ServiceNow, Inc. (NOW) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the ServiceNow Q4 2015 Earnings Conference Call. My name is Whitney and I will be your operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions]. As a reminder this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today, 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, our quarterly IR deck and the simultaneous broadcast of this call can be accessed at investors.servicenow.com. We may make forward-looking statements on this conference call such as those using the words may, will, expect, believes, pipeline, prospects, forecast, vision, addressable market 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 and our 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. With the close of fiscal 2015 ServiceNow became the second enterprise SaaS company in history to report more than $1 billion in annual revenue. This milestone was driven by solid execution across the board; total revenues for the fourth quarter grew 44% year-on-year to $286 million and we continue to see strong demands from our customer base with a 99% renewal rate and a 39% upsell rate. The fourth quarter set the record for net new ACV. We now have 230 customers with ACV in excess of $1 million a net increase of 24. Additionally we have 638 Global 2000 customers a net increase of 26. New Global 2000 logos include Michelin and Hirschi Company our average ACV per Global 2000 customer was $868,000 a 6% sequential increase. At the beginning of 2015 we restructured our sales effort to increase focus on the commercial market. As a result we grew our commercial business 48% in the quarter in addition to robust growth the commercial sales team also booked multiple transactions in excess of $1 million throughout the year. Our total addressable market continues to expand and is now estimated to add $60 billion with our latest software release in December known as Geneva we launched two major new services that expand or scope into service management market, customer service and security operations adding more than an estimated $13 billion to our addressable market. Our customer service offering provides a holistic approach that integrates customer engagement with the underlying engineering and operational processes. We already signed five deals for customer service including Pfizer the leading global provider of financial services technology. In addition we signed four customers for security operations including Raymond James Financial, a leading diversified financial services company. This new offering connects security events for market leading technologies with our advance work capabilities. A key value proposition is the institution of a shared workflow between IT and security teams. Our focus is not on detecting, but on processing security incidents in a highly structured experience and transparent fashion. This has been surely missing in the battle for cyber security. In 2016 our focus on helping customers, to transform their businesses using a service centric approach is intensifying, in this vision everything becomes defined and operated as a service and every enterprise will increasingly manifest itself as a software cloud. To help customers achieve this outcome we stood up and lead consulting team to map out their journey. This new team, which we call Inspire is currently working with a large customer to develop a long-term strategy around the industrial internet of things. This customer plans to roll out a range of internal and external phasing cloud services that will more than triple our segment revenue by 2020. This is an existing customer, but this new engagement change the scope from an operational discussion to a strategic one. Another customer was in the midst of a corporate transformation along with the integration of a major acquisition instead of focusing just on an ITSM rip and replace the Inspire team showed them how IT could support the company’s long-term transformation. As a result we worked alongside to customers, stakeholders to build the strategy, roadmap and architecture for IT and a new business process service center that roadmap will have us replace seven systems in total starting with IT and moving throughout the business. Finally I look forward to seeing you all at the Knowledge ‘16 the week of May 16th in Las Vegas at Mandalay Bay. With that I will now turn the call back 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 2016. We’d like to point out that the company reports non-GAAP results in addition to 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. To see the reconciliation between these non-GAAP and GAAP results, please refer to our press release filed earlier today and for prior quarter’s previously filed press releases, all of which are posted at investors.servicenow.com. Our total revenues for the fourth quarter were $286 million, increasing 44% year-over-year and 51% in constant currency, a negative impact of $13 million. Our average contract terms for new customers, upsells and renewals were 31.9, 26.1 and 23.8 months respectively. Total revenues based on geography were $199 million in North America, $67 million in EMEA and $20 million in Asia-Pacific and Other, representing 70%, 23% and 7% of total revenues respectively. Our calculated billings were $366 million in the quarter, increasing 33% year-over-year and 39% in constant currency, a negative impact of $16 million. Our weighted average subscription billings term was 11.9 months for the third quarter compared to 11.8 months in the prior year. Combined backlog and deferred revenue at the end of 2015 was approximately $1.9 billion increasing 35% year-over-year and 40% in constant currency, a negative impact of $65 million. Subscription gross margin in the quarter was 83% compared to 80% in the prior year. Professional services and other gross margin was 15% compared to 16% in the prior year. Overall gross margin was 74% compared to 70% in the prior year. Operating margin was 14% compared to 6% in the prior year. We ended the quarter with 3,686 total employees, a net increase of 284 in the quarter and 860 in the year. Net income for the fourth quarter was $33 million or $0.20 per basic and $0.19 per diluted share compared to net income of $5 million or $0.03 per basic and diluted share in the prior year. Our basic weighted average shares outstanding was $160 million and our diluted weighted average shares outstanding was $171 million. During the fourth quarter we generated $105 million in cash flow from operations and we used $25 million for capital expenditures resulting in $80 million in free cash flow. This compares to $39 million of free cash flow in the prior year. We ended the quarter with $1.2 billion in cash, short-term and long-term investments. Let’s turn guidance for the first quarter and full year 2016 based on FX rates as of the end of Q4. For the first quarter of 2016 we expect total revenues between $298 million and $303 million, representing year-over-year growth between 41% and 43% and between 42% and 44% in constant currency a negative impact of $2 million. We expect subscription revenues between $261 million and $265 million and professional services and other revenues between $37 million and $38 million. As a reminder, we are increasingly focused on deploying our internal professional services organization as a strategic resource and relying on our partnered ecosystem for service delivery. We expect billings between $360 million and $365 million, representing year-over-year growth between 34% and 36% and between 36% and 38% in constant currency, a negative impact of $3 million. We expect subscription gross margin of approximately 83%, professional services and other gross margin of approximately 9% and overall gross margin of approximately 73%. We expect an operating margin and free cash flow margin of approximately 5% and 21% respectively. We expect diluted weighted average shares outstanding to be approximately $173 million. For full year 2016, we expect total revenues between $1.34 billion and $1.37 billion, representing year-over-year growth between 33% and 36% and between 34% and 37% in constant currency, a negative impact of $6 million. We expect subscription revenues between $1.18 billion and $1.2 billion and professional services and other revenues between $160 million and $170 million. We expect billings of approximately $1.6 billion, representing year-over-year growth of approximately 33% and 34% in constant currency, a negative impact of $7 million. We expect an operating margin and free cash flow margin of approximately 12% and 24% respectively. We expect diluted weighted average shares outstanding to be $177 million for the year and we expect to add approximately 1,000 net employees in 2016. As a reminder, our financial forecast include anticipated attorneys’ fees and expenses for our outstanding litigations with BMC and HP Enterprises, but not any forecast related to their outcomes. The trials are currency scheduled for March 2016 and May 2017 respectively. Before closing, please note our Financial Analyst Day will be held in conjunction with Knowledge ‘16 on Monday May 16th in Las Vegas at Mandalay Bay. After the event we will open up our partner expo hall early to Financial Analyst Day attendees giving them an opportunities to see and speak with more than 100 ServiceNow partners in person attendants will be limited so if interested, please send an email to ir@servicenow.com. For those who cannot join in person, we will hold a webcast of the event accessible on our IR website. With that, operator, you can now open up the line for questions.

