ServiceNow Inc (NOW) — Q4 2017 Earnings Call Transcript

Good afternoon and thank you for joining us. On the call with me today is John Donahoe, our President and Chief Executive Officer. I'd like to apologize if my voice is not clear today, or if I start to cough, as I'm suffering from a cold flu bug. Our press release, Investor Presentation and 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, expects, believes, or similar phrases to convey that information is not historical fact. These statements are subject to risks, uncertainties, and assumptions. Please refer to the press release and risk factors and documents filed with the Securities and Exchange Commission, including our most recent quarterly report on Form 10-Q, for information on risks and uncertainties that may cause actual results to differ materially from those set forth in such forward-looking statements. I would now like to turn the call over to John.

Thanks, Mike. Good afternoon everyone and thank you for joining us on today's call. We reported a strong Q4 today. Our best quarter ever, giving us terrific momentum as we enter 2018. Our teams did an outstanding job executing on behalf of our customers and I want to thank them for their exceptional focus and commitment. We closed a record 41 deals with ACV greater than $1 million. And we now have 500 customers doing more than $1 billion in business with us, up 43% year-over-year. And we have 50 customers doing more than $5 million per year, that's more than double what it was than 12 months ago. And we ended 2017 with our biggest customer topping $20 million, reflecting the growing opportunity to be a strategic partner enabling customer success. Our performance continued to be strong worldwide, with each region outperforming their plan for Q4 and for the full year. Our renewal rate remained consistently strong at above 97% and we added 23 new G2K customers, ending the year with 840. Our average ACV with G2K customers grew 10% sequentially. Our consistent performance underscores our strong product portfolio. We create simpler, faster, better ways for people to get work done, enabling better business outcomes and delivering better customer and employee experiences. And our geographic footprint and strong partner ecosystem give us the ability to serve a diverse customer base and to drive global transformation for our largest customers. In conversations with customers worldwide, I consistently hear how CIOs are being tasked with leading digital transformations across their companies and are looking to deliver great customer and employee experiences in the process. And CIOs are looking for the right strategic technology partners to help them. ServiceNow has become a core strategic partner for CIOs and other C-suite Executives on their transformation journey. We are uniquely positioned to be the connective tissue that streamlines and simplifies workflows across the enterprise, eliminating silos, and creating more seamless interactions. For example, companies are looking to transform the end-to-end employee experience. Employees have come to expect delightful mobile and digital experiences at home and are increasingly looking for the same kind of digital experiences at work. This requires looking at the full end-to-end employee experience as an enterprise-wide initiative, which requires cross-functional collaboration and partnership and integrated digital solutions. Increasingly, we see CIOs partnering with CHROs and other C-suite leaders to deliver this experience. It requires linking together multiple enterprise products and platforms into a seamless experience for their employees. This is what ServiceNow does. In Q4, this enterprise-wide approach was reflected in the continued strength of our platform and product portfolio. 18 of our top 20 deals included at least four products, and our flagship ITSM product was included in all but one of our top 20 deals. And we saw strong results with our HR service delivery, CSM, and Security Operations products. For example, a top 20 global financial institution bought our HR service delivery product to better engage several hundred thousand of employees worldwide. And we saw our largest Security Operations deal to-date with another global enterprise, which views us as a strategic partner to create a common global approach to security incident response management. This customer now uses six of our products. Our customers want us to continue to lead and innovate with best-in-class out-of-the-box integrations and configurations and we're deeply committed to delivering customer success. World-class product experiences and customer success are top priorities for us, and we're investing in both. Focusing on customer success, we recently aligned all of our customer success teams, customer success management, professional services, training and certification and our partner ecosystem team into one group under the leadership of our Chief Revenue Officer, Dave Schneider. This integration will ensure that we optimize value for our customers. We're evolving customer success as a natural extension of our sales motion, continuing to land new customers and expand existing customer relationships in a healthy and sustainable manner. In closing, I'm very pleased with our team's strong finish to 2017 and our continued progress and momentum as we enter 2018. I just attended my first ServiceNow sales kickoff meeting and it was an incredible experience. The passion, energy and excitement of our people to engage new customers and expand how we serve our existing customers is palpable. And that's what makes ServiceNow such a special company; our deep commitment to helping our customers succeed. I look forward to continuing this journey in 2018 and beyond. And with that, I'll turn the call back over to Mike.

