ServiceNow Inc (NOW) — Q3 2018 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. During today's call, we will review our third quarter financial results and discuss our financial guidance for full-year 2018. 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. 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 had a strong third quarter continuing our global momentum and accelerating our role as a strategic partner enabling digital transformation. Our teams continue to execute well and our focus and commitment to customer success is evident in our results. We closed 25 deals in the third quarter with ACV greater than $1 million, and we now have 614 customers doing more than $1 million in business with us. Eleven customers are doing more than $10 million, almost triple the prior year, including four U.S. federal agencies. And we ended the quarter with more than 5,000 enterprise customers. The U.S. federal government represented our biggest deals in the quarter, accounting for a fifth of our total net-new ACV. This was our largest federal quarter ever. For example, the U.S. State Department is now our largest platform customer. We're becoming a critical strategic partner to the U.S. federal government as it modernizes its IT infrastructure and moves to cloud-based services and platforms. And further strengthening our public sector capabilities, we just announced an alliance with Microsoft to deliver digital workflows through the Azure Government Cloud. This alliance is designed to help federal agencies move faster and securely to cloud-based solutions. Just as we've seen in the private sector worldwide, digital transformation is becoming a public sector imperative, and we are deeply committed to being a preferred strategic partner helping governments modernize, drive efficiency, and deliver better experiences for employees and their citizens. I spent much of my time in Q3 traveling the world and meeting with our customers in Australia, Japan, France, Sweden, the UK, and all across the U.S. In every discussion with CIOs and CEOs, a few common themes emerge: most importantly, the business imperative for digital transformation, the need for trusted technology partners, and the challenges of driving cultural change. And in more and more conversations, we are being seen as a strategic partner of choice. Our core focus is on delivering digital workflows that create great experiences and unlock productivity. We make work work better for people, and our powerful platform and diverse product portfolios give us great opportunities. We're well positioned to play a broader strategic role in digital transformation journeys as our customers embrace this part of their future. Product innovation is essential to our success and continues to be a top priority. Our London release went live in the quarter, delivering customers exciting new product capabilities such as Virtual Agent that we announced earlier this year at Knowledge. Our London release demonstrates our ongoing commitment to delivering innovative, intelligent capabilities across our Now Platform and product portfolio. Looking ahead, we're investing heavily in more intuitive consumer-like user experiences and building more mobile-friendly, mobile-first capabilities. We expect to be launching significant enhancements in our mobile capabilities and user experience over the coming year. Customer success is also a big priority for us, and we continue to make good progress. We're driving customer success to be a natural extension of our sales motion and are committed to both landing new customers and expanding our existing customer relationships in a healthy and sustainable manner. Our customer success approach is paying dividends. For example, our customer success team helped land a significant deal with a European Fortune 200 financial institution in the third quarter. This team showed how we can help enable and deliver key elements of their transformation initiatives and drive successful business outcomes. We continue to focus on supporting a strong partner ecosystem. For example, Accenture just announced deeper investments with us in Europe to give their European customers a full range of implementation services and expertise in ServiceNow. Following on the heels of our recognition in May as Forbes' number one World's Most Innovative Company, it was equally gratifying to be recognized this month as a top three company on Fortune's Future 50 list. The Future 50 identifies companies that are firmly focused on the long term. And that's us. In addition, Forrester recognized us as a leader in Enterprise Service Management and Gartner named us as a leader in their Magic Quadrant IT Service Management Tools for the fifth consecutive year, citing our completeness of vision and ability to execute. In closing, I'm very pleased with our strong quarter. We have strong momentum, and we're continuing to make progress against our strategic priorities. At the end of the day, digital transformation is about delivering great experiences and unlocking productivity, and our digital workflows enable both. With our Now Platform in our three workflow clouds: IT, employee experience, and customer service, our customers can create intelligent and intuitive experiences to make work work better for people; and that in turn unlocks productivity, both for the employees who can now focus on higher value-added work and for the entire enterprise by making work simpler, easier, and faster. That is the future of work, and we're committed to helping our customers create it. With that, I'll turn the call back over to Mike.

