ServiceNow, Inc. (NOW) Q1 2016 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the ServiceNow First Quarter 2016 Earnings Conference Call. At this time all participants are in a listen-only mode to reduce background noise, but later we will be conducting a question-and-answer session after the prepared remarks and instructions will follow at that time. [Operator Instructions]. As a reminder today’s conference call is being recorded. I would now like to introduce your first speaker for today, Michael Scarpelli, Chief Financial Officer. Have your floor 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 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, or similar phrases to convey that information is not historical fact. These statements are subject to risks, uncertainties and assumptions. Please refer to the press release and risk factors and documents filed with the Securities and Exchange Commission, including our most recent annual report on Form 10-K, 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’re off to strong start in 2016 with our best first quarter ever. Revenues grew 44% year-on-year to $306 million driven by strong demand from new business and 97% renewal rate. Our Global 2000 business continues to grow at a consistently high rate with 22 new customers during the quarter including TATA Steel Limited and the Bank of Ireland. Our average our per Global 2000 customer was $906,000, a 4% sequential increase and a 21% year-over-year increase. In our two keys transforms we’ve noted first, upsells continue to be a leading growth factor as current customers expand their service and our usage. We now have 249 customers each with annualized contract values in excess of $1 million, an annual increase of 48%. We landed a record 13 upsells in the quarter each with new ACV greater than $1 million. Our Q1 tends to be a seasonally challenging quarter, we recorded two of our largest upsells ever. An existing Global 2000 customer signed a $20 million upsell over five years increasing its commitment by approximately 380%. The upsell was driven by significant product expansion including service-watch, platform and project portfolio suite. Another existing Global 2000 customer signed a $10 million upsell over five years doubling its initial 2015 contract value and this upsell was driven by the adoption of an enterprise license agreement. The second key trend is excellent growth in customer traction within our emerging products. In Q1 we saw new ACV from IT operations management grow a 166% year-over-year and represents 16% of total new ACV, up from 7% a year ago. This was driven in large part by the success of service-watch which was fully re-platform on ServiceNow in December. We’ve a tremendous opportunity to upsell service-watch to our existing customers given the low penetration of this technology. The success of the service-watch acquisition has pioneered in model, acquire strategic assets and talent that strengthen our overall portfolio and then re-implement the assets to leverage to full benefits of the ServiceNow platform. This is the same strategy we will use with our acquisition of ITapp earlier this month as more enterprise workloads move to public and hybrid clouds, we’re in a strong position to provide customer with visibility and control of the cloud application services. ITapp represents the reinvention of operations management for cloud hosted applications world. We expect to complete the re-platforming of ITapp in 2017. Of the item, we’re pleased with the only progress of security operations and customer service. During the quarter we signed an 11 new security customers including 4 in the Global 2000. One customer in highly regulated industry broaden ServiceNow to eliminate it’s manual and unstructured security processes and decrease its overall exposure. The customer sees our solution as key to improve in collaboration and getting better leverage out of the security investments. We landed 11 new customer service management logos in the quarter including three Global 2000. We are seeing good traction in the tech enabled industries including software, telecom managed services, financial services, government and healthcare. Customers are choosing us over CRM based products because of the holistic service management approach which includes incident, problem and change management disciplines. This provides a better closed loop solution not only to improve the quality of the service but also of the core product. Also worthy of note, we achieved FedRAMP certification in February significant milestone for our federal business. This multi-year effort to meet the government's most rigorous technical standard for cloud computing will have a material impact on our ability to sell into the federal market for years to come. ServiceNow operates the only enterprise service management cloud platform granted this highest level of FedRAMP certification. And finally, I look forward to seeing you all at our knowledge conference in next month in Los Vegas. We expect to surpass 10,000 attendees another record in the history of our conference. With that I will now turn the call over to Mike.