Thank you, John. During today's call, we will review our fourth quarter financial results according to historical revenue recognition standard 605 and we'll discuss our financial guidance for Q1 and full year 2018 according to the new revenue recognition standard 606. 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, except for revenues and revenue growth. 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. Q4 was our first quarter with more than $1 billion of total contract value signed, leading to combined backlog and deferred revenue of $3.9 billion or 39% year-over-year growth, giving us strong momentum heading into 2018 and on our path to $4 billion in 2020. Subscription revenues for the fourth quarter were $497 million, representing year-over-year growth of 44% and an adjusted growth of 41%. And PS and other revenues were $49 million, representing year-over-year growth of 20% and adjusted growth of 16%. Subscription billings were $684 million, representing year-over-year growth of 41% and an adjusted growth of 40%. I want to point out that this includes approximately $20 million of billings that we had expected in Q1 of 2018. Our PS and other billings were $50 million, representing year-over-year growth of negative 1% and adjusted growth of negative 4%. Moving on to margins, our operating margin was 18%, and free cash flow margin was 27%. As disclosed in our press release and our presentation, we adopted 606 effective January 1, 2018. As a result, we restated prior periods for upfront revenue recognition for on-premise deals, deferral and amortization of commission costs, and classification of proceeds related to Knowledge as a reduction in sales and marketing expense. Let's turn to guidance for the first quarter and full year 2018 under the new 606 accounting standard. For the first quarter, we expect subscription revenues between $525 million and $530 million, representing 35% to 37% year-over-year growth and 31% to 32% adjusted growth. We expect subscription billings between $601 million and $605 million, representing 25% to 26% year-over-year growth and 25% to 26% adjusted growth. As I mentioned earlier, this does not include approximately $20 million that we expected in Q1, but billed in Q4. And separately, Q1 guidance doesn't include approximately $4 million due to 606 accounting changes. And lastly for Q1, we expect 16% operating margin and 184 million diluted weighted average shares outstanding. For full year 2018, we expect subscription revenues between $2.355 billion and $2.375 billion, representing 35% to 37% year-over-year growth and 33% to 34% adjusted growth. We expect subscription billings between $2.77 billion and $2.79 billion, representing 30% to 31% year-over-year growth and 29% to 30% adjusted growth. Moving on to margins, we expect subscription gross margins of 85%, operating margin of 20%, and free cash flow margin of 27%. For the full year, we expect diluted weighted average shares outstanding of 185 million. Before closing, please note our financial Analyst Day will be held on Monday, May 7th in Las Vegas in conjunction with our Annual Users' Conference, Knowledge18. In-person attendance will be limited, so if interested, please send an e-mail 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.

Thanks very much and congrats on a great fiscal year. John, I just want to follow-up on sort of a statement you made about becoming more strategic for CEOs and other C-level decision makers. As you guys continue down that path, and you're obviously having a lot of success based on the large deals you're signing, what additional investments do you guys need to make as we head into 2018 to continue that progress that I know you're hoping to continue going forward?

