approach to that part of the marketplace.

What I would add, Rob, is the company was a mix of perpetual and subscription licenses. In fact, when you normalize that to be subscription, they're doing less than $1 million a quarter. And in purchase accounting, we lose a lot of that, and we're not expecting with new deals being signed that's going to be that meaningful for the balance of this year.

And going forward, we're not going to do any perpetual transactions with Neebula. Everything will be on a subscription basis.

Sounds good. And then second round, new customers added. I think it was one of your strongest, if not your strongest quarter. So talk a little bit about customer acquisition at this point, types of customers that you're seeing out there and what competition has at this point. Are you seeing anyone get a little more competitive with any of their cloud offerings?

This is Frank again, Rob. I think we were exceptionally strong, both within our customer base this quarter with our renewals and our upsells, both being at or near record numbers, as well as our new customer acquisition, obviously, with the scale of our sales organization and then the number of ramp reps that we have out there going up quarter-on-quarter. Those numbers are going to get pushed higher. We also had record number of acquisitions in Global 2000 accounts, which is even more meaningful to us because that represents a ton of future upsell potential. So I think we're hitting on all cylinders here. From a competition standpoint, the dynamic really hasn't changed. It's really the -- more of the same of what we have reported on historically in terms of the legacy vendors. I mean a little bit of competition coming up from the bottom. That's truly the end of it. Our win rate is exceedingly high. I mean if we have any losses, it tends to be in the context of postponements or doing nothing for the time being. So that -- the status of that is really good. I think our brand position in the marketplace continues to strengthen quarter-on-quarter here.

Our next question comes from Walter Pritchard with Citigroup.

Mike, I'm wondering if you can talk about million dollar deals and how many you had in the quarter and just generally characterize what the large deal sort of success rate and the environment looks like for large deals in your business right now.

Yes. So last quarter, we closed 5 deals, north of $1 million. We now -- with the upsells that we have in the quarter as well to the customers, we now have 91 customers that are paying us north of $1 million a year, up from 80 the prior quarter. In terms of looking at our pipeline, we have a lot of big deals in the pipeline. But big deals tend to be lumpy. We had a number of big deals that pushed from the quarter into this quarter right now. We expect that, and that will continue to happen. But it's -- the nice thing about our model is we're not dependent on any big deals to make our number, and you can see with our guidance increase how comfortable we are with the opportunity we see in front of us.

Got it. And then I think I asked you about -- sorry, go ahead.

What I was going to say is -- what I will say is, we had record number of deals in that $500,000 to $1 million bucket this past quarter.

Got it. And then I think I ask you about this almost every quarter in terms of your sales hiring. And we continue to see just very steady additions on the sales side. Is there any reason to think that it'll be different than that, either you slow down in the second half or you accelerate the sales hiring in the second half? Or how should we think about that looking here into the back half of the year?

So we now are at 64% of our hiring target for our sales and marketing organization, and as we've said before, we typically front-end load that. But we're going to continue at -- we're going to add roughly another 170 to 180 in the second half of this year, so slightly below where we're at right now.

We're actually down on our plan now.

Yes.

Our next question comes from Brent Thill with UBS.

Just a follow-up on Walter's questions on the big deals. Mike, I think you had 2 of your largest transactions ever in Q1. And I just wanted to be clear, in the second quarter, did you have any elephant-sized transactions or were -- just as you described, they were more antelopes than elephants this quarter?

They were good. We had 2 deals in Q1 that were north -- they were $4 million-plus annual deals. This past quarter, the biggest deal we did, I think was $1.8 million in the quarter. So as I said, we had 5 deals. But what I will say is the upsells, we did a number of -- 3 of those big deals were upsells, but we also had a number of upsells to customers kind of in that $500,000 to $1 million range. And we also sought 2 big deals in APJ, which were north of $1 million, which we're very pleased with the execution in that region. Remember, we opened up a lot of new countries in APJ in 2013, and we're starting to see the impact of that.