[Operator Instructions] Your first question comes from the line of Michael Turits of Raymond James. Please proceed.

Hey, guys. Very strong margins, but a little light relative to the billings guide granted with a little bit where FX headwind, anything that happened similar to last year in terms of restructuring around the sales force? And then I have a follow-up question, just a housekeeping question.

Hey, Michael. This is Frank. We don’t have any restructurings planned for this year. So the realignment that you saw last year on to commercial organization, which by the way we highlighted in our prepared remarks, has really worked out excellent for our business. We’re not planning on doing anything like that coming into 2016.

And then, Mike, anything further on that relative to the billings at the low-end of the guide, granted a little bit more FX headwind?

Well, there is a number of things that go into billing that are both positive and negative when you’re doing the forecasting. But I will say that there was an error in our forecasting. And if that error did not occur, we would have ended within -- we would have landed within the midpoint of our range.

Okay. And then I just have a housekeeping question. Can you let us know what your expectations are for the non-GAAP tax rate for 1Q ‘16 and 2016?

For Q1 and all of ‘16, we’re anticipating that it’s going to be somewhere around 35%.

Okay. Thanks very much.

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

Thanks. Mike, just not to dwell on the billing, but just related to the error that you just mentioned, what was that? And also can you just talk a little bit about how you’re factoring in the macro condition for how you look at the billings guide? I think everything is obviously obsessed with that metric. Was there any more conservative view that you put into that or are you not seeing the macro at all show up in the pipeline in terms of the forecast that you gave to the street?

The error had to do with looking at the system for what was our renewal opportunity that we had. And it was clearly an error that we captured and identified on December 15th. So, once again, if we had known that, we would have guided lower, and we would have ended within the midpoint of that the guidance we would have given. And I’ll just say, our guidance is based upon where we see the business for 2016 right now, and we’re comfortable with the guidance we’re giving.

Okay. So no extra macro cushion that you’ve factored in.

This is Frank, Brent. I mean, we’re not really seeing any macro effect yet. I mean, we’re such a secular business. We know, we have not really felt any effects up to this point, nor can we see it sort of down the road that is affecting our business. So that’s not in our guidance.

Okay. Just one more clarification, sales headcount accrued total headcount in this last year, do you anticipate your 1,000 net adds with the growth rate in sales hiring out -- continue to outpace the rest of the headcount?

Yes. So we added roughly 405 people into the sales and marketing organization in all of 2015. And we expect in 2016 we’re going to add about that same absolute number give or take depending on the quality of people we find.

Great. Thanks for the clarification.

Your next question comes from the line of Keith Weiss from Morgan Stanley. Please proceed.

Thank you for taking the question. Two questions, one on the top-line and one on the bottom-line. On the top line, if we look at your guidance for the full year, particularly the billing guidance, you guys have very good sustainability of growth throughout the full year stating mid to low 30s throughout the full year, which isn’t too much different from what you’ve done in the most recent quarter on a constant currency basis. What gives you confidence in the sustainability of that growth what you’re seeing in your pipeline in terms of the opportunity that could help you sustain that high level of growth despite the fact you guys are coming to a pretty big scale as you’re at over a $1 billion? And then on the bottom-line, really nice free cash flows in this quarter. Anything one time in nature or anything we should keep in mind in terms of forecasting cash flows on a going forward basis that might need to be caught up at some point or do you think these sort of cash flow margin improvements are durable on a go forward basis?

