Good day, ladies and gentlemen, welcome to the Q3 2018 ServiceNow Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require operator assistance, please press the star then the zero key on your touchtone telephone. As a reminder, this call will be recorded. I would now like to introduce your host for today's conference, Mr. Michael Scarpelli, Chief Financial Officer. You may begin.
Good afternoon, and thank you for joining us. On the call with me today is John Donahoe, our President, Chief Executive Officer. During today's call, we will review our third quarter financial results and discuss our financial guidance for full year 2018. We'd like to point out that the company reports non-GAAP results in addition to, and not as a substitute for or superior to, financial measures calculated in accordance with GAAP. All financial figures we will discuss today are non-GAAP, except for revenues and revenue growth. To see the reconciliation between these non-GAAP and GAAP results, please refer to our press release filed earlier today and, for prior quarters, previously filed press releases, all of which are posted at investors.servicenow.com.
We may make forward-looking statements on this conference call, such as those using the words may, will, expects, believes, or similar phrases, to convey that information is not historical fact. These statements are subject to risks, uncertainties, and assumptions. Please refer to the press release and risk factors in documents filed with the Securities and Exchange Commission, including our most recent quarterly report on Form 10-Q, for information on risks and uncertainties that may cause actual results to differ materially from those set forth in such forward-looking statements. I would now like to turn the call over to John.
Thanks, Mike. Good afternoon, everyone, and thank you for joining us on today's call. We had a strong third quarter, continuing our global momentum and accelerating our role as a strategic partner enabling digital transformation. Our teams continue to execute well, and our focus and commitment to customer success is evident in our results. We closed 25 deals in the third quarter with ACV greater than $1 million, and we now have 614 customers doing more than $1 million in business with us. 11 customers are doing more than $10 million, almost triple the prior year, including four U.S. federal agencies. We ended the quarter with more than 5,000 enterprise customers. The U.S. federal government represented our biggest deals in the quarter, accounting for a fifth of our total net new ACV. This was our largest federal quarter ever.
For example, the U.S. Department of State is now our largest platform customer. We're becoming a critical strategic partner to the U.S. federal government as it modernizes its IT infrastructure and moves to cloud-based services and platforms. In further strengthening our public sector capabilities, we just announced an alliance with Microsoft to deliver digital workflows through the Azure government cloud. This alliance is designed to help federal agencies move faster and securely to cloud-based solutions. Just as we've seen in the private sector worldwide, digital transformation is becoming a public sector imperative, and we are deeply committed to being a preferred strategic partner, helping governments modernize, drive efficiency, and deliver better experiences for employees and their citizens. I spent much of my time in Q3 traveling the world and meeting with our customers in Australia, Japan, France, Sweden, the U.K., and all across the U.S.
In every discussion with CIOs and CEOs, a few common themes emerge. Most importantly, the business imperative for digital transformation, the need for trusted technology partners, and the challenges of driving cultural change. In more and more conversations, we are being seen as a strategic partner of choice. Our core focus is on delivering digital workflows that create great experiences and unlock productivity. We make work better for people. Our powerful platform and diverse product portfolios give us great opportunities. We're well positioned to play a broader strategic role in digital transformation journeys as our customers embrace this part of their future. Product innovation is essential to our success and continues to be a top priority. Our London release went live in the quarter, delivering customers exciting new product capabilities such as Virtual Agent that we announced earlier this year at Knowledge.
Our London release demonstrates our ongoing commitment to delivering innovative, intelligent capabilities across our Now Platform and product portfolio. Looking ahead, we're investing heavily in more intuitive, consumer-like user experiences and building more mobile-friendly, mobile-first capabilities. We expect to be launching significant enhancements in our mobile capabilities and user experience over the coming year. Customer success is also a big priority for us, and we continue to make good progress. We're driving customer success to be a natural extension of our sales motion and are committed to both landing new customers and expanding our existing customer relationships in a healthy and sustainable manner. Our customer success approach is paying dividends. For example, our customer success team helped land a significant deal with a European Fortune 200 financial institution in the third quarter.
This team showed how we can help enable and deliver key elements of their transformation initiatives and drive successful business outcomes. We continue to focus on supporting a strong partner ecosystem. For example, Accenture just announced deeper investments with us in Europe to give their European customers a full range of implementation services and expertise in ServiceNow. Following on the heels of our recognition in May as Forbes' number one world's most innovative company, it was equally gratifying to be recognized this month as a top three company on Fortune's Future 50 list. The Future 50 identifies companies that are, quote, "firmly focused on the long term," end quote. That's us.