Okay. And just a quick follow-up on -- Frank, you mentioned the strong traction in Global 2000 and that you saw that in your average transaction size. Can you just give us a sense of are you starting to see the concept of a enterprise license agreement get put in place so they can expand beyond IT and HR to different divisions or is this still kind of a case-by-case combat, if you will, that you're still seeing in the sales motion?

Actually, this quarter, with the pricing evolution that we talked about previously and that we introduced, that now is an ELA framework that we have trained our sales organization on, whereas before, that's really something that we reserved for special situations. Now really, that is just another vector that we've trained our sales organization on that they can execute on because we're getting in more and more conversations where our customers do not want to buy incremental. They want to know what is it going to cost if I just go wall-to-wall and standardize on it. I think there's definitely an inflection happening where customers are looking at us like what does this look like when we go wall-to-wall and we standardize on ServiceNow versus I'm just going to do this set of applications for this set of users and we price at ala carte. So enterprise licensing is going to become a much more dominant part of our business going forward. We've always had activity around that with some of our leading customers that were very, very far along in the implementation. But it's now something that's happening upfront in new conversations with customers because they realize that they're going all out with ServiceNow, that's the way they have to approach the pricing model. And it's much more favorable as well because it's just -- the economics look much more interesting on an ELA basis if you go wall-to-wall than it does incrementally.

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

As a follow-up to the nice wins on the HR Service Automation side, I'm wondering, what could cause you guys to implement a separate sales model?

Say again? What would cause us to implement a separate sales model for these different use cases?

Correct.

Yes. That's something that we have to be pretty damn careful with because it starts to bifurcate the model that we have and how we go to market. I mean our go to market, if you may recall from prior calls, we always seek to land an IT organization, occupy that space, then use the advocacy of the IT organization to start invading adjacent service domains. That's what we do, right? So we typically don't like to sort of go off to HR on our own without first having established an IT or certainly not without having IT as a strong advocate in rolling that out. That is a very key part of our sales strategy that we don't want to do that. I mean, we sometimes violated that and it comes back to bite us because all of a sudden, IT is now at odds with us because we've established ourselves in another service organization and we're not in IT yet. So we try to avoid that. Now, is it possible that down the road we get so much critical mass in some of these other service domains that it pays us to do that? We will definitely consider that. At this point in time, that's not on the horizon.

That's helpful. And then as a follow-up to the question on sales and marketing adds, obviously you're adding at a very high rate. I'm wondering if you could comment on growth in sales productivity this quarter.

The sales productivity was actually -- was good. It was up both sequentially as well as year-on-year. Ramp reps are increasing in productivity, which really illustrates that our growth model is working. We are successfully converting sales people to yield as they move through their ramp periods. So that continues to work and gives us the confidence to continue to add resource to the sales organization as we go forward. This has been very consistent for us historically, and it continues to be as we get bigger and bigger here.

Our next question comes from Raimo Lenschow with Barclays.

Frank, new record, there were 6 minutes for prepared remarks. The question I had was like -- a lot of mine have been answered, but the -- at the synergy -- at your conference -- not synergy, but at your conference, at Knowledge, you talked about IT operations and an opportunity there. And there's obviously a lot of talk about the platform and going beyond IT. How are you feeling about it? And what are the latest developments around IT ops? And what do you see in there with the initial steps?