So I will answer the cash flow first, Keith. So you are going to get some variability in cash flow on a quarter-to-quarter basis and the two quarters where we’re going to generally have our lower cash flow is going to be Q1 and Q2. And a lot of that has to do around our Q1 and Q3 and that has to do with our ESPP plan and the way that that gets funded. And you can see that on the cash flow statement. But we feel pretty good about showing some more leverage in our cash flow this year and hence why we’re guiding to 24% for the full year. There is nothing big that’s going to happen there. CapEx as a percent of revenue is going to be somewhere in the slightly down from last year I think we are about 9.5%, 9.4% in 2015. I’m expecting it’s going to be somewhere around 8%, 8.5% in 2016. And then in terms of your other question and in terms of what we’re seeing in our pipeline and I will let Frank talk what gives us the confidence there.

Yeah, the confidence comes from the fact that we now have quite a few years of operating history under our belts. So we have seen those patterns are very persistent in terms of the way our renewals are working the way, our upsells are working the way we land new logos for averaged deal sizes the whole cohort analysis. You know, when you take all of that into account, we really have quite strong visibility in how the business plays out from one quarter to the next, and it’s a nice thing about a SaaS business where you have also big backlogs and deferred [ph] that it’s really rock solid that way. We really don’t depend on one quarter or another being an outlier either to the positive or the negative. So it’s really a function of our history in the business and the persistence of the patterns that we’ve been able to observe.

Excellent. Thank you, guys.

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

Thanks, guys. I guess I am wondering into year and I know there’s always some deals that move in and out of a quarter but was there anything abnormal guys this quarter in terms of large deals that may have slipped into 2016?

Yes. There are always deals that slip from one quarter to the other. Likewise, you are always pulling deals in. I will say like most Q4s it was a very backend loaded quarter. But as Frank mentioned, we had record net new ACV in Q4 and we’re very pleased with what we saw.

Okay. And then in terms of the full year guide, services revenue I think was about $30 million light of consensus in our number. And obviously you’re having some success this quarter. Is that accelerating to the SI channels and is that something we should continue to bake into our model longer term?

Yes, it’s definitely something you should bake into your model as we’ve been saying for a while. The SIs are becoming more important to us for doing service delivery, and we don’t want to be seen as competing with the SIs. As I mentioned, we’re trying to make our own internal PS resources kind of more strategic and we would like the kind of the basic implementation work to be done more and more by our partners. And hey, that’s why the guys like CSV bought Fruition and Accenture bought Cloud Sherpas and we’re going to let those guys continue to grow their businesses. We’re more interested in the long-term subscription revenue from our customers. We just need to make sure that our partners are doing a good job of standing up our customers and want to really focus on that.

Maybe a just quick follow-up to that. With this offloading to the SIs, is there anecdotal evidence that you are seeing an acceleration in that SI business due to the Cloud Sherpas or Fruition or things of that nature?

Yes, this is Frank. There is an acceleration. Our SI business used to be opportunistic. In other words you know, when the opportunities presented itself they would bid on these opportunities, but it’s different now. Because these organizations, they have bought companies, they have made investments and they now have real plans around to service in our business and to driving it to target. So they are much more disciplined, they are much more methodical, much more goal driven in the way they go about pursuing the ServiceNow business. And that’s very, very different from the way it was in years past. As Mike said, we really want to make a room for them, make sure that we enable them. They also play a strategic role with our customers. And that’s really important. We want our customers to have really a broad variety of choices and often times, we partner with these SIs as well. In other words, we will sub them or sometimes they sub us. So it’s a very collaborative relationship that we have with them with our customers.

Thanks, guys.

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

Hi. Mike I just wanted to dive into the question or the statement you made in the release and just mentioned on new ACV being at record levels, which I guess we would expect given that to Q4 you are a growing company. I am wondering, if I look at deferred commissions on the cash flow statement looks like the cash impact of that was roughly flattish year-over-year and your billings, I think we thought with forecasting but your billings you definitely benefited from the 99% renewal rate and I think is an all-time high for your company. So just wondering how we kind of quantify the new ACV and it grew but did it grow at the rates that it grown earlier in the year because it seems like maybe a slowed down a bit there?

Well, I guess, the first thing Walter is, we don’t disclose the actual net new ACV but you can see in looking at our deferred revenue and backlog that we just signed, you can see the gross increase in backlog and deferred revenue. And doing an apples-to-apples comparison of 2014, deferred commissions to 2016 is not -- or 2015 is not an apples-to-apples because the 2015 comp plan was not nearly as rich as the 2014 comp plan. I will say in our guidance going forward for 2016 we’re making our comp plan a little bit richer next year. And that it all depends I would say in 2014 we had a lot more -- we had a lot of reps who really, really blew their number away with acceleration. This year we had guys into acceleration, but they weren’t blowing the numbers away as much in acceleration. So you didn’t have as much as bigger commission payments being paid out, but net-net, our net new ACV was up quite nicely year-over-year quarter.

