Michael P. Scarpelli - ServiceNow, Inc. John J. Donahoe - ServiceNow, Inc..

Kirk Materne - Evercore Group LLC Sarah Hindlian - Macquarie Capital (USA), Inc. Raimo Lenschow - Barclays Capital, Inc. Keith Eric Weiss - Morgan Stanley & Co. LLC Matthew George Hedberg - RBC Capital Markets LLC Justin A. Furby - William Blair & Co. LLC Walter H. Pritchard - Citigroup Global Markets, Inc. Michael Turits - Raymond James & Associates, Inc.

Robert Owens - Pacific Crest Securities, Inc. Jesse Hulsing - Goldman Sachs & Co. Greg R. McDowell - JMP Securities LLC Richard Hugh Davis - Canaccord Genuity, Inc. Derrick Wood - Cowen & Co. LLC Philip Winslow - Wells Fargo Securities LLC Kash Rangan - Bank of America Merrill Lynch.

Good day, ladies and gentlemen, and welcome to the ServiceNow Q1 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following managements prepared remarks, we will host the question-and-answer session and our instructions will follow at that time.

As a reminder, this conference is being recorded for replay purposes. It is now my pleasure to hand the conference over to Mr. Mike Scarpelli, Chief Financial Officer. Sir, you may begin..

Good afternoon, and thank you for joining us. On the call with me today is John Donahoe, our President and Chief Executive Officer. Our press release, investor presentation and broadcast of this call can be accessed at investors.servicenow.com.

We may make forward-looking statements on this conference call such as those using the words may, 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 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. Before diving into our Q1 highlights, I want to take a moment to acknowledge Frank Slootman's leadership at ServiceNow. When Frank became CEO six years ago, ServiceNow had 375 employees and only $93 million in revenue.

One year later, in June of 2012, Frank led the company through an IPO. Since that time, ServiceNow has been the best performing stock of all software IPOs.

Today, ServiceNow employs over 5,000 people, generates revenue of $1.4 billion and has a market cap of approximately $15 billion, representing incredible growth and value creation during Frank's tenure. Along the way, he built outstanding relationships with our employees, our customers, partners and investors.

And I'm inheriting a well-managed, well-positioned organization. Frank has been extremely helpful during this transition, and I look forward to continuing to work with him as our Chairman of the Board. I could not be more excited about leading ServiceNow into our next phase of growth.

When I stepped down as CEO of eBay, I had the opportunity to survey the technology landscape. And it became clear to me that cloud businesses are disrupting both consumer and enterprise experiences for the better. I witnessed this firsthand in the consumer space where cloud-based applications like eBay and PayPal are transforming how consumers behave.

But we're still in the early innings of enterprise transformation and a lot of opportunity remains. I first met ServiceNow while I was at eBay as a happy and satisfied customer. And the more I explored this opportunity, the more I fell in love with this company.

I believe ServiceNow has the potential to become one of the great enterprise software companies of this era and I'm committed to building an enduring company. I've been on board for a little over three weeks, and have had the good fortune of spending that time listening and learning from our customers, partners and employees.

In fact, I just returned from my two-and-a-half week listening tour where I met with over 70 different customers in eight cities across the U.S. During these conversations, three themes stood out. The first is that our customers absolutely love our products and they love our platform. And importantly, they want to do more with us.

Rarely in my business career have I seen such an enthusiastic customer base. We pride ourselves in high customer satisfaction and our average NPS score is 50, which is considered world-class for the enterprise technology industry. Once we land a customer, they continue to buy from us as is demonstrated by our 97% renewal rate in Q1.

A second theme is that many of the largest systems integrators in the world are rapidly investing in ServiceNow's ecosystem. As we look to $4 billion of revenue and beyond, our partners will significantly influence our growth as they implement solutions for our shared customers, provide outsourcing services and consume our products internally.

To more quickly respond to increased ServiceNow demand, the largest SIs continue to acquire smaller ServiceNow partners. For example, in Q1, Accenture made two additional European partner acquisitions. I recently met with Jack Sepple, Senior Managing Director of Accenture's Cloud and Operations Group.

And he said that these acquisitions show that Accenture is focusing on ServiceNow growth as they seek to maintain their leadership position in the ServiceNow ecosystem. In Q1, 62% of our ACV was influenced by partners and we expect that percentage to increase in the years ahead.

The third theme is that we have a real opportunity to raise our visibility and awareness with executives and decision makers across the enterprise. We're well-known within IT and with CIOs. But our platform is being aggressively deployed outside of IT to provide real value in areas such as HR, security and customer service.

And we continue to show strong growth addressing new product opportunities as 93% of all customers now license more than one product and 47% of our Q1 net new ACV came outside of ITSM compared with 33% a year ago. In Q1, we continue to see this theme play out, with strong up-sells driven by existing customers adopting new used cases.

For example, a Global 50 customer that pays $2.5 million for ITSM added an additional $1.7 million primarily for Customer Service Management and ServiceWatch. Another interesting trend we're seeing is the extension of our platform to manage relationships outside the enterprise.

This customer is using ServiceWatch to not only map internal services, but also map external services and they're using customer support management to resolve the underlying issues. In my discussions with customers, they increasingly view our platform as a way to manage work across and outside of enterprise.

