ServiceNow, Inc. (NOW) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q4 2014 ServiceNow earnings conference call. My name is Whitley and I'll be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Michael Scarpelli, Chief Financial Officer. 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, believes, or similar phrases to convey that information is not historical fact. These statements are subject to risks, uncertainties and assumptions. Please refer to the press release and risk factors and documents filed with the Securities and Exchange Commission, including our most recent Quarterly Report on Form 10-Q for information on risks and uncertainties that may cause actual results to differ materially from those set forth in such 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 finished fiscal 2014 with strong metrics across the board. Fourth quarter revenues grew 58% year-on-year to $198 million and billings grew 62% year-on-year to $269 million. We also maintained a rapid growth of our combined backlog and deferred revenue balance, which grew 57% year-on-year to $1.4 billion compared to 59% growth in 2013. The quarter was marked by strong demand from our existing customer base with a 97% renewal rate and a 38% upsell rate, and we also signed the most new customers and new Global 2000 customers in the quarter. We booked 10 new transactions with annualized contract values above $1 million, including four in Europe. The company now has 129 customers, each with an annualized contract value in excess of $1 million compared to 67 at the end of 2013. We closed the quarter with 2,725 customers and now count more than 25% of the Global 2000 as customers. Some of our new Global 2000 logos are: satellite broadcaster, DISH Networks; financials services company, Fiserv; and global insurance provider, Generali Group. Our strong upsell performance in part reflects our service management solutions for human resources and facilities. We sold 40 new HR service management transactions and 38 new facilities service management transactions in the quarter. Nearly 35% of these transactions were with customers new to ServiceNow. One European financial institution recently went live with HR service management for their 25,000 employees. The company transitioned from manual processes to a branded online experience to assist employees in obtaining information on healthcare compensation and learning. They converted their manual HR processes into structured workflows to improve efficiency and reporting. Another customer, Cars.com, created an employee onboarding application that automates the manual process to get new employees up and running as soon as they start. As a result, 90% of all new employees now receive hardware/software and systems access on their first day. In addition, Cars.com extended their use of ServiceNow to help its facilities team to be more effective and efficient in managing their workload, especially while away from their desks. The team has mobile access to ServiceNow, so they can tackle issues, while they are dealing with other incidents. With ServiceNow, the facilities department has more than doubled the efficiency of their limited staff and dramatically improved internal customer satisfaction. During the quarter, we also officially launched ServiceNow Express, a rapid deployment service management offering aimed at companies that want a standard solution with configuration kept to a minimum. Express appeals to enterprises of all sizes, including smaller institutions we previously could not address with our enterprise products. At the end of the quarter we counted 76 customers on Express, a number that is growing rapidly. Customers like specialty investment bank, Ziegler, have cited the ability to get up and running quickly with a solution that can grow with them as a key differentiator. DealerSocket, an automotive software company, said that a disciplined and process around teenage management was an important driver for them. Seventy Seven Energy, a diversified oilfield services company emphasized that Express provided them the simplicity they needed without compromising the necessary functionality. Express is currently available in North America and Canada. We plan to launch in other geographies starting in Q2. We also saw a great traction for our recently acquired ServiceWatch product. Existing customers use ServiceWatch to add dynamic service discovery and mapping to their CMDB deployments, a key capability that increases the value and use of the CMDB. We've already signed more than $5 million in total contract value into two quarters since we acquired ServiceWatch. The annualized contract value for our overall IT operations management business more than doubled in 2014. We saw more customers deploy custom applications to help them manage processes directly connected to their core business. For example, Australia-based RMIT University is tackling its student's admission process with ServiceNow. The goal is not only to improve the student experience, but also to boost the student application conversion and acceptance rates, which in turn drives the university's overall revenue performance. The ServiceNow platform was selected after a technical bake-off against other large software platform players. Finally, during the quarter, we opened previously announced data centers in Asia and South America. These data centers improve our ability to serve the needs of local customers that require the data to reside in a region. We now have eight paired data centers on five continents. With that, I will now turn the call over to Mike.

