ServiceNow Inc (NOW) — Q4 2018 Earnings Call Transcript

Good afternoon and thank you for joining us. On the call with me today is John Donahoe, our Chief Executive Officer. During today’s call, we will review our fourth quarter financial results, and discuss our financial guidance for the first quarter and full-year 2019. 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 finished 2018 with our strongest fourth quarter ever, continuing our momentum as the leading digital workflow company shaping the future of work. Our role as a strategic partner to the world’s largest enterprises continues to accelerate, enabling their digital transformation by making work better for people. Our teams continue to execute well, and our continued focus and commitment to customer success shows in our strong results. Expanding our existing customer relationships will drive much of our growth going forward and we have ample opportunity. We are now helping to enable the digital transformation of almost 5,400 enterprise customers, including almost 75% of the Fortune 500. We now have 678 customers doing more than $1 million in business annually with us, and we have 74 customers who are doing greater than $5 million, up 54% year-over-year. And the number of customers doing greater than $10 million has more than tripled year-over-year to 18, including three above $20 million. Our renewal rate for the quarter was a strong 98%. Our formula is clear. When we land our platform in products with a new customer, we begin delivering great experiences and unlocking productivity. That in turn is what drives our expansion, and our focus is on building long-term strategic partnerships with our customers that enable their success. I’ll point out that we still represent a small percentage of IT spend for most of our customers, which gives us tremendous opportunity to grow and deliver the business outcomes that our customers want and need. Strong performance across our portfolio and across every geography drove our momentum, led by accelerating year-over-year growth in EMEA. Our teams exceeded their plans for the fourth quarter and for the full year. All of our products perform well. Both our HR and customer service products for example now have more than 20 customers doing more than $1 million, and 19 of our top 20 deals in the quarter included three or more products. Even more important, net new business in our core IT workflow products reaccelerated in 2018. This underscores the strength of our flagship product, the strategic partners we’re building with CIOs, and the continued market opportunity to expand the impact of our core IT workflow products. We are very well positioned. In the fourth quarter, I had an opportunity to meet with 50 of the world’s most respected CIOs. They reiterated common themes I’ve shared with you before, and then I continue to hear in my customer conversations worldwide. The business imperative for digital transformation, the need for trusted technology partners, and the challenges of driving cultural change. These leading CIOs understand the power of our Now Platform and products. They view ServiceNow as a strategic partner. But as one CIO put it, he doesn’t view us as just another cloud partner. He sees ServiceNow as the platform that creates a multiplier effect in his cloud ecosystem. Our enterprise capabilities link together other systems and platforms enabling seamless digital workflows that create great experiences and unlock productivity and that’s what every C-suite executive I speak with is looking for. Ongoing product innovation is essential to enabling these business outcomes and continues to be a top priority for us. I feel very good about the progress our product organization is making in improving our user experience and user interface, creating simple intuitive mobile experiences and making our platform and products easier to deploy and upgrade. We’re getting great feedback from beta testers on our upcoming Madrid release and we expect to be launching significant enhancements in our mobile capabilities and user experience later this year. I also feel very good about the progress driving customer success, another top priority. We’re driving customer success to be a natural extension of our sales motion and are committed to landing new customers and expanding existing relationships in a healthy and sustainable manner. We’re entering this year with strong alignment across our pre-sales and post-sales teams and we’re driving a consistent approach to creating value for our customers and delivering their desired business outcomes. Leading this effort is David Schneider, who was recently promoted to be our President of Global Customer Operations. Dave is an exceptional leader, who is deeply committed to driving successful customer outcomes. So as we enter 2019, we’re also investing in increased awareness of our company to the launch this month of our first-ever brand campaign. While many decision makers already know us well, this campaign is designed to increase awareness of ServiceNow more broadly with C-suite executives. The campaign highlights our focus as a digital workflow company, creating great experiences and unlocking productivity. That is what digital transformation is all about and that is the future of work. The intelligent and intuitive capabilities of our Now platform and our IT employee and customer workflows make work simpler, easier, and faster across the enterprise. Simply put, we make the world of work, work better for people. That’s our focus and our commitment. So in closing, I’m very pleased with the strong quarter and year and our continued momentum. We are making continued progress against our strategic priorities led by our focus on product innovation and customer success. And now I’ll turn the call back over to Mike.