In addition, Forrester recognized us as a leader in enterprise service management, and Gartner named us as a leader in their Magic Quadrant IT Service Management tools for the fifth consecutive year, citing our completeness of vision and ability to execute. In closing, I'm very pleased with our strong quarter. We have strong momentum, and we're continuing to make progress against our strategic priorities. At the end of the day, digital transformation is about delivering great experiences and unlocking productivity. Our digital workflows enable both. With our Now Platform in our three workflow clouds, IT, employee experience, and customer service, our customers can create intelligent and intuitive experiences that make work better for people. That, in turn, unlocks productivity, both for the employees who can now focus on higher value-added work and for the entire enterprise by making work simpler, easy, and faster.
That is the future of work, and we're committed to helping our customers create it. With that, I'll turn the call back over to Mike.
Thank you, John. Our first half momentum continued into Q3, and we delivered another quarter of strong performance, setting us up for a great finish to 2018. Subscription revenues were $627 million, representing year-over-year growth of 39% and constant currency growth of 40%. Subscription billings were $674 million, representing year-over-year growth of 35% and constant currency and duration growth of 34%. Our strong top-line performance was driven by bookings outperformance, coupled with accelerated revenue recognition from self-hosted deals. Our U.S. federal business highlighted the quarter. Government agencies are increasingly looking for strategic partners to help them digitally transform their businesses. While IT is a key driver of this initiative, we're also seeing federal customers look to our emerging products, including our platform offering, which drove our largest deal in the quarter.
Our investments in our federal sales force and FedRAMP-certified data centers are paying off, and we view this sector as a large opportunity going forward. In Q3, the U.S. federal sector represented 20% of net new ACV, up from 18% in the prior year. We also saw strong profitability in Q3, including 24% operating margin and 17% free cash flow margin, driven by some marketing expenses shifting to Q4, back-end hiring linearity, and lower than expected professional services partner fees. Due to the strong performance through the first three quarters of the year and expectations going into Q4, we are raising revenue, billings, and free cash flow guidance in 2018. We now expect subscription revenues between $2.415 billion-$2.42 billion, representing 39% year-over-year growth and 37% constant currency growth.
We expect subscription billings between $2.83 billion and $2.835 billion, representing 33% year-over-year growth and 31%-32% constant currency and duration growth. We are maintaining 2018 subscription gross margins of 85% and operating margin of 20%. We continue to see strong productivity from our sales force. We will continue to hire aggressively after adding a record 500-plus net new employees in Q3. We are increasing our 2018 free cash flow margin guidance to 28%. Finally, we expect 188 million diluted weighted average shares outstanding for the year. With that, operator, you can now open up the line for questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star then the one key on your touchtone telephone. Again, if you would like to ask a question, press the star then the one key on your touchtone telephone. Our first question comes from Rob Owens with KeyBanc Capital. Your line is open.
Great. Thanks for taking my question. Would love to drill down a little bit more into the success you're seeing overall in the federal markets and kind of the breadth of the portfolio, which I think you touched on a little bit. Is the take typically around ITSM and then further add-ons, number one? Number two, is this more of a greenfield opportunity you're seeing within Fed or a brownfield opportunity at this point? Would love to get some color. Thanks.
Sure, Rob. I'll tell you, in my travels over the last year, I've met with governments now in all three continents, multiple countries, federal, state, and local. A couple things are clear. I think initially when cloud came around, governments were a little bit suspicious and maybe a little bit slow to embrace it for security concerns, for the newness factor. I will tell you that's changing. Governments are under pressure to deliver efficiency and deliver better citizen experiences, and to do that in a safe and secure way. They now recognize cloud as an important enabler of that. We are seeing strong demand from governments, again, federal, state, and local, really around the world. Now, in the U.S. federal sector, the good news is ServiceNow has been investing in this sector and in this team over the last several years.
We have a dedicated sales team in Washington with a lot of resident expertise there. The demands, I was in Washington for a full week, it was probably end of Q2, early Q3, literally across multiple federal agencies. They're looking for their own equivalent of digital transformation, and they view our platform. What's fascinating is they, perhaps even more than the commercial sector, start with our platform and the power of the platform. The State Department deal that we talked about in the script was fundamentally a platform deal, and then ITSM and other products on top of it. One of the military services is using our platform in some very creative ways to look at how they onboard their soldiers, how they move their soldiers around, how they off-board over time.
We're very excited about the opportunity with both the U.S. federal government and governments more generally, because obviously they have big budgets, they have big needs, they're under pressure to deliver, and they're turning out to be some of our more innovative customers in how aggressively they're embracing the platform. One final story. You can sort of hear my excitement on this. In Australia, and same thing true in the U.K., some of the state and regional governments are using our platform for some really creative ways. For instance, one of the port authorities that also oversees the busing system is talking about how they're delivering better end-to-end experiences, both for the packages and for the people, using the ServiceNow platform.
Again, I think there's enormous opportunity here, and obviously the reason federal is so big in Q3 is that the U.S. federal budget cycle ends at the end of September 30th. This is obviously their equivalent of what commercial business would be at Q4.