Thank you, Kirk. As I mentioned earlier, we had about 500 different customers last year. It's clear that CIOs are addressing the necessity for digital transformation within their companies; every CEO is expressing a desire for this shift. They're increasingly relying on the CIO, often the most tech-savvy member of the C-suite, to lead these initiatives. The CIOs have communicated that while they are adopting cloud solutions, they require a few trusted partners and platforms to support them. Their decisions are being made at the infrastructure level, often opting for AWS or Azure, and sometimes Google or IBM. They're also selecting a few key strategic software platforms, and we are becoming one of those essential platforms. I'm hearing this consistently from them. Initially, they're turning to us for ITSM solutions or existing applications, but they’re also exploring cross-functional workflows, such as improving employee onboarding experiences or enhancing customer support. They want to streamline these processes to prevent future issues from arising. As we position ourselves as a strategic platform, it’s noteworthy that they’re engaging us for new applications and asking what our upcoming out-of-the-box applications will be. Thus, our priorities moving forward are clear. For 2018, we plan to invest significantly in our product and platform. This includes embedding machine learning into our offerings, which is live in Kingston now for CSM and ITSM, enhancing the mobile experience for end users, and continually evolving our applications with new features, including Cloud Management. Another key investment area is customer success. These large organizations require assistance with their transformation efforts, particularly in redesigning their processes. We are expected to play a more proactive role by collaborating with third-party ecosystem providers, and we're making substantial investments in customer success, which we have consolidated under Dave Schneider to align it effectively with our sales strategy. The third investment area is talent acquisition. We're expanding aggressively, adding personnel worldwide to bring in new skills and capabilities relevant to our current and future scale. I previously mentioned hiring Pat Wadors as our Chief Talent Officer, who is now focusing on leadership development and essential fundamentals of a strong talent organization. Lastly, we are investing in enhancing our company brand. While our product brands are well-known among decision-makers in IT, our overall company brand is relatively underappreciated, primarily because we haven’t prioritized its development. To address this, I've brought in Alan Marks, who was the Chief Communications Officer at eBay for the last decade. He will help us elevate our company brand, which will benefit both recruitment and employee engagement, as well as increase our visibility among C-suite executives. These are the four main areas of investment for 2018, which align with the plan Mike outlined, and we expect to fully fund these priorities.

Thank you very much. I have a quick follow-up for Mike. Regarding the $20 million that moved into the fourth quarter, which you expect to receive in the first quarter, I assume that amount is solely from subscription billings. Was there any professional service revenue included in that figure?

Yes, that was entirely from subscription. I'm focusing solely on subscription billings because that's where our attention is as our professional services business shifts more towards our partners. If you take the $20 million along with the $4 million I mentioned due to the accounting change for on-premises, that totals to $24 million, which when added to our midpoint indicates a 31% year-over-year growth.

Great. Thanks guys. Congrats on the quarter. John, in your prepared remarks you talked about HR, SecOps and CSM. I think they performed well this quarter. For my question, I wanted to drill down into CSM a little bit. It seems like there's a lot of momentum there and I think particularly in B2B customers. And from what we've heard, a lot of that's due to your ability to do deeper root cause analysis. I was curious to get your take on that market opportunity.

Sure, Matt. You're fortunate not to be across from Mike, as he's under the weather with a cough, fever, and the flu. It's commendable that he's here. The Customer Service Management (CSM) market is significant. While the entire customer service market is large, our value proposition specifically appeals to a segment of it. We excel where there are many inbound contacts and customers prefer not to spend much time on the phone. Instead, they want to identify and resolve the underlying issues behind these contacts to prevent them from recurring or to automate responses. High-volume B2B scenarios are prime examples of this. Our offering demonstrates a strong return on investment, as it integrates seamlessly within the core ServiceNow Platform, enabling cross-functional workflows. For many companies in the digital space, the leading cause of inbound inquiries is often password resets. Addressing this issue typically requires collaboration among multiple functions—Legal, Compliance, Security, Product, and Technology. Our platform enables efficient routing of these issues to the appropriate teams in an organized manner, facilitating improvements in the password reset process. This means that when someone encounters a password reset issue, it can be resolved automatically, similar to the user experience on consumer Internet platforms, where password resets can be done in about 20 seconds worldwide. Consequently, customers experience fewer inbound inquiries and higher satisfaction levels, resulting in a solid return on investment in our product. We are focusing on industries like telecommunications, technology, B2B, and financial services, which possess these characteristics. As you noted, it’s a vast market with significant momentum. In Q4, we achieved over 4 million deals and launched machine learning capabilities branded as Agent Intelligence. As I mentioned in the last call, applying our machine learning to our own inbound contacts led to a noticeable improvement in issue categorization and routing within just 14 days, and now our customers have access to that capability. It’s a detailed answer, but we’re genuinely enthusiastic about this product and the substantial market opportunity it presents.

That's great. John, when you're speaking with companies like Accenture and DXC, what feedback do they give regarding the potential size of business that ServiceNow could achieve within those organizations? Can ServiceNow be compared to major players like Microsoft, SAP, or Salesforce in terms of business development with systems integrators?