Thank you, John. Q4 was our strongest quarter ever and we have a lot of momentum as we begin the New Year. During the quarter, we booked $1.5 billion in total contract value and our total backlog, including deferred revenue, as of December 31, was $5.1 billion, representing 38% year-over-year adjusted growth, including $112 million of foreign exchange headwind. Q4 subscription revenues were $666 million, representing 35% year-over-year adjusted growth, including $7 million of foreign exchange headwind. Our Q4 subscription billings were $952 million, representing 39% year-over-year adjusted growth, including $11 million of foreign exchange headwind and $4 million of duration tailwind. And our Q4 total billings crossed the $1 billion mark for the first time ever. I’d also like to note that Q4 billings continue to grow seasonally stronger as it is our largest new bookings and renewals quarter each year, which compounds into larger Q4 billings over time. We expect this dynamic will continue and therefore will impact the seasonality of billings in other quarters throughout the year. Our strong top line performance was driven by 51 new transactions greater than $1 million, six of which were new ServiceNow customers. IT transformations continue to be the catalyst for new customer relationships. We reaccelerated growth across our IT workflow throughout 2018, underscoring the massive opportunity remaining for ServiceNow to lead customers through their digital transformations. The remaining 45 transactions greater than $1 million were expansions of existing customer relationships across our full suite of enterprise workflow solutions highlighted by every one of our products outperforming expectations. Moving to Q4 profitability, operating margin was 21% and free cash flow margin was 34%, which was driven by strong Q4 collections and improved days sales outstanding. Now let’s turn to guidance. For Q1, we expect subscription revenues between $715 million and $720 million, representing 35% to 36% year-over-year adjusted growth, including approximately $21 million of foreign exchange headwind. We expect subscription billings between $790 million and $795 million, representing 30% to 31% year-over-year adjusted growth, including approximately $23 million of foreign exchange headwind and $18 million of duration headwind. We expect a 16% operating margin and 190 million diluted weighted average shares outstanding for the quarter. For 2019, we expect subscription revenues between $3.215 billion and $3.235 billion, representing 34% to 35% year-over-year adjusted growth, including approximately $41 million of foreign exchange headwind. We expect subscription billings between $3.705 billion and $3.725 billion, representing 31% to 32% year-over-year adjusted growth, including approximately $45 million and $22 million of foreign exchange and duration headwind respectively. We expect 2019 subscription gross margins of 86%, operating margin of 21%, free cash flow margin of 28%, and 190 million diluted weighted average shares outstanding. To conclude on our 2018 performance, we’re very pleased with the top line returns from investments made throughout the year and we’ll continue to invest in the priorities that John outlined in his prepared remarks. Our goal is to build an enduring company, and we couldn’t be more excited about the opportunity in front of us. Before closing, please note our Financial Analyst Day will be held on Monday, May 6 in Las Vegas in conjunction with our Annual Users' Conference, Knowledge 18. 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 the 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 really nice fiscal year. John, just given the strength here, seeing really big deals and the upsell momentum you’re having in G2 2000. I was just curious, are you starting to face-off with different buyer sets in the customer base? Meaning, one of the opportunities has been to expand or take ServiceNow to being more of an enterprise platform, not just sort of an IT platform. I’m just kind of curious, where you think you are on that journey based on who you’re speaking with these days. And then Mike, to your point on seasonality and billings in the fourth quarter getting bigger, as we think about the full year, as we model billings, is there anything else we should take into account in terms of just seasonality as we get past the first quarter? Thanks.