Thank you, John. Our first half momentum continued into Q3, and we delivered another quarter of strong performance, setting us up for a great finish to 2018. Subscription revenues were $627 million, representing year-over-year growth of 39% and constant-currency growth of 40%; and subscription billings were $674 million, representing year-over-year growth of 35% and constant currency and duration growth of 34%. Our strong top-line performance was driven by bookings outperformance coupled with accelerated revenue recognition from self-hosted deals. Our U.S. federal business highlighted the quarter. Government agencies are increasingly looking for strategic partners to help them digitally transform their businesses. While IT is a key driver of this initiative, we're also seeing federal customers look to our emerging products including our platform offering, which drove our largest deal in the quarter. Our investments in our federal sales force and FedRAMP-certified data centers are paying off, and we view this sector as a large opportunity going forward. In Q3, the U.S. federal sector represented 20% of net-new ACV, up from 18% in the prior year. We also saw strong profitability in Q3, including a 24% operating margin and a 17% free cash flow margin, driven by some marketing expense that shifted into Q4, back-end higher linearity, and lower-than-expected professional services partner fees. Due to the strong performance through the first three quarters of the year and expectations going into Q4, we are raising revenue billings and free cash flow guidance in 2018. We now expect subscription revenues between $2.415 billion and $2.42 billion, representing 39% year-over-year growth and 37% constant-currency growth. We expect subscription billings between $2.83 billion and $2.835 billion, representing 33% year-over-year growth and 31% to 32% constant currency and duration growth. We are maintaining 2018 subscription gross margins of 85% and operating margin of 20%. We continue to see strong productivity from our sales force, and we will continue to hire aggressively after adding a record 500-plus net-new employees in Q3. We are increasing our 2018 free cash flow margin guidance to 28%. Finally, we expect 188 million diluted weighted average shares outstanding for the year. With that, operator, you can now open up the line for questions.

Great and thanks for taking my question. Well, let me drill down a little bit more into the success you've seen overall in the federal markets and kind of the breadth of the portfolio, which I think you touched on a little bit. But is the take typically around ITSM and then further add-ons, number one? And number two, is this more of a greenfield opportunity you're seeing within fed or a brownfield opportunity at this point? Would love to get some color? Thanks.

Sure, Rob. I'll tell you the – in my travels over the last year, I've met with governments now in all three continents, multiple countries, federal, state, and local. A couple of things are clear. I think initially when cloud came around, governments were a little bit suspicious and maybe a little bit slow to embrace it for security concerns, for the newness factor. I will tell you that's changing, and governments are under pressure to deliver efficiency and better citizen experiences, and they now recognize cloud is an important enabler of that. So we are seeing strong demand from governments, again federal, state, and local really around the world. Now in the U.S. federal sector, the good news is ServiceNow has been investing in this sector and in this team over the last several years. We have a dedicated sales team in Washington with a lot of resident expertise there. I was in Washington for a full week, it's probably into Q2, early Q3 literally across multiple federal agencies. They're looking for their own equivalent of digital transformation, and they view our platform. What's fascinating is they perhaps even more than the commercial sector start with our platform and the power of the platform. The State Department deal that we talked about in the script was fundamentally a platform deal and then ITSM and other products on top of it. One of the military services is using our platform in some very creative ways to look at how they onboard their soldiers, how they move their soldiers around, how they off-board over time. We're very excited about the opportunity with both the U.S. federal government and governments more generally, because obviously they have big budgets, they have big needs, are under pressure to deliver, and they're turning out to be some of our more innovative customers on how aggressively they're embracing the platform. One final story: In Australia, and same thing here in the UK, some of the State and regional governments are using our platform for some really creative ways. For instance, one of the port authorities that also oversees a bus system is talking about how they're delivering better end-to-end experiences both for the packages and for the people using the ServiceNow Platform. So again, I think there's enormous opportunity here. The reason federal is so big in Q3 is the U.S. federal budget cycle ends at the end of September 30. This is obviously their equivalent of what commercial business will be in Q4.

Great. Thanks.

Great. Thank you. First, I just had a question for Mike. If I look at the outperformance that you had in Q3 sort of normalizing for duration and currency, it looks like from the slide deck, it was about $21 million of outperformance relative to the midpoint of guidance. Certainly, you're taking the full-year numbers higher for non-GAAP subscription billings, but maybe by a little less than the outperformance you saw in Q3. Is there any sort of – did you see things that you thought would be in Q4 pulled forward? I'm just trying to contextualize what looks like sort of implicit guide down for Q4 relative to what sounds like pretty bullish commentary on the environment.

Yes. No, well, we actually raised Q4 when you look at what we did $8 million for billings was deals that we're expecting in Q3 that happened in Q4 – or sorry we expected in Q4 that were pulled into Q3. And you can see that by the way in our IR deck. We did a reconciliation on page four.