This awareness makes ServiceNow even more relevant and more strategic to our customers, and we're excited by this large opportunity. Rapid success and strong growth in many of our newer products is driven by the commonality of our cloud infrastructure and our platform, which are inherent in each of our products.

Our platform includes many reusable components such as workflow, CMDB, collaboration, analytics and intelligent automation. The strength of our platform provides customers with a full range of service options while maintaining the same look, feel and common usability.

This strategy will be a key theme at our upcoming Knowledge Conference and Financial Analyst Day in Orlando, and I hope to see many of you there. In closing, I want to reiterate how excited I am to lead ServiceNow in the next leg of growth.

Our Q1 results and my recent discussions with customers, employees and partners strengthen my view on our tremendous opportunity and my belief that our best days are ahead. And with that, I'll turn the call back over to Mike..

Thank you, John. During today's call, we will review our first quarter financial results and discuss our financial guidance for Q2 and full-year 2017. 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. To see the reconciliation between these non-GAAP and GAAP results, please refer to our press release filed earlier today and for prior quarter's previously filed press releases, all of which are posted at investors.servicenow.com.

We ended the quarter posting strong operating metrics across the board. 370 customers now pay us more than $1 million in ACV, an increase of 28 in the quarter compared to an increase of 18 in Q1 2016. We also added 26 G2K logos in the quarter, including 11 in Americas, eight in EMEA and seven in APAC.

Our average ACV per G2K is now approximately $1.1 million, a 2% sequential increase. Total revenues for the first quarter were $417 million, representing year-over-year growth of 36% and an adjusted growth of 39% or an impact of $7 million.

Total billings were $529 million, representing year-over-year growth of 40% and an adjusted growth of 37% or an impact of $12 million. Subscription gross margin in the quarter was 84%. Professional services and other gross margin was 4%. Overall, gross margin was 76% and operating margin was 13%. Free cash flow margin was 37%.

And we ended the quarter with $1.3 billion in cash, short-term and long-term investments. Let's turn to guidance for the second quarter and full-year 2017. For the second quarter, we expect total revenues between $458 million and $463 million, representing 34% to 36% year-over-year growth and 37% to 39% adjusted growth on a $11 million impact.

Revenue guidance includes approximately $16 million related to Knowledge with the related expenses of approximately $34 million recorded in sales and marketing. We expect total billings between $491 million and $496 million, representing 31% to 32% year-over-year growth and 36% to 37% adjusted growth or an $18 million impact.

We expect an operating margin of approximately 11% and diluted weighted average shares outstanding to be approximately 179 million. For the full year of 2017, we expect total revenues between $1.86 billion and $1.88 billion, representing 34% to 35% year-over-year growth and 36% to 37% adjusted growth or a $26 million impact.

We expect total billings between $2.235 billion and $2.255 billion representing 32% to 33% year-over-year growth and 34% to 36% adjusted growth or a $37 million impact. We expect subscription gross margin of 84%, professional services and other gross margin of 15%, total gross margin of 77%, operating margin of 16% and free cash flow margin of 25%.

We expect diluted weighted average shares outstanding to be approximately 179 million for the year and expect to add approximately 1,200 net employees in 2017. Before closing, please note, our Financial Analyst Day will be held on Monday, May 8 in Orlando at 12:30 PM local time. We will also hold a webcast event accessible on our IR website.

With that, operator, you can now open up the line for questions..

Thank you. Our first question will come from the line of Kirk Materne with Evercore ISI. Please proceed..

Thanks very much, and congrats on the quarter. John, maybe I'll start with you and congratulations on the new position..

Thank you..

You mentioned the opportunity for ServiceNow to move beyond IT. I was just kind of wondering – yeah, I realize you've been here very short time.

But what needs to happen in terms of – is the product portfolio ready to go in that regard? Is the sales organization set up to be able to do that? Is there a lot of heavy lifting, I guess, left to do to kind of get you – your people are already using you outside of IT.

What do you think has to happen to sort of take that next step to start talking to more line of business heads and CEO types?.

Well, the thing that was striking, Kirk, as I mentioned, because I am new to the enterprise space, I wanted to hear directly from the eyes and ears of customers. And so, I've been on a sort of intensive customer listening tour and had a chance to meet with over 70 different customers over the last 2.5 weeks.

And what was striking is that the quality of growth is exactly what you'd want in that our platform is getting pulled into new used cases by the customers themselves. They see this platform as an opportunity to any place there is a workflow or any place where they can divide a service that we can do for them there what we've done in ITSM.

And so, you just listen to that, whether they either building their own applications or asking us to build applications. And my observation is what the company has done a very good job on over the last couple years is to recognize that and then build these new products or new services into the platform.

So, build the HR, build customer support, build security. And you see the customers appreciating that.

And they're asking to see more of our roadmaps, because they're saying, before I take it further and customize it even further, I want to see what your roadmaps are because if I can get it out of your platform, off-the-shelf, out of (15:10) and that's my preference.

And so, there was a strong desire to share roadmaps and have them influence our roadmap and I must respond.

From what I saw, I think the sales coordination between the sales reps, the product line specialists, our Inspire team and frankly some of our vertical teams in the few verticals that we have them, the coordination seemed strong and then the product teams, we're still the size where our product teams can be directly engaging with customers.

And so, I think the path for the future is to continue that path as we get pulled into new used cases and to deepen our sort of a footprint and track record in these new areas..