Yes, Raimo, I'll try to set a new record next quarter. But on IT, here's a key point to remember. This is our macro observation around what's going on. IT service management and IT operations management have really stopped being separate markets, separate spaces, separate tools, separate people and skill sets. Their workflows are now cutting across operations and service management. Now we have observed that for some time because we're in the middle of that. We're integrating with operations management tools all over the place through Orchestration. We're not just managing the work. We're actually doing the work as well. We think it's exceedingly important for us that we don't view ourselves as a service management platform exclusively. I think that ITOM is something that's separate in a different marketplace. Those boundaries are disappearing, which is why you see us move aggressively in these areas. There's a ton of opportunity because the people that are on the operations management side are going to have to figure out how to bridge into the service management side, and a lot of those vendors are the same legacy people that we already compete with. So the nice part is we're pleased with the Neebula acquisition because there's always 3 things that we look for when we move into a new marketplace like the operations management side. Number one is we're looking for exceptional talent, which we believe we acquired with Neebula. We're looking for really different -- for technology that solves really difficult problems. And thirdly, we're looking for a completely different way of approaching the problem. We don't want to go in with same old, same old just in order to have it, right? We're trying to invert the market, the same thing that we've done with service management. And it's a very exciting time. The tools on the operation management side are very stale, are very old, are very expensive. Customers are very, very ready to look at new approaches. And especially, they understand as well as we do that, that service and operations management are not going to be separate markets going forward.

Our next question comes from Kirk Materne with Evercore.

Frank, you talked a little bit about you're seeing solid growth from the HR app that you guys put out there last year. I was just kind of curious if you had any sort of updated thinking on what you guys might do around developing additional first party apps versus creating more of a sort of an AppExchange or an App Store for the platform. I know you guys have been sort of thinking about that. I just wanted to know if you had any sort of updated thoughts on that.

Yes, that's actually correct. That's heavily in planning mode within ServiceNow. Last year, you saw us introduce the Share infrastructure, which is really a content exchange, especially for customers and partners. But in order for us attract the professional software developer people that develop software for a living and have to sell it, well, we're going to have to have a monetization infrastructure as well. And we're in the midst of -- in planning on having that. We have preliminary designs on making that available by Knowledge15 next year. So we are first definitely going after the professional software developer with the ServiceNow platform, and we need to have a monetization infrastructure in order for that to be a successful strategy for us. That's great question because it's very much on our minds these days.

Okay. And just to make sure I heard that correctly, by '15, you guys think you'll have something in place to start monetizing some of those apps that can be built on top of that?

Yes. Knowledge15 is -- we like to sort of draw the line in the sand around our big Knowledge conferences because it's sort of like a forcing function for us to make sure that we deliver. And we did that with Knowledge14 with the Share infrastructure. A lot of our products sees the light of day around the Knowledge conference.

Our next question comes from Abhey Lamba from Mizuho Securities.

Frank, can you talk about ServiceNow business edition? Have you found it to help you expand your TAM? And how different are these markets, the mid-markets and enterprise? Also, would you need to develop a separate sales force to target them?

Yes, good question. We've been adding customers on Business Edition reasonably well. I mean, we now have quite a few customers where we have a nice population that we can learn from, from what the product is doing and what it needs. But in terms of the go-to-market model, yes, we're really trying to change things up quite a lot to make it completely unattended to get away from a lead generation model, move toward a demand generation model. It's going to -- when we're all said and done, it's going to look a lot more like our low end -- our very low-end competition that people are really aiming for the SMB marketplace. I mean you're talking about transactions that are $5,000, $10,000, $15,000 a year in size. It's different in every regard and not just in the products but the contractual model, the support model, the feature set, the product and so on. So we're getting some really good experience. We're adding customers, but it is -- we are still on a journey here. It's going to be very, very different from our go-to-market motion that you see us exhibit on the enterprise side.

And Mike, a follow-up on your billings guidance. Now will specific billings guidance become a regular feature now? And also, you're calling for about $15 million increase in deferreds next quarter. That's in line with what you did over the last couple of years. We have -- in the first 2 quarters, we've seen an uptick contained in deferreds this year. So if you can just help us understand puts and takes for billings for next quarter, that would be helpful.

We will be giving billings guidance, and the deferred revenues is falling out from the billings and the revenue guidance, and we feel comfortable with that.

Our next question comes from Greg McDowell with JMP Securities.

I just wanted to ask about the Eureka release. I think you guys pushed that out earlier this summer. Any trends you're seeing from the customer base so far in terms of update -- or uptake in some of the new features of that recent release?