Got it. And just a quick clarification on what Matt asked on the impact of services. I guess if we look at the delta between where you guided [indiscernible] of revenue and sort of where we were at, I am wondering, is the delta -- the impact on the lower [indiscernible] billing the same in other words the impact, that 1.6 number just trying to get a sense as to how the services may have impacted that number.

Well, the services is pretty much any services revenue that is recognized flows through immediately into billing. There is nothing upfront with that.

Okay. Just want to make sure, that still the case.

Yes.

Thank you.

The next question comes from the line of Kirk Materne with Evercore ISI. Please proceed.

Hi. This is actually Ted Lin on behalf of Kirk. Just wanted to ask, can you guys talk about, whether you saw any extension of deal cycles or if you saw the initial size of deals change over the course of the quarter?

No, really didn’t see anything different in terms of deal cycle and deal sizes was pretty consistent from what we’ve seen in the past. We had about 10 deals that were north of $1 million and that’s been pretty consistent in that range.

Okay, thanks. Just a quick follow-up. Can you talk about any sort of momentum trends that you are saying with respect to your app store?

This is Frank. That continues to grow quite nicely quarter-to-quarter. I don’t have the numbers right off the top of my head. But the number of apps that have been contributed to the store number, number of downloads, all those metrics, they move sequentially quite a bit. So I think there is about 140, 150 applications up on the store now. And it’s going to be quite active. So good progress there since we introduced it in the summer.

Great, thank you.

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

Yeah, hey, guys. Thanks for taking my question. Just two quick ones. Maybe one for Mike first. Was there anything that you were disappointed by in the quarter? I mean if I look at the net new customer adds in 4Q versus 3Q they were down a little bit, 176 to 174, if I look at Global 2000 adds, they were also down sequentially a little bit, and obviously deferred revenue sequentially the growth was a little weaker than last two years. Is there anything at all that you were disappointed by outside of kind of the error around billings guidance?

Really, just the error in the billings that, and I take full responsibility for that.

Okay, got it. And then, Frank, maybe just a question about product. One, we’ve heard a lot about verticalization in the industry, particularly from sales force mostly, but as you look at the global SI channel and how ordinate certain verticals are for you guys, can you talk at all about the strategy around verticalization either from a product perspective or from a go-to-market perspective in 2016?

Yeah. So you’re correct that the ADSIs of course have a very strong verticalized go-to-market motion, we’ve not had that. The changes that we introduced during 2015 is that we went to a business unit structure. ServiceNow used to be single product, single market, mostly single channel type company. Last year that all changed. We’ve broken our whole organization into business units. They’re not verticalized, were organized by product. And we’re seeing the effects of that quite dramatically, because the merchant products have taken off very, very strongly over the year. The business mix is changing very, very rapidly for ServiceNow, because these new products are taken off with a lot of momentum and that is impart because of the organizational structure and the resources that are behind it. So we’re executing in that mode right now. And I’m certainly not excluding the possibility that we will have a vertical vector to our go-to-market motion as well. But we’re still in the middle of going through the transition to product which is working out really, really well for us, really, really happy with the progress we made in 2015, because that was really a big transition for the company to execute in that mode. I did talk about customer service. That’s certainly something that initially is going to get really focused on technology type businesses, because we have very, very strong fit with the product there, but in the forms of time I think that will take a vertical focus as well, because that business is very different from one vertical to the next.

Got it. And then, maybe on competition, as you go -- as you look at and as you launch customer service and the adjacencies between you and Salesforce grow, what -- how often do you see Salesforce and deals, what’s that competitive framework look like going forward?

Well, we see Salesforce in a number of places. Obviously, we feel we’ve had sort of a borders skirmish around a product that they call RemedyForce, which is really a product by BMC that Salesforce also markets, that’s based on the Force platform. That’s not been a big competitive factor between us and Salesforce. Where we’ve seen that more is in platform opportunities where customers are standing up, custom applications and they’re trying to figure out whether they going to do it Force, or they’re going to do it on ServiceNow. What I will tell you is that with our entry into customer service management, that’s a head on collision with service cloud. And I said in the prepared remarks we’ve done five or six major transactions already, and most of them were contentious with Salesforce and there is just no hiding from that reality. So it’s going to become more intense between us and Salesforce as we get further into 2016.

Got it, thanks guys.

The next question comes from the line of Abhay Lamba of Mizuho Securities. Please proceed.

Hi, thanks. This is Parthiv [ph] standing in for Abhay. Are you seeing customers implement the Geneva release for any new used cases, and any color on the possible effects of the release on ACVs would be very helpful. Thanks.

Well, Geneva just came out in December. So all new projects will be -- that have gone live since that time they’re going live hopefully most of them will be on Geneva. Typically our customer base just gear quite rapidly and in terms of new applications in Geneva; the two that I mentioned, security management there is a huge amount of interest in that new product, because it’s such a no brainer to layer that on to the platform strategy that our customers have with ServiceNow. Then the other one that’s a little bit further afield positioning wise around customer service. And we were quite sort of surprised how rapidly that took off as well because that’s a different sales motion for us traditionally than selling to a core IT. But IT has always been a conduit and something that we can leverage very strongly to get into these new used cases. But we have very high expectations to continue on selling a lot of operations management, software applications. This was very strong in 2015, it will be very strong in 2016, and we have great expectations of these new services with Geneva in 2016 as well. We just had our global sales kickoff in Orlando last week and they were introduced to our sales organization for the first time. So there is a lot of energy brewing behind those initiatives.

