Good day, ladies and gentlemen, and 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. 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 and Chief Executive Officer. During today's call, we will review our Q3 financial results and discuss our financial guidance for full year 2018. We'd like to point out that the company reports non GAAP results in addition to and not as a substitute for or superior to financial measures calculated in accordance with GAAP. All financial figures we will discuss today are non GAAP except for revenues and revenue growth.
To see the reconciliation between these non GAAP and GAAP results, please refer to our press release filed earlier today and for prior quarters' previously filed press releases, all of which are posted at investors.servicenow.com. We may make forward looking statements on this conference call such as those using the words may, will, expects, believes or similar phrases to convey that information is not historical fact. These statements are subject to risks, uncertainties and assumptions. Please refer to the press release and risk factors and documents filed with the Securities and Exchange Commission, including our most recent quarterly report on Form 10 Q for information on risks and uncertainties that may cause actual results to differ materially from those set forth in such forward looking statements. I would now like to turn the call over to John.
Thanks, Mike. Good afternoon, everyone, and thank you for joining us on today's call. We had a strong Q3, 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 3rd quarter with ACV greater than $1,000,000 and we now have 6 14 customers doing more than $1,000,000 in business with us.
11 customers are doing more than 10,000,000 dollars almost triple the prior year, including 4 U. S. Federal agencies. And we ended the quarter with more than 5,000 enterprise customers. The U.
S. Federal Government represented our biggest deals in the quarter, accounting for a 5th of our total net new ACV. This was our largest federal quarter ever. For example, the U. S.
State Department is now our largest platform customer. We're becoming a critical strategic partner to the U. S. Federal Government as it modernizes its IT infrastructure and moves to cloud based services and platforms. And further strengthening our public sector capabilities, we just announced an alliance with Microsoft to deliver digital workflows through the Azure Government Cloud.
This alliance is designed to help federal agencies move faster and securely to cloud based solutions. Just as we've seen in the private sector worldwide, digital transformation is becoming a public sector imperative. And we are deeply committed to being a preferred strategic partner, helping governments modernize, drive efficiency and deliver better experiences for employees and their citizens. I spent much of my time in Q3 traveling the world and meeting with our customers in Australia, Japan, France, Sweden, the UK and all across the U. S.
In every discussion with CIOs and CEOs, a few common themes emerge. Most importantly, the business imperative for digital transformation, the need for trusted technology partners and the challenges of driving cultural change. And in more and more conversations, we are being seen as a strategic partner of choice. Our core focus is on delivering digital workflows that create great experiences and unlock productivity. We make work, work better for people.
And our powerful platform and diverse product portfolios give us great opportunities. We're well positioned to play a broader strategic role in digital transformation journeys as our customers embrace this part of their future. Product innovation is essential to our success and continues to be a top priority. Our London release went live in the quarter, delivering customers exciting new product capabilities such as virtual agents that we announced earlier this year acknowledge. Our London release demonstrates our ongoing commitment to delivering innovative, intelligent capabilities across our Now platform and product portfolio.
And 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. And 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 3rd quarter. This team showed how we can help enable and deliver key elements of their transformation initiatives and drive successful business outcomes. And 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. And following on the heels of our recognition in May as Forbes' number 1 world's most innovative company, it was equally gratifying to be recognized this month as a top 3 company on Fortune's Future 50 list.
The Future 50 identifies companies that are firmly focused on the long term and that's us. In addition, Forrester recognized us as a leader in enterprise service management and Gartner named us as a leader in their Magic Quadrant IT Service Management tools for the 5th consecutive year, citing our completeness of vision and ability to execute. In closing, I'm very pleased with our strong quarter. We have strong momentum and we're continuing to make progress against our strategic priorities. At the end of the day, digital transformation is about delivering great experiences and unlocking productivity and our digital workflows enable both.