Yes. This is Frank. The uptake on Eureka has been amazing by historical standards. I think the data so far shows that it has moved 3.5x as many people by this time than our previous release, which was doubling. And that's a function of how compelling the content of the Eureka release has been. So that is going really, really well.

And one quick follow-up. I was just wondering if you could expand a little bit on the expansion of the Board of Directors and your views on why that took place.

Yes. So the Board of Directors is evolving as a function of the company going public, the VCs being fully distributed in the company and just moving into the mode of being in a completely institutionally held public enterprise. So I mean we've added -- last year, we added Charlie Giancarlo to our board. Just now, we added both Sue Bostrom and Anita Sands. These are all people that have really large company background and experience. We plan on becoming a large enterprise. So we need to have people around the table that have been there and seen it done and can really help guide us. So our VCs are still around the table, but they will not be forever. So this is just an ongoing evolution. There's nothing abrupt about it. This is something that will take place over a number of years.

Our next question comes from Steve Ashley with Robert W. Baird. Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division: I'd like to swing back to the HR service management module and ask, what kind of improved service efficiency are some customers seeing by putting this in? And then separately, what is driving that improvement or whatever level of improvement they're seeing? Is it automation and self-help? Is it changing the processes? I'm sure it's a number of things, but if you could help us understand what kind of a benefit people might see and in what form, that would just be great.

Yes. This is Frank. Terrific question. What happens in most HR organizations today is that there's just a volume of inquiry coming over to transom [ph] by email and by phone and HR organization staff to try and deal with it and respond to that in some reasonable manner. The problem there is we don't know how well we're doing. We don't really know what we're working on, what the sources is of the volume of work that's driving through the organization. So while we're executing on the service model, we're really not managing it. And what happens when you put a service model in place, I mean, a number of things start to happen. You get immediate data on what it is that your organization is working on. You can break it down by geography and categories and also how well your organization is actually doing in terms of responding to the workload that is coming at the organization day in and day out and so on. Once that data becomes apparent, first of all, we can manage our workforce a lot better. We can hold people accountable for their performance. But we can also start to get proactive around why is all this work coming over to transom [ph], right, are we having a problem with our group plan health insurance, are we having a problem with our 401(k) provider, what is it that's driving our work into the HR organization. Most people proactively start knocking off the problems that are driving the volume. This is, by the way, exactly what IT organizations do as well. Then you often see the staffing levels drop dramatically because the workloads go down. That is the essence of service management. Now as I said earlier, in human resources, the workloads tend to be very information-centric. People are looking for answers to specific questions, what's the policy on this and so on. And the faster that people can get to that information without actually invoking the time of people, right, the less resources are needed to deal with those workloads. And I've seen organizations that have cut their HR staffs in half, 50% in -- and once they started, they get full visibility to the work that was flowing through the organization week in and week out. So going from not having a service model and not managing service model to actually having one and then fully incrementally improving it, the benefits are dramatic. And that's why a lot of organizations say this is a total no-brainer compared to being on voicemail and email and just chasing our tail all day long. Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division: Great. So when you stand at a high level, you look over the organization, there was a ton of white space in the IT department. As you've just described, there was a ton of white space in the HR department, where else are -- when you look over the entire organization, are there pockets of white space to be addressed also?

Well, I mean, if you take it through its logical conclusion, everybody who works in the enterprise as both a requester of services and a provider of services, right, as a provider of services, that's really what your job is. If you're working in an organization, you are a provider of services in some form or fashion. So that means that if you are a provider of services, a service model is probably in order, depending on what your deal with. You work in procurement, you deal with suppliers, you work in facilities, you work in sales, you work in marketing, wherever it is, if you're a service provider, a service model is typically not far away. You're also a requester of services. A requester of services, we all are because we need help from HR, we need help from IT, we need help from facilities. So we need to have the ability to invoke the help and the systems of these organizations, and that's also, of course, where we have the service models. So in the end, every single employee in the enterprise is both a requester and a provider of services, and they're going to be -- and depending on what hat they're wearing on that particular moment, they're going to be on a ServiceNow system absorption, whether it's facilities or HR or IT or procurement, vendor management or whatever it is. You're on one part of the service model as a requester or as a provider on the other side. So that's how we're -- it's not just white space. I mean it sort of engulfs the entire world of work, if you will, and that goes on in an institution or in an enterprise.