Yes, Kirk. I think what’s happening is largely driven by what’s happening at customers. As customers are embracing digital transformation – and I can’t emphasize this enough, it’s not a business buzzword in these companies anymore. It’s actually core to strategic reality, in fact, survival in some companies. It’s forcing them to think in a more cross-functional way. For example, there’s a lot more focus on the end-to-end employee experience. Everyone wants to digitally connect with their employees in a world where we have to recruit millennials and retain them, and everyone wants productivity. That requires an employee experience that inherently is cross-functional, where an employee doesn’t really care if they’re dealing with IT, HR, finance or facilities. We’re seeing more and more customer initiatives where they’re looking for cross-functional support to drive a better employee experience. So IT is involved, but they’re partnering with their CHRO or HR. They’re partnering with facilities or finance. I’ve used several examples where I was at major Fortune 100 customers, and all those people were in the room and they’re turning to us saying, we want to build an end-to-end employee experience and we believe your platform connects effectively with many of the other core systems of record, be it a Concur for time and attendance or an AFE for payroll or Workday for an HCM, or many others. They look to us to stitch the workflow together. Often these sales are our joint sales. It’s not like we’re only in IT or only in HR or only in customer service. Increasingly, you’re seeing a shared services mindset. I think we’re benefiting from that because our platform really does help a lot of workflow around each of the other systems of record in a way that allows the customer to get the benefit. I think our sales teams and our PLS teams are responding well, but it’s the cross-functional message that is most powerful and distinct in our customers.

And Kirk on your question on billings, Q1 is seasonally our lowest billings quarter. In 2018, we saw our billings increase, the growth rate was increasing every quarter. I will say a lot of that was driven by the strong outperformance we had especially in the second half of the year. I do expect that our billings will continue to get stronger as we go, but I’m not forecasting it to be as strong a growth as last year. Just larger numbers.

Super. Thanks very much.

Hey guys, thanks for taking my question. Congrats on the results. John, obviously your billings guidance was great. When you talk to executives, can you give us a sense of what the overall view of tech spending in 2018 was? And then how do you think about prioritizing your revenue of digital transformation versus other areas of spend? And then maybe just a quick follow-up; you commented that ITSM reaccelerated in 2018. I’m wondering if you could put your finger on what drove that reacceleration this year. Thanks.

Yes, Matt. On outlook, I’m not sure that we had anything you need to say on that. Most of our customers are under the gun to deliver strong digital transformation results, which include better employee and customer experiences and productivity. As we look into 2019, we can’t really forecast macroeconomics, and we won’t try to, but we see companies continuing to invest in technology as a core enabler of digital transformation. Our focus is very much on demonstrating business value, demonstrating economic value. The fact is we automate workflows, which provide better experiences and drive productivity. Even if spend gets tougher over time, we want to be at the top of the list as a productivity enhancer. We believe that we are. We haven’t seen any major changes in customers yet, but focus on productivity and business value is the long cycle view. On ITSM, the narrative got ahead of the reality around our ITSM when we started publishing, we’re in 75% of the Fortune 500. We frequently land in a division or in a geography or in a part of a company. Even with ITSM, we may land in only one part of the company. There’s absolutely been opportunity to expand across the enterprise. As companies see the power of the ITSM product and the power of automating and providing self-help for IT service management, you’re seeing more enterprise-wide initiatives. With existing customers, that’s driving expansion, and with new customers, they’re starting off with more enterprise-wide initiatives, both in centralized companies and decentralized companies where you may have five or six different branded divisions saying there’s only one way to do IT service management, let’s get to a common way. This provides a better employee experience and better productivity.

I’d also add, Matt, that I think we’re seeing the benefit of the investments we’ve made over the last few years on really improving our overall IT portfolio and some of the focus we’ve had around the whole user experience and other things. That’s really driving that with both existing customers and new customers.

Super helpful. Well done. Thanks guys.

And we’re both really excited about the next step of that this coming year in mobile. Yes, that kind of mobile experiences consumer-grade mobile experiences will be coming out in the next release and then in New York this summer. Awesome mobile experiences.

