ServiceNow Inc (NOW) — Q1 2015 Earnings Call Transcript

Good afternoon, and thank you for joining us. On the call with me today is Frank Slootman, our Chief Executive Officer. Our press release and a simultaneous broadcast of this call can be accessed at investors.servicenow.com. We will make forward-looking statements on this conference call such as those using the words may, will, expects, believes, or similar phrases, to convey that information is not historical fact. These statements are subject to risks, uncertainties, and assumptions. Please refer to the press release and risk factors and documents filed with the Securities and Exchange Commission, including our most recent annual report on Form 10-K, for information on risks and uncertainties that may cause actual results to differ materially from those set forth in such statements. I would now like to turn the call over to Frank.

Thanks, Mike. Good afternoon, and thank you for joining us on today’s call. Total revenues for the first quarter were $212 million. The quarter was marked by solid demand from our existing customer base, with a 97% renewal rate and a 32% upsell rate. We booked eight new transactions with annualized contract value above $1 million. The company now has 168 customers with an annualized contract value in excess of $1 million. We also landed 23 net new Global 2000 customers, bringing our total to 545, including Illumina, a global leader in gene sequencing and array-based technologies; Southern Company, a premier energy company based in Atlanta; the National Bank of Canada; Wolseley, a leading supplier of building materials; and Lennar, one of the nation’s largest home builders. As our customers expand their use of ServiceNow, we see them using our solutions not just to support the business, but increasingly, to actually run the business. H&R Block Canada stood up a new application on ServiceNow during the quarter, just in time for tax season. The company used ServiceNow to support their annual field office readiness, providing the executive team with a dashboard view of the work associated with preparing 600 stores for tax season. The success of that program kicked off additional ServiceNow projects they will be pursuing over the coming year. The U.S. Postal Service created a stamp fulfillment application on ServiceNow with Accenture Federal Services in just 21 days. That application allows the agency to better manage the inventory of more than 20 billion stamps based on local customer demand at 34,000 retail locations. This helps the Postal Service minimize the disposal of unused stamps, directly impacting the agency’s $7 billion in stamp sales. During the first quarter, we launched our latest software feature release, extending service management across the enterprise to marketing, legal, and finance. This release allows business functions to configure their own services and workflows with dedicated analytics and dashboards. For many of our customers, the objective is to create an integrated service experience across all departments and enterprise functions. We helped AAA Allied Group reduce their reliance on email across eight different departments. The customer has said that any interaction with the business will go through ServiceNow. Their marketing department is using ServiceNow to manage creative service requests, taking that service out of email to provide a more efficient and structured workflow. Our latest release also provides a new financial management application to help organizations better understand the costs associated with delivering a service. ServiceNow Financial Management gives CIOs an interactive dashboard that maps IT costs imported from the general ledger due to consumption of services, allowing them to drive dynamic cost allocation around an arbitrary IT tax. During the quarter, we also acquired a company called Intreis to help us develop our solutions in the governance, risk, and compliance segment. We see an opportunity to change the way organizations manage risk by running their compliance process on ServiceNow. We’ve already helped the emergency services/telecommunications authority in Australia transform their audit and risk function. According to the customer, this initiative reduced the collection time for critical compliance data by 93%. Before closing, please be advised of our upcoming annual conference, Knowledge 15, which will take place in Las Vegas next week. We expect approximately 9,000 attendees to share experiences and learn how others achieve success with ServiceNow. At Knowledge 15, we will also be hosting CreatorCon, our first conference specifically aimed at application developers. CreatorCon is part of a broader launch of programs to build a community of highly skilled ServiceNow developers. This will be open to customers, partners, as well as ISVs. To help those partners and developers monetize their work, we will also be launching the ServiceNow Store. The store is our marketplace for applications and services developed on the ServiceNow platform. Together, these programs boost the availability of apps and services to help customers extend the value of ServiceNow across their organizations. Finally, as part of Knowledge 15, we will be holding our annual financial analyst day on April 20. This event is highly recommended to ServiceNow followers and investors, and we look forward to seeing you there.