Thank you, Frank. During today's call, we will review our fourth quarter financial results and discuss our financial guidance for Q1 and full year 2015. We'd like to point out that the company reports non-GAAP results, in addition to and not as a substitute for or superior to, financial measures calculated in accordance with GAAP. All financial figures we will discuss today are non-GAAP unless stated otherwise, with the exception of revenue numbers, which are GAAP. To see the reconciliation between these non-GAAP and GAAP results, please refer to our press release filed earlier today and for prior quarters previously filed press releases, all of which are posted on our website at investors.servicenow.com. Total revenues for the fourth quarter were $198 million, growing 58% year-over-year and 11% sequentially. Subscription revenues for the quarter were $167 million, growing 59% year-over-year and 11% sequentially. Our average contract terms for new customers, upsells and renewals were 34.5, 23.0 and 25.4 months, respectively. Professional services and other revenues were $31 million for the quarter, growing 54% year-over-year and 10% sequentially. Our total revenues per customer were approximately $287,000, an increase of 21% from the prior year and up 4% from the prior quarter. Our annualized contract value for Global 2000 customer was $713,000 exiting the fourth quarter, up 40% from the prior year and up 10% from the prior quarter. We now have 129 customers paying us more than $1 million in annualized contract value, up 93% from 67% in the same period last year and up 21% from 107% in the previous quarter. Total revenues based on geography were $135 million in North America, $49 million in EMEA and $14 million in Asia-Pacific and other, representing 68%, 25% and 7% of total revenues, respectively. Our total billings were $269 million in the quarter, representing 62% year-over-year growth and 34% sequential growth. Our weighted average subscription billing term was 11.8 months for the quarter compared to 11.8 months in the fourth quarter of 2013. Our subscription gross margin was 80% compared to 78% in the prior year and 79% in the prior quarter. During the quarter, we added 32 employees to subscription cost of sales, ending the quarter with 478 employees. Our professional services and other gross margin was 16% compared to 13% in the prior year and 13% in the prior quarter. During the quarter, we added 31 employees to professional services and other cost of sales, ending the quarter with 416 employees. Our total gross margin was 70% compared to 67% in the prior year and 69% in the prior quarter. Our operating margin in the fourth quarter was 6% compared to 2% in the prior year and 6% in the prior quarter. During the quarter, we added 80 employees to sales and marketing, ending the quarter with 1,011 employees; 43 employees to R&D, ending the quarter with 585 employees; and 27 employees to G&A, ending the quarter with 336 employees. We ended the quarter with 2,826 employees, an increase of 996 from the same period in the prior year and an increase of 213 from the prior quarter. Net income for the fourth quarter was approximately $5 million or $0.03 per basic and diluted share compared to a net loss of $3 million or negative $0.02 per basic and diluted share in the prior year, and net income of $6 million or $0.04 per basic and $0.03 per diluted share in the prior quarter. Our basic weighted average shares outstanding was 149 million and our diluted weighted average shares outstanding was 164 million. During the fourth quarter, we generated $48 million in cash flow from operations and we used $9 million for capital expenditures, resulting in $39 million in free cash flow. This compares to $20 million of free cash flow in the same period of the prior year and $7 million in the prior quarter. We ended the quarter with $936 million in cash, short-term and long-term investments. During the year, we signed a record total contract value of $1.2 billion, growing 64% year-over-year. This resulted in $422 million of total deferred revenue at the end of the period, up 58% over the balance at the end of the fourth quarter in 2013 and up 20% over the balance at the end of the third quarter of 2014. Combined deferred revenue and backlog at the end of the quarter was $1.4 billion, growing 57% year-over-year compared to 59% year-over-year in 2013. On a constant currency basis, combined deferred revenue and backlog grew 62% in 2014. Now, let's turn to guidance for the first quarter and full year 2015. For the first quarter of 2015, we expect total revenues between $207 million and $212 million, representing year-over-year growth of 49% and 52%. We expect subscription revenues between $176 million and $180 million, and professional services and other revenues between $31 million and $32 million. We expect billings between $260 million and $265 million, representing year-over-year growth of 44% and 47%. We expect subscription gross margin of approximately 79%, professional services and other gross margin of approximately 12% and overall gross margin of approximately 69%. We expect approximately breakeven operating margin and we expect to incur approximately $4 million in expenses associated with our sales kickoff event held once a year in January. Additionally, we expect free cash flow of approximately $30 million in the quarter. For the full year 2015, we expect revenues to fall within the range of $960 million and $1 billion, representing year-over-year growth between 41% and 47%. We expect subscription revenues between $810 million and $840 million, and professional services and other revenues between $150 million and $160 million. We expect approximately 5% operating margin for the full year and to end the year with approximately 170 million diluted weighted average shares outstanding. Similar to 2014, we expect to add approximately 1,000 employees, allocated to COGS, sales and marketing, R&D and G&A at similar rates to 2014. We also expect our hiring will be front-end loaded similar to previous years. Before closing, please note, our annual users' conference, Knowledge 15, will be held April 19 through April 24 in Las Vegas at Mandalay Bay. In conjunction with this event, our Financial Analyst Day will be held on Monday, April 20 at 8:00 AM local time. This year we are also opening up our partner expo hall to attendees, giving them an opportunity to see and speak with hundreds of ServiceNow partners. In-person attendance will be limited, so if interested in this event, please send an invitation to ir@servicenow.com. For those who cannot join in person, we will hold a webcast for this event accessible on our website. Additionally, due to the timing of this event we will report Q1 2015 earnings on Thursday, April 16, 2015. Operator, you may now open up the call for questions.

[Operator Instructions] Your first question comes from the line of Greg Dunham with Goldman Sachs.

First, just a clarification on metrics and that I heard you correctly. Did you say it would have been 62% constant currency growth on the backlog versus the 67% number?

Correct.

So a 5 point headwind. Should we assume that the 5 point headwind was consistent with billings as well?

There was a billings headwind as well for the quarter. The billings that impacted us for the quarter were approximately $5.6 million in the quarter. I don't have it for the full year of the billing though.

And maybe a little bit bigger picture. I mean, you're starting to show a lot more success in HR and facilities. Can you give us a sense of how big the deal sizes expand, when you do sell HR and facilities in the two-thirds of customers that are existing customers?