All right, great. Thank you so much, John and Mike. John, congrats on your two-year anniversary and to you both on the $50 million of outperformance. On that point, John, I’m looking at the top 20 data and all the regional data, and the strength looks very broad based, but it’s also the biggest fee you’ve had in looks like seven quarters. So can you help just tone in a little bit on exactly what drove that? And then second, actually, I’d like to squeeze in two for you Mike. Given the growth you’re seeing, are you thinking at all differently versus your last update on margins given this significant growth? And then I need to ask about federal. I haven’t heard it come up. With the shutdown in your recurring model, can you just give us a little bit of color as to if anything and what you guys did see within your business? Thanks. I appreciate it.

Sure, Sarah. I’ll start that out. We really just saw strength across the board this year. All of our products had strong performances, and all of our deals met their targets. What really stood out was EMEA had a fabulous year and a fabulous quarter. The Americas, which were the most penetrated, had a fabulous year and quarter as well too, and APJ outperformed for the year. I can’t call out any one thing; it’s really the fruit of all the investments we’ve been making over the last number of years. Particularly, some of the things we’re starting to see with customer success is driving customers to buy more from us. In terms of the federal business, regarding the federal shutdown, I think that’s where you’re getting to, and that potentially will have an impact, but we think we’ll get the results before the end of the year. Q3 is obviously our big federal quarter, with defense being our biggest customer within the U.S. government. This type of shutdown hasn’t really impacted us at all from what we see, based on our conversations with our federal sales team. But as I said, Q3 is our big federal quarter. As for our operating margin guidance, we set that out at our Analyst Day and the results we’re seeing in 2018 give us the confidence that we should invest more because of the opportunity we’re seeing. Hence, while we are giving the 100 basis points of operating margin expansion for the full year, we said it was the minimum we would do at our Analyst Day, and we’re keeping our free cash flow margins flat to start the year, focused on growth.

I’d like to add to that. I think a lot of the investments that Philip has made over the last few years in new sales leadership in Europe is really paying off as well too, because remember this is a long sales cycle. When you change the leader, many times they change people out. I think we have a very stable sales organization in Europe. We made some big investments in Germany in 2018, and I think they’re going to pay off anytime in 2019 and 2020. Leadership has really been driving a lot of the performance in EMEA.

All right. That’s very helpful. Thank you so much.

Excellent. Thank you so much for taking the question. Really impressive results for the quarter and for the year. It was quite impressive hearing every product outperformed the expectations in the quarter, but specific to emerging products now representing 30% of net new annual contract value versus 25% a year ago. Can you maybe drill down a little bit into which one of these products you’re seeing the most adoption? And I’ve got a follow-up.

I mean, it’s all of them in many ways. There’s not massive variability across them. Interestingly, we began talking about this in Q4. We are refining how we’re sort of positioning our platform and the products in terms that align with how customers think about it. We’re saying in essence we’re the digital workflow platform; that’s what we do, that’s our unique role in the modern tech stack of the future, and we’re a platform with three workflows. We have an IT workflow that helps the CIO create the IT department of the future, which includes ITOM, IT Business Management, IT analytics and many of our IT-related products. Our second major bucket is employee experience workflow, which gets to how customers deliver a strong end-to-end employee experience. Frankly, we put ITSM in there along with HR case management, employee onboarding and other products that enable the IT experience. The last is the customer service workflow, where a growing number of customers want to replicate for their customers what we enable them to do with their employees—namely get to the root cause of the problem, fix it, so it doesn’t happen again, and when a customer contacts them, enable self-help and automation wherever possible. By grouping our products into these three groups, we believe it aligns more closely with how customers think about the business problems they’re trying to address. I want to stress that this will not change external reporting for us. This is really just the way we deal with customers and talk to customers, and don’t expect changes there.

We’re not reorganizing sales teams or product line specialists, because our go-to-market motion is working. This is just a matter of simplifying and ensuring that the various products stitch together effectively.