The goal is shared by both parties. We consistently hear that we are among the fastest-growing practices in their portfolios, which is evident when looking at our growth rate. What excites them about collaborating with us is our platform focused on redesigning workflows. It's challenging for companies to tackle workflow redesign independently, so having a respected system integrator as a partner, like Accenture, DXC, or Deloitte, is crucial. I met with Unisys recently, which has a significant government presence in the security sector. When customers invest in ServiceNow, they aim to enhance their processes and redesign workflows. This means they are not merely transferring old workflows to a cloud platform; they are transforming them for ServiceNow, maximizing value for the customer. This approach also creates substantial, high-value business opportunities for third-party partners. We intend to collaborate closely with them, working alongside customers to ensure they derive genuine value, fostering sustainable growth for both our businesses.

Hey, I have avoided the question for Mike. I hope you feel better soon. John, you talked earlier about the changes to the success group and bringing everything under Dave Schneider. Can you talk a little bit more on the change that you're doing there? If you've seen that historically, like you have like at least short-term issues in terms of responsibility, who's doing what, what's the P&L structure there, et cetera? Just maybe double-click on that one a little bit. Thank you.

Yes, it’s a great question and I see this as an important learning year for us. We’ve focused on understanding how customers achieve success with our platform. For them to derive real value, they need to reengineer their processes, whether that’s in IT service management, onboarding experiences, or customer service management. This requires our involvement and the expertise of certified third-party partners. We've restructured our training and certification business to report directly to Dave, and we’re investing significantly to increase the number of qualified ServiceNow partners across key regions and product areas. We’re building strong relationships within our partner ecosystem, tightening the criteria for our partnerships to ensure that only those current with their certifications remain recommended partners. Our professional services team has adapted to avoid competition with third-party partners, although there are times when using our services makes sense for customers, particularly with new products or extensive multi-product implementations where we can provide guidance. Additionally, Dean Robison is leading our efforts to develop a dedicated group of post-sale solutions architects and implementation experts. A critical aspect of our strategy is our investment in the customer success center, which emphasizes a tech touch approach. We’re launching tools like the Value Calculator on our website to facilitate ROI discussions between IT leaders and their executives. We will compile best practices and learning experiences from our partner ecosystem and share them digitally with customers and our sales team. Our aim is to ensure these efforts are seamless for the customer, providing a cohesive and trusted partnership. Dave Schneider, along with Kevin Haverty, is focused on enhancing our post-sales support using the same approach that built our successful presales team. We’re committed to learning and finding leverage points this year, so we can effectively scale our efforts in 2018 with confidence and reliability.

All right, great. Thank you so much both John and Mike. I was jumping between calls, so I apologize if you've hit on any of this. But John, I know we talked in December about ServiceNow approaching becoming a much larger strategic partner for its customers. And I'm wondering how you're feeling about maybe even moving towards the focused account list and how that's going. And then I also wanted to talk to you a little bit about some of the feature sets that are coming out in Kingston because we're hearing some very exciting things there about the release. And then I have a follow-up for Mike.

Great. Mike is preparing for your question. As I mentioned earlier, we are being asked to take on a strategic partner role. This is a natural evolution for our company given our size and scale, leading to what we refer to as select accounts. We currently have around 840 Global 2000 companies that we partner with strategically, and we are learning to engage with them more effectively. Customer success involves covering them comprehensively and ensuring they derive value from our services. We are confident that this approach will enhance and accelerate our ability to strengthen our relationships. We are already seeing early signs of this success, including one customer generating $20 million in revenue for us, which represents about 0.5% of their total IT spending. This demonstrates the significant impact our platform can have in reengineering processes, leading to a measurable return on investment that encourages further investment in the ServiceNow platform and applications. We are evolving our coverage models and focusing on key disciplines like account planning, which is relatively new for us. Dave, Kevin, and our teams are taking on several select accounts this year to develop prototypes. Does that make sense? And Kingston, yes, Kingston.

Yes, please.