Great. Thanks.

The next question comes from the line of Raimo Lenschow with Barclays. Please proceed.

Thanks for taking my question. Two quick questions. Frank, you talked about IT ops there in your last answer, can you talk a little bit about how do you see that evolving in 2016 with Geneva in terms of like how meaningful will that be for you guys? Is it just a first step for customers to go in there, or do you think that’s going to be already meaningful? And then I have one follow-up for Mike.

Well, IT operations management anything last I think year went from 10% to 12% of our business, and it’s not easy to do to grow your share of the pie considering that the whole pie is still growing at a blistering rate as well. IT operations management is an ideal add-on opportunity for our sales organization. It’s just a natural leverage of the core platform. We’re only, for example, with service watch, which is probably that we acquired about a year and a half ago, we just got down in the Geneva release with completely re-platforming that acquisition. That means that it runs on our cloud, it’s re-implemented in our platform, our UI framework, it is a completely native ServiceNow service you can’t really tell that that was acquired or that has origins from another company. We only have penetrated 5% of our customers with our product so far. And it’s a red hot product, so there is enormous upside for us not just sell that, but it leverages everything else it’s used by our security product, it’s used in event management applications. So, operations management is -- there is an enormous amount of runway for us there, and we’re going to be building other assets and potentially acquiring assets in that area as well.

Okay, perfect. Interesting. And then a question for Mike. Mike, if you keep the hiring on sales and marketing constant, in a way, that kind of means is a less productivity for the existing guys keeps going higher. That basically means you have a guide path going down. What’s the puts and takes on your plan for 2016 to kind of say or keep it constant because it’s difficult to find new people versus I need to increase it if I want to keep the growth rate higher for longer? Thanks.

Well, the driving factor behind adding roughly 400-plus people into our sales and marketing organization in ‘16 is we still truly do believe we’re a more market constrained or, I mean, distribution constrained than market. There is still a lot of markets, especially in Asia Pacific where we’re just starting to go into China and some of the other emerging markets in the world. And South America we actually had a very good quarter in South America last quarter, and we have high hopes. Remember, this is a long sales cycle. So it’s going to take a year when we hire these people to really see were we able to get these people productive. And based upon the opportunity we see, we think that’s the right number to continue to add people at that pace.

Yeah. So the acceleration can only kind of like a lot of these are in the greenfield markets where you have to kind of see the market and go to market and then you could do something more. Is that the right way to think about it?

Well, that’s part of it. But remember, we are as well continuing to split territories in North America and EMEA because we’re not saturated with salespeople. Listen, we still don’t even have 50% of the Global 2000 in North America because a lot of those that still aren’t covered yet. We need to have more people.

Okay. Perfect. Thank you.

Your next question comes from the line of Karl Keirstead with Deutsche Bank. Please proceed.

Thanks. One for Mike and one for Frank. Mike, just to be clear and I think it’s a question that Walter was trying to drive at a little bit earlier. If you look at your billings guidance for 2016 of 33% to 34% in constant currency, is there any way for you to sort of quantify what the slower growth in services and narrowing your services focus is having on that constant currency growth and if you would encourage the street as a result to focus a little bit more on subscription billings? And then, for Frank, I’ll just throw it in now. Investor interest in AWS, Asher [ph] and the public cloud shift is very high. It’s probably very early for you guys. But I’m curious, among ServiceNow’s customers that are making that journey, have you seen any impact and are there any ITOM or other tools that could actually see a demand as customers move workloads? Thank you, both.

So, I guess, Karl, I’ll answer first. The bulk of our billings comes from subscription, not from professional services. If you look at where our professional service guide in revenue, that is pretty much dollar for dollar what our total billings is going to be for subscription -- for professional services. Now, when you look at the balance, which is left there, which is the bulk of the $1.6 million the subscription, most of that is actually coming out of billing, our contracted backlog, then renewals and then new business. And our guidance is the $1.6 billion, and that’s what we’re comfortable with right now.

Karl it's Frank. Your question about public hybrid cloud. We actually think that that trend is very beneficial to ServiceNow. And the reason is we have never really focused on managing deep infrastructure. That’s more been the legacy focus of companies like BMC and HP and IBM and CA. What we’ve always done, we’ve always focused on the service orientation, understanding the operational characteristics and availability performance of the services. That is just as important, actually it’s even more important in a public cloud type of environment because customers will be deploying and redeploying constantly between these different platforms and understanding what services are affected by what cloud is what we do, and that’s going to be really important. Secondly, I will tell you that our focus on service integration which really means is that we can really create a single service experience for all these different cloud resources, of the requesting of these resources or the provisioning of these resources, that’s becoming an intense focus of our business as well. We are the company to provide that service integration infrastructure for the public cloud. So these are things that are going to help and fuel our business as opposed to become an impediment to our business because we’re really not focused on deep infrastructure. That’s been -- that’s where the legacy companies have been, that’s not where ServiceNow has been or where we are going.