One thing that's really important to understand about our go-to-market motion is that, we're selling service management, we're not selling an IT flavor and HR flavor or facilities flavor. So our whole thrust is to get enterprise to really embrace and adopt the service management for the enterprise. And there is multiple flavors of service management typically under consideration that our customers want to implement and deploy. So we're not managing and skewing the business, what the contributions are of these individual elements. If there's anything, we're trying to erase those boundaries and not have our customers view us in terms of those individual solutions, but really take an enterprise view of service management, and adopt it as a platform to implement a service platform for numerous service domains. I mean, we talked a great deal about HR and facilities, and the reason is, those are adjacent service domains. Typically that's a low hanging fruit. But there are literally hundreds and hundreds of other applications, some of them are very fine granularity, other are much broader. So we don't think it is very productive, just sort of try to dissect and split the service management business into all these component parts, because we purposely try not to sell that way, not to manage it that way, and really get enterprises to adopt it on an enterprise basis.

Your next question comes from the line of Jennifer Lowe with Morgan Stanley.

Frank, I wanted to follow-up on a comment that I think you made in the prepared remarks around Express. And in particular, I think you mentioned that the functionality is something that would be appealing to customers of all sizes. And I know in the past that it's been, and even on this call, it was positioned as more of an entry-level product at the lower-end of the market. But I am curious, if you see scenarios where Express could potentially get traction in large organizations as well.

Yes. That is absolutely a scenario that we think is realistic. We've not seen a ton of evidence of that to date, but we don't want to position Express sort of as a mini-me SMB type product, like sort of the little brother of big ServiceNo. The focus of Express, and that's why it's branded that way. It's really a product that is extremely prescriptive. It is meant to deploy very, very quickly where customers are not engaging in process design workshops and so on. They're using the processes as defined out of the box. So it's a little bit of a different tangent, if you will on how to do things and which we think that may eventually start to appeal to larger enterprises as well. So we didn't think it was wise from a positioning standpoint to say, hey, this is the small business type product, even though it does open up that market for us, which has great incremental opportunity, but we will not preclude the fact that that larger enterprises may -- that this may have appeal for them as well.

And then just one last one from me. Just curious if you can comment a little bit on what you're seeing competitively, either on the ITSM space, or more specifically as you get more into other areas of ITOM and enter some of these platform used cases. Have the companies that you've come up against competitively shifted at all?

It hasn't really shifted, if anything, the profile of the company has grown so much. And specifically, we are moving away from an ITSM centric positioning to an Enterprise Service Management approach, which really helps in terms of competing with people that have a very, very narrow perspective on the opportunity, right. And we see the market moving in that direction. We now have customers coming out that really are starting the conversations with us in that way rather than starting with that very narrow defined ITIL toolset. That sort of was the way the business was for years and years. We still see the same old folks that we've always seen on the custom application side. We see contention and contest there with pure play platform companies for example, like Salesforce, Oracle and so on and we'll see more of that as time goes on. On the ITOM side, it's the other set of players that everybody is familiar with that we're competing with over there. But I don't think there has been a fundamental shift. The theme here is that the company's profile has grown so much that our hand has grown stronger relative to just serving all these opportunities.

Your next question comes from the line of Walter Pritchard with Citi.

I guess, Frank, on the sale side, it looks like you're going to add, based on Mike's commentary on sales count or headcounts adds in the pro rata versus last year, it looks like you're going to add about the same number of sales people this year as you did last year. Can you talk about where you're adding those people? And how you're maturing as a sales organization? And I am just curious, are you at the point yet where you're starting to really push on productivity as a big driver with quotas going up and so forth versus just adding headcount and driving it that way?

So Walter, in terms of productivity, if any thing, we're going to hire as fast as we can, while keeping productivity roughly in the same place. That's what we've been doing. We will continue to do that. I mean, if we see really strong uptick in productivity, it just means to us that we are not hiring fast enough and we are leaving opportunity out there for somebody else, so our posture in that regard hasn't changed. In terms of the maturity of our sales motion, we have a much more extensive coverage model now, because we have a global accounts model that is split both between people that are focused on new logos and new accounts and then we have the client director model and that's an entire team of people that's focused on existing customers. And then below that we have an entire commercial organization that is also split between new logos and existing accounts. So we have become much more fine and granular in terms of how we're addressing the different types of account whether they're new or existing, because selling to existing accounts is a very different motion, very different model than hunting new logos where it's all about getting beach head and an initial buy-in and then sort of growing it from there. So it has matured and become much more sophisticated over the last couple of years.

And then, Mike, just a quick one on the numbers. It looks like CapEx was like half of what it was in the year ago Q4. And I know, you're doing a lot of data center build out and replatforming and so forth. Can you talk about what drove that and how we should think about CapEx in 2015?

So the CapEx in Q4 being as lowest it was, was really timing on things. And in 2013 Q4 there was more facilities related buildup. We were roughly for the full year CapEx in the low 9s as a percent of revenue. In 2015 as we announced the new facility, we're going to be moving into, we expect that CapEx that's going to be roughly at that low 9-point-something-percent of revenue for the full year. Now remember, three years ago was when we did our original big data center migration. We have the refresh that's happening in all of our data centers with that old equipment that's coming up. Depreciation will be replacing over the next year as well too. That's the other reason, why our CapEx is staying relatively high in 2015.

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

Mike, just on the customer add that stuck out as one of the highest growth rates you have in two years. I know that in '13, you focused on the existing base, but it seems like this year was a repivot to adding net new. I'm just curious, if you could maybe walk through that the strategy, as you go this year? And it sounds like from Walter's question that Frank addressed, that this is that segmentation you are pushing pretty hard in both existing and new, but not favoring one or the other. Can you just walk through that build out?

