Good day, ladies and gentlemen, and welcome to the Q1 2015 ServiceNow earnings conference call. [Operator Instructions] I would now like to turn the call over to Mr. Mike Scarpelli, Chief Financial Officer. Please proceed, sir..

Good afternoon, and thank you for joining us. On the call with me today is Frank Slootman, our Chief Executive Officer. Our press release and a simultaneous broadcast of this call can be accessed at investors.servicenow.com.

We will make forward-looking statements on this conference call such as those using the words may, will, expects, believes, or similar phrases, to convey that information is not historical fact. These statements are subject to risks, uncertainties, and assumptions.

Please refer to the press release and risk factors and documents filed with the Securities and Exchange Commission, including our most recent annual report on Form 10-K, for information on risks and uncertainties that may cause actual results to differ materially from those set forth in such statements.

I would now like to turn the call over to Frank..

Thanks, Mike. Good afternoon, and thank you for joining us on today’s call. Total revenues for the first quarter were $212 million. The quarter was marked by solid demand from our existing customer base, with a 97% renewal rate and a 32% upsell rate. We booked eight new transactions with annualized contract value above $1 million.

The company now has 168 customers with an annualized contract value in excess of $1 million.

We also landed 23 net new Global 2000 customers, bringing our total to 545, including Illumina, a global leader in gene sequencing and array based technologies; Southern Company, a premier energy company based in Atlanta; the National Bank of Canada; Wolseley, a leading supplier of building materials; and Lennar, one of the nation’s largest home builders.

As our customers expand their use of ServiceNow, we see them using our solutions not just to support the business, but increasingly, to actually run the business. H&R Block Canada stood up a new application on ServiceNow during the quarter, just in time for tax season.

The company used ServiceNow to support their annual field office readiness, providing the executive team with a dashboard view of the work associated with preparing 600 stores for tax season. The success of that program kicked off additional ServiceNow projects they will be pursuing over the coming year. The U.S.

Postal Service created a stamp fulfilment application on ServiceNow with Accenture Federal Services in just 21 days. That application allows the agency to better manage the inventory of more than 20 billion stamps based on local customer demand at 34,000 retail locations.

This helps the Postal Service minimize the disposal of unused stamps, directly impacting the agency’s $7 billion in stamp sales. During the first quarter, we launched our latest software feature release, extending service management across the enterprise to marketing, legal, and finance.

This release allows business functions to configure their own services and workflows with dedicated analytics and dashboards. For many of our customers, the objective is to create an integrated service experience across all departments and enterprise functions.

We helped AAA Allied Group reduce their reliance on email across eight different departments. The customer has said that any interaction with the business will go through ServiceNow. Their marketing department is using ServiceNow to manage creative service requests, taking that service out of email to provide a more efficient and structured workflow.

Our latest release also provides a new financial management application to help organizations better understand the costs associated with delivering a service.

ServiceNow Financial Management gives CIOs an interactive dashboard that maps IT costs imported from the general ledger due to consumption of services, allowing them to drive dynamic cost allocation around an arbitrary IT tax.

During the quarter, we also acquired a company called Intreis to help us develop our solutions in the governance, risk, and compliance segment. We see an opportunity to change the way organizations manage risk by running their compliance process on ServiceNow.

We’ve already helped the emergency services/telecommunications authority in Australia transform their audit and risk function. According to the customer, this initiative reduced the collection time for critical compliance data by 93%.

Before closing, please be advised of our upcoming annual conference, Knowledge 15, which will take place in Las Vegas next week. We expect approximately 9,000 attendees to share experiences and learn how others achieve success with ServiceNow.

At Knowledge 15, we will also be hosting CreatorCon, our first conference specifically aimed at application developers. CreatorCon is part of a broader launch of programs to build a community of highly skilled ServiceNow developers. This will be open to customers, partners, as well as ISVs.

To help those partners and developers monetize their work, we will also be launching the ServiceNow Store. The store is our marketplace for applications and services developed on the ServiceNow platform. Together, these programs boost the availability of apps and services to help customers extend the value of ServiceNow across their organizations.

Finally, as part of Knowledge 15, we will be holding our annual financial analyst day on April 20. This event is highly recommended to ServiceNow followers and investors, and we look forward to seeing you there. With that, I will now turn the call over to Mike..

Thank you, Frank. During today’s call, we will review our first quarter financial results and discuss our financial guidance for Q2 and full year 2015. We’d like to point out that the company reports non-GAAP results in addition to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP.

All financial figures we will discuss today are non-GAAP unless stated otherwise. To see the reconciliation between these non-GAAP and GAAP results, please refer to our press release, filed earlier today, and, for prior quarters, previously filed press releases, all of which are posted at investors.servicenow.com.

Our total revenues for the first quarter were $212 million, an increase of 52% year over year and 62% in constant currency. Subscription revenues for the quarter were $180 million, growing 53% year over year and professional services and other revenues were $32 million, growing 48% year over year.

At the beginning of 2015, we changed our customer count methodology. Previously, as defined in our SEC filings, we counted all production instances as separate customers, meaning some logos were counted as multiple customers if they had more than one instance in production.

Under our new methodology, we count each logo once, regardless of the number of production instances. Although individual production instances are often separate sales cycles and sold by different sales reps, we feel that this new methodology is more intuitive and gives better insight into our business and key operating metrics.

This change in methodology impacts total customer count, upsell rate, revenues per customer, number of customers paying greater than $1 million in ACV, and average contract terms. Each of these metrics have been restated for historical periods and are available in our quarterly IR deck at investors.servicenow.com.

Our total customer count, excluding express customers, was 2,461 at the end of the first quarter under our new customer count methodology, and was 2,872 under our previous methodology. Our upsell rate was 32% for the quarter under our new customer count methodology and 25% under our previous methodology.