Thanks so much guys. And just a follow-up, I get a lot of questions from investors as we look out on the horizon to achieving $10 billion and beyond. Can you give us any update on how you’re thinking and progress has evolved on corporate development and M&A since we talked about this topic at Analyst Day? Thanks so much.

Brad, as I said at Analyst Day, priority one, two and three is to execute against our organic opportunities, which continue to be enormous. Shame on us if we take our eye off the ball against our organic growth opportunities. Priority two is to invest in additional organic innovation, with our affirmation of our NowX group, which went live during 2018; this is one of the areas we’re investing in as Mike talked about earlier. We’ve gone from two engineers in NowX to 50 engineers. We are 100% focused on developing new products that will come out in two to three years. We’ll try to launch one to two new products this year and aim to do that routinely. Organic innovation has been a hallmark of our company, and we’re committed to continuing to pursue that. As we look forward, when we did more work later in the year towards reaching $10 billion and beyond, you can selectively use M&A to create other growth engines. This is not out of desperate need or defensive necessity, it’s about finding additional growth engines over time in a strategic way. We’re not in a rush to do it. Interestingly, our customers are pointing us to some opportunities. They’ve said they’d really like for us to consider helping transform IT, suggesting we look for certain types of companies. We’re continuing to monitor this, but nothing is imminent. However, when we see something we think adds to our portfolio and positions us towards the $10 billion target, we won’t be shy about pursuing it.

Thank you, John.

Hey, thanks for taking my question. And congrats from me as well. Can you talk a little bit since we are starting the new year about any changes or no changes to the sales organization? Maybe you could kind of double-click on Dave Schneider getting a bigger role as well and how that will play out for you? Then I had a follow-up for Mike.

Well, I’ll just talk a little bit about Dave and then Mike you can put changes in the sales organization in context compared to previous years as well. First, I’ll say Dave Schneider is a spectacular leader. He’s known for, along with Kevin Haverty, to be the godfather of the ServiceNow best-in-class go-to-market organization. I heard of him before I joined this company and I had the privilege of seeing him up close and personal since I’ve been here. He shows incredible leadership and engenders followership. Dave cares a lot about customer results, not just selling in, but understanding that if our platform and products help customers get results, then expansion becomes a healthy and sustainable opportunity. We’re integrating sales and customer success into a full end-to-end customer lifecycle process. We believe there’s a real opportunity to manage that differently and effectively. We made nice progress in 2018. We just had our sales kickoff last week. It was the most aligned end-to-end customer mindset that we’ve talked about in terms of a formula for success for our customers. We’re excited to take that forward into 2019 and beyond.

Yes, what I’d say, Raimo, is that there are no material changes to the structure of our sales organization going into 2019. If you recall, the last major change was in Q1 of 2015. There will be just a normal tweaking of the sales organization. We will continue to invest in enterprise, where our focus is, and we’re still investing in commercial, which will involve splitting territories, but not moving reps from one class to another. We will continue to look at verticalization but there are no major changes at all to our sales organization, because it’s been working and we don’t want to mess that up.

Perfect. Thank you.

Thanks guys. And congrats on solid results. John, I wanted to ask about the ISV community. You guys are building, and I think the platform’s clearly a powerful part of your story I know it has been. But my sense is that it’s still an untapped opportunity in terms of building out the store and monetizing it. Thus I’m wondering if you can maybe give a sense for how big you think that opportunity can be for you when you look out over the next five to seven years? And is there any reason why you think longer term it couldn’t be something like it’s become for Salesforce? Do you think of it in a different way? Thanks.