Thank you, Frank. During today's call we will review our first quarter financial results and discuss our financial guidance for Q2 and full year 2016. 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 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. Total revenues for the first quarter were $306 million, increasing 44% year-over-year. Foreign exchange fluctuations did not significantly impact our actual year-over-year revenue or billings growth. Of our total revenues, subscription revenues were $267 million increasing 49% year-over-year and professional services and other revenues were $38 million increasing 20% year-over-year. We are pleased with the continued evolution of our partner ecosystem and expanding role they play in ServiceNow deployment. Our average contract terms for new customers’ upsells and renewals were 32.0, 22.8 and 25.5 months respectively. Total revenues based on geography were $211 million in North America, $74 million in EMEA and $21 million in Asia-Pacific and other representing 69%, 24% and 7% of total revenues respectively. Billings were $377 million in the quarter increasing 41% year-over-year. We realized approximately $1 million in additional billing due to the increase in average foreign exchange rates during the quarter compared to the beginning of the year. Our average billings duration was 11.7 months for the first quarter unchanged from the same period in the prior year. Subscription gross margin in the quarter was 84% compared to 81% in the prior year. Professional services and other gross margin was 10% compared to 9% in the prior year. Overall gross margin was 74% compared to 70% in the prior year. Operating margin was 8% compared to 3% in the prior year. We ended the quarter with 3,991 total employees, a net increase of 305 in the quarter. Net income for the first quarter was $14 million or $0.09 per basic and diluted share compared to net income of $2 million or $0.02 per basic and $0.01 per diluted share in the prior year. Our basic weighted average shares outstanding were $162 million and our diluted weighted average shares outstanding was $170 million. Free cash flow margin was 22% compared to 19% in the prior year and we ended the quarter with $1.3 billion in cash, short term and long term investment. Let's turn to guidance for the second quarter and full year 2016 based on foreign exchange rates at the end of the first quarter, we are not forecasting a significant impact to our expected year-over-year revenue or billings growth due to foreign exchange rate fluctuation. Additionally, we do not expect the recent acquisition of ITaap to have a material impact on our 2016 guidance. For the second quarter 2016, we expect total revenues between $332 million and $335 million representing year-over-year growth between 35% and 36%, this includes subscription revenues between $284 million and $286 million representing year-over-year growth between 42% and 43% and professional services and other revenues between $48 million and $49 million representing year-over-year growth between 4% and 6%. Professional services and other revenues guidance includes approximately $11 million related to knowledge with the related expenses of approximately $26 million recorded in sales and marketing. Moving onto billings. We expect billings between $370 million and $375 million representing year-over-year growth between 31% and 33%, this includes subscription billings between $330 million and $335 million representing year-over-year growth between 37% and 39% and professional services and other billing of approximately $40 million which is flat to the prior year. We would like to remind you that our average billings duration in Q2 2015 was unusually high at 12.2 months due to one large customer requesting multi-year billings. As noted on our Q2, 2015 earnings call, this increased our billings by approximately 10 million when compared to the same period in the prior year. For Q2, 2016 we do not expect substantial customer request for multi-year billings and our guidance assumes a billing duration of 11.7 months which is in-line with the historical averages. For year-over-year comparison purpose at our Q2, 2016 billing guidance including constant billings duration of 12.2 months, our guidance would have been included approximately 14 million of additional billings. As a result year-over-year total billing growth would have been between 36% and 38% instead of 31% and 33% and year-over-year subscription billings growth would have been 43% and 45% instead of 37% and 39%. For additional information on cost and billings duration please refer to our IR presentation. Turning to gross margin we expect subscription gross margin of approximately 83%, professional services and other gross margin excluding knowledge revenue of approximately 11% and overall gross margin excluding knowledge revenue of approximately 75%. We expect an operating margin of 7% including net expenses of 15 million related to knowledge and free cash flow margin of approximately 22%. We expect diluted weighted average shares outstanding to be approximately $172 million. For full year 2016, we expect total revenues between $1.355 billion and $1.380 billion, representing year-over-year growth between 35% and 37%. This includes subscription revenues between $1.195 billion and $1.210 billion representing year-over-year growth between 41% and 43% and professional services and other revenues between $160 million and $170 million representing year-over-year growth between 2% and 8%. We expect total billings of approximately $1.6 billion representing year-over-year growth of approximately 33%, this includes subscription billings of approximately $1.42 billion representing year-over-year growth of 37% and professional services and other billings of approximately $180 million representing year-over-year growth of 10%. 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 $173 million for the year and we expect to add approximately 1,000 net employees in 2016. As a reference in our 8-K filing last week, we have settled all outstanding litigation and have no ongoing expenses. There is no impact to our products or services as a result of these settlements. Under the terms of the settlements, we are prohibited from disclosing any information that is not exclusively stated in the 8-K filing. All settlement amounts have been excluded from non-GAAP results. Please note, our financial Analyst Day will be held in conjunction with Analyst Conference on Monday, May 16th in Las Vegas at Four Seasons. Please send an email to ir@servicenow.com if you would like to attend in person. 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] Our first question comes from the line of Kirk Materne from Evercore ISI. Your line is open.

Thanks very much, and congrats in the quarter. Yes, Frank, I just want to ask you, obviously last year you put in the commercial sales organization and that was a big undertaking. I was wondering if you just talk a little bit about how that going for you all in terms of bringing in net new customers that you may even talking to last year at this time. And then just talk about the strong start of this year in terms of just execution having everybody in place, even how much of that was reflected in the results today? Thanks very much.