Our total revenues per customer for the trailing four quarters were $345,000 under our new customer count methodology, an increase of 21% from the prior year. Our total revenues per customer for the trailing four quarters under our previous methodology was $298,000.

We now have 168 customers under our new customer count methodology that pay us more than $1 million in annualized contract value, up 75% from 96 in the same period last year, and up 10% from 153 in the previous quarter. Under our previous methodology, we have 143 customers that pay us more than $1 million in annualized contract value.

Our average contract terms for new customers, upsells, and renewals were 29.7, 22.5, and 23.6 months, respectively, under our new customer count methodology and 29.6, 20.3, and 26.3 months, respectively, under our previous methodology.

Our annualized contract value per Global 2000 customer was $746,000 for the quarter, up 34% from the prior year and up 4% from the prior quarter. Total revenues based on geography were $149 million in North America, $48 million in EMEA, and $15 million in Asia Pacific and other, representing 70%, 23%, and 7% of total revenues, respectively.

Our non-GAAP billings, calculated as revenue plus change in deferred revenue from the statement of cash flows, was $268 million in the quarter, increasing 48% year over year and 59% in constant currency. As a reminder, we price and invoice in local currencies. Approximately 30% of our first quarter billings were in foreign currencies.

Our weighted average subscription billings term was 11.8 months for the first quarter, compared to 12 months in the first quarter of 2014. In the first quarter, subscription gross margin was 81%, compared to 76% in the prior year. Professional services and other gross margin was 9%, compared to 10% in the prior year.

Overall, gross margin was 70% compared to 66% in the prior year. Operating margin was 3% compared to negative 5% in the prior year. We ended the quarter with 3,047 total employees, an increase of 944 from the same period in the prior year and an increase of 221 from the prior quarter.

Full details of our quarterly headcount adds by department are available in our quarterly IR presentation. Net income for the first quarter was approximately $2 million or $0.02 per basic and $0.01 per diluted share, compared to a net loss of $11 million, or negative $0.08 per basic and diluted share in the prior year.

Our basic weighted average shares outstanding was 152 million and our diluted weighted average shares outstanding was 166 million. During the first quarter, we generated $67 million in cash flow from operations and we used $27 million for capital expenditures, resulting in $40 million free cash flow.

This compares to $13 million of free cash flow in the same period of the prior year. We ended the quarter with $999 million in cash, short term, and long term investments. Our total deferred revenue balance was $463 million at the end of the first quarter, up 10% over the $422 million reported at the end of the prior quarter.

Let’s turn to guidance for the second quarter and full year 2015, based on current FX rates. For the second quarter 2015, we expect total revenues between $237 million and $242 million, represented year over year growth between 42% and 45%.

We expect subscription revenues between $192 million and $196 million and professional services and other revenues between $45 million and $46 million. Our professional services and other revenues outlook includes $11 million related to knowledge, with the related expenses of $23 million recorded in sales and marketing.

We expect billings between $260 million and $265 million, representing year over year growth of 38% and 41%. We expect subscription margins of 80%; professional services and other gross margins, excluding knowledge, of 15%; and overall gross margins of approximately 70%.

We expect an operating loss of approximately $5 million, including net expenses of $12 million related to our knowledge conference. We expect free cash flow of approximately $40 million. For the full year 2015, we expect revenues to be in the range of $970 million to $1 billion, representing year over year growth of between 42% and 47%.

Our total annual revenue estimate consists of subscription revenues between $820 million and $840 million, and professional services and other revenues between $150 million and $160 million.

We expect approximately 5% operating margin for the year and to end the year with approximately $180 million fully diluted gross shares outstanding, which includes all basic shares, stock options, and RSUs outstanding before applying the Treasury stock method. With that, operator, you can now open up the lines for questions..

[Operator instructions.] Your first question comes from the line of Jennifer Lowe of Morgan Stanley..

Mike, the first question I had was for you. And in particular, I wanted to look at the billings calculation methodology a little bit. I think a lot of us in the past have been looking at it as a change in deferred off the balance sheet, and I think that was what was in guidance too.

This time around, it looks like now you’re switching to look at it on a cash flow basis.

So one, I just wanted to verify that’s sort of how you’re going to be thinking about it going forward, and two, can you talk a little bit about why you look at that as being a more appropriate way to calculate billings?.

This quarter, FX really impacted us quite a bit, given the movement you saw. I think the euro was around 1.21 at the end of December. It’s down to 1.08 now. And we saw a lot of movement. Remember, 30% of our billings are in foreign currencies as well.

Our international operations, our functional currency is the euro, so that really impacts us quite a bit. And as a result, we think it’s more meaningful to factor in that FX, and you picked that up in the cash flow statement. And going forward, that is the way that we will do it. Historically, there wasn’t that much of a difference between the two..

And then maybe just rolling that forward a little bit further, I know in the past, when you’ve given the full year guidance, you’ve talked a little bit about the assumption of FX headwinds on revenue.

Could you just give us a little bit more color on what you think the FX impact is baked into the billings guidance for Q2, and then the full year revenue guidance?.

We took down our internal plan for the balance of the year approximately an additional $6 million based upon just our backlog in deferred revenue for revenue. There’s also, remember, a big chunk of our new business is in foreign currencies, and that’s reflected as well in the guidance that we gave.

But specifically, for backlog and deferred revenue, it was about another $6 million as of March 31 that we took out of our revenue plan. In terms of the billings, I don’t have that exact number. That’s based upon current FX rates today, the billings guidance that we’re giving..

Your next question comes from the line of Walter Pritchard with Citi..

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

First of all, does that make sense?.