What I would say is, one of the reasons why you'd expect our new logo count to go up with the number of reps we've added and the number of ramps reps we've had, you have to have more logos for those people who aren't bringing in new accounts. Our focus is really on quality of customer, as I've said many times. And what we mean by quality of customers, the large customers, because those are the ones that buy more from us. So the one metric that we tend to focus on and I am particularly focused on are the Global 2000. We now have 522 of the Global 2000 as customers. 31 of those were actual adds, the other movement was because of Global 2000 acquiring customers of ours, but that's the metric that I really look at. And why that is, is that Global 2000 account for 50% of our business. We don't actually pay anyone on new logos per se. And in 2015, our goal is really going to be just going after quality customers, not necessarily a fixed number.

Just one quick follow-up. I think we have said over the years, it's a three-legged stool. It is high renewals, high upsells and new logos. And if you're executing each of these three areas, that's when you get to high growth and the combustion and the whole business is humming and working well. So there is a no repivoting going on here that would just shift that emphasis. We've always pushed on all of three, very high renewals, very high upsells, and we must plan to flack in terms of new logos, at the same time all these things need to happen, we're going to do very well, and that's our strategy.

And I just wanted to remind you with these large customers it's long sales cycle.

Frank, at the Analyst Day there were a number of real high profile SIs that had talked about the partnership they are building with you. Maybe if you could comment about what you're seeing from some of the SIs? If you could comment just a little bit about some of the capacity that's coming on? Are you comfortable with where you are getting that support in the field?

Yes. We've really made an enormous amount of progress, certainly in the last couple of years, but especially in 2014, the large SIs and it's a whole spectrum, sort of at the top end. Obviously, KPMG has been with us for a very long time. They are really very early to invest, but people like Accenture are sort of at the top heap. They're really beginning to double and triple down and really realizing and understanding how important this is. Again, it's an enterprise play. Forget the ITSM positioning, that's just one component of it. So the very high end brand profile. GSIs are coming in very hard. But then there is a whole group of GSIs and outsourcers that are super-active in our business, people like Tata, TCS coming in, Infosys, HCL has been with us for a very long-time super-successful, Cognizant, CSC. What's really great about this that's for our customers, there's a tremendous ecosystem, right. There is a very, very extensive set of choices geographically as well, where you can engage people that have really, really good experience on our platform and it's a key factor in our growth and our business going forward. It's a big focus as well for our sales organization 2015 to really work on a very fine engagement model in all geographies where we operate with that community of players. We think it's very important for our business.

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

I had question on your '15 operating plan. If you look at your sales productivity metrics and new adds on customer front, you're doing great both in adding new logos and obviously upselling and cross-selling into the base. So my question then is when you look through '15, when you look at your target operating margin, is that a fixed point that you're going to try and sell for during the year? Or do you accelerate hiring maybe in the second half? It looks like you're beating your targets on the topline?

We are never going to stick with a firm operating margin target for the year. That is kind of the way we look at it right now. We think that is something that's achievable. But if we see we're able to ramp reps faster, the opportunity, or we find good people, we will accelerate the hiring. If we see any type of slowdown, in terms of customer demand, we'll take the paddle off the accelerator and not hire as many and then you will drop more to the bottomline. But we're really focused on growth and continuing to show some margin expansion, but not too quickly.

And maybe a follow-up for you, Frank. I mean, if you look at where you're making the progress on the operating margin front, I know we're just talking about '15 here, but given your expansion of the product portfolio and your penetrating new parts of the enterprise, is there a range that you think is too aggressive or not aggressive enough in terms of expanding headcount even as you think about going into next year?

Well, there is, right. I mean, we look at headcount expansion. It's all led by the tip of the spear, which is our sales organization and all the other functions need to be balanced out in support of that effort, right. And we're essentially looking at sales expansion in terms of the productivity, how that's developing for us, so that's really how we're led. But we're not led by trying to produce an operating margin of a certain number. Obviously, when we give guidance, there are constraints on how that all works out, but fundamentally this is a productivity equation, and which we've said over and over, if periodicity holds, it means the model works. I mean we are converting people to yield, and those ramp reps are coming in at those productivity rates, and we will continue to hire. If productivity rates are starting to really go up, that's a signal for us to go hire. If it goes down, it will be a signal for us to moderate the hiring. There is actually metrics as well that we look at that would help us determine whether we go faster or slower. But that's fundamentally how we're looking at our business. So we're very affirmed from a profitability standpoint and we're much more economically oriented in the sense that it's about contract value, it's about cash, right. And if we keep that in a very healthy balance, we have a very, very healthy, very high growth business and we're gradually moving the margins up as we go along here.

Your next question comes from the line of Rob Owens with Pacific Crest Securities.

Just in terms of the sales and sales compensation, is it still equal as we look at new customer versus upsell in terms of quota retirement and how your sales people are compensated?

Yes, a dollar is a dollar to us, whether it's a new customer or an upsell. Where you get the variability is a rep who is one of our client account directors who has some of our installed customers, their quota will be different than what a account executive who is going after hunting. So generally a new customer, those people are going to have lower quotas, so they're going to make commission dollars per dollar of ACV, our contract value, versus the guys who have the existing accounts.

And there is a little bit of spike in G&A sequentially and it's been kind of volatile throughout the year. What was that? And is 18.5% kind of the run rate going forward or should we see that resettle a little bit here?