Yes, Kirk, we're actually super placed with the progress that our commercial sales organization which we really stood up in the US. That's what our announcement a year ago was about. So, we now have a whole year of experience under our belt. That organization grew in excess of a 100% on bookings over the last year. So, that's really good. Commercial market is really important in the long-term basis. We cannot just be driving our business from global 2000 accounts. So, these investments have to be made and are actually feel that they're paying off well ahead of schedule here. In terms of your second question, we've been diligently working on all the changes that we have to make the company in terms of preparing ourselves to go to market with multiple products and multiple markets and multiple channels. And as you can see from the results that is gradually paying off, but it's a marathon one quarter, is not the entire story. So, we're pleased with the results showing that the investment we're making are yielding. So, we were at that place.

Thanks a lot.

Thank you. Our next question comes from the line of Matt Hedberg from RBC Capital Markets. Your line is open.

Thanks for taking my question. Guys, congrats on the quarter as well. Mike, in your prepared remarks, you talked a little bit about the eco system. I am wondering if you can give us a little bit more detail there, the Sis should certainly provide that, we think of a benefit going forward here. I'm not only into the services mix shift, but selling additional non sort of core apps. Can you talk about some of the progress you're seeing there?

So, as part of our Analyst Financial Analyst Day, we're going to talk more about the impact of the G SIs. Right now we're still trying to figure out some meaningful matrix that we can share with this tree. As I mentioned before in Q4, we were looking at some new matrix and how we would report that and we just haven’t made any decisions and we will start to talk about that at our Analyst Day.

Okay, and then maybe one more, I know headcount, additions is always critical matric for you guys adding talent. I'm curious you had a nice headcount adding Q1 here and it sounds like a 1000 for the years is pretty consistent. Are you having less churn right on their which is a more capacity a new plant foregoing into the year?

No, I don’t think there is more capacity. We did see kind of in the last kind of in March we start to see some churn within our organization, but we're kind of where we need to be right now. There was a fair bit of want to churn that we really worked on. You usually see that in Q1, was more towards the end of the quarter but we're comfortable with the capacity we have on hand now. That’s all reflected in our operating margin guidance for the year.

All right. Thanks a lot, guys.

Thank you. Our next question comes from the line of Brent Thill from UBS. Your line is open.

Thanks. Frank, back to your comment about this steam the cash best Q1 ever, beyond the couple of mega contracts that you sign. Can you just give us a little more sense of that what why you would characterize as your best Q1. What are the other things that surprised you and stood out in Q1?

Well, the reality is that for high growth company like ours. Every quarter sort of has to be our best quarter ever. So, this is not sort out of the ordinary for us to observe that about our business. But as I said in the prepared remarks, one of the things that was super strong is our whole upsell dynamic in our business. I think we're unusually in the whole SaaS universe, how strong our app store business is. So, we have a really good ability to land even with modest presence and have the ability to dramatically expand that in a relatively short period of time. We really like that sales dynamic and the reason is it's much harder to do very large transactions from start where you have zero presence in account. So, once we have established that beach has the our ability to sell and accelerate that presence is well established and we liked it at launch.

And then quickly, for Mike, just on the two large mega contracts. Did you disclose what was built versus what hearing in Q1 or all those some of that built in Q1, was that related built bill?

Well, all of those contracts are their annual billings. There was some co-term that happened and on average they're coming in at about an 11.7 months as factored into our overall billings guide.

Okay, great, thanks.

Thank you. Our next question comes from the line of Raimo Lenschow from Barclays. Your line is open.

Hey, thanks for taking my question and congrats as well. Quick question, so now that you have and is a focus for you guys as well, do sell a broader product portfolio. How did you set up the salesforce for this year? Are they carrying quotas for all the different product? How do you intent to like them to kind of go out and continue to do the ups cross sale that you're already seeing?

Raimo, this is Frank. Our people are carrying a global quota and they can choose how they retire quota. We obviously have overlays built into our sales model and now especially on the solution consulting site, but also on the sales side. People that have dedicated number, dedicated to products. We are beginning to move in a direction where for product lines that there are farther afield from our normal sales dynamic where we're going to have dedicated teams. In other words, sales teams that can only sell that product line. We haven’t done that yet. We are moving in that direction. And that sort of a new chapter in our evolution of our sales model, if you will and we'll report on that as we go along here. But generally speaking, no, there is one quota and they retire that in the best way they know how.

Okay, perfect. And then last, just to clarify like, you know, lastly you obviously had quite a few changes in terms of sales territory and to split. Am I not correct to assume that this year was very minimal changes?

Yes.

Thank you.

Thank you. Our next question comes from the line of Walter Pritchard from Citi. Your line is open.

Hi, thanks. Michael, do you think about the past to the $4 billion plan you put out with the Global 2000 customer growth. I think the one thing that strikes me there is you’ve had great traction in the US. You have a really good market sharing in Europe as well in Asia, still I think its 7% market share. Can you talk just about specifically that geography and your competitive position there, sort of where you see the encumbrance, I think they could be stronger today than the newer as well as you’re the evolution you go to market organization and your ability to ramp the market share in Asia like you have in these other two geographies.