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 2015. We’d like to point out that the company reports non-GAAP results in addition to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. All financial figures we will discuss today are non-GAAP unless stated otherwise. To see the reconciliation between these non-GAAP and GAAP results, please refer to our press release, filed earlier today, and, for prior quarters, previously filed press releases, all of which are posted at investors.servicenow.com. Our total revenues for the first quarter were $212 million, an increase of 52% year over year and 62% in constant currency. Subscription revenues for the quarter were $180 million, growing 53% year over year, and professional services and other revenues were $32 million, growing 48% year over year. At the beginning of 2015, we changed our customer count methodology. Previously, as defined in our SEC filings, we counted all production instances as separate customers, meaning some logos were counted as multiple customers if they had more than one instance in production. Under our new methodology, we count each logo once, regardless of the number of production instances. Although individual production instances are often separate sales cycles and sold by different sales reps, we feel that this new methodology is more intuitive and gives better insight into our business and key operating metrics. This change in methodology impacts total customer count, upsell rate, revenues per customer, number of customers paying greater than $1 million in ACV, and average contract terms. Each of these metrics have been restated for historical periods and are available in our quarterly IR deck at investors.servicenow.com. Our total customer count, excluding express customers, was 2,461 at the end of the first quarter under our new customer count methodology, and was 2,872 under our previous methodology. Our upsell rate was 32% for the quarter under our new customer count methodology and 25% under our previous methodology. Our total revenues per customer for the trailing four quarters were $345,000 under our new customer count methodology, an increase of 21% from the prior year. Our total revenues per customer for the trailing four quarters under our previous methodology was $298,000. We now have 168 customers under our new customer count methodology that pay us more than $1 million in annualized contract value, up 75% from 96 in the same period last year, and up 10% from 153 in the previous quarter. Under our previous methodology, we have 143 customers that pay us more than $1 million in annualized contract value. Our average contract terms for new customers, upsells, and renewals were 29.7, 22.5, and 23.6 months, respectively, under our new customer count methodology and 29.6, 20.3, and 26.3 months, respectively, under our previous methodology. Our annualized contract value per Global 2000 customer was $746,000 for the quarter, up 34% from the prior year and up 4% from the prior quarter. Total revenues based on geography were $149 million in North America, $48 million in EMEA, and $15 million in Asia Pacific and other, representing 70%, 23%, and 7% of total revenues, respectively. Our non-GAAP billings, calculated as revenue plus change in deferred revenue from the statement of cash flows, was $268 million in the quarter, increasing 48% year over year and 59% in constant currency. As a reminder, we price and invoice in local currencies. Approximately 30% of our first-quarter billings were in foreign currencies. Our weighted average subscription billings term was 11.8 months for the first quarter, compared to 12 months in the first quarter of 2014. In the first quarter, subscription gross margin was 81%, compared to 76% in the prior year. Professional services and other gross margin was 9%, compared to 10% in the prior year. Overall, gross margin was 70% compared to 66% in the prior year. Operating margin was 3% compared to negative 5% in the prior year. We ended the quarter with 3,047 total employees, an increase of 944 from the same period in the prior year and an increase of 221 from the prior quarter. Full details of our quarterly headcount adds by department are available in our quarterly IR presentation. Net income for the first quarter was approximately $2 million or $0.02 per basic and $0.01 per diluted share, compared to a net loss of $11 million, or negative $0.08 per basic and diluted share in the prior year. Our basic weighted average shares outstanding was 152 million and our diluted weighted average shares outstanding was 166 million. During the first quarter, we generated $67 million in cash flow from operations and we used $27 million for capital expenditures, resulting in $40 million free cash flow. This compares to $13 million of free cash flow in the same period of the prior year. We ended the quarter with $999 million in cash, short term, and long term investments. Our total deferred revenue balance was $463 million at the end of the first quarter, up 10% over the $422 million reported at the end of the prior quarter. Let’s turn to guidance for the second quarter and full year 2015, based on current FX rates. For the second quarter 2015, we expect total revenues between $237 million and $242 million, represented year over year growth between 42% and 45%. We expect subscription revenues between $192 million and $196 million and professional services and other revenues between $45 million and $46 million. Our professional services and other revenues outlook includes $11 million related to knowledge, with the related expenses of $23 million recorded in sales and marketing. We expect billings between $260 million and $265 million, representing year over year growth of 38% and 41%. We expect subscription margins of 80%; professional services and other gross margins, excluding knowledge, of 15%; and overall gross margins of approximately 70%. We expect an operating loss of approximately $5 million, including net expenses of $12 million related to our knowledge conference. We expect free cash flow of approximately $40 million. For the full year 2015, we expect revenues to be in the range of $970 million to $1 billion, representing year over year growth of between 42% and 47%. Our total annual revenue estimate consists of subscription revenues between $820 million and $840 million, and professional services and other revenues between $150 million and $160 million. We expect approximately 5% operating margin for the year and to end the year with approximately $180 million fully diluted gross shares outstanding, which includes all basic shares, stock options, and RSUs outstanding before applying the Treasury stock method. With that, operator, you can now open up the lines for questions.