Okay. Great color. Thank you both.

Your next question comes from the line of Mike Kasaro [ph] with Pacific Crest. Please proceed.

Yeah. Hi, guys. Rob Owens with Pac Crest. Couple of questions around the ITOM the opportunity. You mentioned about a 5% penetration rate at this point. Can you help me understand just with those customers what is done to ACV overall, I think 2016 was pointed to as kind of a critical year in inflection point for ServiceWatch, what metrics should we expect to see out of that portion of the business? Thanks.

So the only new thing that we’re going to start to disclose with our K which is going to get filed as we’ve told people as now we are -- we started tracking ITOM revenue separately because it is license different than the rest of our products is done on a per device or person script basis. And so for 2015 ITOM revenue was 8% of our total subscription revenue and for the quarter it was actually 8.2% for Q4. And so that’s the one new metric that you’re going to start to see, and you will see that in our quarterly numbers as we go forward for 2016.

So if we think about that from a bigger picture, what’s it typically add to a customer that’s taking it in terms of ACV?

You know, it depends upon the -- it depends upon the customer’s environment. We have some customers that have almost doubled their ACV. We have others that are and these are we have a number of million dollar plus deals and it’s really ServiceWatch has been a key piece of that, but it’s not just ServiceWatch there is other things as well too. We have another customer who is paying us over about $6 million and almost two thirds of that is ITOM. So it depends upon the customer.

Thanks for the color, Mike.

This is Frank. Rob I mean, we believe that the ITOM business from a revenue standpoint booking standpoint is easily equivalent to what we have had in service management and overtime will be bigger than that.

Thanks, Frank.

You bet.

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

Great, thank you. Just one question for you Mike. We only get that backlog number once a year or so I wanted to drill a little bit into that for the full year up 40% constant currency. And I just want to ask, I mean there has been a pretty close historical relationship between the backlog and deferred and next year’s revenue, and it does suggest again that it could be -- your 2016 revenue could be higher than your guidance you just provided. So I was just wondering is there anything different about the components of backlog this year than previous years, and maybe how FX is impacting what’s in backlog? Thanks.

So as we did mention that our backlog, our reported backlog, as of December 31st is $65 million year-over-year just because of FX is down, and once again, our guidance, we’re comfortable with the guidance we gave for both our billings and revenue for 2016.

Okay, thanks.

Your next question comes from the line of Justin Furby, William Blair & Company. Please proceed.

First, on ITOM, Frank. I might have missed this, but can you call out in terms of new ACV in Q4 what that was and what it grew year-on-year and just curious when you think about fiscal ‘16 in your billings guidance, and the different areas of potential upside, what you think maybe is the biggest opportunity whether it’s platform, ITOM certain geographies, different package apps, just anything that may surprise you to the upside and then I got a follow-up.

Yes, I think ITOM for the full year, I think, grew around 66%, somewhere around there. So that’s that number. As I said earlier, I have huge expectations of our efforts. We’re doing very large transactions in this area. I think the market for ITOM is bigger, will be bigger than four IT service management and the combination of these products especially with the way we’re approaching it, which is very different from what historically has been done. It is super compelling and ServiceWatch is a very catalytic technology because it helps customers understand what opportunities they have to really advance, how you manage services in an enterprise versus just managing infrastructure. So that’s a big one. Obviously we have a lot more irons in the fire right now. So our business is just becoming very exciting because we’re just pushing on a number of different areas and they are all moving, and this just we used to be a business that was driven primarily on the replacement of legacy helped us businesses that we have coming off a long way since that time. We are just becoming a very strategic platform for our customers.

Got it, and then, Frank, just a follow up. You talked a little bit about it I think maybe Mike did about the different comp plans, so just curious if you can give a little more color in terms of the thought process of fiscal ‘14 versus ‘5 and ‘16 and why it sort of changes back and forth there?

I mean you are always trying to tweak your comp plan, and through our sales organization, there were decisions to change the plan and coming into 2016 now, we decided we wanted to make our plan a little bit richer because that will help attract people and retain people in our sales and marketing organization.

This is Frank. The one thing that I can add to that, you’re probably wondering why don’t these plans will get cheaper consistently over time, again, it’s not a spreadsheet. Sometimes when we’re adding territories where people are going to need more time to get productive. We’re not going to have an aggressive -- we are going to have an aggressive comp plan there, right. So the bigger you get, the more you are in nascent territories you have to tweak your plans to make sure that people have an opportunity to make money. So depending on what phase we’re in, what territory we’re in, you are going to see that move around. So I think we are being just very thoughtful that we are doing it the right way rather than taking purely a spreadsheet mentality to do that thing.

Got it. Thanks. And if I could just ask one more just on Q4 billing and I hate to go back to it, but services revenue Mike I’m just curious if the difference between you being the midpoint of guidance versus beating it, does it have to do with services I guess did it surprise you in terms of the deflection to the partnering ecosystem or was it in line with what you thought for Q4?

It was in line with what we thought for Q4, and it was purely a subscription renewal error.

Got it. Thank you.

Your next question comes from the line of Jesse Hulsing with Goldman Sachs. Please proceed.