Yes, this is Frank, Walter. Now, Asia is sort of a tail of two regions. We've done exceptionally well in Australia. We got in early and we've really outperformed our own expectation in that market really great accounts and really great presence. It's a very mature organization. Now, that's in contrast to what's going on in Asia and Japan where we got a much later start and where we are still relatively immature. Those are very different routes to markets. And we're still in the midst of really figuring out how to best do business there. We are making that way, we are selling, we are getting customers. But as you observe from the percentage, this is not yet kicking in the way we would like it to

Okay. Thanks, very much.

Thank you. Our next question comes from the line of Keith Weiss from Morgan Stanley. Your line is open.

Thank you guys for taking the question and nice quarter. I want to drill into the legal settlements from far from two side, if you can go into it. One from a topline perspective. Think to any pent up demand behind settling those losses, people who were maybe sitting on the side lines, who sale cycles that got extended because of what you guys had to do to convince people that it wasn’t liability or it wasn’t risk behind this. That's the one side equation. Then on the other side of the equation, is there any OpEx that was sort of in the budget in the model for this year that now comes out because you're a little bit more in for investment or margin expansion that I should be aware of?

Keith, this is Frank. I'll answer the first question and then I'll let Mike answer the second question. So, the answer to your first question is really not, there the litigation was a slight overhang in the sense that it cost some distraction and some friction. I'm not aware of it causing any business not to happen. So, I don’t think there is any pent up demand that we're envisioning, that's going to free up here with the settlement?

In terms of the cost associated with the litigation, we have incurred cost in Q1 through the settlement and actually into April. The budget has in essence been reallocated for the ITapp acquisition and that's why we said ITapp acquisition we don’t expect to have any material impact on our guidance for the year. And hence while we let in at the 12% operating margin. So, we will see a shift between G&A and R&D, but that's not going to drop to the bottom line.

Excellent, this one. Well, thank you.

Thank you. Our next question comes from the line of Alex Zukin from Piper Jaffray. Your line is open.

Hi, guys, two quick ones from me. First off, congratulations on the quarter. If you look at your pipeline from an ACV perspective, from new versus existing customers. How does it look like this year versus the prior year?

Well, as our install base and customers get bigger, upsells becomes a bigger piece. So, obviously our ACV pipeline is bigger this year for new customers than it was last year. And it's bigger for two reasons. One, because they're install base customers is bigger but also our sales force is a lot bigger now.

All right, that's helpful. Any update on the app store initiative, how that's been trending versus your expectations at any sense of what percentage of revenue or bookings is coming from platform license at this point?

This is Frank. That continues to trend upwards. We are realizing substantial amounts there, but it's not of the order of magnitude where we think we need to call it out in our prepared remarks and so on. It's a long-term investment you'll see at our conference in Vegas last month. Next month that we have a good portion of the conference dedicated to platform, platform enable months, store, is really helping people monetize their investments that are making on the platform. But we are not view, depending on this or viewing this as a major impactful source of business in the current time frame.

That's helpful, thank you guys.

Thank you. Our next question comes from the line of Michael Turits from Raymond James. Your line is open.

Hey Guy, Michael Turits. Two questions. One, Frank and Mike, you pulled out a lot of applications including security and others. And now you're also talking about rolling potentially rolling out some, sounds like overlay sales force. It seems like it's working really well. Is there any more cost associated with this as opposed to what seems like your earlier strategy which was more of a platform and strategy with customers and partners developing application?

It's Frank, Michael, now. That really because the way we view it is we look at how well we develop pipeline both in the aggregate as well as by different classes of products. So, we're going to allocate head counts in our sales organizations in such a way that drives the development of demand, the quickest. So, it's really -- we can either sub divide, continue to sub divide territories, or we can move them into a product classes and then at this point where we're seeing demand developing faster when we start dedicating more resources to these new product opportunity. So, it really is not incremental in terms of cost.

And then, a follow-up question I have in sort of different direction. But, you raise the revenue guide but not the billings guide. Is something to get clarity in terms of duration going into next quarter but in last quarter and fourth quarter there was some duration issues especially to the shorter end. Is it, do you feel like you have got to handle on where duration is going, any risk that you could have customers looking for much shorter duration even some one year and is that part of, any lack of visibility on the billings for the full year?

No, what I would say is there is a lot more judgment that goes into billings, forecasting billings than the recent subscription revenue just because it's very easy to pull in renewals, customers can delay renewals. And if a contract is signed in the last day of the quarter or the day one of the next quarter that can emphasis a big contract that could have a $5 million impact or $5 million contract for revenue on the last day of the quarter as zero impact on your revenue. Hence why, we said at the beginning of the year, our full year's billing guidance is approximate, last year we never gave you billings guidance for the full year until the second half. And in the second half of this year we will give you a more accurate or an actual range of where we think the billings guidance is going to be for the full year.