Great. And just a quick follow-up for Mike. ACV growth in the other category was particularly strong this quarter, Mike.

Was there any product or set of products that was very strong for you guys? I realize it's a compilation of products, but just anything that stood out necessarily?.

No. We really saw strength across the board. If you look at our HR ITOM, our security ops that was pretty strong. I would say, our IT business management was very strong and that probably had the highest growth rate year-over-year and that includes performance analytics in that bucket. ITOM was strong, down from Q4.

But as we said before, Q4 they tend to be lumpier, bigger deals and Q4 was just such a strong ITOM quarter. So, all-in-all, we're very pleased with our overall ACV performance relative to our plan. And that's reflected in our results, you can see that in the billings and you can see that in the subscription revenue..

Great. Thanks very much..

Thank you. Our next question will come from the line of Sarah Hindlian with Macquarie. Please proceed..

Hi. Great. Thank you. Congratulations on a blowout quarter, guys. And welcome, John, looking forward to working with you. I think one thing that we probably spend a little bit of time on, and I think may be underappreciated in the stock is, what you're doing with your channel partners, and how that ecosystem is evolving.

We saw a lot of headlines come out this quarter. Would love to hear a little bit about how you're thinking about the channel. What you're seeing there, versus last quarter? And how it's affecting or impacting your go-to-market? And then I have a quick follow-up for Mike..

Yeah. Actually, I was going to jump in, Sarah, its Mike, and I can answer this....

Sure, of course..

...and given John is relatively new, what I would say is, over the last kind of six to nine months, we've been investing extremely heavy in our whole channel organization to develop both the GSIs and the local partners. And we're starting to see that really pay off.

As John mentioned, 62% of our ACV is now influenced by partners and I expect that will continue to increase over time..

And Sarah, what I'd just add is, I did have a chance, as I mentioned, to meet with Jack at Accenture and talk with Mike Lawrie at CSC and the folks at IBM.

And I think everyone senses this is a platform that's growing and expanding, and we want to mutually invest in it to ensure that we're providing the training, not just in the ITSM product but in the new products.

I heard a lot from customers, asking us to play a more proactive role in ensuring that local, smaller partners are getting trained and vetted as to provide help in the implementation integration, again, largely in some of the newer products.

And so you just get the sense that the ecosystem is just starting to pick up and hit a next level of traction and we'll continue to focus on that and invest in it..

All right. That's fantastic. And just another really quick one for you Mike. Duration, I know that moves around on you guys a lot.

What's sort of driving customer decisions on duration? And is there any particular trend there if it's worth calling out for us?.

Are you talking in billings duration, or are you talking in contract....

Yeah, billings..

...that whole issue on billings duration is really driven by our partners or customers. Certain of our customers or partners have requirements to capitalize. They will prepay multiple years in advance. And that's exactly what happened with one of our big MSP partners in the end of the quarter that they prepaid it.

Well, they agreed they wanted five-year billings in advance and that was the end of the quarter, that cash will flow through this quarter..

Okay, very interesting. Thank you. Congratulations. And welcome on board, John..

Thank you, Sarah..

Thank you. Our next question will come from the line of Raimo Lenschow with Barclays. Please proceed..

Hey, thanks for taking my questions. And John, welcome and congrats on a great quarter from me as well. And hey, John, I would assume part of your mandate is that you've been one on the management side that has seen the company go from $1 billion to kind of several billions in terms of run rate.

What do you see in terms of process and hardening of processes within ServiceNow to kind of get the company to the next level? Thank you..

Well, I'll tell you what attracted me here, which I really liked. It's the foundation to build on, was a couple of things. One, the quality of the platform. This platform is architected the right way.

Fred Luddy deserves enormous credit, because as I did my due diligence about this platform and then as I listened to customers, everyone says what a flexible, easy-to-build on and extensible platform it is. The other thing that I found interesting and attractive was the organic growth.

A lot of the innovation at ServiceNow has been organically developed. You don't see that very often. Usually, technology companies have a one-hit wonder. And then use M&A to add in new innovations.

And because of the way the platform is architected and because of the way Frank and team have really jumped on the HR, customer support, security, business applications, you see organically built innovation and a muscle and a track record to begin to do that.

And so, I think with that engine that innovation engine has to be the core of the core of any successful technology organization.

And when you got that, then it's a matter of, all right, how do we build out the sales force going from a single product to multi-product? Again, over the last 12 to 24 months, the company has made significant progress on that. That will continue.

How do you go from one market to global? Again, strong progress in the U.S., increasingly 30% of our business is outside the U.S. We want to accelerate that global growth, that global development. One of the wonderful things about a technology business is that you can be global instantly.

The ability to recruit, develop and retain our team, right? We're becoming a larger team, a more global team. We had to invest a little bit more in process. I'm not a zealot about developing top talent, retaining top talent and we'll continue to do that here. And then lastly, just our customer management.

As I mentioned in my remarks, we sort of have grown up through the IT world and are well-known in that world. Our products getting pulled out of IT. We have very good new and emerging reputation. And I think we have an opportunity to elevate and expand our customer relationships.

So, we can build strong, deep, enduring relationships that are founded on great product, but also followed through on great service and great delivery..

Perfect. And one follow-up for Mike. Mike, your cash flow came in very strong. The cash generation for the company is great.

How do you think about usage of cash? I know it's a little bit early, but how are you guys thinking about that?.