Thanks for taking my question. Frank, when you look at the mix of opportunities on the service management side of the house, how was the mix trending between what you might call traditional ITSM and finance facilities, HR, kind of the newer platform opportunities?

Yeah, I don’t have any sort of hard data to sort of characterize that in a very fundamental way. But more in a qualitative sense, the vast majority of our customers are now looking at service management really as an enterprise initiative, as an enterprise platform. They are looking at service integration strategies. They really don’t want their organization to have to know that you have to go to IT for this thing, you got to go to HR for that thing. People shouldn’t have to know what the boundaries between organizations are, especially when it comes to procurement. Does this go through IT? Does this go through facilities? Does this go through purchasing? So that’s where organizations are looking to put a service cloud infrastructure in place where nobody needs to know what happens behind the curtain. That’s the whole nature of cloud is that you obfuscate the whole backend infrastructure and you just don’t need to know. You just submit your request and it gets automatically provisioned. It works the same way as Federal Express and Amazon information will find you, you don’t have to keep checking back. That’s really what our customers are after. Yes, oftentimes IT is the starting point. I think that will be the case for a long time to come because IT tends to be the leader in the organization that’s really bringing the service model to the other service domain in the enterprise. But we probably have 300, 400 customers now that are on HR service management. That’s growing a leaps and bounds. We have all business units around it. Customer service also ties in facilities management. That’s a big area because that’s now the external phasing side of service management. So we just think that we have just tons and tons of opportunity. The days that this was strictly an IT function, they are well in the past at this point.

And a quick follow-up. I am looking at your investor deck and you’ve broken out your addressable markets and provided a lot of granularity about how you are arriving at those numbers. But a lot of them are outside of traditional ITSM. Outside of ITOM which you have broken out metrics for, which one of those buckets, whether it’s customer service or PPM or another bucket, do you expect to have the most growth in ‘16 and into ‘17?

Well, I don’t have a crystal ball. All of those things are hot, they really are. They are on the move. Depending on who you ask, you will get a different answer. Security is red hot. Customer service surprised the hell out of us, the deals were very large. They were very rapid. They came from places that we didn’t necessarily expect. So we’re learning all kinds of things. The combination of PPM, which is project management and financials, is becoming a very hot commodity as well. We have such a nice opportunity upselling from our platform with all these different services. So it’s great to be in sales at this company.

Thanks.

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

Thanks so much. I wonder if you could just comment first of all on ELA activity in the period if there was much and if you’re seeing an increase in that?

No, we really didn’t see the ELAs in the period at all. It was our typical licensing.

Great. And then, lastly, ITOM, everyone has been drilling on it and you guys have pointed out that really there is a great enterprise opportunity. Is that also a commercial/mid-market opportunity with the ITOM products?

Well, absolutely, there is. I don’t know if we’ve ever set something to the contrary, that really doesn’t stop at the large enterprise doors. Our products scale down very nicely. Even in Express, one of the things that we have added to Express was our discovery kit ability. That was one of the things that was glaringly missing in the first incarnation of that product. People had to have that. And you’re talking about really small shops now that want to be able to discover all the laptops and desktops and service that they have and be able to manage the operating histories. So ITOM is integral to any service management deployment, whether it’s huge or whether it’s small.

Perfect. Thanks so much.

Your next question comes from the line of Kash Rangan with Bank of America Merrill Lynch. Please proceed.

Hey, guys. Thank you. I’m just looking at the stock down about 50%, big move, and I’m wondering to myself, as solid as your growth is, there is a bit of deceleration in billings relative to where you were at the start of the year whether you look at ACV of your G2K, the growth rate there, the sequential deferred revenue growth rate. Now, on the flipside, you are turning way the hell more profitable than anybody expected about a year back or so. So, clearly, your cash flow and op income generation are significantly ahead of people’s expectations. But the growth did decelerate a little bit. And I do completely appreciate the point that you -- had you known what you knew on December 15th, the numbers would have been right in line midpoint or even high-end, perhaps. Is this merely a conscious decision on your part to slow down the rate at which you’re -- not slow down the rate at which you’re hiring, but the second derivative sales headcount you’re adding 400, you added last year 400 is it a conscious decision that as you progress being a larger company going through revenue deceleration that you get that natural margin expansion or is it that the market itself is somewhat limited that you have to slow down the growth rate and not necessarily keep up that $1 billion business growing 50% as you have been at the start of this year?

This is Frank. Maybe, again, I can put a little bit of an angle to this. We went and we are still going through a bit of a transformation in the sense that we are becoming a multiproduct, multimarket and even multichannel type company. Before we were literally scaling on the single product, single market, single channel and by the way that went exceptionally well for us, but the transformation as I just described it is not trivial one over a year ago we completely changed our product organization to be able to drive on multiple fronts at the same time. And we have gradually implemented that focus throughout the organization in the solution consulting teams, which is a pre-sales organization and the sales organization itself, so that we can bring that multiproduct orientation to the entire company. That’s not an easy transition to go through. You just don’t keep sort of ramming bodies and maintain the same momentum. Because there are different kind of hiring profiles, skill profiles, different organizations that absorb these people. But we went through a ton of that transition in 2015 and we feel we’re in a really, really good place to be able to grow and expand with the structure and the model that we have. We’ll be able to buy assets, we’re able to build assets and really add-on to our model. So that’s probably the best explanation that I can give. Obviously, there is large numbers as well. We just cruised through the $1 billion full year revenue. We haven’t been there yet right, and so we’re also getting used to the scale and size of everything that’s going on in this company. We have offices in 64 different places around the world. It’s becoming a good size business and we’re growing into it and we’re pushing hard. So feeling good -- feeling very good about where we are in our evolution.