Well, as you know we do have some litigation and there is cost associated with that litigation that are now starting to heat up with vMC and HP, so you will get some variability based upon the work that's done by outside lawyers.

So that being said, we should continue to see this higher rate of G&A?

Correct.

And then lastly on DSL front, its improved year-over-year for the last three quarters, is that a function of linearity or just a better job of collections on your part?

It's a better focus on collections for us, I will say.

Your next question comes from the line of Kash Rangan with Merrill Lynch.

I'm the newbie I'm going to ask you the dumb question, so thanks for indulging me. Question for you, Frank. When you look at your opportunity relative to say Salesforce or Workday, how are you looking at those companies relative to your go-to-market? When you look Salesforce sales, marketing, customer support, broadly speaking front office, there is certain amount of leverage and understanding of the sales process there. Whereas Workday, setting to two completely different problem domains, finance, HR. Are you more like a Workday in terms of your go-to-market or more like a Salesforce? What are the things that you looked at the SaaS landscape and have figured that are worthy of replicating and certain things that are so unique to ServiceNow?

So we're definitely farther afield from Workday than we are from Salesforce in the sense that I think Workday and us have a fairly good balanced relationship in terms of what they do, what we do. There is not a lot of overlap. Sometimes there are some processes that probably either leader company could tackle, and so it depends on various factors, whether a customer go this or that way, but on the whole that's fairly well delineated. Salesforce lives much closer to where we are, because of Service Cloud, because of Force. There are many more opportunities for us to sort of get into an overlapping motion. I mean fundamentally when you strip away all the jargon and the alphabet soup, we are all workflow orchestration platforms and we can tackle a very wide range of applications, whether they are external like CRM or whether they are internal like surface management. And it's no surprise, and by the way, Salesforce is very well aware of this. There's no secret here. The market is very large, so as a result we're not bumping into each other every minute of the day, but as the companies get larger and we all are getting larger here, I think the potential for contest is going up. Certainly, our customers understand this as well, that's when you peel away the veneer and the jargon and the rhetoric, the core capabilities all move on the similar set of issues.

And I guess, as a consequence, the nature of sales people you're hiring going forward is going to be different than the kind of people that you hired a year back or two years back, I would suppose.

Well, I think that's years ago, we picked up people that were very familiar with the ITSM problems, the ITIL processes and so on. We have long moved past that and we've been hiring people with ERP backgrounds from Oracle and SAP. People those who really have big time enterprise selling backgrounds that we've actually done very well; people coming enterprise and infrastructure companies as well that have done outstanding in our world. There really wasn't sort of one place to go to for us to really run our hiring model through, and we sort of have to figure it out and piece it together on our own. So we haven't sort of gone to one set of companies where we sort of consistently get our people in. That's worked well for us. So it is an ERP grade type of sale. There are long sale cycles. They are very strategic. They are very campaign-oriented. They involve many, many different audiences and stakeholders all the way to the top of the house and executives, CIOs, COOs, CFOs and sometimes in many cases even CEOs as well, and that's not untypical for the other companies I mentioned either.

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

I just have one question. Clearly, 31 net customer adds in the Global 2000, that was pretty impressive. I just wanted to ask, how has the profile of an initial signing changed? Is it more skewed towards seats or broader set of modules? And how do you sort of skew compensation for your sales people?

So that actually has changed a lot and you can see that from the success not just in the Global 2000, but how large the transaction sizes are. And that is a function of how broadly we're selling now, right, instead of trying to do a legacy service desk system replacement. That's not how we're selling anymore. We're going in the much higher level. And we're driving service management as an enterprise discipline. And right from the get-go we're trying to get to higher ups in the organizations, CIOs to see the opportunity for all the other service domains that they have to address, and the fact they have tons of legacy sitting around in terms of largest notes and SharePoint and a plethora of web tools. They're looking for a platform that they can sanction for their organizations to stand up this new class of workflow services, right. So our sales motion and our messaging has evolved dramatically and that is what's driving larger transactions for us, and that is how we are training our sales organization, that is how they are going to market. We used to really sell at manager and director level, and then go to VP signature and now we're really almost invariably working at top of the house with our transactions, because of the size and the strategic nature of it.

And I will add to that too Nandan that most of our sales still are on a per user basis, it's licenses that are seat licenses that are driving that other than our ITOM space, which is more on a per device basis, how we're licensing those.

Your next question comes from the line of Abhey Lamba with Mizuho Securities.

Are you seeing kind of more learning points within HR and facilities or is IT still a lead-in sale for you? And when you see some pure HR facilities to have some opportunities, competitively do you see any different players over there?

It used to be that way. It was always landing in IT, that that has absolutely changed. I think I said in the prepared remark that I referred of those HR and facilities transactions were with customers, where we had no IT engagement. I mentioned the example of the Australian university, they are not IT users of ours either. So it is becoming more and more common. It's a growing part of our business, where IT is not the entry point. So this is really great for our sales organization, because we don't easily strike out. We can also come in through the ITOM side of the house these days, and so it's great. We will take any opportunity to build the beach head and we will go from there. So that's a growing trend. And I definitely expect that to continue.

And competitively, any different kind of players there?