Mike, the first question I had was for you. And in particular, I wanted to look at the billings calculation methodology a little bit. I think a lot of us in the past have been looking at it as a change in deferred off the balance sheet, and I think that was what was in guidance too. This time around, it looks like now you’re switching to look at it on a cash flow basis. So one, I just wanted to verify that’s sort of how you’re going to be thinking about it going forward, and two, can you talk a little bit about why you look at that as being a more appropriate way to calculate billings?

This quarter, FX really impacted us quite a bit, given the movement you saw. I think the euro was around 1.21 at the end of December. It’s down to 1.08 now. And we saw a lot of movement. Remember, 30% of our billings are in foreign currencies as well. Our international operations, our functional currency is the euro, so that really impacts us quite a bit. And as a result, we think it’s more meaningful to factor in that FX, and you picked that up in the cash flow statement. And going forward, that is the way that we will do it. Historically, there wasn’t that much of a difference between the two.

And then maybe just rolling that forward a little bit further, I know in the past, when you’ve given the full year guidance, you’ve talked a little bit about the assumption of FX headwinds on revenue. Could you just give us a little bit more color on what you think the FX impact is baked into the billings guidance for Q2, and then the full year revenue guidance?

We took down our internal plan for the balance of the year approximately an additional $6 million based upon just our backlog in deferred revenue for revenue. There’s also, remember, a big chunk of our new business is in foreign currencies, and that’s reflected as well in the guidance that we gave. But specifically, for backlog and deferred revenue, it was about another $6 million as of March 31 that we took out of our revenue plan. In terms of the billings, I don’t have that exact number. That’s based upon current FX rates today, the billings guidance that we’re giving.

Mike, wondering, similar to Jennifer’s question on the Q2, I guess one kind of rule of thumb I might use is that the currency impact for billings on Q1 would sort of roll into Q2, and you’d see a similar impact in Q2. First of all, does that make sense?

If the FX rates stay where they are without moving such that our weighted average exchange rate and our balance sheet rate at June equals what it is at March 31, there’ll be no impact.

There’ll be impact on a year over year basis, though.

A year over year basis, but I mean in terms of the guidance that we’re giving.

They’re very important, because we view the ISV strategy as a way to really increase the breadth and depth of our platform deployments in large enterprises all around the world. We’ve been pretty good at really spreading our platform through the sale of our own applications and a lot of our partner activity and so on, but content is what drives platform adoption. We always say we’re applications led, we’re platform driven and enabled, so content is really, really key. One of the ways we really think we’re going to unleash that torrent of content is through the ISV community. So the store is really a monetization feature. I think we have very good routes to market for ISVs in terms of our conferences and our programs and so on, but they have to have the ability to get their content in front of our customer base and then be able to monetize it. In terms of revenue, yes, there is a revenue component in terms of selling through the store, but that is not principally how we’re gonna get paid. We’re gonna get paid on the platform licenses. Effectively, you can think of them as run times. Every time a third-party piece of content is sold, that will trigger, in most situations, incremental platform licenses as well. So that’s how we’re thinking about it.