Thanks, Justin. First of all, I don’t know if you’re based in Chicago, where I grew up, but if you are, please stay inside and stay warm. Let me just start with platform. We are fundamentally a platform company, and our customers recognize that, which was one of the things that struck me most when I first joined the company, how many customers led with it, saying things like, I love your products, but I really love your platform. It’s easy to build on, it’s fast and it’s extensible. Already we have many developers in our customers building in our platform. We’re continuing to make investments in the platform to enable that for what we call platform-as-a-business. Josh Callan took over that product earlier this year and it’s an important area of investment because when customers build their applications on our platform, the propensity for them to buy our prepackaged applications and to expand is simply high. It also creates a growing product development laboratory for us because we see where our customers are building and where they want us to build something out of the box. Our ISV program is relatively in its early stages. We’ve got a good strong leader there, Avanish. I’d characterize it as early days. We’re encouraging people to build vertical solutions, which we think is a real sweet spot since our platform is fundamentally horizontal. We’re trying to find partners who can build something that’s customized to specific use cases that we’re not going to build ourselves for certain industries. This creation creates a win-win for the end customer, for the partner, and for us. The analogy you talked about earlier is very much possible and achievable, potentially even more so in a world where platforms are becoming increasingly important. The number of apps in our store grew 100% last year. The number of ISV partner transactions grew 124%. The metrics are good but they started from a small base, and we want to continue to focus on it. We think it’s one of those organic growth opportunities still in its early days.

Great. Thank you. While you’re on the topic of partners, can you share some of the success you saw this year with partner influence? I think it ticked up over the first three quarters relative to percentage but still is modest overall. So just an update, I guess relative to fourth quarter contribution on what’s partner influence and how we should think about 2019 relative to that metric?

Yes. I would say, Rob, there’s a partner involved in almost every one of our large deals that we do. Little of our business goes through the channel, but our deals are heavily influenced by our partners. We think somewhere for the full year, or for Q4, you look at our top deals. It was 79% influenced and sourced was 29% that worked through the channel.

What I’d add is that we’re getting better. We’ve had a nice new strong leader in Ecosystem, David Parsons, who joined us in the fourth quarter. Just in the last 60 days, we’ve had talks with three of our top four sizes. They all say ServiceNow is one of, if not the largest, fastest-growing practice. We want to be the largest practice— that’s the aspiration. We’re getting better at partnering with them on both sides. Mike said 12 months ago, we did not have aligned people talking to aligned people. Today we have a vendor who runs our European business and made an effort to ensure that our UK leader and specific account executives on UK accounts are talking to their partner counterparts on those accounts. There’s more joint planning at accounts and more joint sales campaigns. In some ways, we’ve gone from a 2 to a 4 on a scale of 1 to 10 in the last year. We’re twice as good as we were a year ago, but we want to be 10-plus, and the partners still want to be in the same way. Partners are very important to our success, and we’re going to continue to get better at making sure we operate strategically and effectively with them.

Great. And then John, since you provided the segue for me. I guess on the international front, you talked about the acceleration. Any changes behind that international acceleration? Is it just maturation or is it more of your go-to-market efforts?

I think there’s no simple answer to that, but let me just make one or two observations that are not silver bullets among things. Our European team has done a really nice job of being innovators inside of our company. Philip and his team became the first to identify the top 35 strategic accounts in Europe. They did the best account planning. One of our leaders, Michael Moss, has a template that we just rolled out in our sales kickoff. He ran Northern Europe and has built a strategic plan with the customer, a shared strategic plan around their company priorities, CIO’s priorities, and how our Now Platform is helping them achieve the outcomes and results. I can’t speak to the math of how that all works out; but the account coverage, dialogue, and elevating our way into the strategic level of C-suites means they’ve done a really nice job in Europe. Our frontline teams are also adopting those principles, partnering with customer success and other functions, which helps us to provide better service. This is not rocket science; it’s proving itself out.

I’d like to add that a lot of the investments Philip has made over the last few years in new sales leadership in Europe is really paying off as well, because this is a long sales cycle. When you change the leader, many times they change people out. We have a very stable sales organization in Europe. We made some big investments in Germany in 2018, and I think they’re going to pay off anytime in 2019 and 2020. Leadership is really driving much performance in EMEA.

Thank you.