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

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

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

And then Frank, for you, just on the app store and ISVs as a customer of your platform and so forth, can you talk about how you’re thinking about how important that app store is to getting ISVs onboard and generally how important ISVs are as you think about developing your platform as a revenue opportunity in the future?.

They’re very important, because we view the ISV strategy as a way to really increase the breadth and depth of our platform deployments in large enterprises all around the world.

We’ve been pretty good at really spreading our platform through the sale of our own applications and a lot of our partner activity and so on, but content is what drives platform adoption. We always say we’re applications led, we’re platform driven and enabled, so content is really, really key.

One of the ways we really think we’re going to unleash that torrent of content is through the ISV community. So the store is really a monetization feature.

I think we have a very good routes to market for ISVs in terms of our conferences and our programs and so on, but they have to have the ability to get their content in front of our customer base and then be able to monetize it.

In terms of revenue, yes, there is a revenue component in terms of selling through the store, but that is not principally how we’re gonna get paid. We’re gonna get paid on the platform licenses. Effectively, you can think of them as run times.

Every time a third party piece of content is sold, that will trigger, in most situations, incremental platform licenses as well. So that’s how we’re thinking about it..

Your next question comes from the line of Michael Turits of Raymond James..

Mike, I just wanted to come back to the currency question.

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

Remember, going into Q1 guidance, we had already told people that we took our revenue down for FX. Cumulatively, from when we started planning in the end of Q3 2014, we’ve taken out almost $40 million out of our 2015 plan because of FX. But that was based upon where the rates were back in September.

Specifically, when we went into the Q1 call, at that time, the rate had already dropped to 1.12, and we had already lowered our guidance for 2015, partly on that. And as I just mentioned, we just took another $6 million out of our number for the balance of this year as a result. Specifically, FX associated with our backlog in deferred revenue we had.

But there’s an incremental piece based upon the new business that we plan on booking, because we quota people in local currencies as well, too, around the world..

Is it possible to just tell us what the revenue headwind is total year over year, not where you were, but versus - or where you were versus what the revenue headwind was?.

Year over year, it’s going to be about $40 million, ballpark, which is conservative. I think it’s actually a little bit higher than that..

Your next question comes from the line of Brent Thill with UBS..

Mike, just for Q2 on the billings guide, is there anything else other than FX we should keep in mind in terms of the sequential Q1, Q2 guide down on billings? And I’m just curious, just as it relates to the big deals, you were down year over year on the deals over a million.

Is there anything that you’re seeing that’s different this year in terms of how those deals are coming through? And I would assume the pipeline’s pretty good for the large deals, but if you could give us a little more color that would be helpful..

You know, as we’ve told people before, these are very long sales cycles, and they tend to be lumpy. Our linearity in Q1, it was very back end loaded. There were a number of deals that slipped as we always have, that slip from one quarter to the next.

And we’re off to a fast start this quarter, but we like to see a little bit more into Q2 before we change our outlook going forward for the balance of the year. We’re comfortable with the guidance we gave..

Your next question comes from the line of Kirk Materne with Evercore..

Mike, just maybe a follow up back on Mike Turits question, just on the year over year hit from FX. If I think about it, obviously [$3] million is about 4% headwind. Obviously, this quarter is almost a 10% headwind on revenue.

So is the assumption that the gap between recorded and constant currency should close over the course of the year, assuming that the euro doesn’t get materially worse.

Is that a fair way of thinking about it? So that we [wouldn’t] see as big a gap between, say, reported revenue and reported billings in constant currency?.

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

And just in terms of you guys obviously had an incredibly strong finish to the year. I know you mentioned the first quarter was a little bit more back end loaded seasonally.

Did you guys get off to a slower start, or is it just as [indiscernible], it’s just more you guys getting into longer, bigger deals, just the deals cycles extend and just have quarters that might be more back end weighted?.

As Mike said, we were off to a slow start, because we had sort of a hyperbolic Q4, which is great. But unfortunately, we hit January, you know, a lot of business gets pulled forward and it just takes time for the sales teams to build the pipeline back up, so it then starts pushing the business all the way to the back end of March as well as past it.

We had quite a bit of deal slip, but the good news is actually that literally when we turned the corner into April, that all started to close in rapid fashion. We’ve already closed more than half in the first two weeks of April [of our push] and we expect to get most or all of it before this month is out. So we’re not terribly concerned.

The quarterly patterns are sometimes difficult in our business, because our sales cycles are long. And it’s much easier to sort of view things in six month increments, because it normalizes out, this kind of aberration. You know, our customers don’t really care whether they do it in March or April.

Obviously, our sales teams do, because that’s how we incentivize them, but obviously, we can’t get too excited about it. We think that structurally, our business is very, very sound, but sometimes things bounce from this side of the line versus that side of the line. And our deals, we don’t lose them, they don’t go away. And we do close them.

Sometimes, they just bounce outside of the quarter. So we’re feeling good about the way our business is developing, but we definitely saw quite a bit of friction in Q1. And it’s kind of hard to know if it was because we were a little light on mature pipeline or if it was due to other factors.

We’re reading the tea leaves a little bit, looking at other companies, what they were experiencing. But on the whole, especially what we saw in April, we’re feeling quite good about it..

Your next question comes from the line of Greg Dunham from Goldman Sachs..

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

Actually, feeling much better about it going into April versus going into January. Q1, as those of you that have followed us ever since the IPO, it’s always a tough quarter, because Q4 is so strong. And that’s just the nature of our business.

But yeah, the June quarter is our historical Q4, when our fiscal year was June, so both the Q2 and Q4 have always been our strong seasonal quarters. So we’re feeling good coming into this quarter as well as the back half of the year..

And then Mike, just one more from me. I think what’s a little confusing is the FX, the constant currency adjustment. You know, 30% of your billings and revenue are international.