Our next question comes from Alex Zukin with Stephens.

One housekeeping item. Did you guys give the Global 2000 customer adds in the prepared remarks? Maybe I missed that.

Yes, 455 Global 2000s. We added net 29.

Got it. And then, Frank, one for you. How does the competitive environment change for you in some of these large deals where you're going after the very broad enterprise service management deployment?

Well, I think, first of all, it's not that different in terms of who the usual suspects are. They're the same people that we've always contended with because they're the incumbents trying to hang on to the legacy that I've built over a long period of time. But as I said earlier, we're at an inflection now where ServiceNow is not just viewed as being usable or useful in a few areas, but it's viewed as something that needs to be standardized upon because it makes sense to do so. And also, my comments about the whole ELA structure on pricing also address that. So competitively, people are viewing us much more as an enterprise platform now than they ever had before when they really were targeting a few specific applications that they wanted to automate with ServiceNow. So that -- from a competitive dynamics standpoint, I think we're much more threatening than we've ever been. And if you tie to that our forays into ITOM, now we're invading from our service management platform those markets as well, and that obviously also deals with the same set of competitors that we have on the service management side. So this game is far from over. We're just still in early innings, and we're going to be dealing with that same cast of characters for a long time.

And on the platform side, are you starting to have situations where you're running into Force.com?

Yes, we do and that's been going on for years as well. I referenced in the prepared remarks the CIO survey that is done by Morgan Stanley. And they survey 150 CIOs every 6 months or so, I believe, and there's always 2 platforms that get mentioned in that survey. It's Salesforce and it's ServiceNow. And I believe in the last survey, our numbers in terms of projected use by CIOs were right out there with Salesforce. So I think we are having tons of traction in this area, and we're obviously high profile that CIOs know about is in our -- and planning to be on our platform this year or next.

Our next question comes from Derrick Wood with Susquehanna Financial Corporation.

I wanted to ask about the pricing change and now that it's been out for a couple of quarters, just kind of curious what the net effect has been. Is it helping with velocity of new use cases? Is it helping to monetize usage from the installed base? What really has been the desired effects? And how is that tracking relative to expectations?

Yes, the -- this is Frank. The net effect of that set of introductions has been a reduction in friction. Making changes in pricing is never easy, and we keep doing it and when we encounter friction or have opportunities to make business go easier and faster. And we strongly feel, based on the experience that we now have under our belt, that the latest change is really, really helping for various reasons to reduce the friction. So we're pleased with it. Our sales people are pleased with it. It's a lot of progress from where we were. I referenced the ELA framework is really being a second vector to really approach enterprise-wide transaction. That is helping a lot because the incremental model introduced a lot of friction for enterprise-wide deals. So it's really good steps forward, and we're pleased with where we are on pricing. It's not an easy thing, but we're converging on a really good place with it.

Great. And I wanted to go back on the question on the new customer activity. Very good number. I'm just wondering if you can give a little bit more color as to the incremental strength. Is it more international? Is it moving down market? Is it more channel leverage? Because it does seem like it was a bit of an inflection from looking over the last year or 2. So just trying to get a better sense of what the drivers were if anything sticks out.

I would say it was broad-based across the world. And what I would say, too, is that it's really still very much a direct sales model. We don't rely on a channel that heavily for sales. We do rely heavily on partners for implementation services. I did point out that APJ, we're very pleased with our results there with some very big deals, but it's really across the board. And you'd expect our new logo count to go up given the number of ramp reps we're moving into right now. So there was no surprise there on our front. And by the way, new customers exclude business addition of customers.

Yes, good point.

Our next question comes from Tim Klasell with Northland Securities.