Hi, thanks for taking my questions. I wanted to ask about the six $1 million-plus deals that were new customers of ServiceNow in the quarter. A couple of questions. First, of those deals, were any of them driven by non-core ITSM, where the customer came in because of either HR or CSM? And then the second question I have on that is, was there any change in who ServiceNow is competing against and/or what they are replacing in those deals?

So, what I would say is in those deals, there was some CSM and HR that helped drive it, but IT was in all of those deals as well too, and it’s still IT, which is the main driver. One has HR that helped drive it, and as I said this is the biggest project; there are other things too. It’s the regular competitors we’re replacing all the time. It’s still larger accounts; it’s pretty big and they tend to be HPE or BMC depending on what the company shows, and we’re still seeing those replacements.

I guess some of those small accounts we’re seeing CSM right there. Certainly, in the commercial segment, there are a number of new customers starting with the CSM product and then migrating their way. That often is because they have a Chief Operating Officer who oversees all elements of that, but not as much in the upper level.

And then maybe Mike, just one follow-up. In terms of on-premise revenue in the quarter, I think you called it out for the third quarter. I know Federal tends to drive more of that than your enterprise customers, but just how much was on-premise revenue this year in the fourth quarter versus last year?

In the fourth quarter, the fourth quarter was $29 million in comparison to $26 million in Q4 of 2017. That’s actually down from Q3; Q3 tends to be our biggest on-prem, because that’s a big federal quarter and a lot of federal customers are on-prem due to security requirements.

Great. Thanks again guys. That was a great quarter.

Hey, my question is for Mike. Just wondering on the metrics here as we look forward now. You’ve had about a year and some time to look at the backlog number and help maybe us understand how to think about that. I think it’s kind of tough looking at billings as a leading indicator. How do you think about billings and backlog now? Now that you have more time under your belt, how do those play out?

We will continue for 2019 to give guidance around billings and you will see the backlog and our Qs when we file our Qs as required under 606.

And just maybe a follow-up to that, Mike. In terms of managing the business, how do you think about sort of managing on those two metrics as we orient our models going forward? Should we be cautious or not?

The way we manage the business is net new annual contract value. You see that annually in the proxy, and you will get a proxy for it by now seeing the backlog on a quarterly basis and the disclosures around what’s going to roll up over the next 12 months. That’s how we manage the business.

Great. Thank you.

Hi, guys. Good quarter. Just one for Mike and one for John. First, for John, how do you think about expansion strategically in two areas: one, security, and two, in ITOM? Then for Mike, just a clarification with IT up 58% of new ACV this quarter. Is that only because everything else grew so fast? Or if we did the math, what would come out with less growth in the fourth quarter? I know you said you did well for the year?

Yes, Mike. I always say we start with the customer in mind, and we listen to our customers. As we think about the IT workflow, what we’re asking CIOs and what they’re asking us is how we can help them build the modern IT shop of the future. Our ITOM product, which had a very strong year, is increasingly being complemented by service mapping or some of the other products within ITOM. They view this as important, so we’re investing in that. We’re trying to ensure that we have both modern and legacy ITOM capabilities. I think that will continue to be an area of investment and focus. In security, we play a specific role. We offer incident response and vulnerability response, which is a core competence of what our platform does and apply it to security use cases. I don’t see us getting into fundamentally new areas of security where solutions already exist. If the extensions help a CIO or CISOs build a better overall security experience or a more comprehensive security portfolio, we’ll look at it. But we’re not pushing to be a niche player in a very crowded and fragmented arena. However, GRC (governance risk compliance) has seen high demand, and many CIOs and CFOs look for greater scrutiny around risk management and compliance. We see a lot of opportunity there, and we believe our GRC product will continue to grow in 2019.

So, with regard to growth, IT was very strong for the full year. It was strong in Q4, but emerging growth was very strong in Q4. That shadowed that, and you can see that in the investor deck.

Okay. I guess Kash has dropped off the line. So, thank you operator. As a reminder, a replay of this call will be available with the webcast in the investors section of our website. Thanks for joining us today, everyone.