Even if I look at the euro, the depreciation was less than 20%, so I don’t get how you get a 10 point headwind in the quarter, given 30% mix and given less than 20% move in the euro.

Can you help walk through where the delta is?.

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

Okay, we can follow up offline on that. Thank you..

Your next question comes from the line of Raimo Lenschow with Barclays..

Frank, it’s the first quarter, where you kind of show up like a normal software company, and everyone is now kind of a bit confused. But I would say it’s kind of quite okay to be normal.

Just quick question, if you think about the change in momentum in Q1, is it really like plain vanilla, you had a massive Q4 and so the sales pipeline was a little bit empty, so [indiscernible] again, or did you do any changes in terms of kind of getting the [sales guys] kind of to run 10% faster or focus more on different deal sizes, or whatever? Or is it just really like, this is Q1, let’s get on with it?.

I appreciate you asking that question, because we also had a fairly sizable sales realignment and reorg coming into the new year. That happens every year, but this particular year more than half our reps ended up with new account assignments.

And what that does is it really dramatizes the effect that we already talked about, because people knew they were going to lose their accounts, so they’re closing like there’s no tomorrow, but they’re also not building the pipeline, because they don’t know what they’re gonna get.

So the lower you go into the organization, the more they will point to this particular dynamic as being very impactful to the Q1 dynamic. But it’s sort of one time. The reality of our business is we go through a lot of sales reorgs, because the organization expands so rapidly.

We have to subdivide territories and we’ve really dramatically increased the focus on the commercial markets. So there were a lot of moving parts between December and January, and as a matter of fact, we were like a mature pipeline coming into the quarter. So that was an additional factor that was at play..

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

Is that kind of the right way to think about it?.

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

Your next question comes from the line of Matt Hedberg of RBC Capital Markets..

Frank, I’ve got a product question on performance analytics. When we talk to customers and partners, it seems to be resonating as a killer app or feature.

Is there a way to think about the ASP uplift of that product and maybe where you’re seeing some adoption?.

Well, our standard pricing for PA is 20% on our subscription per user fees. It is an important capability for us. Strategically, we’re really moving performance analytics away from standard business intelligence data, warehousing approaches, where people forklift the data to another data structure and then do the reporting over there.

We’re really focusing that technology towards real time reporting. We think that’s going to be super differentiated for us, because we are sitting on the data as it changes, and we’re able to represent that in real time or near real time. It’s going to become a very, very important part of our strategy going forward.

So performance analytics is a key component. We acquired that technology about a year and a half ago now, almost two years ago. We’ve had good take up. But we’re just in the beginning stages of really running this play. It’s going to get much more significant going forward for our customers and the types of applications people are implementing..

And maybe just a quick follow up.

Maybe I missed it, but did you give the number of HR or facility wins in the quarter?.

We didn’t. One of the things that we did coming into the year is that we didn’t change our pricing. We do have different SKUing now. We are now just selling one service management SKU, and regardless of whether it’s IT, HR, or any other flavor of enterprise service domain, it’s all the same price.

We don’t have the same visibility on the number that is specific to HR or facilities, because our customers are buying them, and they want to have the ability to assign it to whatever department they’re going to be using it for. So we don’t know precisely how they’re using it, whether that’s HR or IT or any other flavor.

I think I talked about this in previous calls, but it’s a very important part of how we go to market is to sell it as service management than not specific to IT or HR or any other flavor. We really want our customers to embrace service management for the enterprise, and then they can decide how to allocate it to different service domains.

But I will tell you that HR continues to be a very robust, very, very high activity area for us, and that’s going to continue. That’s very exciting for us..

Your next question comes from the line of Steve Ashley of Robert W. Baird..

I have just a quick question on the Express product.

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

We sort of view Express as a days and weeks for order of magnitude versus weeks and months for what you’d call the flagship product. That’s really the enterprise product. And Express can really go in very, very quickly, because all you have to do is really populate your users and establish their credentials and you’re off to the races.

There’s really no design process, workshop. All those concepts, they’re not there. This product is supposed to be used out of the box, so the moment you define the system, everything is on, and you can start using it. That’s why the product is called Express, because it’s really an order of magnitude faster in terms of standing it up.

The vast majority of Express users really obviously are smaller enterprises. There’s some mobility between the enterprise products and Express. We’ve seen customers go both directions, which is actually a really good dynamic for us, because we’ve seen a bunch of them graduate to the bigger product.

We’ve also seen some of them fall out and needed to go to the smaller product. So we’re really happy to have it..

Your next question comes from the line of Kash Rangan with Merrill Lynch..

This may be a bit of an ignorant question, since I’m relatively new to your stock, but it looks like there’s a changing seasonality to your business. I’m going back over the last three years. We just looked at the deferred revenue sequential increase in Q4.

It has been getting better and better from 2012 to 2013, to 2014, particularly in 2014, although the current moved pretty severely against you. You had well north of 20% sequential growth there. That’s like 400 or 500 basis points better than you have been in Q4 in other years.

And consequently, it’s only natural to expect some more seasonality going into Q1. So is it really that? Of course, you don’t share with us billings forecasts for the year, but as you look at your billings target for the year on a constant currency basis, are there any changes to your expectations, even within a range, albeit..

I’ll say that, as I mentioned before, it was a very back end loaded quarter, and a number of deals slipped into Q2, and we’ve closed a number of those, as Frank mentioned. And so as a result, there’s two things impacting that. There is the deals that got pushed, as well as the FX, which is impacting us.

But absolutely, our plan going into the quarter was to be a down quarter. You don’t see it as much in billings, because we have a lot of contracts that we signed in Q4 that start January 1, which don’t get reflected in our billings or deferred revenue but are in backlog going into Q1.