Just a follow-up there on Business Edition. How many customers do you have on there? I think you gave us some customer counts a quarter or so ago. Wondering how that has ramped.

On Business Edition today, paying customers, we have 14 accounts in the last few quarters that we signed up. And we do have some other customers as well, too, but as Frank said, we're still learning a lot from those customers on what we need to do before we really do a big push with this.

Yes, we're not in the mode of massively scaling and ramping business position. We're very much in a mode of discovery and improvement, where we're not yet applying a full thrust of effort behind it because we feel we're not ready to do that. When we have -- we have now a couple of dozen customers that are some -- Mike said 14 or so that are paying customers where we have a whole bunch of them that are in test mode. It is the right pool for us to do the work that we have to do to figure that out. I expect that we're going to spend a few more quarters really in this kind of a mode of adding customers incrementally. Like this before, we really are going to sort of open the floodgates. We're not at that point. We don't think we can productively apply the resources to it. So we're sort of holding our powder dry until we feel we're at that point.

Okay, great. And then on the Neebula acquisition, getting good feedback from your partners on it. But how much customer overlap do you have? How many customers -- joint customers do the 2 companies have?

I think Neebula has about 30 customers in production. I think there's probably, I think, maybe about a dozen or so might be ServiceNow customers. They were a very active partner of ServiceNow. They came to our conferences. We had an integration with Neebula already. They were able to populate our CMDB and work with our Discovery tools. But that's just the history. We think that every single customer that Neebula can appeal to ServiceNow can appeal to as well. I mean, there's 100% intersection there from an opportunity standpoint. I mean we will present and lead with Neebula every single place that we go in with ServiceNow. You can count on that.

The one thing I need to add [ph] is we are completely reimplementing that on top of our platform, which is going to take us some time to do as well, and you'll see a really big push on that.

Yes. That's actually a question that was asked earlier that I didn't address. We said in prior calls, we're very fanatical around platform, and when we do acquisitions, we look at the architecture and the implementation to make sure that we can do it and that we can do it in a reasonable time. Mirror42, the acquisition we had last year, was fully implemented over a 9-year -- 9-year, excuse me, 9-month period. We are already far along, and the planning stage is doing exactly the same thing with Neebula. It's going to move into the ServiceNow cloud. It's going to use our data model. It's going to -- from a UI standpoint, you will not be able to tell that it's not a ServiceNow application, and it will get refreshed and managed right alongside everything else inside ServiceNow. So that's a very strong commitment we have to platform strategy.

Our next question comes from Brad Sills with Maxim Group.

It sounds like great uptake in this quarter's early traction on the HR application. Can you comment a little bit on what you're seeing in the other 2 facilities in field service?

Yes, and these are application areas that are -- have exactly the same kinds of characteristics in terms of service model. And typically, they're similar to HR in the sense that historically, they haven't had anything. They just have email interactions with people that needed help or services from those areas and particularly in procurement. They really ought to view themselves as a service organization because there's a very high intensity of interaction with people that are doing the requisitioning of services. So that's why the payoff is quite compelling to go to a structured, defined service model. But HR, because it is so employee facing in terms of what it does, it's the place where people like to go first. And the HR organizations are typically quite animated and interested in service models because they view themselves more service organizations, I would argue, than a purchase organization does that deals with suppliers all day long. But we will see good uptake in all these areas. I mean the sale that we're really trying to make with CIOs is that, look, you need an enterprise service model to make sure that the organization that you have in your enterprise are behaving as service providers and that you have structured processes that allow you to report on it and see how well you're doing, are you efficient in delivering the services and so on. And that's a new thing for large enterprises and institutions in the public sector.

Great, Frank. And then just one on the CreateNow portal. Are you seeing any trends with use cases or even applications that you could see evolving into another category of line of business application that you package up and sell yourself?