Well, as you know right now, we have started doing in that settlement of our issues and we are using a portion of that to pay the taxes on our issues. So, in essence, issue less our issues. Until we are GAAP profitable, we will not look at doing any type of share repurchase. But eventually, that will most likely be what we do first.

But obviously, we will be opportunistic in terms of M&A. To-date, there hasn't been anything that compelling. But we will continue to look. And if and when we see something compelling, we'll do something..

Perfect. Thank you. Well done. Congrats..

Thank you. Our next question will come from the line of Keith Weiss with Morgan Stanley. Please proceed..

Excellent. Thank you guys for taking the question, and very nice quarter. I want to dig in a little bit more on the sort of those other products, I think that's a 50% growth in terms of percentage of new ACVs, one of the most striking figures on the page there. And two questions on that.

One, as that becomes a bigger and bigger part of the business, is there a different competitor set that you're facing now that the value proposition is becoming more of like automating all work? And if so, who are the competitors that you're going up against in those deals, number one.

And the second part of the question is, and you touched on this a little bit before, John. In terms of getting the sales organization in place to sell sort of outside the IT department against these new competitors, I know we've done a lot over the past year or two.

Is there anything significant we should be thinking about in terms of further sales reorganizations as we head into FY 2017?.

Keith, it's interesting, because I sort of been training through my 20 years at Bain and my 10 years in the consumer Internet to always start by looking through the eyes of the customer when I'm thinking about a market or a competitive environment.

And what was striking in the 70-some-odd conversations I have is that in the eyes of the customer, ServiceNow is addressing a need that the other platforms weren't really designed to do. They think of ServiceNow anytime a workflow is involved. And often these workflows, and increasingly workflows cut across organizational boundaries.

And simply put, they want to reduce complexity, simplify and automate and then empower their employees to focus on higher value-added activities, whether it's IT employees or security analysts or CS agents.

And so, I was asking him, how would you describe ServiceNow? And I hear words like you guys are the workflow automation engine or the business process optimization platform. And so, customers don't see our platform as competitive with other platforms because they're looking at us through a different set of lenses.

And so, in fact what they said is, they want us to more seamlessly connect with the other platforms because they view it as complementary. And so, I guess the lesson I learned from the consumer Internet is, eight years ago, there's all this talk about the big platforms potentially competing with one another.

And if you look at what happened, most of them focused on innovation, focused on delivering for their customers and there was ample room for growth for both. And I think we've got that kind of white space. What we do, others are not doing.

And if we continue to innovate and continue to drive hard in that direction, we're going to focus on innovating, satisfying our customers and I think when you do that, the rest takes care of itself..

Got it.

And then on any significant sales changes expected for FY 2017?.

I don't think so.

Mike?.

No. For 2017, we discussed everything in our January conference call what we're doing, and that was really more just the verticalization of we're starting with the SLED/MED area, State, Local, Education and Medical. And we're not planning on doing anything else as of today in 2017..

I touched on this a minute ago, but one of the things that was also striking, and I think it's a testament to the culture here and frankly, to Dave Schneider and Kevin Haverty, and the sales team they built rather.

But they're just wonderful teamwork of on-the-ground, do I need to bring in a product specialist, do I need to bring in a vertical specialist, do I need to bring in the Inspire team? The ability to bring others in quickly respond, team up, was very noticeable when I was out on the road..

Got it. Again, excellent quarter, guys. Thank you..

Thanks..

Thank you. Our next question will come from the line of Matt Hedberg with RBC Capital Markets. Please proceed..

Hey, thanks for taking my question. I'll offer my congrats as well to John. I had a question. I wanted to follow-up on an earlier comment on the partner network, and dig a little bit deeper into your expanded relationship with IBM.

I mean, how should we think about that helping drive growth? Yet you guys have spent a lot of time talking about Accenture, but IBM to us seems like a pretty interesting opportunity as well..

Well, I can comment what I know, which is still early days, and having had a little bit of exposure to it. But obviously, IBM is a great company and we've very complementary skill sets and capabilities.

And so, the dialogs I've been involved in, which admittedly have been few thus far in only three weeks, are talking about how can we go-to-market together? How can we have our product be a compete component of their service offering and how can we jointly serve customers effectively together? And so, I think it's an important partner and one that will grow..

I would just add that today, IBM now is our largest MSP that we have in terms of direct revenue from point (29:03)..

That's great, Mike. And then maybe a quick follow-up.

ACV per G2K is trending nicely towards your 2020 target of $2 million, but with the momentum that you're seeing in multi-product sales and new use cases, is it reasonable to think that spend can move closer something like north of $5 million in ACV per G2K customer at some point in the future?.

I like the way he thinks..

Yeah. Now, let's get to the $2 million and then we'll look at taking it up. I don't disagree with you that I think the $2 million is definitely a relatively conservative number, especially when you look at the IT budgets of these large Global 2000. We're just taking a very, very, very small piece of that overall budget.

So, I think as we develop and get better, add value selling to our customers beyond the CIO, I think you'll see that number move up..

Thanks, guys..

Thank you. Our next question will come from the line of Justin Furby with William Blair. Please proceed..

Thanks, and congrats on a fabulous quarter. And John, I'll offer my congrats as well. I wanted to actually start with you around the tour over the last few weeks in terms of the large customers that you've been talking with.