Great. Thanks.
Thank you. Our next question comes from Jennifer Lowe with UBS. Your line is open.
Great. Thank you. First, I just had a question for Mike. If I look at the outperformance that you had in Q3, sort of normalizing for duration and currency, it looks like from the slide deck, it was about $21 million of outperformance relative to the midpoint of guidance. Certainly, you're taking the full year numbers higher for non-GAAP subscription billings, but maybe by a little less than the outperformance you saw in Q3. Did you see things that you thought would be in Q4 pull forward? I'm just trying to contextualize what looks like sort of an implicit guide down for Q4 relative to what sounds like pretty bullish commentary on the environment.
Yeah, no. Well, we actually raised Q4 when you look at what we did. $8 million for billings was deals that we were expecting in Q4 that were pulled into Q3. You also see on the revenue side as well too, there was about $4 million of the beat in Q3 was associated with Q4 deals that were self-hosted that happened in Q3.
Okay.
You can see that, by the way, in our IR deck. We do a reconciliation on page four.
Okay, great. Maybe just a bigger picture question. I think you and others have had a pretty phenomenal calendar 2018, we're not at the point yet to get calendar 2019 guidance. I guess sort of two questions. One, there was a question earlier in the year whether tax reform would create sort of a better than normal spending environment. Now that we're sort of closing out the year, I'd be curious to get your thoughts on whether that had as much of an impact as maybe you thought it would. Two, as you talk about these digital transformation projects with customers, what's sort of the time duration attached to those? Are people talking to you about multi-year deals that would carry over into future years, or is it sort of tactical around tax reform in 2018 that maybe fueled a little more than normal activity?
Yeah, I'll start, Jennifer. I don't think we've really seen any big impact to tax reform. I'm not hearing customers spending more specifically on ServiceNow due to tax reform. I definitely don't think it's hurt us, but I would say we weren't expecting a big uptick as a result of that. I'll let John talk about more the length of a digital transformation with customers. Well, Jennifer, the thing that's striking to me, and I'd say this has evolved even in the 18 months I've been here. Digital transformation is no longer a business buzzword. Digital transformation is an essential strategic need for virtually every customer that I'm meeting with, and it is just stunning the consistency around that. In simple terms, you think about it, software is disrupting every company, in every industry, in every geography. Every company wants to digitally connect with their customers.
They want to provide a better digital experience to their employees, and they want to use digital technology to drive productivity and efficiency so that they can dedicate their capital, their scarce resources to innovating for their customers and not getting consumed in the complexity of running a global enterprise. I hear that literally in every interaction, actually commercial and governments. Digital transformation's absolutely at the top of the investment priorities of companies, and I don't think it's driven by tax reform or even macroeconomic factors. I think it's more strategic spend. We feel ourselves in the middle of that strategic spend, where, I'll give an example. I was in a large Fortune 50 consumer products company where they've identified, and growth in consumer products companies are not huge, so productivity's become very important. They've identified, they said, "We've done the easy cost reduction.
Now, we need to drive productivity, healthy productivity." This is the head of their shared services, their business shared services group, which is a highly empowered group across their divisions. He said, "Streamlining, simplifying, and automating workflows across our large global entity, we view as a source of highly positive, highly healthy productivity that improves employee experience and helps reduce cost." He said, "We've looked around, and we view ServiceNow as a core strategic partner and core strategic platform in helping us do that." What I find encouraging, so yes. Is it multi-year? Absolutely, it's multi-year, but increasingly, we're getting pulled into the strategic initiatives of companies and tied to real business outcomes, economic outcomes around employee experience and around productivity. I think that's what's fueling our demand. Obviously, cloud is a phenomenon.
We're still early in the cloud world, I believe, and cloud's one of the few investments you can make that can provide better experiences, faster speed, and lower cost. That's really driving the demand.
I would add, too, Jennifer, the one thing that we have seen, and I remember from five, six years ago, a lot of the analysts used to say that the role of the CIO was going to be diminished because of cloud. If anything, we see with the digital transformation, the CIOs are becoming more strategic in their companies, and it helps that we have a relationship with the CIOs. Absolutely.
Great. Thank you.
Thank you. Our next question comes from Kirk Materne with Evercore ISI. Your line is open.
Okay. Thanks very much, and congrats on a nice quarter. John, I was kind of curious, just you mentioned sort of the three workflow clouds, I think, in terms of IT employee onboarding and customer service management. I was just curious, are you guys doing anything around the go-to-market to try to take those kind of concepts into the market more directly? Are there things you're thinking about? You may have mentioned that before, but that's the first time I've heard you sort of talk about them in those three buckets. Michael, I was wondering if you could just touch upon, well, big hiring quarter for you guys, where are you adding people, maybe, and where you're focused on with those hires for next year. Thanks.