Great, thanks very much. Thanks Frank.

Thank you. Our next question comes from the line of Jesse Hulsing from Goldman Sachs. Your line is open.

Yes, thanks guys, appreciate it. ITaap, Frank can you talk about the acquisition and the timeline for integration and also when you think about how this ITaap portfolio of solutions of all overtime, how much is going to be driven by M&A versus internal development? Thank you.

Yes, the whole notion of cloud management has been on our radar for years and we have had our own internal development in this area as well and a bunch of our customers are using our provisioning capabilities for EWS and as you are in and things like that. We have prosecute opportunities to buy technology in this area for a while now and we are pleased that we succeeded in acquiring this company. We are going to fully re-platform meaning that this is not going to be integrated, we don't do an equation, we do re-implementation and that means it's going to run on our clouds, on our platform, in our UI framework there really be no seams, no separation between these services and the ones we have built previously that's going to be completed sometime during the first half of 2017. This is not trivial technology it takes time to mature because there is just a ton of variables that this kind of software needs to take into account it's not a simple application at all. We think this is a marketplace or segment of the marketplace that is in its infancy and it's going to take considerable amount of time for people to learn and understand how to deploy this. It’s a complete reinvention of how operations management and system management really works in a cloud hosted environment. So we need to own this. It is strategic to us. The reason is that it is a key resource that gets requested and provisions through our platform, so the ability to provide that is very, very important we cannot, not be in this marketplace we got a very strong response from our large Global 2000 customers saying this is exactly the right thing for you to be doing. So it's nice to see that kind of validation of strategy when we announced this deal.

Thanks Frank.

You’re welcome.

Thank you. Our next question comes from the line of Sarah Hindlian from Macquarie. Your line is open.

Thanks. It's Hindlian. Congratulations guys on the quarter. Thanks for taking my questions too. I was wondering if you could give us some color around what drove your strong upsell. Do you really view that Mike and Frank as seat expansion or you are thinking about that in terms of ARPU growth and when we are considering this upsell could you give us a little bit more color as well on where you are seeing the most traction and then maybe I can sneak in one more question, but maybe this is little bit redundant but are you seeing any seat contraction in the core ITSM product from any sort of public cloud usage at all?

This is Frank, yes, to your last question is no. Not at all, but yes to your first question in terms of what drives the upsells. What’s really going on is that in our customer base people are really gaining the confidence to have longer relationships and bigger relationships with us. They are stepping up in a much more strategic sense. The notion I am just going through replace some legacy apps, do some modernization that's sort in a rearview mirror. They are moving with much stronger strategic intent on ServiceNow as a key platform in their overall technology portfolio and that's really what’s driving. And big upsells really reflect strategic intent on the part of our customers, which is why we called it out in our prepared remarks because we think it's really core to what’s going on with our company.

With those upsells we are seeing both seat expansion and new products as we introduce new products especially ITOM and some of the newer products with customer security and customer service.

Thanks Mike.

Thank you. Our next question comes from the line of Rob Owens from Pacific Crest. Your line is open.

Great and thanks for taking my question. I want to drill down just a little bit into the security operations opportunity and I think you had said you had four customers in backlog or in trial when you released the product. You mentioned 11 new security customers. I am curious as to exactly what they are doing. You mentioned eliminating manual security process, so is this automating changes within infrastructures or more automation of IT task number one and just maybe at a high level customer example of how they are using it? Thanks.

Yes Rob it's Frank. This is really into the management for security that's the simple way to think about it. What’s going on in the world of security is that enterprises and institutions make huge investments in detection and scanning all the companies that you are familiar with in that universe. But as the scanning and detection takes place, the ability to process and act on those events is incredibly immature. The security operation centers is comprised of these people sitting around desk, staring at screens and spreadsheets and texting each other and talking to the IT department there is really no sense of disciplined structure and work flow to dealing with these alerts. Now on the IT side we have that because we have matured that over the last 10-20 years we’re very, very disciplined in that area and the reason we’ve had to be that way is because of the sheer volume. Well, that reality is now sinking on the security side of the house as well and the second reason is that security and IT have to work together. There is no other way and the reason is when security people need something done on the IT infrastructure they do not have the authority or the ability to make those changes. Those are going to run through IT. So making sure that the workload is integrated within security and IT that is what we do. That is what this product does. The response to the basic concept of what this new product does has been incredibly strong and there has been a lot of action in the marketplace as well, IBM acquired a competitor there has been a number of acquisitions in this area, everybody is waking up to this basic capability. We just happen to be very, very well equipped with an extremely matured rich platform to be able to tackle this. Now we are not a security company by background, but we have staffed up in the entire organization with security people to go and prosecute this and as I said earlier we are also going to adapt our selling motion to make sure that we fully explore the opportunity that is presenting itself.