I'm just curious when you're having these conversations, what you're hearing from them in terms of their plans around public cloud adoption and sort of where they see ServiceNow fitting into that? And then I've got one follow-up for Mike..

Well, it's obviously every – I think probably without exception, every one of them is embracing cloud aggressively. And the far majority, that pattern you say is, there is a consolidation of IT responsibility and technology responsibility inside of these enterprises.

So, there is a central group, a central often IT, sometimes they're calling them technology solutions group, but sort of operating on behalf of the enterprise. And you have a spectrum.

You have more regulated industries, where they're building, they have significant cloud offerings themselves, private clouds, much like we did at eBay or PayPal or we have at ServiceNow. Many of the banks have this, financial services, healthcare.

And they intend to be largely private clouds, because I think they have the scale and capability to do that. On the other end of the spectrum, you obviously have some companies that are moving to the public cloud to the absolute maximum extent possible. And a very few are all the way there, but you see them in process.

And then I would say the bulk are in the middle where they intend to have some sort of blend, hybrid cloud, public and private.

And one of the interesting new products or interesting areas where we ended up having a fair amount of conversation, we have a Cloud Management product that is helping, because part of what they're saying is, can you help? Is there any way you can help us in this learning journey, in this journey moving to the cloud? And so, our Cloud Management product, I think is one that's going to be we'll be updating it in the Jakarta release, is one there is a lot of interest in and I think there's some real value in that..

Got it. Thanks. And then, I guess, maybe probably best for Mike on this one. In terms of the ecosystem, it's interesting that the G2K adds have picked up, if you look over the last six quarters versus the prior six quarters, even as your penetration keeps coming up.

But I'm just wondering if you'd feel like that's a reflection of the bigger SIs knocking down walls for you. Is it your competitive positioning improving? I guess, what do you attribute, does it feel like it's getting any easier in terms of identifying new opportunities and new G2Ks versus maybe a few years ago? Thanks..

Well, what I'll say, it's pretty easy to identify an opportunity with the G2K because there's 2000 of them, so you know who they are. And so, we tend to put people on the ground where those people are – and so just by virtue of having more people, it makes it easier.

And as we've been expanding in APAC and more in EMEA, you're seeing the G2K we're landing there. Remember, these are long sales cycle selling into the G2K. These are not find them in a quarter and close them. Many G2Ks are two-plus years sales cycles. And so, we've pretty good visibility into that. So, it's no big surprise.

And I think this will be another good year of G2Ks in total for us. And we have a very large or a big focus on G2K, as you know..

Got it. Thanks very much, and congrats again..

Thank you. Our next question will come from the line of Walter Pritchard with Citi. Please proceed..

Thanks. I guess continuing on that question on the G2K side. Can you talk about, I guess, APAC specifically? That looks like a pretty good quarter for adds there.

Can you talk about how comfortable you are with that traction and momentum continuing in APAC? Would you attribute the success there to? And how are you doing in APAC with adding additional products like you have in the U.S.

and in Europe?.

Well, when we roll out a product, we roll that product out in all markets. So, we're not rolling products just out in the U.S. for instance. You can buy our HR product or security ops or customer service in all markets.

What I will say is, we're seeing very good traction of Customer Service Management in APAC right now, but as well, you see the other products there. And I will say China is the one market that we really don't have any presence in China.

There's a big chunk of G2K there, but we're doing very well in places like Indonesia, in Singapore, Japan is starting to take off for us. Australia has always been a big market there. So, it's a lot of work.

I think it was probably a little higher in Q1 than I would have expected out of APAC, but for the year, I feel very good about APAC in terms of new G2K logos..

Great. Thank you..

In terms of finding people, we don't have any issue finding people over there..

Got it. Thanks..

Thank you. Our next question will come from the line of Michael Turits with Raymond James. Please proceed..

Hey, guys. Good evening, John. Of course, congratulations and welcome. I look forward to working with you..

Thank you..

I had two questions. One, which I think maybe both you and Mike have addressed this around Fed, which obviously has been a strong area for you. But you've recently gotten FedRAMP and there's even more opportunity there. How do you view that opportunity around Fed? And then Mike, I had a follow-up question on another topic..

To be honest, Michael, I didn't meet in this particular trip with any Federal customers, I don't believe. So, I know the sales team there is strong, and we've got a good track record. But Mike, you may be able to add more color..

Yeah. I think Fed has – it's a huge opportunity in the Federal Government. I will say Q1 is generally not a big quarter with the Federal. We pretty much were right on plan where we expected, but it's not a big number as you know. Q3 will be the big Fed quarter for us, and we have a good pipeline of opportunities for, in particular, Q3..

Right. And then my follow-up, Michael, is another question on duration. You explained this quarter's greater duration at five-year prepaid.

But three things around duration, one, especially with those multiyear prepaid, any pressure increase that we should be aware for discounting there? And then secondly, there's been a countervailing trend, I think, in the industry towards shorter billing duration, and in some cases, less than a year. So, obviously, it net out that way this quarter.

But is that increasing if that you're aware of?.

So, for this one customer in particular that was a five-year prepay. There was no discount to get them to prepay. They insisted on doing it, not us, because they want to capitalize that amount and treat it as CapEx. So, we allowed them to do that.

