ServiceNow Inc (NOW) — Q4 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, our quarterly IR deck and the simultaneous broadcast of this call can be accessed at investors.servicenow.com. We may make forward-looking statements on this conference call such as those using the words may, will, expect, believes, pipeline, prospects, forecast, vision, addressable market or similar phrases to convey that information is not historical fact. These statements are subject to risks, uncertainties and assumptions. Please refer to the press release and risk factors and documents filed with the Securities and Exchange Commission, including our most recent quarterly report on Form 10-Q and our annual report on Form 10-K for information on risks and uncertainties that may cause actual results to differ materially from those set forth in such statements. I would now like to turn the call over to Frank.

Thanks Mike. Good afternoon and thank you for joining us on today’s call. With the close of fiscal 2015 ServiceNow became the second enterprise SaaS company in history to report more than $1 billion in annual revenue. This milestone was driven by solid execution across the board; total revenues for the fourth quarter grew 44% year-on-year to $286 million and we continue to see strong demands from our customer base with a 99% renewal rate and a 39% upsell rate. The fourth quarter set the record for net new ACV. We now have 230 customers with ACV in excess of $1 million, a net increase of 24. Additionally we have 638 Global 2000 customers, a net increase of 26. New Global 2000 logos include Michelin and Hirschi Company; our average ACV per Global 2000 customer was $868,000, a 6% sequential increase. At the beginning of 2015 we restructured our sales effort to increase focus on the commercial market. As a result, we grew our commercial business 48% in the quarter. In addition to robust growth, the commercial sales team also booked multiple transactions in excess of $1 million throughout the year. Our total addressable market continues to expand and is now estimated to add $60 billion with our latest software release in December known as Geneva. We launched two major new services that expand our scope into the service management market, customer service and security operations, adding more than an estimated $13 billion to our addressable market. Our customer service offering provides a holistic approach that integrates customer engagement with the underlying engineering and operational processes. We already signed five deals for customer service including Pfizer, the leading global provider of financial services technology. In addition, we signed four customers for security operations including Raymond James Financial, a leading diversified financial services company. This new offering connects security events for market-leading technologies with our advanced work capabilities. A key value proposition is the institution of a shared workflow between IT and security teams. Our focus is not on detecting, but on processing security incidents in a highly structured experience and transparent fashion. This has been surely missing in the battle for cyber security. In 2016 our focus on helping customers to transform their businesses using a service-centric approach is intensifying. In this vision, everything becomes defined and operated as a service and every enterprise will increasingly manifest itself as a software cloud. To help customers achieve this outcome, we stood up and lead a consulting team to map out their journey. This new team, which we call Inspire, is currently working with a large customer to develop a long-term strategy around the industrial internet of things. This customer plans to roll out a range of internal and external phasing cloud services that will more than triple our segment revenue by 2020. This is an existing customer, but this new engagement changed the scope from an operational discussion to a strategic one. Another customer was in the midst of a corporate transformation along with the integration of a major acquisition. Instead of focusing just on an ITSM rip and replace, the Inspire team showed them how IT could support the company’s long-term transformation. As a result, we worked alongside two customers' stakeholders to build the strategy, roadmap, and architecture for IT and a new business process service center that roadmap will have us replace seven systems in total starting with IT and moving throughout the business. Finally, I look forward to seeing you all at Knowledge ‘16 the week of May 16th in Las Vegas at Mandalay Bay. With that, I will now turn the call back over to Mike.