Yes. I mean we do see in HRM facilities you see pure plays, people that only do that sort of that thing. And obviously we're a platform player and we're a surface management company, so as a result it's a very different tangent and it's driven as an enterprise initiative for me. What companies are fighting is the extreme fragmentation and sprawl of tools, it's really not in the interest for HR to have their own little thing in facilities and field management and pretty soon they have hundreds and hundreds things laying around. But it is the nightmare of an IT organization to get this fragmentation and sprawl. So we already ended out to that mentality and approach to standing up with this class of services.

I will add to that, Abhey, though is even though we maybe selling into HR or some of the other lines of business, we are generally still doing this with the IT organization and CIO, we are not doing this behind their back.

Yes, preferably not. I mean we're always looking for the advocacy of the IT organization, the sanction, if you will, that we absolutely prefer not to be at odds with the IT organizations. There is a bunch of competitors out there that do come in through organizations other than IT, and then are at odds with IT. Last thing we want to be with our customers, be at odds with the IT organization that would be very counterproductive.

Your next question comes from the line of Matt Hedberg with RBC Capital Markets.

Frank, I believe last quarter, CreateNow was at I think between 8% and 9% of quarterly ACV. Can you give us a sense for where that was in Q4? And maybe how that should trend in 2015?

I don't know off the top of my head.

So the one thing to -- I don't know what that number is right now. And the reason we don't know that is we're not really managing our business that way as we've said before. Such a big portion of our business is coming in from our repeat customers with upsell. And yes, we know exactly what the skew number is for the current quarter, but remember 38% of our business we said was upsell and a big chunk of those upsell is tend to be custom app development on our platform. So we really want to stop talking about the platform and ITSM and it's really going to be a service management concept that we're going to be talking about going forward in ITOM.

It's super important for everybody on the call, to try and internalize that. There is no platform business here that is separate from any other ServiceNow business. ServiceNow is really one thing that does many things, but its one thing. And we're trying, we're selling it that way, we' are not managing it that way, and it doesn't serve our capital markets customers to think of our business that way.

And obviously, very strong cash flow for the quarter and the year, Q1 guide looks great. I think it's over 130% growth. Mike, when we think about the 5% operating margin targets for the year, is there way that we should we think about the spread between, let's say, a cash flow margin and operating margin going forward or is there a way to think about that?

Yes, there is a way to think about that. And you will see next year our free cash flow margin will be greater than our operating margin. It's going to be sometime before they catch up. And eventually over time they should converge or get closer to converging.

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

I guess, Frank, you guys had a really nice year in terms of growth in the Global 2000 customers. I guess is there anyway to think about, I guess what's helping them expand. Is it new use cases? Is it more seats on existing used cases? I know that to you guys it probably doesn't really matter as long as they are growing. But, I guess, what do you see sort of fueling that growth within sort of customers that obviously know you very well to start with.

It's all those things, right. Sometimes we're biting off new divisions in the Global 2000. We don't always take down everything there is to take down. I mean, most of the time we don't. And I guess, there's just internal organizational delineations that sort of prevent that from happening. And it takes time to sort out really become fully standardized, fully implemented and be the world implementer. So there is certainly a growth factor there in terms of consolidation. And then the other growth factor is the one you mentioned, which is going after other used cases. And the use cases are endless, right. I mean any structured workflow orchestration problem, we can go on pursue with our platform. And you never are going to run out of opportunities with that kind of scope.

Frank, can you talk just a little bit about the App Showcase? And could you believe you can a little leverage from some those apps this year? Is that something that takes 12, 24 months to sort of build momentum behind? I guess, how should we think about that sort opportunity for you guys from sort of other apps, other ITs building on top of your platform?

That's actually has become a growing focus for the company. Certainly at our Bay Conference this year in April in Vegas, you will see us introducing the notion of a ServiceNow store. We're very active now in really sort of building ServiceNow as a place for professional software developers. And the difference here is that professional software developers are not just people that build software for a living, they are people that sell software for living. We have tons of people that build software living, but they don't sell it, they just build it for their own purposes. It's really for the crowd of people that build software and sell it. Those are the people that we have to make incremental accommodations for in terms of what it costs to developer on our platform, how attractive we make that. And we need to provide them with the community and monetization model, so that they view the ServiceNow market, if you will, because we now have as Mike said, 500 and some Global 2000 enterprises. Those are all opportunities for them, right. This is the market to sell into with a great platform, very well established routes to market. But we got to make sure that we have everything in place operationally, contractually and economically to make this a good place to be for them.

Your next question comes from the line of Alex Zukin with Stephens.

I want to actually expand on the just asked question about the monetization of the app store opportunity. If you kind of compare and contrast the way you're thinking about monetization with respect to an app exchange from a Salesforce.com, what have you learned or what are kind of puts and takes about how you're thinking about that space versus some of these establish players?

So a couple of things. First of all, we think Salesforce has done a really good job, so we've got school on their learnings and their successes in that regard. And it's a little bit different than what you see on the consumer side with companies like Apple and so on. That said, our focus is going to be more aggressive on recruiting people rather than -- the monetization is not monetization for our sake, it's monetization for their sake, right. In other words, the software developers, they have to be able to run a reliable business on our platform. It is not as critical for us to insert ourselves transactionally, even though we're going to do that. That's not the focus of this effort. Certainly, not being an issue we're going, right. So it's really like how do we make ourselves as compelling a place to be for people that build and sell software for a living. So we're going to be more aggressive than players that are further along more established in this regard, because we're now going to contest in fact other players in this regard.