Kingston has received fabulous feedback. It's been live for less than a month, and we already have 90 customers using it, which indicates a positive trend in our upgradability. We're improving the speed and quality of our upgrades, allowing customers to upgrade quickly. The desire to upgrade is driven by key features, particularly machine learning. There is significant industry discussion around this topic, and after acquiring DxContinuum last year, we have integrated it into our core platform, making machine learning accessible for ITSM and CSM to address real customer issues. This is not just a theoretical solution; it's about enhancing categorization and routing in ITSM to drive greater automation and productivity. Additionally, both CJ Desai and I have emphasized a serious commitment to improving user experience, applying consumer Internet standards rather than just enterprise software norms. We recognize we still have a long way to go, but Kingston marks our initial steps in this direction, with customers noticing substantial enhancements in user experience. This improvement will extend through our upcoming releases in London and Madrid, significantly enhancing both the fulfiller and end-user experiences. Moreover, after acquiring Telepathy last year and bringing in talented user experience professionals, we are investing heavily in this area. We also acquired SkyGiraffe, with the intention of integrating mobile capabilities natively into our platform this year. While our mobile functionalities currently meet enterprise standards, we believe there is ample room for enhancement. Kingston is just the start of what we expect to be a continuous improvement in user experience. Lastly, it's exciting to mention that our Founder, Fred Luddy, envisioned a platform where regular users could automate workflows without needing to be developers or IT professionals. We've developed a no-code development feature that allows individuals outside of IT to automate processes. This capability is notable because approximately one-third of our use cases fall outside our core platform, as customers are applying our platform to workflows and areas we hadn’t anticipated. Increasingly, teams in various departments, whether in facilities, Internet of Things, or legal, are creating innovative automated workflows built on the ServiceNow Platform, and this no-code development feature facilitates that.

Okay, that's very helpful. Thank you so much John, I appreciate it. Mike, one more really quick one. I'm sorry, you're sick, but I just want to drill into you. The $24 million in subscription billings, even when I back that out, the sequential decline you're guiding for in Q1 still looks a little bit steeper than usual. Is there anything there other than seasonality that we should be thinking about?

Yes. So, first of all, there's $20 million from Q4 that should have been in Q1. That $4 million is purely a 606 accounting that does not impact Q4. And we had such a banner quarter in Q4 that pulled forward a lot of business from Q1 into Q4. You see that $20 million I was referring to is really early renewals and prepayments from customers that drove that, which had no real economic impact on our financial results other than billings and free cash flow part of that. So, as we are getting bigger, we're definitely seeing more seasonality in our business. And if you look at the way that our quota is being distributed throughout the year, Q4 is definitely the big quarter for us.

Thanks. I have two questions for you, Mike. First, regarding 2020, it seems you are maintaining your goals of acquiring 25 G2K customers each quarter, and you appear to be on track. Can you elaborate on how this relates to your salesforce and the incentives you provide? Are you implementing any strategies to further penetrate your existing customer base or to acquire new logos, especially considering the expansion of your product line compared to a few years ago? I'm interested in knowing if your approach has changed in that regard. I also have a follow-up question.

Yes. Currently, our core sales representatives earn the same commission for every dollar of new ACV, regardless of the product. This may change in the future, but we believe this approach is effective. We also have product sales specialists who focus on different products to support our salespeople, which aligns with our practices over the years. Regarding incentives for acquiring new logos or G2K, we have consistently provided bonuses for new logos to our reps, and I do not foresee any changes to this. It represents a very small portion of their total compensation, and I do not expect significant adjustments in this area. We will continue operating in this manner.

Got it. And then just on 606. Just any comment on margin impact in terms of the 20% you're giving. And then as it relates to disclosure around the revenue backlog number, is the $3.9 billion number that you're showing there, is that a 606-type backlog number that we can start thinking about using? I heard you did say first $1 billion bookings quarter. I'm just wondering how we should start thinking about the bookings that could come from that metric.

Yes. The backlog and deferred revenue is under 605. Our auditors are still reviewing that disclosure, and it will be released for the first time in our March quarter. We will discuss this further at our Financial Analyst Day, where we will explain our expectations regarding this. You will also see the new disclosures about how your deferred revenue and backlog will convert into revenue during Q1. Did I address all your questions? I think I missed one.

Yes, that makes sense. No, that's good. Actually, just margin impact on the 20%, yes.