We haven't really seen anything of that sort where there was activity going on that we picked up and started repurposing for sale and not excluding that, that might happen at some point. One thing I will mention about CreateNow, there was quite a bit of inflection during the quarter in terms of 8 percentage of the total non-ITSM revenue because it jumped during the quarter from 6% to 14% of our revenues -- of our bookings, excuse me, of our bookings. And just remember, 18 months ago, we weren't even charging for this yet. And so this is leaps and bounds. And we were even surprised to see the numbers sort of jump as hard as it did. And it just -- we think it's an indication of just general interest in the platform-building custom applications. It's been out there a while now. Sales people are getting used to it. Customers are getting used to it. So it's becoming much more mainstream in our go-to-market motion. So that was kind of an interesting metric to have seen emerge as well.

The next question comes from Justin Furby with William Blair & Company. Justin A. Furby - William Blair & Company L.L.C., Research Division: I'm just curious on the IT operations market, if you look at that $18 billion or whatever the number is, how much of that today -- post Neebula, how much do you think you can address of that? And then if you look out maybe over the next 3 to 5 years, where do you think that goes? And is it likely to be sort of continued acquisition or more internal development?

Well, it's -- the $19 billion is a highly fragmented aggregation of subsegments and it includes mainframe. So it's sort of a nice wrapper, but there's no doubt that most vendors, including us, were not addressing the full scope of that today or will be in the future. But obviously, there is -- there are many, many billions of dollars of spend going on in that area. We get questions all the time from our customers what are we planning on doing in this area because they're very, very interested in having this kind of software be on our platform. There are many, many more segments that we are evaluating opportunities both to build, to expand or to acquire. Neebula was really a nice shot in the arm, a really good, solid asset that really helps service availability management, which we think is a centerpiece for IT operations management. But there are many others that are existing categories that are being reinvented and where opportunity is lurking. So stay tuned. Justin A. Furby - William Blair & Company L.L.C., Research Division: Okay, great. And then just one quick on the government. I mean, was there any activity in this quarter? And kind of if you look into Q3, it's an important quarter. What are kind of your expectations as part of your billings guidance around the federal vertical?

Well, federal vertical was not unusually strong this quarter. I do expect next quarter will be strong, and we don't give specific billings guidance around different segments of our business. But I do expect Q3, as you'd expect, will be a good federal quarter for us.

Our next question comes from Philip Winslow with Crédit Suisse. Philip Winslow - Crédit Suisse AG, Research Division: Most of my questions have been asked already, but I'm just wondering if you could give us more color on the Orchestration add-on sales as well as Discovery and obviously how the ServiceWatch can fit in with the Discovery tools?

Yes, so those -- this is Frank, Phil. These products have been doing really well. They've been growing as a percentage of our business almost every quarter, and it's becoming the -- by the way, I mean we did a new customer transaction, the largest transaction we did this quarter, which included -- and that customer is now our largest Discovery and Orchestration customers literally like in an initial transaction. Usually, we sell Discovery and Orchestration downstream from the initial transaction. Shows you it's going to become more front and center to what we're doing. So how does it fit with Neebula? I mean, Orchestration -- excuse me, Discovery, really, it finds the hard and soft assets in the infrastructure and then populates a repository. And that scan is typically repeated on a weekly basis to keep it up-to-date. What it doesn't do is map those hard and soft assets to the services that it supports. That's what Neebula will do. So Neebula is highly complementary to the sale of Discovery and the CMDB. This is something that has to be -- if you don't have Neebula, that is something that has to be done manually, which is darn near impossible because it will be out of date by the time you do it. The Neebula is completely dynamic and automated, which is what makes it such a compelling add-on to our portfolio of capabilities. Very, very necessary. And we believe that every customer that is serious about managing service availability are going to need to have Neebula or something like it.

And I would add that Discovery and Orchestration were about 7.4% of our net new ACV in the quarter, up from the prior quarter and up from the prior quarter before that with Orchestration growing the fastest of those 2.

We have no further questions. I would now turn the call back over to Mr. Michael Scarpelli for closing remarks. Please proceed.

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 today's conference. You may now disconnect. Have a great day.