And then Mike, on the seven figure deals that you guys signed in the quarter, where there any kind of elephant or whale-sized deals, multi-million ACVs?

No. There were $2 million was kind of highest.

Your next question comes from the line of Michael Turits with Raymond James.

Mike, I jumped on a little late. So can you just reiterate the margin guidance for next year and also the FX impacts in the quarter and in the guide? And then Frank, I was wondering if you could just visit the ITOM, your thoughts on ITOM, event management, some of those things you've talked about in terms of your entrance there and what you maybe doing so far there with Neebula?

So we said, 5% operating margins for the full year breakeven Q1. In terms of the FX impact, what I had said was on the deferred revenue and backlog year-over-year there was a $40 million impact there for the full year on a constant currency basis. And then on the billings for the current quarter, there was an FX headwind of $5.7 million as what the FX headwind was in the current quarter on billings.

Anything on the revenues that you've given guidance on the revenue and then you also mentioned what you thought '15 would be?

Yes. So 2015 just given where the euro and other currencies that moved against the dollar subsequent to December 31, we took another $13 million out of our revenue, which has already been factored into our guide for 2015, which had already had a big impact on our backlog as you saw.

And then Frank on the ITOM?

Yes. So in my prepared remarks I mentioned that we had really good progress during the quarter on ServiceWatch, sort of the first quarter out, we started to really get our act together and we started selling it, so that we exceeded our own expectations in that regard, so that was good. The second thing that was good is, I mean we nearly tripled our ITOM business year-on-year in 2014. And that's really, I don't want to say without trying, sort of Salesforce would take exceptions to that comment, but we didn't have a real strong effort and focus behind it. It was sort of drafted everything else that we're doing. And I'm actually super excited about the opportunity that we have there, because that market is really, really larger than the service management opportunity and we have just some ideal jump of opportunity. Just in last week, I was up in Seattle, where our folks are that are managing our ITOM products. I've seen the ServiceWatch reimplementation on ServiceNow. We're going to show that Knowledge 15. I am super excited about what we're doing in this area. It is such a compelling piece of technology and it is just very, very high leverage, because it's going to help just about everybody there, everybody needs to have the ability to dynamically map and discover services in the way this technology does it, it's very compelling. So I'm excited about ITOM. I think we can drive this business way harder than we have. We have a very strong dedicated group of people that are getting after this business, and because it's not been our traditional focus, because we are a service management company, I just think we have room up here going forward, so all good.

Your next question comes from line of Greg McDowell with JMP Securities.

Just one quick question for you Mike. I want to go back to that $1.4 billion backlog in deferred revenue number. Since we only get that number once a year, and as I look at the historical relationship between backlog and deferred and full year revenue, it does suggest revenue growth this year could be quite a bit higher than your 2015 guidance. So I guess my question, is there anything different about the backlog and deferred revenue number? And how it may translate into actual revenue number this year or is there just some level of conservatism in there in 2015 guidance, and obviously FX impacts that does? Just wondering if you could give us a little more color on it?

The one important thing you need to remember at the backlog is multiple years of contract value in there. So what I will say is, in 2014 we saw a lot of renewals for customers being three-year renewals, because that's how we are incenting our sales force. So you can't necessarily do a direct correlation between our deferred revenue and backlog growth to our revenue for next year, because there is multiple years of contracts to be build in that number. And what I will say is, as we disclosed or we signed, I think it was about 34.5 months for their average new customer contract last quarter, which was up from the quarter before. So you do get variability in your contract lengths quarter-over-quarter.

Your next question comes from the line of Justin Furby with William Blair & Company.

Frank, I was hoping you could discuss new ACV bookings by geography in Q4. And maybe talk a little bit about, if you look outside the U.S., how win rates have been trended across sort of the major APAC and European market?

I think North America and EMEA, the main European theaters, are all doing really, really well. We're very happy with how diversified our revenue streams are geographically, not just across North America, but in lot of the European markets. And just made a lot of ground there and it's just very, very consistent and very reliable productivity and so on. Now, when you get to markets beyond that, like Latin America and you get to Asia, outside of Australia; Australia is also a market where we've been a long time, where we have strong critical mass and a lot of predictability. The newer markets is where we still are up and down from one quarter to the next, because we're very developmental in nature over there. And we just accept that, because we have to get started sooner or later, and it's just the investment that we're making and it's sort of part of the productivity equation as well. If you just invest in markets that are super-productive and predictable, yes, you can drive your productivity numbers up rapidly. But we know we have to be in these places, and we were sort of biting the bullet and sort of dealing with the pain that we're going to have upfront to really figure out the models and how to do business there. Specifically single-up places like Japan and Brazil, where we have those kind of challenges, but those are markets where we have to be and we're there.

And then, just quickly on the Global 2000, you've got a quarter of it. Do you think the next 500 that you go after, are those easier to win harder? And I guess what's the primary reason preventing the other 75% from moving to you, is there one theme across those or is it all sorts of different reason?