Yes, you asked that. We estimate that the adoption of 606 in 2018 will impact us by about 1.5% to 1.6%. Much of this is influenced by the timing and volume of on-prem revenue. We are aware of the deals we have that are set to renew, but I cannot predict if new customers will choose on-prem solutions at the last minute or whether they will opt for one-year or multi-year deals, as this could significantly affect our bottom line.

Good afternoon, guys. This is actually Stan Zlotsky sitting in for Keith Weiss. And a quick two-part question. First one, the 42% of new ACV mix that is now allocated to the other line, that was a very impressive uptake. If you were to stack rank the products that made up the 42%, I know you mentioned HR, SecOps and customer service, how would you stack rank those products within that 42%? And then I have a quick follow-up.

Yes, those three products, along with our platform and analytics, account for between 5% to 10%. They contribute to that overall figure, but we won't provide guidance on specific products.

But they're all growing impressively. I mean, it's not as though one of them is carrying the other ones. It's pretty stunning to see the consistency with growth rate, at least to-date, across those five.

And what I will say is all of those exceeded their plan for the year.

Understood. Got it. And then the other thing that really stood out to us was the 10% increase in ACV from the G2K customers that we saw. What drove such a big increase? And should we think about this as the typical seasonality going forward as you sign more of the large customers in Q4? Thank you.

As I was talking at investor conferences after last quarter, we had mentioned that we felt pretty confident Q4 we're going to make up for that because we had a lot of contracted upsells as well as we sell our pipeline. Q4 tends to be a quarter where we do a lot of upsells to our existing customers. If you look at Q4 of 2016, that was a 10% sequential growth as well. Whether that seasonality stands or not, what I can say is I feel confident, on average, we will continue to grow that 4% sequentially between now and 2020. There will be variability.

Hi. Thank you. I'm going to start with a question that relates to the previous question. The ACV is very strong. The customer adds was a little bit lower this quarter. I assume it's still a lumpy number, but Mike, you still think you're on target as we look out to 2018 to realize the customer adds you need to keep the model going to those 2020 goals. Is there anything you want to call out in the 23 adds this quarter that was either better, worse or unusual?

Well, what I would say is when we put this goal in place in 2015, we had to add, on average, 20 per quarter. We've been adding well in excess of that now. We just have to have another 160 between now and 2020. So, it's less than 15 per quarter, and I feel pretty good about that as well.

Yes. And the customer adds in the first three quarters were really strong.

They were.

Let me ask about the competitive landscape. Some application vendors, especially in the SaaS sector, seem to be targeting workflow within their applications and possibly across their applications, mentioning ServiceNow as a vendor they might want to replicate or compete against. How do you view the competitive dynamics currently, considering the narrative from some of these application vendors?

I still believe our primary competitor is unstructured workflow, which involves assisting customers in utilizing software that they are not currently using. A significant portion of our growth can be attributed to this. In some instances, we are replacing outdated ITSM, legacy-based, on-premises solutions. However, in many customer onboarding cases, especially for employees, there are no existing solutions available. This represents a major area of unstructured workflow. My perspective on this is rather straightforward, viewed through the lens of the customer. CIOs have expressed to me the necessity for a few reliable platforms that integrate seamlessly. They expect each platform to excel in its specific domain without pretending to be something it is not. The more these platforms can provide a seamless customer experience without imposing the burden of implementation and integration on customers, the more satisfied those customers will be. Our focus is on workflow. This company was established on the principles of workflow, and our platform was designed with workflow in mind. We have a proven history in this area, which customers leverage through our ready-to-use applications, as well as in numerous scenarios where they utilize our platform for workflows that go beyond what we initially envisioned in those applications. While others may be incorporating some form of workflow capability into their features, they tend to adopt a broader approach. Many of these platforms, which are valuable and which we also utilize, are more vertical in nature, while we have a more horizontal focus. Therefore, I don't see it as a zero-sum game. The cloud presents a vast opportunity, and our key responsibility is to ensure that our collaboration creates greater value for our customers. We aim to make sure that the combination of infrastructure providers and various software platforms works together effectively to enhance the customer experience. While others may be expanding their workflow capabilities, we remain dedicated to this as our primary objective. Our platform is built around this concept, and we will persist in striving to be best-in-class and delivering significant return on investment for our customers.