Okay.

And you can see that by the way in our IR deck. We did a reconciliation on page four.

Okay, great. And maybe just a bigger picture question. I think you and others have had a pretty phenomenal calendar 2018 and we're not at the point yet to get calendar 2019 guidance. But I guess sort of two questions. One there was a question earlier in the year whether tax reform would create sort of a high – better-than-normal spending environment, now that we're sort of closing out the year. I'd be curious to get your thoughts on whether that – how much of an impact is maybe you thought that it would? And two, as you talk about these digital transformation projects with customers, what's sort of the time duration attached to those? Are people talking to you about multi-year deals that would carry over into future years? Or is it sort of tactical around tax reform in 2018 that maybe fueled a little more than normal activity?

Yes. I'll start Jennifer. I don't think we've really seen any big impact to tax reform. I'm not hearing customers spending more specifically on ServiceNow due to tax reform. I definitely don't think it's hurt us, but I would say we weren't expecting a big uptick as a result of that. And I'll let John talk about more the length of a digital transformation with customers.

Well, Jennifer the thing that's striking to me and I'd say this has evolved even in the 18 months I've been here. Digital transformation is no longer a business buzzword. Digital transformation is an essential strategic need for virtually every customer that I'm meeting with and it is just stunning the consistency around that. In simple terms, you think about it's software that's disrupting every company and every industry and every geography. Every company wants to digitally connect with their customers. They want to provide a better digital experience to their employees and they want to use digital technology to drive productivity and efficiency so they can dedicate their talent and capital to scarce resources to innovating for their customers and not getting consumed in the complexity of running a global enterprise. I hear that literally in every interaction, actually, it's commercial and governments. So digital transformation absolutely is at the top of the investment priorities of companies and I don't think it's driven by tax reform or even macroeconomic factors. I think it's more strategic spend. And so we feel ourselves in the middle of that strategic spend where – I'll give an example. I was at a large Fortune 50 consumer products company where they've identified – and growth in consumer products companies are not huge. So productivity becomes very, very important. They've identified – and he said, we've done the easy cost reduction. We need to drive productivity, healthy productivity. This is the head of their shared services, their business shared services group which is a highly empowered group across their divisions. He said, automating workflows – we view streamlining, simplifying, and automating workflows across our large global entity as the source of highly positive, highly healthy productivity that includes employee experience and helps reduce costs. He said, we've looked around and we view ServiceNow as a core strategic partner and core strategic platform in helping us do that. Yes, is it multiyear? It's absolutely multiyear. Increasingly we're getting pulled into the strategic initiatives of companies and tied to real business outcomes, economic outcomes around employee experience and productivity. We think execs know that cloud is a phenomenon. We believe we're still early in the cloud world, and cloud is one of the few investments you can make that can provide better experiences, faster speed, and lower cost. That's really driving the demand.

I would add too Jennifer. The one thing that we have seen I remember from five, six years ago, a lot of the analysts used to say that the role of the CIO was going to be diminished because of cloud. If anything we see with the digital transformation, the CIOs are becoming more strategic in their companies, and it helps that we have a relationship with the CIOs.

Absolutely.

Great. Thank you.

Thanks very much and congrats on a nice quarter. John, I was kind of curious just you mentioned sort of the three workflow clouds I think and in terms of IT employee onboarding and Customer Service Management. I was just curious, are you guys doing anything around going to market to try to take those concepts into the market more directly? Or are there things that you are thinking about? You may have mentioned that before but that's the first time I've heard you talk about them in those three buckets. And then Mike, I was just wondering if you could just touch upon about well a big hiring quarter for you guys, where you're adding people maybe? And where are you focused on with these hires for next year? Thanks.