Thank you, Frank. During today’s call we will review our fourth quarter financial results and discuss our financial guidance for Q1 and full year 2016. We’d like to point out that the company reports non-GAAP results in addition to not as a substitute for or superior to financial measures calculated in accordance with GAAP. All financial figures we will discuss today are non-GAAP unless stated otherwise. To see the reconciliation between these non-GAAP and GAAP results, please refer to our press release filed earlier today and for prior quarters, previously filed press releases, all of which are posted at investors.servicenow.com. Our total revenues for the fourth quarter were $286 million, increasing 44% year-over-year and 51% in constant currency, a negative impact of $13 million. Our average contract terms for new customers, upsells, and renewals were 31.9, 26.1, and 23.8 months respectively. Total revenues based on geography were $199 million in North America, $67 million in EMEA, and $20 million in Asia-Pacific and Other, representing 70%, 23%, and 7% of total revenues respectively. Our calculated billings were $366 million in the quarter, increasing 33% year-over-year and 39% in constant currency, a negative impact of $16 million. Our weighted average subscription billings term was 11.9 months for the third quarter compared to 11.8 months in the prior year. Combined backlog and deferred revenue at the end of 2015 was approximately $1.9 billion, increasing 35% year-over-year and 40% in constant currency, a negative impact of $65 million. Subscription gross margin in the quarter was 83%, compared to 80% in the prior year. Professional services and other gross margin was 15% compared to 16% in the prior year. Overall gross margin was 74% compared to 70% in the prior year. Operating margin was 14% compared to 6% in the prior year. We ended the quarter with 3,686 total employees, a net increase of 284 in the quarter and 860 in the year. Net income for the fourth quarter was $33 million or $0.20 per basic and $0.19 per diluted share compared to net income of $5 million or $0.03 per basic and diluted share in the prior year. Our basic weighted average shares outstanding was $160 million, and our diluted weighted average shares outstanding was $171 million. During the fourth quarter, we generated $105 million in cash flow from operations and we used $25 million for capital expenditures resulting in $80 million in free cash flow. This compares to $39 million of free cash flow in the prior year. We ended the quarter with $1.2 billion in cash, short-term, and long-term investments. Let’s turn to guidance for the first quarter and full year 2016 based on FX rates as of the end of Q4. For the first quarter of 2016, we expect total revenues between $298 million and $303 million, representing year-over-year growth between 41% and 43% and between 42% and 44% in constant currency, a negative impact of $2 million. We expect subscription revenues between $261 million and $265 million, and professional services and other revenues between $37 million and $38 million. As a reminder, we are increasingly focused on deploying our internal professional services organization as a strategic resource and relying on our partnered ecosystem for service delivery. We expect billings between $360 million and $365 million, representing year-over-year growth between 34% and 36% and between 36% and 38% in constant currency, a negative impact of $3 million. We expect subscription gross margin of approximately 83%, professional services and other gross margin of approximately 9%, and overall gross margin of approximately 73%. We expect an operating margin and free cash flow margin of approximately 5% and 21% respectively. We expect diluted weighted average shares outstanding to be approximately $173 million. For full year 2016, we expect total revenues between $1.34 billion and $1.37 billion, representing year-over-year growth between 33% and 36% and between 34% and 37% in constant currency, a negative impact of $6 million. We expect subscription revenues between $1.18 billion and $1.2 billion and professional services and other revenues between $160 million and $170 million. We expect billings of approximately $1.6 billion, representing year-over-year growth of approximately 33% and 34% in constant currency, a negative impact of $7 million. We expect an operating margin and free cash flow margin of approximately 12% and 24% respectively. We expect diluted weighted average shares outstanding to be $177 million for the year and we expect to add approximately 1,000 net employees in 2016. As a reminder, our financial forecast includes anticipated attorneys’ fees and expenses for our outstanding litigations with BMC and HP Enterprises, but not any forecast related to their outcomes. The trials are currently scheduled for March 2016 and May 2017 respectively. Before closing, please note our Financial Analyst Day will be held in conjunction with Knowledge ‘16 on Monday, May 16th in Las Vegas at Mandalay Bay. After the event, we will open up our partner expo hall early to Financial Analyst Day attendees, giving them an opportunity to see and speak with more than 100 ServiceNow partners in person. Attendance will be limited, so if interested, please send an email to ir@servicenow.com. For those who cannot join in person, we will hold a webcast of the event accessible on our IR website. With that, operator, you can now open up the line for questions.

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

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

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

There are several factors that influence billing, both positively and negatively, when forecasting. However, I must mention that we made an error in our forecasting. If that error hadn’t happened, we would have ended up within the midpoint of our range.

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

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

Okay. Thanks very much.

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

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

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

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

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

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

Great. Thanks for the clarification.

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

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

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

Excellent. Thank you, guys.

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

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

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

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

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

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

Thanks, guys.

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

We don’t disclose the actual net new annual contract value, but you can observe the significant increase in both backlog and deferred revenue we just signed. Comparing deferred commissions from 2014 to 2015 or 2016 isn’t straightforward because the commission plan in 2015 was less generous than in 2014. For our guidance in 2016, we plan to enhance our commission structure. In 2014, we had many representatives exceed their targets significantly, whereas this year, although some reps performed well, they didn’t exceed their numbers to the same extent. As a result, we had smaller commission payouts, but overall, our net new annual contract value increased nicely year-over-year quarter.

Got it. Just to clarify what Matt asked about the impact of services. If we compare your guidance with where we were, I'm curious if the effect of the lower billing is the same, meaning I'm trying to understand how the services may have influenced that 1.6 number.