Mike, I just wanted to come back to the currency question. You told us what the incremental was, but can you just be specific about what is the year over year revenue headwind total that you expect for Q2 and for the year that’s baked into guidance? And then the way I calculate it for this current quarter, you came in maybe twice what I would have expected, so is there something that would have caused that to be?

Remember, going into Q1 guidance, we had already told people that we took our revenue down for FX. Cumulatively, from when we started planning in the end of Q3 2014, we’ve taken out almost $40 million out of our 2015 plan because of FX. But that was based upon where the rates were back in September. Specifically, when we went into the Q1 call, at that time, the rate had already dropped to 1.12, and we had already lowered our guidance for 2015, partly on that. And as I just mentioned, we just took another $6 million out of our number for the balance of this year as a result. Specifically, FX associated with our backlog in deferred revenue we had. But there’s an incremental piece based upon the new business that we plan on booking, because we quota people in local currencies as well, too, around the world.

Mike, just for Q2 on the billings guide, is there anything else other than FX we should keep in mind in terms of the sequential Q1, Q2 guide down on billings? And I’m just curious, just as it relates to the big deals, you were down year over year on the deals over a million. Is there anything that you’re seeing that’s different this year in terms of how those deals are coming through? And I would assume the pipeline’s pretty good for the large deals, but if you could give us a little more color that would be helpful.

You know, as we’ve told people before, these are very long sales cycles, and they tend to be lumpy. Our linearity in Q1, it was very backend loaded. There were a number of deals that slipped, as we always have, that slip from one quarter to the next. And we’re off to a fast start this quarter, but we like to see a little bit more into Q2 before we change our outlook going forward for the balance of the year. We’re comfortable with the guidance we gave.

Mike, just to follow up on Mike Turits' question regarding the year-over-year impact from foreign exchange, I understand that the $3 million represents about a 4% headwind. This quarter, it's almost a 10% headwind on revenue. Should we assume that the disparity between recorded and constant currency figures will narrow over the course of the year, assuming the euro doesn’t significantly decline? Is this a reasonable way to look at it? This would mean we wouldn’t expect to see a large gap between reported revenue and constant currency billings.

You’re still going to have constant currency headwinds when you do the comparison for future quarters, but our guidance that we’re giving, if we don’t see deterioration in Europe, should be more in line.

You had an exceptionally strong finish to the year. I know you indicated that the first quarter was a bit more back-end loaded seasonally. Did you experience a slower start, or is it simply a matter of pursuing longer, larger deals, with extended deal cycles leading to quarters that might be more back-end weighted?

As Mike mentioned, we began the year slowly due to a strong Q4, which was positive overall. However, entering January, we experienced some business pull-forward, and it took time for our sales teams to rebuild their pipeline. This delay pushed some business into late March and even beyond. We did experience a significant amount of deal slippage, but the encouraging news is that once we reached April, deals began closing quickly. We've already secured more than half of our expected deals in the first two weeks of April, and we anticipate finalizing most or all of them by the end of the month. Therefore, we are not overly worried. Our quarterly results can be unpredictable since our sales cycles are lengthy. It’s more beneficial to assess our performance over six-month periods to account for these irregularities. Customers are indifferent to whether their business closes in March or April, even though our sales teams have a preference because it affects their incentives. Although we shouldn’t overreact, we are confident in the structural soundness of our business. Occasionally, deals may shift out of the quarter, but we retain those opportunities and eventually close them. While we faced some challenges in Q1, we are optimistic about our business's trajectory based on what we observed in April. We are trying to understand whether the difficulties stemmed from a lighter, mature pipeline or other factors by looking at trends in other companies as well. Overall, especially with April's results, we are feeling quite positive.

I guess following just up on that, how would you characterize the pipeline today, looking towards the end of the year versus what it was a year ago?