Yes. Great question, Kirk. And to be honest it's sort of funny. Mike and I are sitting in the room right now where we did our end-of-summer product reviews and looking about our strategy. I had just come back from a month on the road meeting with customers. CJ Desai just came out of all of his product reviews. What we realized is we've been describing our product portfolio in what I would describe as inside-out terms: HR, security, customer support, ITOM, ITSM. The reality is those aren't the words the customers are using. This move to the Now Platform and three clouds is to some extent adopting the same language customers are using when they think about it. Let me just describe each. Customers almost inevitably talk about our platform first, not our products. They say your platform is powerful. We recognize the power and value of your platform both your out-of-the-box and our ability to build applications on it. It's become one of our core platforms, one of our core – if I've heard this once I've heard it 25 times in the last 60, 90 days: you're now one of our core strategic platforms going forward. So, the Now Platform is the foundational element. The three clouds are really describing our existing products around the business areas they're addressing. Our IT workflow cloud is helping IT run their business, run IT as a business. So that's IT Service Management, ITOM, IT Analytics Management, IT Business Management. The CIOs are increasingly looking at our capabilities to help them run their function better. The employee workflow clouds or the employee experience cloud is how they're describing their desire to automate workflows to deliver better end-to-end employee experiences and drive better efficiency. So that's where ITSM, HR Case Management, HR Onboarding and Offboarding all come together to help build end-to-end employee experiences. They're asking us around facilities and finance and other functions: can we automate workflows? You'll see us our product development focus around building out those workflows to deliver the end-to-end experiences and help them drive greater productivity across that. The last cloud, the customer support, the customer service workflow cloud is driven by a subset of customers. More B2B customers are increasingly using our capabilities to serve their customers. I think about the whole customer service market as two broad segments: B2C segment where customer service platforms are more CRM-based and that's not our sweet spot. But B2B environments where the inbound customer contacts need to get to the root cause of what's causing the problem, getting that root cause addressed, and then getting back to the customer with resolution. Our platform is well suited to that and that's really when you look at our growth in customer support where it's driving. I think these three categories allow us to clearly describe who we are: the digital workflow company and help drive our incremental innovation investment and link it to their business outcomes.

And then Kirk, on your question with regards to head count, where are we putting these people. Most of these people the #1 is R&D. Number two is our sales organization and that kind of flows through the rest into the others. We think that R&D and sales will be the big investment areas as we see the opportunity in front of us.

Great. Thanks, guys.

Hi, Thank you so much for taking my question. I just wanted to get your thoughts very quickly. Do you see any tailwinds or headwinds through IT spending in 2019 based on John your conversations with customers? And secondly, when I look at the way you categorize your clouds you've got to play in HCM. Broader, being understood as HCM you've got to play in the CRM market. Also, I cannot help but wonder, but as you look at your plans to be a $5 billion, $10 billion revenue company, it appears to me that there could be other major markets that you have to participate in a pretty big way. Because you know, obviously, company like salesforce.com worked and have made some significant acquisitions along the way on route to trying to be a large company. So I just wonder how do you think about the acquisition roadmap and your potential of playing in markets in a much bigger way that you have to, if you were to become a multiple of your current size? And it's meant to be worded in the constructive way rather than a critical way? Thank you so much. Appreciate it.

Well, Kash, let me – on IT spend as I said earlier to be honest it's digital transformation investment that every company is needing to make. They're embracing software, they're embracing cloud and that's therefore driving IT spend. So we see continued strength there. I appreciate your question because I think it's a really important one. Again, I'm going to answer this through the eyes of the customers about what I hear consistently and how we understand where we play. What I consistently hear from CIOs, COOs in some cases CEOs is as they embrace cloud at the infrastructure level, they're consolidating their infrastructure needs and figuring out what their public cloud, hybrid cloud, private cloud strategies are. At the software level, they're adopting four to six strategic cloud platforms. Those would be often it's a Salesforce for their sales cloud and sometimes their marketing cloud, Adobe for their marketing cloud. A Workday for their employee or HCM cloud, Office 365 or Microsoft often for their productivity, albeit on the supply chain you'll hear SAP frequently. ServiceNow is both the IT cloud but also the workflow cloud. The cloud that helps enable the workflow all around these other systems on record. Customers want one plus one plus one plus one to equal ten. It's not a zero-sum game in their minds. They view each of these core strategic platforms as additive and they want us to work effectively together, which I believe that we can do and are doing. Our particular role is not just IT, it's workflow. We view our market opportunity as digitizing and automating workflows across the enterprise. We will never be an HCM system of record. We don't need to be and we use Workday internally. We think they're terrific. We'll never be a CRM system of record. We think there's – we think Salesforce and Adobe and others do that quite well. We'll never be a financial system of record or a financial ERP. What we do, do better than anyone is workflows around those platforms. If we look at that opportunity, that market opportunity offers tremendous growth potential to $10 billion and well beyond. I just want to make sure I do not see this and nor do customers see this as a zero-sum game among the major strategic cloud platforms; they want them to work together. I believe there's plenty of growth for all of them. In particular, I think us as the digital workflow company we have a huge market opportunity that's additive to the others and that's what we're pursuing. These three clouds everything I'm talking about has not been thought up here in some windowless conference room. It's based out of conversations with hundreds of customers. That’s what they're saying to us. I was fortunate enough to be able to speak to the top CIO group a couple of weeks ago. A CIO of a major industrial company, Fortune 25 or Fortune 50 company said hey this is his algorithm: one plus one plus one plus one times ServiceNow equals ten times. He talked about his tech stack being Salesforce or Workday and Office 365 in his case an Oracle for financial ERP. He said we have ServiceNow that instead of being plus one is times one and the multiplicative impact we can have not just in IT but when workflows around those other cloud gives the ten times impact. That’s directionally is what we're hearing and that's directionally what we're pursuing.