And are there any go-to market technology partners then from content perspective and I assume you talking about the resilience system acquisition by IBM or is this more from the peer work flow perspective?

This is from the peer work flow expected. There is a huge ecosystem play here because all the folks that are on the detection and scanning side in terms of follow ups, networks, fire eye etcetera those all become key partners for us in this game as is Plunk and so on. But we think security is such a fragmented diverse world having a single integrated work flow is going to be incredibly important for that whole process to work and be functional. I think everybody knows that a lot of the big breeches that we have seen advertised on the front pages of the Wall Street Journal is not due to our inability to detect them, it's due to our inability to act on them and that's really where we come in.

Great, thanks for the color.

Thank you. Our next question comes from the line of Steven Ashley from Robert W. Baird. Your line is open.

Thanks so much. I just wanted to ask on ITOM, which modules are you seeing the strongest adaption for here in the early going?

This is Frank. ITOM, actually the great thing about ITOM is, we are selling it as a suite. So in other words it's not sold in individual pieces. Now that said discovery is a core capability because that's what populates the CMDB, I mean we believe our ability has to have that orchestration is really the ability to bring about change in the on premise infrastructure, so the penetration on that has grown a lot. Service-watch has been a runaway success for the company as we highlighted in the prepared remarks. Yet and the value of the transactions is quite high. Yet, the penetration in our customer base is still single digits. So, we have an enormous opportunity yet to go with ITOM, but the whole thing is it's a very holistic approach it's not a point and product sale for us.

Great. And then, I just like to ask one follow-up question on the sales force organization. You talked in the last conference call about the fact that last year you transitioned, you had to go to more of a business unit kind of structure Australia you talked about having dedicated sales teams for certain products. Can you give us just a little more color on the current sales force structure around how it's laid out today?

So the sales force structure essentially has sort of four quadrants if you will. We have a global accounts organization and we both have a new logo organization, a resource or focus if you will as well as an existing accounts focusing organization. We have the same thing on the commercial site, we have a new account, hunting focus into commercial organization and we have one that takes care of existing customers. That model is quite mature in North America when you get over to Europe and Asia where we are not as mature we don't have the mass due to bring about that entire focus. You see the separation at the rep level but not yet at the organizational level. That will happen in four months time because those model will eventually carry through the way that I described. But the two vectors are commercial versus enterprise, and the other vectors is new accounts versus existing account that is fundamentally how we break down. The business unit structure that you reference is on the product side of the house not on the sales side of the house, but what I did say earlier is that we are now starting to make the first steps in having some dedicated focus for product lines that we view as farther afield from our core selling motion. ITOM is not far afield from our core selling motion which is why we are not separating that out and it works very well for us there is no reason to change that. But on the security side customer service side as I said, we would like to see those pipelines grow faster and we think we are definitely going to achieve that with the dedicated sales focus.

Perfect that's helpful, thank you so much.

Thank you. Our next question comes from the line of Justin Furby from William Blair. Your line is open.

Thanks guys and congrats. I wanted to ask about bookings mix I guess if you were to look at new ACV come into door, it sounds like it was 16% from ITaap this quarter. I am wondering if you were add up the other areas like platforms, CX, CRC security, the other 9 ITSM products, are we at a point where it's 40% or more of new bookings and what did that maybe look like a year ago, I’m curious what you think it looks like a year out from now? Thanks.

This is Frank. It was actually about 30% and a year ago it was about 82% so that's the breakdown.

Sorry it was, say that one more time Frank. It was 82% a year ago of booking that came from non-ITSM or ITSM was 80%?

ITSM was 82%, it was 70, service management is what we are saying and service management was 70% this quarter.

Versus 80 last Q1?

82% year end.

And if you look at a year from now what would be a guess of what you think it might look like just curious?

Look we’ve, by the way this starts to become just speculation to something great. But we think that by 2020 service management will end up being about half our business. We may be underestimating over estimating that but that's sort of an end state where we are envisioning at that. It's right where we are going, it could actually be less because emerging products are coming online a lot faster than we had anticipated.

Got it. And then if you think about geographies within those different products, are there any areas if you look at the US, is a much more of a propensity to sell other products or what does it look like across US, Europe and A-Pac in terms of penetration of those newer product? Thanks.

They are more mature to market, they're more you see diversified selling take place. In markets that are less mature, the initial selling motion is always around surplus management because it's a well-worn path very well understood. So, the more mature then more penetrate, then more saturated, the more you see the diversified sales happening.

Got it. Thanks very much; appreciated.