Yeah. Great question, Kirk. To be honest, it's sort of funny. Michael and I are sitting in the room right now where we did our end of summer product reviews and looking about our strategy, and I had just come back from a month on the road meeting with customers. CJ Desai had just come out of all his product reviews. What we sort of realized that we've been describing our product portfolio, and what I would describe is inside-out terms, HR, security, customer support, ITOM, ITSM, and the reality is those aren't the words that customers are using. This move to the Now Platform and three clouds is, to some extent, adopting the same language that customers are using when they think about us. Let me just sort of describe each. Customers almost inevitably talk about our platform first, not our products.
They say, "Your platform is powerful. We recognize the power and value of your platform, both your out-of-the-box and our ability to build applications on it, and it's becoming one of the core platforms, one of our core" If I've heard this once, I've heard it 25 times in the last 60, 90 days. "You are now one of our core strategic platforms going forward." The Now Platform is the sort of foundational element. The three clouds are really describing our products, our existing products around the business areas that they're addressing. Our IT work, we call it three workflow clouds. Our IT workflow cloud is helping the IT run their business as a run IT as a business. That's IT service management, ITOM, that's IT analytics management, IT business management.
The CIO are increasingly looking at our capabilities to help them run their own function better. The employee workflow cloud or the employee experience cloud is how they're describing their desire to automate workflows to deliver better end-to-end employee experiences and drive better efficiency. That's where ITSM, HR case management, HR onboarding and offboarding, those all tie together to help build end-to-end employee experiences. They're asking us around facilities and finance and other functions that can we automate workflows.
You'll see us, our product development, and Now's focus will be on building out some of those workflows to deliver the end-to-end experiences and help them drive greater productivity across that. The last cloud, the customer support or customer service workflow cloud, is really driven by a subset of customers, frankly, more B2B customers, who are increasingly using our capabilities to serve their customers. I think about the whole customer support market or customer service market as two broad segments. One, a B2C segment, where customer service platforms need to be more CRM-based. That's not our sweet spot. B2B environments, where the inbound customer contacts need to get to the root cause of what's causing the problem, get that root cause addressed, and then getting back to the customer with resolution, our platform's very well-suited to that.
That's really when you look at our growth in customer support, where it's driving. These, I think grouping in these three areas, I was at the major CIO organization a couple of weeks ago, I think allow us to more crisply describe who we are. We're the digital workflow company and help drive our incremental innovation investment and link it to their business outcomes, link it to the goals that they've established for themselves. I think you'll see us drive a little more of our marketing and how we talk about the company in these terms.
Kirk, on your question with regards to headcount, where are we putting these people? Most of these people, the number one is R&D. Number two is our sales organization. It kind of flows through the rest into the others. We think that R&D and sales will be the big investment areas as well, actually in our next three years is what we're planning on hiring most of our people in those two groups, as we see the opportunity in front of us.
Great. Thanks, guys.
Thank you. Our next question comes from Kash Rangan with Merrill Lynch. Your line is open.
Hi, thank you so much for taking my question. I just wanted to get your thoughts very quickly. Do you see any tailwinds or headwinds to IT spending in 2019 based on, John, your conversations with customers? Secondly, when I look at the way you categorize your clouds, you've got a play in HCM. Broadly being understood as HCM, you've got a play in the CRM market. I also cannot help but wonder, as you look at your plans to be a $5 billion, $10 billion revenue company, it appears to me that there could be other major markets that you have to participate in a pretty big way. Obviously, companies like Salesforce.com, Workday, they've made some significant acquisitions along the way en route to trying to be large companies.
I just wonder how you think about the acquisition roadmap and your potential of playing in markets in a much bigger way that you have to if you are to become a multiple of your current size. It's meant to be worded in a constructive way rather than a critical way. Thank you so much. Appreciate it.
Well, Kash, on IT spend, as I said earlier, to be honest, it's digital transformation investment that every company is needing to make. They're embracing software, they're embracing cloud, and that's therefore driving IT spend. We see continued strength there. I appreciate your question because I think it's a really important one. Again, I'm going to answer this through the eyes of the customers about what I hear consistently and how we understand where we play. What I consistently hear from CIOs, COOs, and in some cases, CEOs, is as they embrace cloud, at the infrastructure level, they're consolidating their infrastructure needs, and they're figuring out what their public cloud, hybrid cloud, private cloud strategies are. Then at the software layer, they're adopting four to six strategic cloud platforms.