And I definitely expect, as we get larger, we will be no different than any other software company. And you’ll see the typical seasonality..

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

I’m looking at 2012 to 2014. There’s a clear trend where the sequential growth in your deferred revenue used to be 14% to 15% in 2012. Now this Q4 of 2014 was 20%, although the currency moved against you. So there’s clearly a huge shift in your seasonality, it sounds like.

So that’s why I’m trying to dovetail into what you’ve been saying, and I appreciate the detail you guys are giving, but maybe….

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

So no change with respect to your plan as a business for calendar 2015, I take it? Assuming currencies hypothetically did not change.

So you would not have changed your real plans, is what you’re saying, for the year?.

[Indiscernible].

Okay, got it. Thanks. Wonderful..

Your next question comes from the line of Jason Maynard with Wells Fargo..

Could I ask maybe one thing, and I’m sure you probably want another couple more billings questions on this call, but if you can indulge me for one second. Is there anything else going on, Mike, in terms of seeing some of the trends towards the add on sales just ended up getting billed later in the year.

I think you guys [indiscernible] that out on Q2 last year, if I recall correctly.

And I’m just curious, is that trend sort of normalizing, or do you see that as you increase cross selling of additional products continuing to push more and more? And is that the seasonality effectively that you’re talking about?.

Once again, I think what’s being reflected in Q1 in this seasonality you’re seeing is that Q4 was such a big number. And our sales reps knew they were losing a number of accounts, getting redistributed. So they pulled in every single upsell and deal.

That’s really what happened, and there were a number of deals as well that pushed from Q1 into Q2, because of the linearity in our quarter, which we closed a number of those already..

And then Frank, just a question for you. Your comment around HR case management, having a single service management SKU, I’m just curious, from your standpoint, you guys have been talking about, I’d say, a broadening out of the use cases. You called out marketing, obviously HR.

How are you feeling about just sort of the broader applicability into other areas, even like in the external service and support, things like that, where it’s not just the traditional internal help desk, IT [indiscernible]?.

That’s a central theme of our entire strategy, is to really drive service management to an enterprise product.

It’s also one of the reasons why we didn’t want to segment our business in terms of all these domains, because there are tons of other service management applications that really don’t sort of fit squarely on a functional department or function. It can just be a single service that’s being provided.

And one of the things that we’ve also included - we’re going to show that next week at our conference - is a template for customers to actually build their own customer service management applications.

And it’s so highly abstracted and templated that you can auto generate most of the service management applications, because there’s just tons and tons of use cases out there, and we cannot support that all.

We’re just picking some of the big service domains out of there to prime the pump, because we know they’re sizable and there’s a lot of opportunity there.

But there is lots and lots of use cases, which is why we went through this templated automation approach to sort of help people with the tooling to do that, with really no coding skills whatsoever, to be able to stand up those kind of services where you have case management, knowledge management, requests.

You get cataloged and everything, where you stand that up automatically for our customers. So the whole notion of managing service is very, very broad based inside the enterprise. It’s actually not limited to the categories that we’ve mentioned..

Your next question comes from the line of Brent Thill with UBS..

Just a quick follow up, as it relates to what happened with the sales force, and I had a number of questions from investors who were asking to what degree are the changes this quarter similar to what you’ve done in the past.

And in terms of the changes that you made, are those now all settled in and you’re set for the year?.

We’re certainly set for the year, but it’s very unlikely that we’re set for years, because of the rate that our business grows.

And at the rate that we’re bringing on people, the service areas are getting denser and denser, meaning that the whole commercial market, we’re much more aggressive in covering that now, whereas previously we were very much skewed and biased toward the very large enterprise.

Now, we have a whole organization dedicated to the commercial accounts, the non-large enterprise accounts. So as we said earlier, this is a very large reorg, and the net result of it was that a lot of people changed their account responsibilities. More than half of them, and that’s just big.

It creates a measure of discontinuity in the overall process of generating activity and building pipeline..

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

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

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

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

Yeah, the effect of that is that when people know they’re losing accounts, they’re going to take whatever they can off the table. They’ll leave nothing behind for the next guy. That’s natural behavior, and obviously, then, once that happens, the new guys have to start all over again, because nothing was left behind.

And when you do that, at the change of the fiscal year, it’s exacerbated, because everybody’s in the accelerators and they're putting everything and anything into it to make sure they maximize their yield on the investment that they’ve made in prior months to develop that business. So that’s the dynamic at play here.

But as I said, it’s a one-time thing. Some measure of that we have every year, because of the rapidly growing nature of our business, but this was very pronounced in this particular transition..

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

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

Your next question comes from the line of Abhey Lamba from Mizuho Securities..

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

First quarter revenues themselves were impacted by - it’s actually, if you look at the December 31 rate, our revenues were down $2.7 million in the quarter as a result of where the rate ended up being. In terms of billings, we don’t really try to forecast our billings based upon a forecast currency other than the rate it is when we give our guidance.

And so I can’t give you that number specifically, what you’re asking for, on the billing side. The billings is based upon the timing of your invoicing to customers as well, too. And so that can skew quite a bit as well. If we had a lot more billings in the beginning of the quarter, before the rates fell, it would have been a higher number.

And if they’re skewed toward the end of the quarter, when the rates had fallen quite a bit, you’d see a lower billing number..

And very quickly, the [deals] that slipped from the quarter, were they in any particular region or industry vertical, or have any brought a macro takeaway from those? Or was it all related to your sales force reorg? And a follow up to that is essentially what are you modeling for your close rate for the second quarter? I understand your pipeline is very strong, but what are you thinking of closing versus historical Q2?.

In terms of the deal slip, that’s really an immaturity of pipeline, right? Customers don’t really care whether it’s March or April. And we do not want to resort to unnatural acts to force these things to happen inside March, because it’s going to cost us a lot of money.