Actually, feeling much better about it going into April versus going into January. Q1, as those of you that have followed us ever since the IPO, it’s always a tough quarter, because Q4 is so strong. And that’s just the nature of our business. But yeah, the June quarter is our historical Q4, when our fiscal year was June, so both the Q2 and Q4 have always been our strong seasonal quarters. So we’re feeling good coming into this quarter as well as the back half of the year.

And then Mike, just one more from me. I think what’s a little confusing is the FX, the constant currency adjustment. You know, 30% of your billings and revenue are international. Even if I look at the euro, the depreciation was less than 20%, so I don’t get how you get a 10-point headwind in the quarter, given 30% mix and given less than 20% move in the euro. Can you help walk through where the delta is?

All I know is the detailed calculation that we have to support that, and you can see that coming through the cash flow as well too, by doing the movement there. And the cash flow is at the average rate.

Frank, it’s the first quarter, so it’s expected for you to act like a typical software company, which might lead to some confusion. However, being normal during this time is completely fine. I have a quick question regarding the change in momentum in Q1. Was it simply a result of having a strong Q4 that left the sales pipeline a bit lacking, or did you implement any strategies to motivate the sales team to work harder or target different deal sizes? Or is it really just a matter of acknowledging that it’s Q1 and moving forward?

I appreciate you asking that question, because we also had a fairly sizable sales realignment and reorg coming into the new year. That happens every year, but this particular year more than half our reps ended up with new account assignments. And what that does is it really dramatizes the effect that we already talked about, because people knew they were going to lose their accounts, so they’re closing like there’s no tomorrow, but they’re also not building the pipeline, because they don’t know what they’re gonna get. So the lower you go into the organization, the more they will point to this particular dynamic as being very impactful to the Q1 dynamic. But it’s sort of one time. The reality of our business is we go through a lot of sales reorgs, because the organization expands so rapidly. We have to subdivide territories, and we’ve really dramatically increased the focus on the commercial markets. So there were a lot of moving parts between December and January, and as a matter of fact, we were like a mature pipeline coming into the quarter. So that was an additional factor that was at play.

And one follow-up there, Frank. If you look at the normal sales org or reorg, it’s kind of one quarter looks really ugly, then the next quarter, it kind of comes back together, and then you’re back on track in Q3/Q4. Is that kind of the right way to think about it?

Well, it wasn’t really ugly. This was still our third best quarter ever. I wouldn’t consider that ugly at all. But I do think that the effect of the reorg is a one-quarter event. In that part, I’m agreeing with you.

Frank, I’ve got a product question on performance analytics. When we talk to customers and partners, it seems to be resonating as a killer app or feature. Is there a way to think about the ASP uplift of that product and maybe where you’re seeing some adoption?

Well, our standard pricing for PA is 20% on our subscription per user fees. It is an important capability for us. Strategically, we’re really moving performance analytics away from standard business intelligence data, warehousing approaches, where people forklift the data to another data structure and then do the reporting over there. We’re really focusing that technology towards real-time reporting. We think that’s going to be super differentiated for us, because we are sitting on the data as it changes, and we’re able to represent that in real time or near real-time. It’s going to become a very, very important part of our strategy going forward. So performance analytics is a key component. We acquired that technology about a year and a half ago now, almost two years ago. We’ve had good take-up. But we’re just in the beginning stages of really running this play. It’s going to get much more significant going forward for our customers and the types of applications people are implementing.

And maybe just a quick follow-up. Maybe I missed it, but did you give the number of HR or facility wins in the quarter?

We didn’t. One of the things that we did coming into the year is that we didn’t change our pricing. We do have different SKUing now. We are now just selling one service management SKU, and regardless of whether it’s IT, HR, or any other flavor of enterprise service domain, it’s all the same price. We don’t have the same visibility on the number that is specific to HR or facilities because our customers are buying them, and they want to have the ability to assign it to whatever department they’re going to be using it for. So we don’t know precisely how they’re using it, whether that’s HR or IT or any other flavor. I think I talked about this in previous calls, but it’s a very important part of how we go to market is to sell it as service management than not specific to IT or HR or any other flavor. We really want our customers to embrace service management for the enterprise, and then they can decide how to allocate it to different service domains. But I will tell you that HR continues to be a very robust, very high activity area for us, and that’s going to continue. That’s very exciting for us.