Typically, those would be, often it's a Salesforce for their sales cloud and sometimes their marketing cloud, Adobe for their marketing cloud, a Workday for their employee or HCM cloud, Office 365 or Microsoft often for their productivity. If they have a supply chain, you'll hear SAP frequently. ServiceNow is both the IT cloud but also the workflow cloud, the cloud that helps enable the workflow all around these other systems of record. They say two things. One, they want one plus one plus one plus one to equal 10. It is not a zero-sum game in their minds. They view each of these core strategic platforms as additive, and they want us to work effectively together, which I believe we can do and are doing. Two, our particular role is not just IT, it's workflow.
We view our market opportunity is digitizing and automating workflows all across the enterprise. We will never be an HCM system of record. We don't need to be. We use Workday internally. We think they're terrific. We'll never be a CRM system of record. We think Salesforce and Adobe and others do that quite well. We'll never be a financial system of record or a financial ERP. What we do do better than anyone is the workflows around those platforms. If we look at that opportunity, that market opportunity, we think it's an enormous TAM and offers tremendous growth opportunity to $10 billion and well beyond. The point I just want to make is I do not see this, and nor do customers see it as a zero-sum game among the major strategic cloud platforms. They want them to work together.
I believe there's plenty of growth for all of them. In particular, I think us as the digital workflow company, we have a huge market opportunity that's additive to the others. That's what we're pursuing. To be honest, again, these three clouds, everything I'm talking about has not been thought up here in some windowless conference room. It's based out of hundreds and hundreds and hundreds of conversations with hundreds and hundreds and hundreds of customers, and it's what they're saying to us. I'll make one final comment. You can hear a little of my passion on this. As I said, I was fortunate enough to be able to speak to the top CIO group a couple of weeks ago. A CIO of, again, this case, a different one, but of a major industrial company, Fortune 25, Fortune 50 company, said this is his algorithm.
He called it one plus one plus one plus one times ServiceNow equals 10 times. He talked about that he has in his tech stack, he has a Salesforce, a Workday, an Office 365, in his case, an Oracle for financial ERP. Then he said, "We have ServiceNow, but instead of that being plus one, it's times one, and that the multiplicative impact we can have, not just in IT, but when workflow around all those other clouds is the 10 times impact." That directionally is what we're hearing, that's directionally what we're pursuing.
Very well put. Thank you so much, John. Thank you, Mike, as well.
Thank you. Our next question comes from Alex Zukin with Piper Jaffray. Your line is open. Alex, please check your mute button. Our next question is Raimo Lenschow with Barclays. Your line is open.
Thank you. I like my new name. Quick, John, can I stay on that subject? As you kind of move over to talk more about platform, and be more the workflow cloud, as you think about 2019, how do you think about your go-to-market with your sales guys in terms of how they are positioning it, what you do with your sales guys in terms of are they able to kind of get that message across? What needs to change there to kind of even do a better job there? For Mike, you gave us a cash flow margin kind of framework at the Analyst Day. I see now we kind of upgraded that a little bit. Can you talk a little bit about the drivers for the upgrade this year, and if that changes your overall framework? Thank you.
Raimo, on your first question, I believe this allows us to even focus the sales teams even more. Obviously, our platform and IT cloud is our historical sweet spot, the CIO. As Mike mentioned, the CIO is increasingly playing a strategic role. Describing things as the employee experience cloud or employee workflow cloud is a better description, I think, of what we do because employee experience is not just an HR issue or just an IT issue or just a legal or just a finance. Increasingly, you're seeing as companies try to embrace the end-to-end employee experience and automate workflow, the CIO has to work with the CHRO, who has to work with the CFO. We often are sponsored, introduced into that equation by the CIO, but we find ourselves working with that triad, that team more frequently.
Sometimes you have a shared services, a shared business services person that often reports to the CFO. It's that triad as companies are trying to say, "How do we digitize our internal processes and digitize our internal employee experience?" It needs the CIO, CHRO, and CFO or shared services. We're calling on that group. In the customer service or customer support world by being even sharper and clearer that B2B is our focus. In many cases, customer service in a B2B environment reports either to the CFO or COO. Again, that's an area that's a natural, and the CIO is often involved, so it's a more natural adjacency for us.
I think if Dave Schneider or Kevin Haverty were here, they'd say this kind of way of thinking about and describing what we are, which is it actually reflects what we're doing, mirrors what we're doing in a more focused way. Again, the CIO, as Mike said earlier, is increasingly involved in almost all of those situations. Our strength there is I think an asset.
Rame on cash flow, I thought you'd be happy that I was giving or we were giving good cash flow margin increase for the year.
No, I am. I am.
But-
I just wanted.
It's driven by a couple things this year. Part of it is Q4 is off to a very good start in terms of the billings associated with the number of customers that I expect collections to be very strong this quarter, more than what I was thinking earlier on in the year, it's really a timing issue. The other thing is there's a bunch of CapEx projects that we're initiating, but I don't think the payments are going to happen until next year. That's really pushing some of our spending from a cash flow perspective into 2019. As a reminder, at Financial Analyst Day, we did say you will get greater than 1% operating margin and greater than 0% free cash flow margin expansion. Not giving guidance for 2019 right now, but I do think will converge a little bit the growth.