And as we proved to ourselves in the first two weeks of April, we’ve already closed more than half of them and under normal conditions. So that’s all fine, because our relationships with customers are 10, 15, 20 years, so a couple of weeks is not going to make a whole lot of difference. And we’re really happy with the way that is going.

And it’s very much a function of how much mature pipeline we have coming into the quarter. In terms of your close rate, I don’t have an answer for you on that question, because that’s not something that we typically discuss on the call..

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

What I will say about close rates is we have an exceptionally high close rate in general, but what happens to us, our biggest number one competition is always the push, because these are large transactions. It always depends on whether a customer has the resources and the priority in the organization to undertake it.

That is often the driver, why a deal doesn’t happen in the quarter, when a customer just isn’t ready. We don’t lose them to competition. The deals are not going away.

But it’s not atypical for us to see transactions not just move one quarter, but move two quarters and sometimes, even three quarters, because they have to be ready to engage on the overall deployment. And it’s not a small commitment. These are really, really big rollouts and goal lines. So that really is the nature of our business.

And then you add to that that the March-April dynamic is not super compelling compared to December-January, and this is how it plays out. We’re actually kind of surprised how strong April started, because it was almost a complete reversal of sentiment from where we were in late March. So that was kind of a nice thing to see..

Your next question comes from the line of Greg McDowell with JMP Securities..

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

I don’t know how I can do that in 30 seconds or less. We are going to record our keynote presentations. I really would encourage you to go and watch those, because we’re really laying out our case for what’s possible and what you should aspire to.

And the biggest thing about ServiceNow, the platform affords an opportunity to really change the way people work, away from unstructured messaging approaches, which is really email and voice and so on, getting to systems, structured data, structured workflow type of approaches. The opportunity is just immense there in terms of productivity.

We really find that there is an incredible productivity frontier in large institutions and enterprises. The one thing we will also see is due next week, is the release of a research study that we’ve undertaken that has attempted to quantify what the effect of that is in terms of time lost and time wasted in organizations.

And it’s of such an order of magnitude that we believe that CIOs and senior executives in general will give a high level of priority around dealing with this. And so much of the money always flows to the customer side of the organization, where we touch customers.

On the inside, we tend to be generations behind in terms of the opportunity to automate and streamline and really achieve huge productivity gains. So that’s what the conference is about. There’s going to be a lot of announcements. We’re going to show a ton of new product in all our categories.

In operations management, on the platform, as I mentioned, where we have the store. We have a brand new developer IDE coming out. And of course in service management, the financial management app, as I talked about in the prepared remarks. So there’s a lot of product that’s going to be released and previewed at the conference.

But the mega theme is always around how service management is really changing the way people work in institutions and enterprises..

And one quick follow up for you, Mike, is I think a question we’re going to get a lot tomorrow is if all these slipped deals have already closed in Q2, or early in April, why does the Q2 billings imply such a slowdown on a constant currency basis? You grew billings 59% in constant currency in Q1, and I know on an as reported basis, you’re guiding to 38% to 41%.

But even assuming another 10 point currency headwind, we’re talking about 48% to 51%, so it would seem like there would be the potential with some of these slipped deals already closing that there could be some acceleration on a constant currency basis, instead of the decel that you’ve guided to.

So I was just hoping you could expand a little bit on that..

Well, remember, a lot of the billings that we give guidance for is coming out of what’s in our contracted backlog today, as well as the renewal cycle that we have. With our customers, that’s where the bulk of it comes versus new business.

And so even if you have deals that push from one quarter to the next, that doesn’t move the billings as much as our backlog billings and renewals. And the guidance we gave is based upon what’s in our backlog of renewals. And it factors in those deals slipping into this quarter..

Your next question comes from the line of Justin Furby with William Blair & Company..

Frank, I wanted to go back to the reorg. You mentioned that more than half of the accounts saw more change in terms of assignments, but what did that look like a year ago in terms of the percentage? Was it 10%, 20%, 30%? Just trying to get a sense for the magnitude of how pronounced it was.

And maybe you said this, but why was it so pronounced this year versus last year? And then Mike, I’ve got a follow up..

I really can’t quantify what the difference is, because I just don’t know. I just know that this was viewed by our sales organization as huge in terms of the effect that it had on sales activity development and so on.

Why was it huge? It’s a very profound reorganization in terms of us allocating resources much more deeply and much more broadly in places where they haven’t been before. As I said already, we have an entire commercial account organization now. A lot of people have been moved around. A lot of global account organization.

Because we have added so many people, there is far fewer reps names than there were before. So we have narrowed their focus considerably. Whereas before they might have had 15, maybe they now have five, for example. So those are really, really big changes in an organization. It obviously has a good sized effect on activity development.

We don’t want to dwell on it either, because of the way sales people operate. That’s going to take care of itself in fairly rapid order, because they’ve got to eat..

And then, Mike, the billings guidance, if rates would have frozen when you gave guidance in late January, would you have still beat your billings guidance for the quarter?.

Yes..

Okay.

And is there any change, when you look to Q2, in how you’re approaching the guidance?.

No, it’s the same approach that we established our guidance going into Q1. We’re applying the same methodology. [indiscernible] the rate’s in effect now..

Your next question comes from the line of Tim Klasell with Northland Securities..

Just a quick one here.

As we look forward, do you plan, given the growth rates, that you will do the sales force reorg at the same magnitude next year and following year, so we should sort of plan in that sort of seasonality? Or was this year a little bit more exaggerated?.

What was really new this year is at the end of 2014, we hired a new VP of commercial sales for the Americas, and this reorg is moving a number of those people directly underneath him, where in the past, all of that, the commercial and the enterprise, was rolling up under one person.