I have just a quick question on the Express product. How quickly does that product deploy versus the flagship product? And maybe could you give us a general sense between the mix of larger companies and smaller companies that are adopting?

We sort of view Express as a days and weeks for order of magnitude versus weeks and months for what you’d call the flagship product. That’s really the enterprise product. And Express can really go in very, very quickly because all you have to do is really populate your users and establish their credentials, and you’re off to the races. There’s really no design process, workshop. All those concepts, they’re not there. This product is supposed to be used out of the box, so the moment you define the system, everything is on, and you can start using it. That’s why the product is called Express, because it’s really an order of magnitude faster in terms of standing it up. The vast majority of Express users really obviously are smaller enterprises. There’s some mobility between the enterprise products and Express. We’ve seen customers go both directions, which is actually a really good dynamic for us, because we’ve seen a bunch of them graduate to the bigger product. We’ve also seen some of them fall out and needed to go to the smaller product. So we’re really happy to have it.

This may be a bit of an ignorant question since I’m relatively new to your stock, but it looks like there’s a changing seasonality to your business. I’m going back over the last three years. We just looked at the deferred revenue sequential increase in Q4. It has been getting better and better from 2012 to 2013, to 2014, particularly in 2014, although the current moved pretty severely against you. You had well north of 20% sequential growth there. That’s like 400 or 500 basis points better than you have been in Q4 in other years. And consequently, it’s only natural to expect some more seasonality going into Q1. So is it really that? Of course, you don’t share with us billings forecasts for the year, but as you look at your billings target for the year on a constant currency basis, are there any changes to your expectations, even within a range, albeit.

I’ll say that, as I mentioned before, it was a very back-end loaded quarter, and a number of deals slipped into Q2, and we’ve closed a number of those, as Frank mentioned. And so as a result, there are two things impacting that. There is the deals that got pushed, as well as the FX, which is impacting us. But absolutely, our plan going into the quarter was to be a down quarter. You don’t see it as much in billings because we have a lot of contracts that we signed in Q4 that start January 1, which don’t get reflected in our billings or deferred revenue but are in backlog going into Q1. And I definitely expect, as we get larger, we will be no different than any other software company. And you’ll see the typical seasonality.

I think the dynamic you’re talking about, I said earlier, we used to be a June quarter fiscal. And obviously, we changed that a couple of years ago. So that obviously means that Q4 is going to gradually become more prominent if you look at it from a historical standpoint.

I’m looking at 2012 to 2014. There’s a clear trend where the sequential growth in your deferred revenue used to be 14% to 15% in 2012. Now this Q4 of 2014 was 20%, although the currency moved against you. So there’s clearly a huge shift in your seasonality, it sounds like. So that’s why I’m trying to dovetail into what you’ve been saying, and I appreciate the detail you guys are giving, but maybe…

We also had such a record Q4 where a lot of deals were pulled from Q1 into Q4 with guys closing.

So no change with respect to your plan as a business for calendar 2015, I take it? Assuming currencies hypothetically did not change. So you would not have changed your real plans, is what you’re saying, for the year?

It sounds like you're trying to connect with the details provided, and I appreciate the thoroughness. Michael Scarpelli mentioned that we had a record Q4 where many deals were moved from Q1 into Q4, indicating strong closures. Kash Rangan then asked if there were any changes to the business plan for calendar 2015, assuming no hypothetical currency fluctuations would affect the real plans for the year.

Could I ask one thing? I'm sure you have more questions about billings, but if you could indulge me for a moment. Is there anything else happening, Mike, regarding the trends in add-on sales that ended up being billed later in the year? I think you mentioned that in Q2 last year, if I remember correctly. I'm just curious if that trend is normalizing or if you see that as you increase cross-selling of additional products continuing to grow. Is that the seasonality you're referring to?