I don't disagree that there is more pressure on shorter billings for customers, especially as you deal more with MSPs where their customers are paying them monthly. But our pricing is all based upon 12 months billing in advance. And so, if customers are going to push for shorter billing terms, they're going to end up paying for it with less discount.

And there's absolutely no incentive, by the way, for our reps today to bring in multiple years in advance from a customer. We removed that a while ago..

Right. Mike, thanks very much. Thanks, John..

Welcome..

Thank you. Our next question will come from the line of Rob Owens with Pacific Crest Securities. Please proceed..

Hi. Thanks for taking my question. So, Mike, just to be clear on that, as we look at forward billings expectations and how we ramp our models, we shouldn't see an increase to long-term deferred. You've had just kind of the one customer here and then another specific event that happened during the fourth quarter.

But as we move forward, the growth should really be in short-term..

We really forecast the growth all to be in short-term because many of these multiyear billings in advance, we find out about them last minute. They're very hard to forecast. And we give you guys full transparency when they do occur, telling you..

Great. Thanks for the clarification there.

Number two, if I look at your top 20 new deals and the success you're seeing with multi-products, and 16 of the top 20 was three or more, is there any change in the selling motion that's affording you this success? Are partners contributing to this? Is this doing anything to sales cycles? Would just love more color..

Yeah. I haven't seen any noticeable change in sales cycles yet. I will say, as we mentioned, partners now touch 62% of our ACV. So, obviously, they're helping. It's really hard to give you a, to say our X% of our ACV is specific by our partners. As we've talked in the past, these are self-reported numbers.

So, I really don't know how good those partner influence metrics are that we give you. All I know is this is definitely not hurting us..

Okay. Thanks..

Thank you. Our next question will come from the line of Jesse Hulsing with Goldman Sachs. Please proceed..

Thank you. John, congratulations. I have a question about, I guess, your strategy or, I guess, your vision that's just may be starting to formulate after you've talked to customers for the IT department, and I guess the addressable wallet there. It sounds like you see a lot of opportunity expanding outside of IT.

But I'm wondering what adjacencies or what opportunities you see within the IT department?.

Well, what's interesting is, I see an evolution of the IT department itself. And you sort of see that midstream. Interestingly, I've seen this on the boards I sit on, with the CIOs.

And I saw this over the last couple of weeks that you see the CIOs increasingly being drawn to BV, almost the Chief Transformation Officer and that these companies recognize that technology can help transform how they operate, right? And the goal of every company is to minimize the resources consumed in the running of the company and maximize the resources devoted to innovation and your end customers.

And so because technology can really help reduce complexity, simplify, automate and empower employees to be more customer facing, the CIO is often the most technology literate senior executive.

And so, they're being called on to drive what mild, we would have called business process reengineering, technology-enabled business process reengineering across the enterprise.

And so, while on one hand we report HR product, customer support product, security product, you see the CIOs or IT touching these because they're going after them as workflows. And the CIOs have workflow capability. And increasingly, I think in respect to the larger companies, they're looking for the CEO to play that role.

The other thing that's I think sort of acting as early kerosene on this trend is just the movement toward intelligent automation, machine learning, deep learning where data and analytics can help automate these processes and help you go from being reactive and responsive to being more predictive and addressing the root cause and remediating it.

And the center of where that knowledge often is going to reside inside the enterprise.

So, you're not going to build machine learning capability in every department, you're going to say, all right, where's our machine learning? Just as you often have a big data analytics group, you're going to have machine learning or what we call intelligent automation group. And I think that's going to reside in IT.

So, I see an expanding role of IT in many of these enterprises..

Got it. And then a quick follow-up for Mike that he kind of touches on that last point.

How is the re-platforming of DxContinuum going? And have you guys put more thought to how you'll embed that into your platform? And I guess price? Do you see opportunity for a new SKU or a price uplift for kind of intelligent capabilities?.

So, as you know, we just bought DxContinuum early in this year. Our plan is that this will be coming out with our Kingston release, which is the end second half of 2017 towards the end of the year. We're still working on pricing on that. So, stay tuned..

But what's interesting is, and what I've come to really respect is, I would call, the ServiceNow approached this. We bought DxContinuum, and the first step is to rewrite it into the platform. And so it's part of the platform. It's embedded in the platform, so that all customers can capitalize it and take advantage of it, including all of our products.

And then second, instead of it just being Machine-Learning-as-a-Service or AI-as-a-Service, we picked four specific used cases where there's clear need and are applying it to the used cases so that when it gets launched, when it gets announced, acknowledged and then launched, our customers will be able to use that immediately on real world problems that they're facing, within the context of our existing platform, within the context of our existing products.

And so, I have a lot of respect for the way that this trend of taking these acquisitions and re-platforming them or rewriting them into the platform because you see that our customers are going to be able to benefit from it quickly..

Got it. Helpful. Thanks, guys..

Thank you. Our next question will come from the line of Greg McDowell with JMP Securities. Please proceed..

Great. Thank you very much. Hi, John; hi, Mike. John, I want to ask about your first couple of months, maybe from a different angle.

Is there anything you've heard or learned that has made you maybe rethink some of your original assumptions before joining ServiceNow? Or any areas of maybe the original operating plan that that you've discovered, and whether talking to customers or talking to employees? Need a little fine tuning. Thanks..

Well, it's been three weeks. So that we announced it two months ago, I only started three weeks ago..