We also, halfway through last year, we did hire a head of Americas enterprise sales. Both those two leaders report into our VP of worldwide sales. That’s what created the big reorg that was telegraphed out to people that was going to be happening in January of 2015. And so I don’t expect to have that big of an impact in future years..

Your next question comes from the line of Karl Keirstead from Deutsche Bank..

Just a couple of cleanup questions. It looks like there was a little outperformance on the gross margin side relative to your guidance. Can you talk through that? And then also, it looked like capex as a percentage of revenue upticked a little bit. Maybe you could offer a little color there..

Yeah, what helped in the subscription margin was the exchange rates, for one thing. And the other thing, just kind of delays in some expenses that we had within our data centers. Remember, one of the reasons why we bill in foreign currencies is we operate data centers around the world, and we have expenses in foreign currencies.

So we have a pretty good hedge in place there, but a lot of our data centers, where they were kind of some of our international data centers, are not even close to being at capacity. So when the FX rates do strengthen the U.S.

dollar, you’ll see improvements in our gross margins just due to some of those international data center costs coming down in U.S. dollars.

And sorry, what was your second question you asked, Karl?.

Just on the capex, the percentage of revenue looked like it upticked a little bit this past quarter..

It’s really just timing of things happening. As we said, for the full year, we expect it to be roughly, I think we said, about 9% of revenues for the full year, is what we’re expecting..

Your next question comes from the line of Derrick Wood with Susquehanna..

So Mike, when I look at the 59% constant currency billings, and I think you said it was 66% last quarter, that doesn’t look like much of a hiccup. But it sounds like there’s a difference between bookings and billings, and bookings growth was probably lower than billings.

Is that the right assumption?.

I haven’t done the math to try to figure that out, and I’m trying to understand your question more..

Well, you didn’t see much of a slowdown in billings growth versus Q4. But you know, you’re talking about deal slippage, so I’m just trying to put two and two together..

But a lot of the billings that we have have nothing to do with our current bookings, because a lot of our billings, as I mentioned, come out of our backlog, which we booked already..

And Frank, as you gear up and are kind of getting more aggressive and moving outside of IT, and maybe this is alongside some of the changes you’re making in the sales force, but are you doing anything different in the go-to-market approach where you look at maybe more specialist overlays or working with partners in a different way to really help move outside of IT?.

One of the things we’ve done in December is we changed our [product] organization away from a functional single product, single market approach to a product line model, where we really now have organizations that can move with multiple products against multiple markets at the same time.

So we now have you can call them BUs or product lines that now have product leaders on them. We really did that to be able to increase the focus on markets that otherwise would not get the quality of attention and focus and resources. And particularly, that’s for things like IT operations management, a product like Express.

They have their own resources. The platform now has its own organization. So all those teams are going to be developing their own go-to-market capabilities and really driving the sales organization across a much broader front.

So that was a substantial change in how we internally operate, but that will begin rippling out to the outside as well over time. This is just starting on the inside in how we work on a day to day basis.

But then, it won’t be long, because they are responsible for the go-to-market motions and all the marketing programs, all the partner strategies, etc., that are associated with these individual product lines. So this is really a fairly substantial change, because it really broadens the approach for ServiceNow as a whole.

Before, we were very much led by our service management product, because that’s so dominant in the overall mix, and in order for us to make sure the other products are getting adequate resources, that’s why we went to this model..

Your next question comes from the line of Katherine Egbert with Piper Jaffray..

With respect to FX, if I can, is it just a direct FX impact, or are you seeing any areas where you price in U.S.

dollars and maybe people are downsizing deal sizes because it’s more expensive?.

No, as I said, in most international locations, we’re pricing in local currencies. The major places where we play in are EMEA is euros and pounds. Australia is Australian dollars. Canada is Canadian dollars. In Singapore and others, it’s principally in U.S.

dollars, but the bulk of our business internationally is Europe and Australia would be number two..

And just without giving any color on HR and facilities and some of the other areas, it makes your addressable market a little bit less clear.

What can you tell us about that? Does your addressable market stay the same now that you have one SKU? How do we look at that?.

Well, we view service management as really one market. That’s sort of the net that you should take away from this. Certainly, we can size this marketplace by looking at how many HR people there are in the world, and we’ve done that. And some of that you will find on our investor page, exactly how we arrived at that. But these are not structural changes.

These are really positioning changes. Our customers are saying, look, I’m adopting service management. I don’t know how many people I will have in IT versus HR versus any other service domain.

So for us to be able to buy one set of service management licenses and for us to be able to deploy them as our needs develop is much more attractive than having them segmented and fragmented into categories. So that’s why that happens. It really has no effect on our addressable market. It’s just how we approach it..

And then one last quick one.

The acquisition you made, did it add any review this quarter?.

No. That’s really a professional service organization, and they came on with about $500,000 in backlog, but that’s still to be performed. It was more getting the people, the domain expertise, for our product management, to further strengthen our GRC application..

Your next question comes from the line of Sarah Hindlian from Brean Capital..

I was hoping you could give us a little bit of an update in terms of what you’re seeing right now in terms of [ITOM] adoption. I know you discussed last quarter seeing about 10% of the business coming from that market, which is still largely unsupported by the sales force.

And then two, I’m hoping - and not to beat a dead horse either, but I’m trying to understand the guidance in terms of seeing half of these deals close that were slipped and the assumption of a consistent FX rate from this point on. I’m hoping you could give a little bit of color in terms of the conservativism around this outlook..

In terms of the ITOM, we’re seeing roughly about 10% of our business is ITOM that we’re seeing, and that was consistent with what we were seeing in Q4. In terms of our guidance, our guidance is based upon, as I mentioned before, there is the FX headwind on our existing backlog, but 30% of our business is denominated in foreign currencies.