Very well put. Thank you so much, John. Thank you, Mike as well.

Okay. Our next question is Raimo Lenschow with Barclays. Your line is open.

Thank you. I liked my new name. Quick, John, can I stay on that subject? As you kind of move over to – and talk more about platform and be more the workflow platform, how do you – as you think about 2019 how do you think about your go-to-market with your sales guys in terms of how they are positioning it? What you do with your sales guys in terms of – are they able to kind of get that message across? What needs to change there to do a better job there? And then for Mike, you gave us some cash flow margin kind of framework at the Analyst Day. I see now you kind of upgraded that a little bit. Can you talk a little bit about the drivers for the upgrade this year and if that changes your overall framework? Thank you?

Yes. Raimo on your first question I believe there are lots of opportunities to even focus the sales teams even more. Obviously, our platform and IT cloud is our historically sweet spot to CIOs. As Mike mentioned, the CIOs increasingly play a strategic role. Describing things as the Employee Experience Cloud or Employee Workflow Cloud is a better description of what we do because the Employee Experience is not just an HR issue, or just an IT issue, or just a legal or just a finance issue. You're seeing companies try to embrace the end-to-end employee experience, and automate workflows. The CIO has to work with the CHRO, who has to work with the CFO. We are often introduced into that equation by the CIO, but we find ourselves working with that trio more frequently. Sometimes you have a shared services and a shared business services person that report to the CFO but it's that triad as companies digitize their internal processes and digits their internal employee problems. So we're calling on that group. In the customer service or customer support world, by being even sharper and clearer that B2B is our focus. In many cases customer service in a B2B environment reports either to the CFO or COO. Again, that's an area that's a natural adjacency for us. If Dave Schneider or Kevin Haverty were here, they'd say this kind of way of thinking about and describing what we are, which actually reflects what we're doing, mirrors what we're doing in a more focused way. The CIO as Mike said earlier is increasingly involved in almost all of those situations. Our strength there is an asset.

Then Raimo on cash flow, I thought you'd be happy that I was giving good cash flow margin increase per year free cash flow.

Oh, I am. I am.

But it's driven by a couple of things this year. Part of it is Q4 is off to a very good start in terms of the billings associated with the number of customers that I expect collections to be very strong this quarter more than what I was thinking earlier on the year and it's really a timing issue. The other thing is there's a bunch of CapEx projects that we're initiating because I don't think the payments are going to happen until next year. That's really pushing some of our spending from a cash flow perspective into 2019. At Financial Analyst Day, we did say we will get greater than 1% operating margin and greater than 0% free cash flow margin expansion. Not giving guidance for 2019 right now, but I do think operating margin and free cash flow will converge a little bit to growth and then longer term now, I just want to remind people cash taxes will kick in around 2023, 2024, which will have an impact on free cash flow.

Okay, clear. Thank you. Congratulations.

Cash did a great job on going at a very high level, and John you answered it great. I wanted to drill downwards a little bit and ask you about two product areas. One in ITOM, how much do you think about going down the stack, closer into monitoring and actually touching the infrastructure? And then one sub-segment that's been active in M&A and the industry lately has been around IT notification what seems to be, well there's been some acquisitions there. I was wondering if that is in your sweet spot and if you're investing here? So, down the stack towards monitoring and touching the IT infrastructure and IT notification?