Thank you. Our next question comes from the line of Kash Rangan with Bank of America Merrill Lynch. Your line is open.

Hey guys, congrats on the quarter. With respect to ITOM, what percentage of the sales force actually can sell ITOM and are you really comfortable that the end market is at the point where somebody that is used to buying ITSM or a sales person that's used to selling ITSM has made the appropriate contacts and introduction on to the IT operations set of house because in the large companies these two divisions can be completely separate. How comfortable are you that we're at the point where the market is able to buy this as a suite from one sales person with securing a combined quota from both of these products?

Well it's Frank. Actually I don't think they are completely separate because the buying center is really fundamentally the same at the CIO level. It’s one conversation and I can make that very apparent to you because even if you look at the legacy companies, they all have operations management and service management product portfolio and that's not by accident because there is very high leverage between these respected capabilities and the generation of software that we are working in now. That's very high degrees of automation. It is just essential that service and operational management, they're not just closed cousins, I mean, they're completely integrated in terms of work flow and processes. And everybody that we talked to is viewing service and operation management as bridges that they have to cross. It's – this is the reason why we are in the business. It's not optional for us to be in the operation management business because it's really two halves of the whole. That's probably the best way to say it.

Would you get price, that last year results were great but we had a couple of quarters of good billings, some quarters of not as good billings. So, would you think that we are at the point where ITOM ITSM sales cycles too. We're converting. Sales force says better shot at producing deals that we don’t have to worry about the traditionally tough quarter consistencies in terms of billings.

You know what? We got a pay to worry about tough quarters. It's a hard fight out there, we take nothing for granted. We are pleased with the strength that we saw here but we are on the next quarter. These things are customers, they make major commitments. It's not just that they pay a lot of money. They also go through gut wrenching reimplementations, redeployments, big change in their infrastructure. They can't always chew that off. They sometimes have to push that out. So, this is a real world marketplace, right? This is not Facebook signing up another million users. This is a real enterprise business.

Got it. Frank, why would you not raise your sales hiring plans given the success of the quarter? That's it from me, thank you.

We are hiring staffs as we know how to do it in productive fashion. By the way, sales productivity is what we use as our guide to determine whether we are hiring faster or slower. We are always trying to drive sales productivity down because if it's going up, that means we are not hiring fast enough. So, that's how we determine the pace and how we follow the rate at which we bring people in. If you hire too fast you are going to get unwanted attrition, you start tracking really unhealthy dynamics. So, we are always sort of walking that fine line between the little too much.

Thank you. Our next question comes from the line of Greg McDowell from JMP Securities. Your line is open.

Great, thank you. One quick question about the traction around customer service management. You mentioned some wins in the Global 2000. I was just hoping you could give us some color on what those deals typically look like, are they green field opportunities, replacement opportunities, how competitive are those deals? And maybe a second part of that question is how should we think about the initial ASP of customer service management versus the initial ASP of your traditional ITSM stuff? Thanks.

Yes, it's Frank. It's been a really interesting couple of months for us to sort of see the initial transactions take place. Our positioning irrelative to customer service is different from the traditional CRM approach that you might get from Deluxe of Oracle and sales force. Because we are going out with the service model as it has been defined and pioneered and matured on the IT side and it's a holistic model because it doesn't just care about the engagement model with the customer but it also cares about root cause analysis which is the engineering vector. And it cares about operations. You know, like how do I change the product or service to make sure that it's higher quality and these people do not keep calling me with the same set of issues and request. Now the IT customer understands this almost innately and intuitively, that's what we take advantage of and we really deal with people that have an intuitive understanding of why this service model makes sense and the more the service model looks like what they deal with in an IT organization the more people will come to the realization that this is the way to do it. So, the initial transaction we've done is there has been very strong conviction on the part of our customers that the model, the philosophy the way we do this is has really been the driver. All the other stuff, the online channel engagement, that's sort of table sticks. Everybody does that. But when you look at the service model, it's a very different offering. So, we are not to showing up with me too offering, we have a very different approach to coming into this marketplace.

Thank you.

Thank you. Our next question comes from the line of Philip Winslow from Credit Suisse. Your line is open.

Thanks guys. This is actually Michael Turits that join for Phil. I was hoping you could dig in a little bit into the process of shifting some of the sales force to self-dedicated products rather than kind of the whole suite at once. Are these going to be kind of new hires coming into to do this? Are you going to repurchase part of the existing sales force and can you give us just sort of a general timeline for when you expect this to be implemented? Thanks.

So, this is another one time thing. This is something that will start happening on an ongoing basis. We are going to start off at a modest level, is probably couple of dozen people involved and certainly in the coming quarter that are going to get this kind of a sales dedicated focus. It may involve existing people. It will surely involve new people. But that's up to the sales organization to decide how and where and who they are going to deploy against these opportunities. This is just a beginning. We are going to learn. We are going to see what works. We are going to do some more of that. What doesn't work, we'll back out. So, this is just a beginning of a journey. Not a one-time structural change and it will be all set and done. So, stay tuned.