Longer term, though, I just want to remind people, cash taxes will kick in in around 2023, 2024, which will have an impact on free cash flow.
Okay. Perfect. Clear. Thank you. Congratulations.
Thank you. Our next question.
Our very next question. Thank you.
It comes from Michael Turits with Raymond James. Your line is open.
Kash did a great job of going very high level, and John, you answered it great. I wanted to drill downwards a little bit and ask you about two product areas. One, in ITOM, how much do you think about going down the stack, down closer into monitoring and actually touching the infrastructure? One sub-segment that's been active in M&A in the industry lately has been around IT notification, there's been some acquisitions there. I was wondering if that is in your sweet spot and if you're investing there. Down the stack towards monitoring and touching the IT infrastructure and IT notification.
Michael, again, the way I'll answer that is we're listening intently to the customer and listening intently to how CIOs, how VPs of infrastructure, VPs of application envision running and leading IT over the next five to 10 years. There's just no doubt that the role of IT shifting in the company and the way they're running IT is shifting and growing. We've had very strong demand for ITOM this year, and that can be discovery, service mapping, just as they're trying to get a robust CMDB. I think there is some appetite for us to explore, as you described, moving down the stack or to have our platform continue to broaden and expand, so that they have, I don't want to say one-stop shop, but they can have fewer applications and have more applications on our platform, is the way I would say it.
When you look at our roadmap, when you look at any M&A we may do, we're simply listening to our customers and saying, "All right, how do we continue to build out our ITOM and other IT capabilities to help ensure that CIOs can run IT in a modern way?" They have this barbell effect, where they have a lot of this legacy stuff, and the legacy stuff's not going away overnight. Yet they have modern platforms like ServiceNow and other modern applications and modern mindsets around Agile and DevOps. CIOs want our platform to help them bridge both. They can't walk away from the legacy. We help them address that. Also, we're increasingly helping them run IT in a modern way.
That will continue to drive not only the organic growth and organic roadmaps rather, for IT-related products, but also our M&A agenda, when we can add incremental capabilities to our company and our platform that match those needs that CIOs want, we'll continue to do that. IT notification, to be honest, I haven't heard that specific request, and CJ's not in the room with us. It very well could be on the roadmap. Do you know, Mike, is it?
Yeah, there's a lot of people that play in that market. You've got Atlassian bought Opsgenie, you have Zendesk bought that Zenskill. You got VictorOps that was acquired. It's not something, there's a lot of players down there. Splunk is playing in that space. We're going to more partner down there right now.
Great, guys. Thanks very much.
Thank you. Our next question comes from Justin Forte with William Blair & Company. Your line is open.
Hey, guys. This is actually Vinay on for Justin. Thanks for taking my question. Congrats on the quarter. Continuing on the product theme, if you look at the HR services or case management market specifically, just kind of wondering, how do you see the pace of spending or deal sizes trending there? How would you characterize the competitive environment? Thanks.
Well, the HR, what we have been describing as our HR product, increasingly, I consider it a component of our employee experience, has performed well. You asked magnitude, we have, I think it's something, 20 customers over $1 million. Again, where we tend to get involved is when there's an employee experience initiative. That's when you want to combine many of the finance system of records, the HR, HCM system of record, things like payroll, T&E, and other things into a seamless experience for employees. Increasingly, companies are realizing that they want what I would've called a shared services portal. They want to have their employees go one place where they can report problems, get knowledge, get their questions answered, and get things resolved.
If you have to go to a different place for an IT problem, as you do an HR problem, as you do a facilities problem, employees are going to pick up the phone. Employees don't like that. Increasingly, organizations don't like it because it's high cost. Our shared services portal, both web and increasingly mobile, allows companies to tell their employees, "Go one place for all of your internal problems and questions, and get them resolved." If you can use self-help, that's what employees love, that's far more productive and efficient for the company, or an automated response through Knowledge. That's the pull, that's the underlying business pull we feel, and that's the situations where our platform, our workflow platform's relatively unique.
That may start with HR case management, that may start with our onboarding and off-boarding, it may start with the shared services portal. We had a customer, a large top 5 U.K. bank. It's a global bank based in the U.K., and they went live with our end-to-end employee experience that we were fueling, in this case, alongside SuccessFactors, with 173,000 employees. I think from start to finish, they got it live in something like six months. It might've been a little more than six months. Again, that was a CEO, COO-sponsored initiative that HR is partnering with IT, partnering with finance to drive a strong end-to-end experience. Our platform is a cross-functional workflow platform, was the sort of a foundational element.