Of course..

But Greg, we had a board meeting (45:22) yesterday. I'll just be honest. I said to the board, I'm thrilled. And I'm not just saying it, I said it to them that sure, there's a lot of opportunities to mature and grow and expand as we more naturally deal with the success the company's had, absolutely.

But the two things that I appreciate, which are the two things that are really hard to – you can learn to scale, you can learn to go global, you can learn to evolve, but it's the core of innovation, there's a core innovation capability here. The quality of the platform, the core innovation capability, I think, is real.

And that was a real question for me listening to these customers, and they validated that. And then again, great credit to Frank and Mike and the historical culture here. There's no arrogance in this culture. This culture wants to win. They're willing to change. It's not caught up in its ways just because we've had success doing it.

And so, there is a real focus on, all right, what do we need to do to get to $4 billion, right? What do we need to do? What do we need to evolve? What do we need to change? And so, with the product and the culture being quite healthy then, everything else is manageable.

Do we need to allocate more resource in one country for another? And probably we do. Do we need to be more systematic in our leadership developments? Probably we do. Do we need to continue to evolve our post sale coverage of our customers? We probably do. But all of those things are things other people have done before.

And we can draw from best practice. The things that are hard to do when you don't have them are the innovation and the culture. And I'm very appreciative of those two things..

That's helpful. Thanks..

Thank you. Our next question will come from the line of Richard Davis with Canaccord. Please proceed..

Hi. Very quickly, you kind of touched on this. But some of the companies that we track have faced a little bit of capacity constraint. That's kind of a good news, bad news on the professional services side of the house, simply because there's been a lot of consolidation. Have you seen any of that? And that's really the only question I had. Thanks..

And Richard, do you mean our own professional services organization or....

No, partners. Partners..

Partners. I don't know, Mike, if we....

I would say, I've heard this comment from some of our bigger partners and from some of our salespeople. One of the number one concerns from partners is finding people that are trained on ServiceNow already, because they're in such high demand.

So, that means they have to hire people and do all the training themselves where they'd rather find some people especially as they want to go into new geos and start practices, because they are finding they have to have people close to where their customers are, because customers are asking that.

But we've been hearing that same thing for the last five years, quite frankly..

Got it..

So, we're very focused internally here on training our partners and we will get better at that over time as well too, as well as training our customers..

Thank you so much..

Thank you. Our next question will come from the line of Derrick Wood with Cowen. Please proceed..

Thanks, and great job on the quarter. I wanted to ask about the customer service side of the fence. We're hearing you show up more in RFPs. And Mike, I know when you entered the market 18 months ago, you gave some figures, I think out of the gate, there were a handful of customers, a couple quarters later, you had a couple dozen.

I'm just curious, can this become a bigger volume business, or is it still kind of lumpy? And is the focus kind of upper mid-market or G2K or both? Just a little more color around how activity has been trending in this area..

What I would say is, this is a market that our commercial guys are excited about and they're able to do big deals. We've done a number of big deals in the commercial segment, but as well, we are seeing G2K customers buy our CSM product. So, I think it's applicable across the board..

Okay.

And from a volume standpoint, is it still kind of early in terms of ramping up volume versus where it was a year ago?.

Obviously, it's been growing year-over-year. We had a very good Q1 with that. We actually did close to – one deal was close to $1 million. And that was a commercial account that we sold that into, I'll say, in Q2. We closed a very nice deal with the G2K already in Japan. So, we're pretty excited about that product.

But I'm no more excited about that product than I'm about HR security ops. All of these products standalone can be billion-dollar revenue businesses one day. Now that's quite a ways off, but I do feel pretty positive about those all three businesses..

Great. And Mike, you took up free cash flow margin guidance from 24% to 25% for the year.

Was this based on the strong Q1 and strong multiyear payment cash? Or are there other elements driving this?.

Mainly through the strong Q1. And we're going to talk more about free cash flow and the puts and takes at our Analyst Day..

Great. Thanks..

Thank you. Our next question will come from the line of Phil Winslow with Wells Fargo. Please proceed..

Hi, guys. Thanks guys for taking my question, and I want to pass along my congratulations as well, John. A question actually to both you guys on just the balance there that you're doing, or how sort of you're focusing on the sales force and go-to-market efforts because clearly you continue to add your G2K customers.

But also if you look at the rest of the slides, your ACV per customer is going up and obviously, the customers with multiple products that percentage is increasing.

So, how are you balancing just, call it, the ability to up-sell into existing ones and grow AR that way relative to bring on net new?.

I'll answer that one, Phil. First of all, I want to clarify it. 73% of our customers are now have bought multiple products, not 93.

And what I would say is, the way we balance that is, as we talked about in January of 2015, our whole go-to-market where we segmented our sales force between commercial and enterprise, but we further segmented it between account executives and client account managers and directors.

The client account managers and directors are really focused on our existing customers and going back into those existing customers and making sure they renew, they buy more of their existing product, but also that's where we target our new products going to them. And our client account executives are focused on landing those new clients.

And what's been very helpful is now having more product in their bag when they go into a customer, if they realize a customer isn't ready for an ITSM replacement right now, because this is not a priority to that department, we can now sell something else and could potentially do an HR replacement to begin or a new HR implementation because many times, we're replacing what was being done in email and we're seeing that same thing with customer service.