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

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

Yes.

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

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

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

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

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

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

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

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

Got it. As you launch customer service and the connections between your company and Salesforce grow, how often do you encounter Salesforce in deals, and what does the competitive landscape look like going forward?

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

Got it, thanks guys.

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

Geneva was just launched in December, so most new projects that have gone live recently are anticipated to be based on Geneva. Our customer base tends to adapt quickly, and there is significant interest in new applications, particularly in security management, as it aligns well with the platform strategy of our customers using ServiceNow. Additionally, we've been pleasantly surprised by the quick adoption of a new offering related to customer service, which involves a different sales approach compared to our traditional IT sales. IT has always been a strong channel for us in exploring new use cases. We are very optimistic about continuing to sell a substantial amount of operations management software applications. This area performed exceptionally well in 2015 and is expected to do the same in 2016, especially with the introduction of new services related to Geneva. We recently had our global sales kickoff in Orlando, where our sales team was introduced to these initiatives for the first time, generating a lot of enthusiasm.

Great. Thanks.

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

IT operations management increased from 10% to 12% of our business last year, and growing our market share in this area is challenging, given that the overall market is expanding rapidly. IT operations management presents a great opportunity for our sales team as it naturally aligns with our core platform. For instance, we recently completed the Geneva release of Service Watch, which we acquired about a year and a half ago. This means it now operates on our cloud and is fully integrated into our platform and user interface, making it a completely native ServiceNow product. So far, we've only reached 5% penetration with our customers. It's a highly sought-after product, offering significant potential for growth, as it complements our other offerings like security products and event management applications. There is a vast opportunity for expansion in operations management, and we plan to develop additional solutions and possibly acquire new assets in this field as well.

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

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

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

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

Okay. Perfect. Thank you.

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

So, I’ll start by answering your question, Karl. The majority of our billings are from subscriptions rather than professional services. When you examine our revenue from professional services, it closely aligns dollar for dollar with the total billing for subscriptions in that category. The remaining amount, which constitutes most of the $1.6 billion, primarily originates from our contracted backlog, renewals, and new business. We are comfortable with our guidance of $1.6 billion at this time.

Karl it's Frank. Your question about public hybrid cloud. We actually think that that trend is very beneficial to ServiceNow. And the reason is we have never really focused on managing deep infrastructure. That’s more been the legacy focus of companies like BMC and HP and IBM and CA. What we’ve always done, we’ve always focused on the service orientation, understanding the operational characteristics and availability performance of the services. That is just as important, actually it’s even more important in a public cloud type of environment because customers will be deploying and redeploying constantly between these different platforms and understanding what services are affected by what cloud is what we do, and that’s going to be really important. Secondly, I will tell you that our focus on service integration which really means is that we can really create a single service experience for all these different cloud resources, of the requesting of these resources or the provisioning of these resources, that’s becoming an intense focus of our business as well.

These factors will enhance and support our business instead of hindering it, as we are not concentrating on extensive infrastructure. Unlike the legacy companies, ServiceNow is moving in a different direction.

Okay. Great color. Thank you both.

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

We are going to start disclosing ITOM revenue separately in our filings because it is licensed differently from our other products, on a per device or person script basis. In 2015, ITOM revenue accounted for 8% of our total subscription revenue, and for the fourth quarter, it was 8.2%. This is the new metric you will begin to see in our quarterly reports moving forward into 2016.

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

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

Thanks for the color, Mike.

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

Thanks, Frank.

Thank you. I have a question for you, Mike. We only receive the backlog number about once a year, so I wanted to delve into that. It shows a 40% increase in constant currency for the full year. Historically, there has been a strong correlation between the backlog and deferred revenue affecting next year's revenue. This trend indicates that your revenue for 2016 could exceed the guidance you just provided. Is there anything different about this year's backlog components compared to previous years? Additionally, how is foreign exchange influencing the backlog? Thank you.

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

Okay, thanks.

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

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

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

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

This is Frank. One thing I can add is that you might be wondering why these plans don't consistently become cheaper over time. It's important to note that it's not as simple as a spreadsheet calculation. As we add new territories, it takes time for people to become productive. We will implement a robust compensation plan in these areas. The larger we grow and the more we engage with emerging territories, the more we need to adjust our plans to ensure that our teams have the chance to earn well. Depending on the phase and the territory, you can expect some fluctuations. We're being very careful to approach this thoughtfully instead of just relying on a purely spreadsheet-driven mindset.

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

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

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

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

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

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

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