The fact that we work well with all the other supporting platforms, that's why calling it employee experience, I think, is a more accurate depiction, and will also drive our incremental roadmap priorities.
Got it. Helpful. Thank you.
Thank you. Our next question comes from Matthew Hedberg with RBC Capital Markets. Your line is open.
Hi, guys. Thanks for taking my questions. Congrats on the results. I wanted to ask about FriendlyData. It looks like it's bringing natural query language or natural language query to the platform. Seems like that could resonate well with some of your non-technical users. I think you guys mentioned that you're re-platforming it. Can you comment a bit about what this means to the platform, and maybe any feedback from customers when this acquisition was announced?
Yeah, Matt. This is, I think it's now our fourth, I'll call it AI-related acquisition, starting with DxContinuum. Look, here's what customers are saying. They're saying two things. One, they want to build experiences that are really easy to use, or really easy to build. Low code, no code kind of capabilities for the developers inside the company, they want to have experiences that their employees can get automated or self-help kind of functionality. What this particular acquisition does, as you said, sort of language processing, just helps you translate, natural language search helps you translate voice or voice text would be my simple way of saying it. With natural language, and receive responses in charts or graphs or texts. It's a form of chatbot, is the way I think about it.
You make a request in one mode, whether that's voice or text or verbal, it responds in the mode you want back. It's a nice team, it's a good team of engineering talent and a good platform, we're doing what we do with every acquisition we make, that they're recoding it into the core ServiceNow platform. I'll remind you of one core platform driving all of our applications and customers. We think it accelerates our roadmap significantly, it'll be used across all products, will help drive platform adoption. We're thrilled to have the team. Really strong team, nice team, we're excited to have them part of our overall organization.
That's great. Thanks a lot.
Thank you. Our next question comes from Walter Pritchard with Citi. Your line is open.
Hi, thanks. Question, I think, for Mike or if David Schneider's in the room there. Wondering on the sales capacity build as we look at that headed into 2019. Could you maybe contrast or compare how that ramp and the composition of that ramp compare to what we've seen in the last couple of years?
I expect it to be pretty similar in terms of what we're looking to add going into next year. I'm not expecting major changes to the sales organization next year. I will say most of our revenue, as you know, comes from large enterprise. As we've said before, around 20%, 21% of our revenue is commercial, and the other is G2K and large enterprise and public sector. Obviously, we're very focused on public sector, and geographically, we think there's a large opportunity to continue to grow in Asia with new logos. There's a lot of opportunities still within the U.S. and EMEA to further penetrate our existing accounts, and we still find that reps have too many accounts they're covering, and we need to hire more people. We're going to continue there.
As well, we're going to continue to add more product sales specialists as well to support our emerging products within our sales organization.
On the product side, relative to security, I'm wondering if you could update us on success there and your thoughts on it. You're sort of a fairly narrow player in that market, if you have any ambitions in terms of expanding your addressable offerings in that area.
I'll take this, Mike, and you can add on. Inside what we characterize as security are really currently three use cases. One is GRC, which by the way, there's a lot of demand for, and you can call that security or not security. It's often driven by the audit committee, and there's a growing focus on governance, risk, and compliance. I might even add privacy to that in this day and age, too. We know that product is getting a lot of demand, and increasingly, CIO and CFOs are being brought to audit committees, and they want to have automated ways of monitoring all the various tools and all the various platforms and all the various products that go into governance, risk, and compliance across an enterprise. The ServiceNow platform's a great way to get one source of truth for that.
That's driving that piece of the equation. We have incident response and vulnerability response as the two core use cases in our security suite. We see, I'd say, strong demand for both. I view it consistent with your question. It's complementary to the many other security platforms and tools in that space. We may incrementally add to it. I don't think it's going to be a major area of expansion for us, simply because I think it's being well-served by others. It's a fairly fragmented space. It's a space that's changing rapidly. I think the workflows around security, that's going to be our sweet spot, and that's in essence what we do. That's why this workflow mindset, these workflow clouds, will help do workflow around security.
I don't think you'll see us become one of the core security platforms like a Palo Alto or a Splunk or a FireEye or some of the others. Great. Thank you.
Thank you. Our next question comes from Sarah Hindlian-Glaser with Macquarie. Your line is open.
All right, great. Thank you so much for taking my question, and great job on the quarter. Quick question for both of you. I'll start with you, Mike. Mike, how are you thinking about the professional services segment going forward? Because we've heard from some of your SI partners that one of their biggest issues is really a high-class problem, and it's that there's essentially not enough ServiceNow experts out there in the field to meet the demand in their ServiceNow practices. Do you think about needing to reinvest in that business? And then a quick one for you also, John. It seems to me that you guys are likely really starting to see some brand recognition for ServiceNow in the market. I imagine you would have to be, given the size of some of the deals you're signing.