Once again, I think what’s being reflected in Q1 in this seasonality you’re seeing is that Q4 was such a big number. And our sales reps knew they were losing a number of accounts, getting redistributed. So they pulled in every single upsell and deal. That’s really what happened, and there were a number of deals as well that pushed from Q1 into Q2, because of the linearity in our quarter, which we closed a number of those already.

That’s a central theme of our entire strategy, is to really drive service management to an enterprise product. It’s also one of the reasons why we didn’t want to segment our business in terms of all these domains, because there are tons of other service management applications that really don’t sort of fit squarely on a functional department or function. It can just be a single service that’s being provided. And one of the things that we’ve also included - we’re going to show that next week at our conference - is a template for customers to actually build their own customer service management applications. And it’s so highly abstracted and templated that you can auto-generate most of the service management applications, because there’s just tons and tons of use cases out there, and we cannot support that all. We’re just picking some of the big service domains out of there to prime the pump, because we know they’re sizable and there’s a lot of opportunity there. But there are lots and lots of use cases, which is why we went through this templated automation approach to sort of help people with the tooling to do that, with really no coding skills whatsoever, to be able to stand up those kind of services where you have case management, knowledge management, requests. You get cataloged and everything, where you stand that up automatically for our customers. So the whole notion of managing service is very, very broad-based inside the enterprise. It’s actually not limited to the categories that we’ve mentioned.

Just a quick follow-up, as it relates to what happened with the sales force, and I had a number of questions from investors who were asking to what degree are the changes this quarter similar to what you’ve done in the past. And in terms of the changes that you made, are those now all settled in and you’re set for the year?

We’re certainly set for the year, but it’s very unlikely that we’re set for years, because of the rate that our business grows. And at the rate that we’re bringing on people, the service areas are getting denser and denser, meaning that the whole commercial market, we’re much more aggressive in covering that now, whereas previously we were very much skewed and biased toward the very large enterprises. Now, we have a whole organization dedicated to the commercial accounts, the non-large enterprise accounts. So as we said earlier, this is a very large reorg, and the net result of it was that a lot of people changed their account responsibilities. More than half of them, and that’s just big. It creates a measure of discontinuity in the overall process of generating activity and building pipeline.

Frank, is there a percent that you could put on, just ballpark, what percent of the sales force you actually changed this quarter?

Yeah, more than half ended up with new account assignments.

In changes net new and overall, that would equate to…

No, if you look at all the accounts that we had, 50% of those accounts had new sales people covering them, not necessarily new people we hired. But we reorganized and moved accounts around within both our existing sales people and new people that we hired.

Yeah, the effect of that is that when people know they’re losing accounts, they’re going to take whatever they can off the table. They’ll leave nothing behind for the next guy. That’s natural behavior, and obviously, then, once that happens, the new guys have to start all over again, because nothing was left behind. And when you do that at the change of the fiscal year, it’s exacerbated, because everybody’s in the accelerators and they're putting everything and anything into it to make sure they maximize their yield on the investment that they’ve made in prior months to develop that business. So that’s the dynamic at play here. But as I said, it’s a one-time thing. Some measure of that we have every year, because of the rapidly growing nature of our business, but this was very pronounced in this particular transition.

So can you just roll that forward then? You would anticipate maybe a quarter or two for that to settle in before you feel that you’re back to full capacity?

Yeah, we’re past that now. Everybody’s locked and loaded. And as I said, we feel much better about the way the pipeline has been developing coming into April versus coming into January, as you relate it to the numbers that we have to generate.

Mike, not to beat a dead horse, just going back to the currency question for a minute, based on what you use for your guidance for the quarter, how much was the additional impact on Q1 revenues and billings?