Got it. And one for Scarpelli, no change to close rates in Q4 relative to Q4 last year, or was there any change sequentially year-over-year, and if yes, what kind of close rate assumption are you using for your billings forecast, Mike, for 2016? That's it from me. Thank you.

So first of all, we never disclose close rates…

Directionally…

There was nothing unusual about this Q4 in comparison to last Q4. And I am comfortable with the guidance we gave for 2016.

Thanks, guys.

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

Thanks. Frank, you mentioned in your prepared remarks the strength to the commercial business and the productivity you’ve seen there, but didn’t hear any commentary on the enterprise side. Could you just characterize the kind of the level of productivity tracking out of that segment?

Yeah, there was a reason I mentioned the commercial businesses because you guys got so rattled a year ago, and it took several quarters to shake that off. So, I thought I’d just make a few -- put some color on that business, because it’s been a very successful transformation for us. The reality is our business is sort of 50-50 large enterprise global on the one hand, and then the commercial business the other half. So we have to really drive both sides of that business equally hard. I mean, our growth assumptions are based on both those business be able to sort of maintain that 50% share of the overall pie. But there’s no doubt that if you left everybody here to their own devices, we would gravitate towards the very large enterprise, because those are the most productive, most lucrative business relationships that we have in this company. And that’s the reason why we created the commercial organization, because we were not to let that happen. We were going to make sure that we would have dedicated focus on these other markets. It’s more fragmented, the deals are smaller, but still outstanding business for us and we like it.

And Derrick, just to support the strength in enterprise, we did add 26 Global 2000 in the quarter. It was actually 33 with adjustments with acquisitions and stuff. So we now have 638 Global 2000 and you saw that we now have over 200 -- we have 230 customers that pay us over $1 million a year each. I think the average is right around $2.1 million.

Okay. That’s helpful. And then…

And that continues to grow.

Okay. And then, Frank, you mentioned the CSC and Accenture having acquired two of your biggest partners. Just be curious to hear how those relationships have evolved? Has there been any disruption or vice versa, are you using were tailwinds with kind of resources and pull through? Just to hear about how those evolved that would be helpful. Thanks.

Yeah. It’s actually made our relationships with those folks more intense, more strategic. We’ve just become more important, in relative terms to them as a platform than we were before they made these acquisitions. Right? So the fun and games is over with. We now have real live investments in it. The real business is they have managers, they have plans, they have targets. Accenture was a premier sponsor at our global sales kickoff last week. This is a really big growth opportunity for them and we’re happy to be partnering with them. We were -- the nice thing about having folks like CSC and Accenture is they have transformational capabilities that they can bring to our very large customers. We’re really raising the expectations on what outcomes people really should expect from ServiceNow deployment. So we’re thrilled to have these people in our business and our customers are happy as well. They have real good variety of choices, a very broad pool of talent to engage. That’s been a complaint that we historically have had is that we grew very rapidly and we were always exhausting the resources in the marketplace. So this is one of the reasons why we’ve carefully cultivated our ecosystem. We didn’t want to crowd out our partners, because we would really constrain our own growth if we did that. So I think these relationships are great, and they’re going to be growing and more important -- become more important as we go on here.

Thank you.

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

Hi. Thanks guys for taking my questions. Frank, you mentioned this in your continuing sort of increasing TAM or just applicability of your guys' services, security, customer service, et cetera. And when you think about just the go-to-market strategy here, is there anything changing as you just continue to expand the applicability in ‘16 versus ‘15? I know you talked on the comp plan, but anything sort of structural to the Salesforce on the go-to-market strategy? And then, a quick follow up to just for housekeeping items. Wonder if you just quantify the billings error there and was it $4 million, $5 million, just sort of how much lower would have guidance with that?

So the billing error was $5 million.

On your question, Phil. This is Frank. The structural difference that we started that we have embarked on and that’s still going on is that we have a high degree of product specialization in the various organizations, and we started that on the pre-sales side. We have it on the sales side. We have it on the professional services side. Obviously this all started in the -- with the product team. So our whole organization has a fully built out product dimension to it. And but not all GEOs have the same amount of product specialization. So that investment will be ongoing as we scale we will be having more and more dedicated resources that relate to these specific areas. You can imagine the security management, we are not a security company by our DNA set if you will, but we stood up a product organization with nothing but security people in there. We have always had security people in the field because being a cloud company security is a really big topic of conversation with our customers. But we have to have very dedicated, very specialized people to be very effective and credible with our customers to drive those kinds of businesses. But the opportunity is so great that for us to make those investments is a no-brainer and that’s what we are doing.

Got it. Thanks guys.

There are no further questions. Thank you. I will now turn the call back to Michael Scarpelli for closing remarks.

Thank you. As a reminder, a replay of this call will be available in the investors section of our website. Thanks 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.