Is there some kind of strategic shift behind marketing to the enterprise that you're undertaking that you can share with us? Thank you both. Appreciate it.
Sarah, I'll start with the professional services. That is absolutely true. We do hear from partners that they can't find enough ServiceNow-trained people. As a result, we started this over the last year, we hired a new head of training. We've been investing extremely heavily in training, where we're trying to roll out a lot of free content for our partners and others. That's why you see that reflected in our professional service margin, where training rolls up in there. In terms of we do think our professional service organization is strategic, but we are there to support our partners doing implementations as well as our customers where they want us there. Our preference is for partners to be doing the implementations.
We want our partners to be investing in their ServiceNow business, because if they do that, they're going to help sell ServiceNow, and we think that is the right thing to do. We'll continue that way. John, I'll let you talk about brand.
Yeah. I'll just piggyback. Sarah, coincidentally, Mike mentioned we hired Cat Lang, who is just a fabulous leader of our training certification. She joined us about a year ago, and she happens to have her global team in town today, and I was down with them this morning. One of the things that we're actively engaging with the partners on is how do we work with them to turbocharge the number of certified resources. So big effort to certify their existing employees.
Whether it's in Europe or the U.S., we're trying to work with a Deloitte, with an Accenture, with a DXC, with a KPMG, with an IBM, going to campus and training generations of ServiceNow-certified people that they then join these firms. So I hope 2019 is the year we go from defense to offense on that to help fill the void, to have a large enough pool of certified professionals.
Terrific.
Thank you for the recognition on the company brand. Alan Marks, our Chief Communications Brand Officer, happens to be sitting next to me. He was with me for 10 years at eBay and joined ServiceNow 18 months ago, and he's got a smile on his face because of your question. He and our Chief Marketing Officer, Dan Rogers, are working really well together to try to raise our profile as a company in addition to our products. Our products are well-known in IT, but we just haven't really ever focused on raising our awareness as a brand. It helps to be named the most innovative company in the world by Forbes. It helps to be one of Fortune's top three companies of the future. That's raising our visibility. We're also, if you happen to live in San Francisco.
You may notice that we actually have a few billboards, a few wraparound buses. We're ramping up our digital marketing a little bit. Still, I think, relatively early days, but it is an area that we feel like it's both appropriate and the time's right to ramp up our investment in brand. Again, the way we think about it is there's product brand and company brand. Product brand is geared to decision-makers, and to be honest, with IT, we're well-known, and increasingly with other parts. Company brand is more focused on recruits, employees, and getting some C-suite awareness outside of IT. That's why we think it's an important and complementary area of investment, and we're still, I think Alan would say we've begun our path down that journey, and we still have a long way to go.
We're excited about the brand, and we're excited about the opportunity.
Thank you very much. Very helpful. Appreciate it.
Thank you. Our next question comes from Sterling Auty with JP Morgan. Your line is open.
Hey, guys. This is actually Ugam Kamat for Sterling. Just to dig deeper into the Fed traction that you saw in the quarter, if you were to rate which are the products that have seen the highest adoption amongst the Fed customers, how would you rate them?
Oh, well, ITSM and ITOM. IT, in general, is still the predominant product that is in the federal government. With that, we did mention platform is becoming increasingly more important. Actually, our largest platform customer is now a government agency. By and large, IT and ITOM are still the bulk of what's in the federal government. We have seen some CSM as well, and platform. Don't really think we've seen any. I'm looking at HR. Have we seen any HR in the federal government?
Well, what's interesting, the use case I referred to earlier, I don't know if they're using the specific HR case management product or they're building their own applications because this is the military service because of the specific use cases.
Yeah.
Similarly, this is not the U.S. federal government, but ironically, I don't know if it's ironically, several airports use ServiceNow to help manage, again, that's a municipal, a more local government or regional government. They're using ServiceNow to help drive the airports, which include customers and employees. Sometimes it's with the out-of-the-box applications, and sometimes they're just frankly using the platform to be configured to the specific use case of an airport.
Got you. That's helpful. As a follow-up, if I were to follow on the contract length that we saw in the quarter, the new customer contract length and the upsell contract length actually shortened for the last two quarters. Anything that needs to be read into that, or is it just the normal course of business?
It's a normal course of business. Q3 is a big Federal quarter. Federal government signs one-year deals. That's what skews that. The other thing in Q3, upsells is such a big piece of our business, and a number of our customers co-term their contract to the end of the year, and many are on a calendar year invoicing cycle for when their contract started because Q4 is such a big quarter. That's just normal seasonality.
Awesome. Thank you, guys.
Thank you. That's all the time we have for questions. I would now like to turn the call back to Mr. Michael Scarpelli for any closing remarks.
Thank you. 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.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.