And so our pipeline of opportunities and what our plan was for new business this year is coming down as well, because of the FX associated with that. And the guidance we’ve given is based upon kind of where we’re seeing things right now. And we’re a little bit cautious with how we saw Q1, the linearity.

Yes, we’re off to a strong start right now, but we’d like to see a little bit more of that. What I will say is this is the strongest start we’ve ever seen at the beginning of a quarter. But does that mean that’s going to continue throughout the rest of the quarter? We’re going to take a wait and see..

Your next question is from the line of Alex Zukin with Stephens..

I was wondering, with the sales reorg, is there any change in focus between focusing on new accounts versus kind of existing opportunity, considering you’ve broadened the product set so much?.

We’ve had that orientation since the beginning of 2013. You’ve been with us that long. That’s when we introduced the separation that we have between existing accounts and new accounts. And we have carried that theme through in this new organization, the model.

So both from the commercial side and on the enterprise side, there is the delineation between people that take care of existing accounts and the people that are hunting for new logos. So this is now the third year into it that we are organized that way. It’s really important for a SaaS company, because we rely so heavily on renewals and upsells.

So that’s how we are, and that’s how we’ve been, and that’s certainly what we will be going forward. As you know, SaaS companies will become increasingly dependent over time on existing customers. That’s just the nature of the way the model eventually works. So we’re really well set up to be able to run that the way we’re currently organized..

And Mike, can you just talk a little bit about what drove the upside to cash flow in the quarter?.

You know, we had some really, really strong collections in the quarter. We had a number of customers who paid us earlier than we were expecting. That’s one of the things that we noticed. I was surprised at some of the large payments that came in in sub-30 days. Still annual.

There was nothing because of multiple year payments, but I can give you one example of one customer that should have paid us in April on 30 days. It was two point something million. I was shocked they paid us in March, within 22 days or something like that of the contract. So it’s just the timing of cash collections is the biggest driver that we saw..

Are you guys seeing any more evidence of leading with applications outside of IT and HR, in finance and facilities this quarter?.

Well, that’s part of our go-to-market thrust, so our organization is directed and instrumented to campaign our platform, not just in IT. Obviously, we’re going after IT, but there’s many situations where IT, for whatever reason, is not up for grabs. It could be contractual, for whatever reason.

So it’s really great that we can go after a human resources department or sometimes just pure platform applications. So we don’t easily strike out. If we can’t go through the front door, we go in through a side door. We have many arrows in the quiver, many clubs in the bag, so to speak, to pursue business. And certainly our sales people like that a lot.

We don’t easily strike out..

Your next question comes from the line of Philip Winslow with Credit Suisse..

I actually want to focus on the business here, on the new customer acquisition, from some of the newer applications. Last quarter, you gave some color of some wins outside of your traditional IT customers, folks that weren’t using the IT [indiscernible] product.

Wondering if you could give some color on that, what you saw this quarter, what the pipeline looks like for the rest of the year..

That information is all anecdotal for the reasons that I mentioned earlier, which is now we’re just selling one service management SKU, and we let our customers decide how they use them. And over time, they actually move them around between one service domain, like IT, to another service domain, like facilities.

The downside of that, of course, is that we don’t have precise data anymore, whether the uptake is one discipline or another. But the anecdotal evidence is very, very strong, that the uptake in HR is very, very good. And the thing about human resources, we’re not just getting involved in the HR on the service management side either.

We’re involved in compensation planning applications, we’re involved in onboarding/offboarding applications. Actually going to show some of that with one of our partners at the conference next week.

So HR’s become a whole domain of service management applications, not just the traditional case management, knowledge management, request management, which is what people most associate with what we do. So these areas are getting much more deeper, much broader, than they historically have been understood.

The same thing is true in facilities areas as well. There’s capital request planning, there’s not just all the usual request oriented type of applications. So the nice thing about getting time in market for these apps is that we’re getting past the standard service management capabilities into a lot of other interesting areas.

That’s just how our business develops. People start understanding what the platform can do for them, and then the new services are being discovered, that are interesting to be stood up on our platform..

And just obviously building on some of the anecdotal side, because obviously you guys do have that single SKU now, but when you think about sort of the near and the long term, just the end user side here, especially kind of the newer user bases that you’re going after - you’ve obviously talked about HR, field service, facilities management, GRC, you even made an acquisition in GRC - which do you think is a bigger near term opportunity that can drive revenue for you faster versus what’s the bigger, longer term market for you?.

Well, I think that the IT operations management, especially under the influence of our Service Watch product, which we acquired last summer, I think it’s a super important product. There is a ton of interest in the product. There’s a lot of proof of value kind of steps going on.

So we’re very excited about that, because it’s the tip of the spear, if you will, for our entire operations management strategy, and it just leverages the services management side absolutely perfectly. So we see that as an important area for us. Service management is such a big area. We got started in IT.

Obviously, everybody understands that part of our business. Then we’re getting into adjacent service domains, sometimes referred to as business services. But increasingly, we’re getting involved into, with services now, that actually run the business not just support the business. And I mentioned this in the prepared remarks as well.

Next week at conference, we have somebody speaking on how they’re running an admissions process inside a university, which is really more like a CRM application. And in other words, a lot of the boundaries that we’ve traditionally seen between CRM applications and service management applications are becoming much fuzzier.

And we’re now involved in take offs against SalesForce and Oracle, and companies like that. Well, you never saw that a few short years ago. So that’s all very existing for us, and that’s why I mentioned the product line reorganization we did last December, because our organizations are really getting in position to drive us down those paths..

And at this time, there are no additional questions in the queue. I would now like to turn the call back over to management for closing remarks..

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