First quarter revenues themselves were impacted by - it’s actually, if you look at the December 31 rate, our revenues were down $2.7 million in the quarter as a result of where the rate ended up being. In terms of billings, we don’t really try to forecast our billings based upon a forecast currency other than the rate it is when we give our guidance. And so I can’t give you that number specifically, what you’re asking for, on the billing side. The billings are based upon the timing of your invoicing to customers as well, too. And so that can skew quite a bit as well. If we had a lot more billings in the beginning of the quarter, before the rates fell, it would have been a higher number. And if they’re skewed toward the end of the quarter, when the rates had fallen quite a bit, you’d see a lower billing number.

Were the deals that slipped from the quarter concentrated in a specific region or industry, or do they present any broader macro insights, or were they primarily due to the reorganization of your sales force? Additionally, what are your expectations for the close rate in the second quarter? I know your pipeline is strong, but what are you anticipating for closures compared to historical Q2 data?

In terms of the deal slip, that’s really an immaturity of pipeline, right? Customers don’t really care whether it’s March or April. And we do not want to resort to unnatural acts to force these things to happen inside March, because it’s going to cost us a lot of money. And as we proved to ourselves in the first two weeks of April, we’ve already closed more than half of them and under normal conditions. So that’s all fine, because our relationships with customers are 10, 15, 20 years, so a couple of weeks is not going to make a whole lot of difference. And we’re really happy with the way that is going. And it’s very much a function of how much mature pipeline we have coming into the quarter. In terms of your close rate, I don’t have an answer for you on that question, because that’s not something that we typically discuss on the call.

The deals that kind of slipped, though, were both in North America and Europe, the ones that have subsequently closed, so there was no specific industry. They were kind of spread across a number.

What I will say about close rates is we have an exceptionally high close rate in general, but what happens to us, our biggest number one competition is always the push, because these are large transactions. It always depends on whether a customer has the resources and the priority in the organization to undertake it. That is often the driver, why a deal doesn’t happen in the quarter, when a customer just isn’t ready. We don’t lose them to competition. The deals are not going away. But it’s not atypical for us to see transactions not just move one quarter, but move two quarters and sometimes, even three quarters, because they have to be ready to engage on the overall deployment. And it’s not a small commitment. These are really, really big rollouts and goal lines. So that really is the nature of our business. And then you add to that that the March-April dynamic is not super compelling compared to December-January, and this is how it plays out. We’re actually kind of surprised how strong April started, because it was almost a complete reversal of sentiment from where we were in late March. So that was kind of a nice thing to see.

I guess first, for you Frank, since we’re only three to four days away from the kickoff of your user conference, I was just hoping you could preview some of the main themes and messages you want to get across to the user base. And then Mike, I have a second question for you.

I don’t know how I can do that in 30 seconds or less. We are going to record our keynote presentations. I really would encourage you to go and watch those because we’re really laying out our case for what’s possible and what you should aspire to. And the biggest thing about ServiceNow, the platform affords an opportunity to really change the way people work, away from unstructured messaging approaches, which is really email and voice and so on, getting to systems, structured data, structured workflow type of approaches. The opportunity is just immense there in terms of productivity. We really find that there is an incredible productivity frontier in large institutions and enterprises. The one thing we will also see is due next week, is the release of a research study that we’ve undertaken that has attempted to quantify what the effect of that is in terms of time lost and time wasted in organizations. And it’s of such an order of magnitude that we believe that CIOs and senior executives in general will give a high level of priority around dealing with this. And so much of the money always flows to the customer side of the organization, where we touch customers. On the inside, we tend to be generations behind in terms of the opportunity to automate and streamline and really achieve huge productivity gains. So that’s what the conference is about. There’s going to be a lot of announcements. We’re going to show a ton of new product in all our categories. In operations management, on the platform, as I mentioned, where we have the store. We have a brand new developer IDE coming out. And of course in service management, the financial management app, as I talked about in the prepared remarks. So there’s a lot of product that’s going to be released and previewed at the conference. But the mega theme is always around how service management is really changing the way people work in institutions and enterprises.

Thank you. As a reminder, a replay of this call and the broadcast of our financial analyst day will be available as a webcast in the investor section of our website. Thanks for joining us today.