Well, you can see it both, as easier and harder, harder in a sense that this is a group of people that were not early adopters, right. The other guys obviously were more aggressive, more technology savvy, more focused, more interested in moving quicker. But at the same time, time is not their friend, because the systems they are setting on are aging and old, and getting increasingly higher risk and more expensive and more painful. The other thing I will tell you is, the risk for that sort of the next batch of Global's is going to be way down, because there is just so much experience out there, ecosystem is so big and rich that it's going to be much easier to cross this bridge forward. ServiceNow is a much bigger company than it was at the time, when the sort of the first 100 sort of stepped through the door. So there's a bunch of things going on. I just think we're still early going, because not only have we sort of tackled the first 500 of them, now we're far and far from saturated in our opportunity into Global that we already have. And that's why we have the type of sales organization and allocation of resources the way we have, because we view those Global's almost as markets on to themselves. I mean that's how rich and opportune they are, and how much upside we have to sort of gain more share of wallet, if you will, in those places.

When we going to new geo, the first question we ask is, how many Global 2000 are in that geo, and that is usually the deciding factor as to whether we go into that market or not. And there is still a lot of markets out there that have Global 2000, where we're not there yet, and it just takes time to get them. We'll get there eventually, but we're going to do it at a measured pace.

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

At your Analyst Day, you laid out your broader vision and help us understand that, and that included ultimately pushing into business management. Can you give us an update on where that initiative might stand today?

Well, business management is a whole group of capabilities that are sort of above the layer of the operational workings of service management. So it has things like project portfolio management, our governance risk compliance, all our analytics capabilities. We announced last year at an IT financial management initiative that's something that we're going to showcase at the Knowledge Conference coming up, because financials are sort of the third dimension, the first dimension being asset, the second one being operating data. So there is going to be really -- the business management, I see that as another area like ITOM, where there is an enormous spent opportunity for us to access. I mean we're just getting started and really beginning to understand, and really get footholds in those opportunities. So we're very opportunity rich as a company, which is exciting going forward. We have many places, if you do come to Knowledge, we're going to showcase as much as we can in the time that we have available to do so in a lot of these places, like business management. You're going to see business management, you're going to service management, you're going to see operations management, you're going to see application enrollment, all those things. So it will be a much bigger view of ServiceNow than you have ever seen before.

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

Pretty impressive 60% growth on $1.4 billion in bookings. But, Mike, you mentioned briefly that sales cycle are longer, these deals are getting bigger. Obviously, as you move into more domains, the deals are going to get more complex. Can you just frame out a little bit on how that changes sales cycles or seasonality, if at all, or do you still go-to-market kind of on a domain-by-domain basis, and hence you wouldn't see much change in the sales cycle?

So what I had said is, I was reminding people that these are long sales cycles. They are not getting any longer, but still, they are not short is my point there. I think you're going to see the normal seasonality that you see in most software companies that we tend to have very large Q4s and a fairly big Q2, Q1 and Q3 are the more challenging quarters. And that's been the same that we've always seen and I think that will continue. As we get bigger, you'll see more seasonality in billings with that Q1 being a down quarter. And as you can see from my guide, we're guiding slightly down from where we were this past quarter.

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

I just have a one quick question here and sort of a follow-on from some of the prior questions. We're noticing amongst your installed base that, as you become broader they are beginning to hook-in some other solutions around operations or security to trigger a service request. Are you noticing that? And are there any particular partners or integrations where you think you're providing extra value?

That's actually a very good observation. As I said earlier, fundamentally, when you strip away the veneer and the jargon and the rhetoric, we are a structured workflow and orchestration platform. So essentially, we manage work and we change the way work is managed. Work these days doesn't come from people, it comes from system. So for example, in the area of security, when security events are raised by something like Splunk, for example, which is a very good partner of ours, it automatically triggers a structured workflow on ServiceNow, right, because that's how the systems are working. Something happens in one part of the organization and it triggers actions and orchestrations in another part of the organization. Once you start looking more closely, you see endless opportunities for this sort of thing. It can happen at a very high level, where you get very, very close to the business itself or you get very deep in the infrastructure like as related to security events, for example, that are very arcane in nature and actually difficult to understand. So it's actually the applicability of this core set of capabilities is very deep and very broad. And if you stay involved with it, you'll see more and more of this variety and diversity.

And is there any way to monetize it or is it something that customers just sort of expect to be part of the platform?

Well, we are monetizing, right. We're monetizing on the ITOM side on the basis of devices or notes and on the service management we're monetizing on the user. So any time more devices physical or virtual are involved, we gain, and the more people get involved, we gain. Eventually, everybody in enterprise will be trusting ServiceNow, and our whole game is just to increase the density of that surface fabric, where people are using this for more and more and more things to get through the day.

Your next question comes from the line of Phil Winslow with Credit Suisse.

This is Siti Panigrahi for Phil. I wanted to ask about orchestration and discovery product. Just wondering what kind of traction you are seeing within your installed base? And what sort of opportunity we should think about going forward?

That was about 10% of our business in Q4, I believe. As I mentioned earlier, it had almost 200% growth, sort of much faster growth than the rest of the business, and it's happening without it being a core focus of our sales organization. We're actually going to put a lot more wood behind that arrowhead. We think the addition of ServiceWatch, the product that we acquired from Neebula last summer, is going to help really charge that business, because it's going to become so much richer in value as a function of that addition. So we're very excited to be in that business, because the ServiceNow platform is just an ideal leverage in jump off point for us to be in that feature set.

There are no further questions in queue. I'll now turn the call back over to Mr. Scarpelli for closing remarks. End of Q&A

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.

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