And to be clear too, the cost associated with this are factored into our full-year guidance for our operating margin already.

Great, thanks.

Thank you. Our next question comes from the line of Ryan MacDonald from Wunderlich Securities. Your line is open.

Thanks for taking my question. Just quickly digging a little bit more into the headcount, I think you said earlier that you are expecting to hire a 1000 people net new employees for the year. Can you talk about what segments of the market or specific geographies that you will be focusing on with that expansion?

Well, those people predominately go into sales and marketing and then R&D. The R&D people observe with most of those are going in North America, we are starting to add more people into India, as well as our R&D facilities in Europe and Israel. The sales and marketing it is skewed more towards as a percentage growth of people in our Asia-Pacific and AMEA. But in absolute the US market is still such a vast market. There is a lot more room to split territories here that there will be more of those in absolute going into North America.

Okay. And just a quick just clarification on the new security and customer service. Customers that you wonder in the quarter. Are those completely new customer wins or are they upsells from existing customers? And what was the say competitive dynamics involved with those deals?

No security site, I think they were all upsells. There really wasn't a competitive dynamic because this is something that customers want to deploy on the ServiceNow platform because it's not viewed as a standalone service. It has to take advantage of event management capabilities. CMDB, everything that's the collaboration kit bell, the notification, all that stuff plays into it. But on the customer service side, we've had some opportunities where these were not customers previously. So, those are some new logo, new land type of opportunities which has been interesting to see. It's early going, it's fairly a random in the sense that the patterns are not all crystallized at this point.

All right. Thank you very much. Congrats on the quarter.

Thank you. Our next question comes from the line of F. A Lima [ph] from East/west Securities. Your line is open.

Yes, thank you. Back in the cloud management space what are the key competitive you expect to see and how do you plan to differentiate world system? Also, based on your earlier comments it seems like it's at least a 2018 revenue event. Do you think you need to buy more technologies to round out the portfolio or will it be all organic development as part of the platforming?

Well when it comes to cloud management, we acquire what we needed and everything else we are going to build. I mean an acquisition is not just about technology, it's also about the talent. And so we have this core group of people that has come into the company and we will extend that group of people to do what we need to do. In terms of competition, very early going but as you have noticed, there has been a bunch of acquisitions in these area. CISCO just bought a company. Oracle just bought a company. VMware has been the long standing player in this space. We believe that because of the ServiceNow platform, that this is not a standalone marketplace at all and we think that we come in with a very compelling advantage, a launch in this service from the ServiceNow platform because again this all runs through the catalog. It runs through all the orchestration capabilities, the way people consume IT as a service. The entire service experience around it like so many things they start off as one off standalone things and then people realize they are not separate assets. They are really show bizzes that operate in the broader framework.

Thank you.

And with regards to your comment to buy that it's a 2018 revenue. As we mentioned, it is being re-platformed on our platform and we do two releases a year that should be in our April/May release. So, it will start having an impact on bookings in Q2 of 2017.

Got it. Thanks, Mike. And any quick comments on the linearity during this first quarter or was it any different from the earlier first quarters? Thank you.

No, it was good. Was strong at the beginning and end March. On purpose we are pushing to get feels close sooner and but nothing unusual.

Thank you.

Thank you. [Operator Instructions] And our next question comes from the line of Jeremy Breindel from Royal Capital. Your line is open.

I was curious about the impact that FX has on the updated guidance in the quarter I think. To start the year you expected FX to have a negative impact from the topline. It sounds like that changed. So, can you tell us how that impacted the guidance?

Well, for the year-over-year right now where we trade where we are. The average for Q1 of 2016 to the average for Q1 of 2015 was pretty consistent. Remember we traded about five different currencies. It is about 30% of our business that is foreign and as we're going right now we just we expect it's going to be similar.

Got you. When you initially guided for revenue, I think you estimated FX would be like a certain headwind for the year. But I believe has that changed?

I don't. I didn't, I give guidance based upon where we saw the average rate was at the beginning of the year and that has not changed that much from where it is today. Slightly up.

Great. Because I thought you said it was $7 million headwind expected for 2016 but now it's not at zero?

On 1.38 billion, that's not a very big number, it's roughly the same.

Got you, okay.

Thank you. That concludes our questions for today. So, I would like to turn the call back over to the management for the closing remarks.

Thank you. As a reminder, a replay of this call will be available as a webcast in the investors section of our website. Thank you, for joining us today.

Ladies and gentlemen, thank you again for your participation in today's conference call. This now concludes the program. And you may all disconnect your telephone lines at this time. Everyone have a great day.