So that's our go-to-market. What I would say is, 70% to 75% of our net new ACV is really coming from our installed base of customers versus new customers. And we just think over time, that's going to become a bigger and bigger piece of our business as our installed base gets bigger..

Phil, building off of something what Mike just said and something he said earlier on the question about additional Y2K. I was struck. I spent a lot of time with sales reps the last couple of weeks and riding around with them. And a number of them that said, two years ago, I was covering 21 accounts, now we get to focus on three.

It's sort of the benefits of scale. The benefits of scale that allows that kind of focus on a Y2K account, which whether it's not yet a customer and we have cases where there's reps, as Mike said, it's a long sales cycle, who are assigned to Y2K, they may not generate revenue for a year, or if they're just covering existing customers.

And so, the benefits of scale are noted. As we get larger, that coverage gets easier.

Is that Y2K?.

Yes..

Sorry about that..

No, worry. I was with you. All right. Great..

A little bit in the past, I guess..

Thanks, guys..

We're running the acronyms..

Thank you. Our next question will come from the line of Kash Rangan with Bank of America Merrill Lynch. Please proceed..

Hey, guys. You did certainly take me back on a 1998 June nuclear winter with your Y2K comment. I thought I was 20 years younger for a moment..

Yeah, me too..

There's one question for John, and one for Mike. John, I mean, you had a bit of a different background. As you pointed out, not so much enterprise tech, more consumer tech and management consulting. As you look at that, typically enterprise tech companies, there are enterprise people that are CEOs and certainly, you have a very unique background.

How should we think about what are the things that you would be applying there uniquely based on your eBay and management consulting experience that is particularly asserted to ServiceNow and given its evolution? And one for Mike.

Mike, sorry to ask this, but how should we think about ASC 606 as to the additional level of disclosures? Any potential changes to your rev rec practice? Thank you so much..

Yeah, Kash. On the first, I'll just highlight a couple things. And to be clear, I had the benefit of joining a company that has enormous enterprise experience and expertise. And I think I bring two or three things. One is, I was a CEO.

I know what it's like to try to lead a large global enterprise, and I know the fundamental challenge or issue we're trying to address, which is how do you help an enterprise deal with all the complexity the technology has brought and turn technology into an asset, so that the enterprise can focus on where they want to focus, which is the things that drive value for them, which is innovating and delivering for their own customers.

And so, in dialogs with our customers already, I feel like I can relate to what the C-suite is looking for from our platform and others. Second, I spent 20 years at Bain and spent a lot of time talking to CEOs about business transformation. That's in essence what Bain did.

It didn't do the technology portion of business transformation, but the kind of transformation that we're involved in, our platform is one piece. But the workflow redesign that has to go with it is an important piece. And this is again a source of differentiation versus some of the other technology platforms.

If you just kind of automate that process, that doesn't help anyone. And so the way our clients are getting value out of our platform is not just the technology, but also the opportunity to redesign the processes, redesign the workflow so that you can simplify, streamline, automate.

And my Bain experience, I think, is in talking to some of our partners, I sort of been on that side of the table at one stage of my career. And then the third area might be something I referred to earlier, which is consumer internet is quite good at delivering user experience. And I think enterprise is behind on delivering comparable user experience.

And while ServiceNow has done a nice start with our service portal, there's ample opportunity to significantly improve the user experience, both for employees and for fulfillers. The IT professionals or others that are the administrators of our product.

And so, CJ decide who's running product technologies made this as number one priority, and I'll be spending a lot of time and attention on that as well..

And then Kash, on your question on ASC 606. So, first of all, we will be spending a little bit of time at our Financial Analyst Day talking about the impact of ASC 606. You'll also see when we file our Q, which will get filed next week, we will be putting disclosures with a range of the potential impact.

We will be adopting that full retroactive starting with the 2016 year, in terms of – and we will be doing that starting in Q1 2018. As you know that really only impacts us at a revenue line for our on-prem customers or customers who have the right to go on-prem without significant penalty.

The revenue impact in 2016 on $1.4 billion, if we had done that, would have been somewhere between $22 million to $27 million on the revenue side. And then you know, there are commissions today, we defer and amortize them over the contract period that gets changed under ASC 606.

The impact of that is it's going to push out roughly $23 million to $26 million in expense over a longer period of time. Net-net on an operating margin basis, we'd have a pickup of somewhere between $40 million to $50 million in all of 2016, if we had adopted it January 1.

On the disclosure side, we will be disclosing quarterly what's required on the backlog and deferred revenue and then how that backlog is going to roll off into revenue over the next 12 months.

And that also, you're required to disclose the impact of how much of your revenue came off your balance sheet from the beginning of the quarter, which we'll talk more about at our Financial Analyst Day..

And certainly here at Bank of America, we look forward to a better user experience relative to legacy, ITSM. Wishing you good luck, John and Mike..

Maybe you can help them become a customer..

Thank you. Ladies and gentlemen, this is all the time we have for questions today. So now, I'll be handing the call back over to Mr. Michael Scarpelli, Chief Financial Officer, for closing comments and remarks.

Sir?.

Thank you very much. And I apologize for the analyst who had questions and we didn't get a chance to answer them. But as a reminder, a replay of this call will be available as a webcast in the Investors section of our website. Thanks for joining us today..

Thank you..

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program and you may all disconnect. Everybody have a wonderful day..