Michael, again the way I'll answer that is we're listening intensely to the customer and listening intensely to how CIOs, how VPs of infrastructure, VPs of application envision running and leading IT over the next five to ten years. There's just no doubt that the role of IT shifting in the company and the way they're running IT is shifting and growing. We have strong demand for ITOM this year and that can be discovery service mapping just as they are trying to get a robust CMDB. There is some appetite for us to explore moving down the stack. We want our platform to continue to broaden and expand so that they have fewer applications, and more applications on our platform. If you look at our roadmap, any M&A we may do, we're simply listening to our customers to continue building IT-related products that help ensure that CIOs can run IT in a modern way. They have this complexity with a lot of legacy stuff. We can help them address that. We can help them run IT in a modern way. That's going to drive our organic growth and, our M&A agenda when we can add incremental capabilities to our company and our platform that match those needs that CIOs want. We'll continue to do that. For IT notification, to be honest, I haven't really – that may be – I haven't heard that specific request, but CJ is not in the room with us. It very well could be on the roadmap, it's just not something I've heard.

Yes, there's a lot of people that play in that market. There have been acquisitions there, like you've got Zendesk, VictorOps, and others. It's not something we'll be a major player in. There's a lot of different players down there. We’re going to partner more in that space right now.

Great, guys. Thanks very much.

Hey, guys, this is actually Vinay on for Justin. Thanks for taking my question. Congrats on the quarter. Continuing on the product theme, if you look at the HR services or Case Management market specifically, just kind of wondering how do you see the pace of spending or deal sizes trending there, and how would you characterize the competitive environment? Thanks.

Our HR product is increasingly viewed as a key part of the employee experience. It has performed well, reaching around 20 U.S. clients, including approximately 20 customers generating over $1 million each. We typically engage when there is an initiative focused on enhancing employee experience that integrates various financial record systems, HR, and payroll into a seamless experience for employees. More companies are recognizing the need for a unified services portal, which allows employees to go to one place to report issues, access information, and resolve concerns. When employees have to navigate different sources for IT, HR, or facilities issues, it leads to increased frustration and costs for companies. Our shared services portal—available on both web and mobile—encourages employees to utilize a single point of contact for all internal queries and issues. Employees appreciate self-help options, which improves productivity. This trend highlights the importance of the employee experience, which I believe is a better representation of what we offer and will drive further priority for our initiatives.

Got it. Helpful. Thank you.

Hey, guys. Thanks for taking my questions. Congrats on the results. I wanted to ask about FriendlyData. It looks like it's bringing natural language query to the platform. It seems like that could resonate well with some of your non-technical users. I think you guys mentioned that you're re-platforming it. Can you comment a bit about what this means to the platform? Any feedback from customers when this acquisition was announced?

Yeah, Matt. This is I think it's now our fourth AI-related acquisition starting with the DxContinuum. Here’s what customers are saying. They want to build experiences that are easy to use and really easy to build, so low code, no code for the developers inside the company. They want experiences their employees can get automated or self-help kind of functionality. This particular acquisition helps you natural language search, helps you translate voice or voice text would be my simple way of saying it. It's a form of chatbot, you make a request in one mode, whether that's voice or text or verbal and it responds in the mode you want back. It's a nice team and platform, and we're doing what we do with every acquisition we make – that they're recoding it into the core ServiceNow Platform, our menu of one core platform driving all of our applications and customers. We think it accelerates our roadmap significantly. It will be used across all products and will help drive platform adoption. We're thrilled to have the team, really strong team, nice team. We're excited to have them part of our overall organization.

That's great. Thanks a lot.

Hi, thanks. A question I think for Mike or if Dave Schneider is in the room there. Wondering on the sales capacity build as we look at that headed into 2019. Could you maybe contrast or compare how that ramp and the composition of that ramp compared to what we've seen in the last couple of years?

I expect it to be pretty similar in terms of what we're looking to add going into next year. I'm not expecting major changes to the sales organization next year. I will say most of our revenue comes from large enterprises. As we've said before, around 20%, 21% of our revenue is commercial and the other is G2K and large enterprise and public sector. Obviously, we're very focused on public sector and geographically we think there's a large opportunity to continue to grow in Asia, but there’s plenty of opportunities still within the U.S. and EMEA to further penetrate our existing accounts. We also find that reps have too many accounts they're covering, and we needed to hire more people. We will continue to run aggressively in hiring more product sales specialists as well within our sales organization.

And then on the product side relative to security. I'm wondering if you could update us on success there and your thoughts on it? You’re a fairly narrow player in that market if you have any ambitions in terms of expanding your addressable offerings in that area.