All right. Makes sense. Mike, hope you feel better.

Thank you.

You want to take this one, Mike, or should I think this one? I think we'll go to the next one, operator.

Great. Thank you. I guess this is going to be for John.

Thanks for being here, Jennifer.

So, I had a quick question just around this broader discussion people have been having on tax reform and whether that potentially frees up some more dollars to go into IT budgets. And in particular, it seems like digital transformation is potentially a place where this incremental budget could go to the extent it materializes. I'm curious in your conversation with customers, how are they feeling about IT budgets for 2018? And is there any thought yet whether they might see some benefits from tax dollars being freed up a bit?

Jennifer, that's an excellent question. It's still early to make any definitive statements. However, I can share that just yesterday afternoon, I met with the Chief Information Officer of a major global healthcare company who was very enthusiastic about receiving some additional budget. She made the effort to travel here specifically to discuss employee experience and how to leverage that for cross-functional workflows. Coincidentally, I also met this morning with another large multinational company, where the Head of Infrastructure mentioned that he has a strong budget this year aimed at driving cross-enterprise transformation. This trend indicates that CEOs and CFOs are starting to recognize that to maximize the value of technology investments, it's not sufficient to only allocate funds to individual departments or silos. It’s vital to support cross-functional initiatives, as the true advantages of enhancing customer and employee experiences, and boosting productivity, stem from collaborative efforts. I believe we are increasingly seeing this approach reflected in our growth.

Okay, great. And I have a question for Mike. I apologize. So, hopefully, this is a quick one. And sort of in that same vein, given that tax reform has some incentives for CapEx type decisions and one of the things that determines whether some things are CapEx or an OpEx is if there's the potential to do that as an on-prem deal. I know you'd mentioned, I think, in response to Walter's question that sort of one of the moving pieces is whether new business comes in and wants to have that on-prem optionality or not. Is there any thinking at this point whether the more attractive CapEx depreciation rules might cause you to see a few more on-prem-style deals than you maybe would have seen in the past?

It's too early to determine if we'll see an increase in on-prem deals. Many of our customers are dealing with constraints on their operating budgets versus capital budgets. Consequently, they often prefer to structure their agreements to utilize their capital budgets, and I anticipate that trend to persist. I'm uncertain if there will be more or fewer such deals compared to what we've observed historically. While one might assume that the immediate tax write-off could influence this, it's premature to make any predictions, and we are not forecasting that change.

Okay, great. Thank you. And I hope you feel better.

Thank you.

Great and thanks for taking my question. While I am tempted to ask Mike a six-part question, I think I'll defer to a callback on that front. So, maybe you can expand a little bit on the low-code, no-code opportunity and what that could mean just relative to the installed base and potential expansion there as well as your opportunity in the end market.

Yes, Rob, I think the short answer is we don't really know. But I think we have this platform that customers give us feedback that it's easy to use, it's fast to build on, it's extensible. So, in addition to building outstanding out-of-the-box applications, we're trying to incent the spread of that platform across enterprise. We're going to do it a couple of ways. One, we're investing heavily in our platform-as-a-business. And our platform-as-a-business, that is platform as our product line grew, as Mike mentioned earlier, very attractively last year. So, people are buying the platform with the intent of using it outside of our core applications as well as our core applications. Second, we are seeding the third-party development market, both inside companies and outside companies. So, our store, our ISVs in store grew 100%. 100% net new ACV growth from our partners through our store and OEM program last year. It's still a relatively small program, but it's a way where we can open up the ability to innovate on top of our platform. And we're having a number of OEM partners like Nuvolo and Factor5 and Fairchild who have built applications on top of our platform, often a vertical solution or a specific use case that they're gearing it toward. And then lastly, what the no-code platform is for, the no-code effort is to just make it easier inside the enterprise for non-IT, non-developer employees to extend the use of our platform in ways that even we can't imagine. So, our goal is to unleash the next wave of innovation. Obviously, the more this happens, the stickier our platform becomes. It both opens up new doors of opportunity and makes it stickier. And so I think it's too soon to tell to see how much it's used.

Are there any specific plans to go after that type of base at this point? Or is it just a portion of byproduct of the solution you have?