With our Now platform in our 3 workflow clouds, IT, employee experience and customer service, our customers can create intelligent and intuitive experiences that make work, work better for people and that in turn unlocks productivity, both for the employees who can now focus on higher value added work and for the entire enterprise by making work simpler, 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 $627,000,000 representing year over year growth of 39% and constant currency growth of 40%. And subscription billings were $674,000,000 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 1st 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 $2,415,000,000 $2,420,000,000 representing 39% year over year growth and 37% constant currency growth. We expect subscription billings between 2.83 $1,000,000,000 and $2,835,000,000 representing 33% year over year growth and 31% to 32% constant currency and duration growth. We are maintaining 2018 subscription gross margins of 85% and operating margin of 20%. We continue to see strong productivity from our sales force and we will continue to hire aggressively after adding a record 500 plus net new employees in Q3.
We are increasing our 2018 free cash flow margin guidance to 28%. Finally, we expect 188,000,000 diluted weighted average shares outstanding for the year. With that, operator, you can now open up the line for questions.
Our first question comes from Rob Owens with KeyBanc Capital. Your line is
open. Great and thanks for taking my question. Would love to drill down a little bit more into the success you've seen overall in the federal markets and kind of the breadth of the portfolio, which I think you touched on a little bit. But is the take typically around ITSM and then further add ons, number 1? And number 2, is this more of a greenfield opportunity you're seeing within Fed or a brownfield opportunity at this point?
We'd love to get some color. Thanks. Sure, Rob. I'll tell you the in my travels over the last year, I've met with governments now in all three continents, multiple countries, federal, state and local. And a couple of things are clear.
I think initially when cloud came around, governments were a little bit suspicious and maybe a little bit slow to embrace it for security concerns, for the newness factor. I will tell you that's changing. And governments are under pressure to deliver efficiency and deliver better citizen experiences and they now recognize cloud and to do that in a safe and secure way and they now recognize cloud is an important enabler of that. So we are seeing strong demand from governments, again, federal, state and local really around the world. Now in the U.
S. Federal sector, the good news is ServiceNow has been investing in this sector and in this team over the last several years. We have a dedicated sales team in Washington with a lot of resident expertise there and the demands. I was in Washington for a full week, probably into Q2, early Q3, literally across multiple federal agencies, they're looking for their own equivalent of digital transformation. And they view our platform.
What's fascinating is they perhaps even more than the commercial sector start with our platform and the power of the platform. And so 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. And so, 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 and how aggressively they're embracing the platform. One final story. You can sort of hear my excitement on this. I 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 a bus, the bussing system is talking about how they're delivering better end to end experiences both for the packages and for the people using the ServiceNow platform. So again, I think there's enormous opportunity here. And obviously, the reason federal is so big in Q3 is that the U. S. Federal budget cycle ends at the end of September 30.
So this is obviously their equivalent of what commercial business would be in Q4. Great. Thanks.
Thank you. And 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 in currency, it looks like from the slide deck, it was about $21,000,000 of outperformance relative to the midpoint of guidance. Certainly, you're taking the full year numbers higher for non GAAP subscription billings, but maybe by a little less than the outperformance you saw in Q3.
Is there any sort of did you see things that you thought would be in Q4 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?
Yes. No, well, we actually raised Q4 when you look at what we did, dollars 8,000,000 billings was deals that we're expecting in Q3 that happened in Q4 sorry, we expected in Q4 that were pulled into Q3. And then you also see on the revenue side as well too, there was about $4,000,000 of the beat in Q3 was associated with Q4 deals that were self hosted that happened in Q3.
Okay.
And you can see that by the way in our IR deck, we do a reconciliation on Page 4.
Okay, great. And maybe just a bigger picture question. I think you and others have had a pretty phenomenal calendar 2018 and we're not at the point yet to get calendar 2019 guidance. But I guess sort of 2 questions. 1, there was a question earlier in the year whether tax reform and sort of would create sort of a better than normal spending environment.