Inside, what we characterize as security are really three use cases. One is, GRC, which by the way there's a lot of demand for it. You'd call that security and not security it's often driven by the Audit Committee. There's a growing focus on governance, risk, and compliance. I might even add privacy to that in this day and age. That product is getting a lot of demand. CIOs and CFOs are being brought to audit committees, and they want to have automated ways of monitoring all the various tools and platforms that go into governance, risk, and compliance across an enterprise, and the ServiceNow Platform is a great way to get one source of truth for that. That's driving that piece of the equation. We have incident response and vulnerability response, and I'd see strong demand for both. I view it consistent with your question, it's complementary to the many other security platforms and tools in that space, and we may incrementally expand, but I don't think it's going to be a major area of expansion just because it's been well served by others. It's a fragmented space that’s changing rapidly. The workflows around security that's going to be our sweet spot and that's essence of what we do. That’s why this workflow mindset, these workflow clouds will be help do workflow around security. I don't think you'll see us become one of the core security platforms like Palo Alto, Splunk, or FireEye.

Great, thank you.

Great. Thank you so much for taking the question and great job on the quarter. So a quick question for both of you. I'll start with you Mike. How are you thinking about the Professional Services segment going forward? Because we've heard from some of your SI partners about one of your biggest issues is really a high-class problem, and it's essentially not enough ServiceNow experts out there in the field to meet the demand in our ServiceNow practices. So do you think about needing to reinvest in that business? Then a quick one for you also John, it seems to me that you guys are likely really starting to see some brand recognition for ServiceNow in the market. I imagine you have to be, given some of the deals you're signing. Is there some kind of a strategic shift behind marketing to the enterprise that you're undertaking that you can share with us? Thank you both, appreciate it.

So Sarah I'll start with Professional Services. That is absolutely true. We do hear from partners that they can't find enough trained people. As a result, when we started this over the last year, we hired a new head of training. We've been investing extremely heavily in training. We're trying to roll out a lot of free content for our partners and others. That's why you see that reflected in our Professional Service margin. We're training ourselves in there. We do think our Professional Service organization is strategic, but we are there to support our partners doing implementation as well as our customers where they want us there. Our preference is for partners to be doing the implementations. We want our partners to be investing in their ServiceNow business because if they do that they're going to help sell ServiceNow. We think that is the right thing to do and will continue that way.

Yes, to piggyback, so Sarah coincidentally Mike mentioned, we hired Cat Lang who is just a fabulous leader of our training certification. She joined us about a year ago. She happens to have her team, her global team in town today and I was down with them this morning. We're actively engaging with the partners on how do we work to turbocharge the number of certified resources. It’s a big effort to certify their existing employees. We’re trying to work with Accenture, with DXC, with KPMG, with IBM going to campus and training generations of ServiceNow-certified people. I hope 2019 is a year we go from defense to offense in that, to help fill the void of certified professionals.

Thank you very much. Very helpful. Appreciate it.

Hey, guys, this is actually Ugam Kamat on for Sterling, so just to dig deeper into the fed fraction that you saw in the quarter. If you were to rate which are the products that have seen the highest adoption amongst the fed customers how would you rate them?

Well, ITSM and ITOM, IT in general is still the predominant product that is in the federal government. With that, we did mention platform is becoming increasingly more important. The largest platform customer is now a government agency, but by and large IT and ITOM are still the bulk of what's in the federal government. We have seen some CSM as well and platform. I don't think we've seen any HR in the federal government.

What we're thinking – I mean the use case I referred to earlier I don't know if they're using the specific HR expansion product or they're building their own application because this is a military service. Similar, this is not the U.S. federal government but ironically several airports use ServiceNow to help manage, again it's a municipal more local government or regional government. The government that they are using ServiceNow to help drive the airports, which include customers and employees. Sometimes it's with out-of-the-box applications and sometimes they're just frankly using the platform to configure to the specific use case of an airport.

Got you. That's helpful. As a follow-up, if I were to follow on the contract land that we saw in the quarter. I mean the new customer contact land, the upsell contract land actually shortened for the last two quarters. Anything that needs to be read into that? Or is it just a normal course of business?

It's a normal course of business. Q3 is a big federal quarter. Federal governments sign 1-year deals, let's excuse that. The other thing, upsells is such a big piece of our business. The number of customers co-term their contracts at the end of the year and many are on a calendar year invoicing cycle for when their contracts started, because Q4 is such a big quarter.

Awesome. Thank you, guys.

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