Yes, to be honest, one of the aspects of innovation is that there are different horizons. We are driving significant innovation in our core functionality and the fulfiller experience, which are closely tied to our products. By introducing initiatives like our ISV in-store and low-code, no-code solutions, instead of investing a lot of time and resources into extensive studies and assumptions, we are creating what we believe are excellent testbeds and will follow where our customers lead us. This has been a key factor in our company's success from the start. Fred Luddy established a fantastic platform, and we never envisioned in isolation that we would develop an HR service delivery product or a CSM product or a security ops product. In reality, it was our customers who guided us toward these applications and workflows, and we responded by building the necessary applications. This is simply another method to enhance our engagement with various use cases. We will observe and learn, and when we identify an emerging opportunity, we will create our out-of-the-box application. It's too early to say, but there's been impressive engineering work done by Pat Casey and our platform team to construct this.

Great. Thank you.

Hey going guys. A quick one for John, a quick one for Mike. John, first, can I get your view on how things are progressing in the mid-market/commercial segment of the business? And any changes there in how you're doing competitively?

Commercial has had a good year. And I would say it's a very steady build-out of our team there. I think they're getting their sales motion down. We had a number of greater than $1 million deals in commercial. So it's, I think, $4 million deals in Q4, including three ITSM ones and one CSM one. And so that's where some of our CSM tractions also come. So, commercial is an important part of our business and we'll continue to build it out. And what's also interesting is some of those commercial customers become enterprise customers, right? One of the areas they are targeting is high-growth commercial companies. That would have been ServiceNow a year ago. We would have been a commercial company. We just became an enterprise company. And so we're also trying to target what are those high growth commercial accounts that will then turn into enterprise companies through their success.

Thanks John. Mike, I have a quick question for you. I understand your reasoning for shifting away from total billings to focusing on subscription billings. However, to help us prepare for next year, can you clarify the variability expected for professional services revenues and billings? The market was anticipating around $200 million. Is that estimate approximately accurate? Having this information will assist us in our modeling.

Yes. When you exclude the Knowledge revenue from 2000 or from K17, since we adjusted it to counterbalance the expenses in sales and marketing, the professional service and training revenues will remain flat year-over-year for the entire year.

Hi great. Thanks. This is Taylor Reiners on for Alex. Just had a quick question on security. One of the more interesting partnerships you've announced recently was your partnership with Okta. And I was wondering kind of how you're seeing your partner ecosystem of ISVs such as that drive both deal volumes and deal sizes.

That's an interesting perspective. I hadn't considered it that way. Perhaps Mike can reflect on that. What stands out to me is the number of partners eager to integrate with our platform, particularly because customers are expressing a desire for our platforms to work well together. In the security sector, there are numerous endpoint solutions and various platforms. Chief Security Officers are seeking ways to simplify their operations by collaborating effectively with others.

These partnerships being announced by Okta are essentially technology collaborations that enhance the experience for our customers through better alignment. This is not about our sales team seeking to boost sales; rather, it focuses on achieving better outcomes for our customers collectively. We hold Okta in high regard and utilize their services extensively within our organization, having integrated with them for a significant period. Currently, we are engaging in some go-to-market activities alongside them to further assist our customers.

I mean, if you think about our own use cases we have now on NOW, Okta is a key part of it. We also announced the integration with Slack in Q4, I believe it was, maybe it's late Q3, which is another example of the fact that our engineers and engineers in companies all over the world want to get tickets through Slack or at least have that option. And so where we see those opportunities that are customer-driven, we'll do deeper, stronger technology alliances to make our products and platform seamless with others because that is what customers want.

Got it. And then just a quick follow-up on that. I was wondering, at the Analyst Day, one of the more interesting things you mentioned was that roughly half of your CSM customers were actually net new to ServiceNow. And I'm wondering, now that we're seeing net new ACV growth from your other products match ITSM, I was wondering if you can talk about the volume of customers you're seeing that are coming from the other category that are net new to ServiceNow for the first time.

Yes. I would say in general, most of our new customers, typically, we land with ITSM. And CSM and others are add-on. What we have said is we are seeing deals where HR and CSM are leading and opening the door for new opportunities, which enables us to then sell our others. But that is not the norm.

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.

Thanks everybody.