Now that we're sort of closing out the area, I'd be curious to get your thoughts on whether that had as much of an impact as maybe you thought it would. And 2, as you talk about these digital transformation projects with customers, what sort of the time duration attached to those? Are people talking to you about multi year deals that would carry over future years? Or is it sort of tactical around tax reform in 2018 that may be fueled a little more than normal activity?
Yes, I'll start, Jennifer. I don't think we've really seen any big impact to tax reform. I'm not hearing customers spending more specifically on ServiceNow due to tax reform. I definitely don't think it's hurt us. But I would say we weren't expecting a big uptick as a result of that.
And I'll let John talk about more the length of a digital transformation with customers.
Well, Jennifer, the thing that's striking to me, and I'd say this is 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. And 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 they can dedicate their scarce talent, their scarce capital, their scarce resources to innovating to their customers and not getting consumed in the global the complexity running a global enterprise. So I hear that literally in every interaction, actually commercial and governments. And so digital transformation is 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. And so we feel ourselves in the middle of that strategic spend, where I'll give an example. I was at a large Fortune 50 consumer products company where they've identified and growth in consumer products companies are not huge. So productivity has become very, very important. And they've identified they said, we've done the easy cost reduction.
We've done the easy now we need to drive productivity, healthy productivity. And this is the head of their shared services, their business shared services group, which is a highly empowered group across their divisions. And he said, automating workflows, we view 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. And he said, we've looked around and we view ServiceNow as a core strategic partner, core strategic platform in helping us do that. And so what I find encouraging, so yes, is it multiyear, absolutely it's multiyear, 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.
So 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 is one of the few investments you can make that can provide better experiences, faster speed and lower cost.
And that's really driving the demand. I would add to, Jennifer, the one thing that we have seen, and I remember from 5, 6 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 Martyrn 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 3 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 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. And then Mike, 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.
Yes. Great question, Kurt. And to be honest, it's sort of funny, Mike and I are sitting in the room right now where we did our end of summer product reviews and looking about our strategy. And I had just come back from a month on the road meeting with customers, CJ decided just come out of all his product reviews. And 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. And so this move to the 3 the Now Platform and 3 clouds is to some extent adopting the same language that customers are using when they think about it. So 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. So the Now platform is the sort of foundational element.
And then the 3 clouds are really describing our products, our existing products around the business areas that they're addressing. So our IT work we call 3 workflow clouds. Our IT workflow cloud is helping the IT run their business as a run IT as a business. So that's IT Service Management ITOM, that's IT Analytics Management, IT Business Management. And so 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. And so that's where ITSM, HR case management, HR onboarding and off boarding, those all tie together to help build end to end employee experiences. And they're asking us around facilities and finance and other functions that can we automate workflows. And so you'll see us our product development and Nowak'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. And then 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.
And I think about the whole customer support market or customer service market is 2 broad segments. 1, a B2C segment where customer service platforms need to be more CRM based. That's not our sweet spot. But B2B environments where the inbound customer contacts need to get to the root cause of what's causing the problem, get that root cause addressed and then getting back to the customer with resolution that our platform is very well suited to that. And that's really when you look at our growth in customer support where it's driving.
So these I think 3 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. So I think you'll see us drive a little more on marketing and how we talk about the company in these terms.
And then Kurt, on your question with regards to headcount, where are we putting these people? Most of these people, the number 1 is R and D. Number 2 is our sales organization and it kind of flows through the rest into the others and we think that R and D and sales will be the big investment areas as well. And actually in our next 3 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? And secondly, when I look at the way you categorize your cloud, you've got to play in HCM, broadly being understood as HCM. You've got to play in the CRM market.
I also cannot help but wonder, but as you look at your plans to be a $5,000,000,000 $10,000,000 revenue company, it appears to me that there could be other major markets that you have to participate in a pretty big way because obviously from just salesforce.com, WorkCare, they've made some significant acquisitions along the way on route to trying to be large companies. So 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 were to become a multiple of your current size. And it's meant to be worded in the constructive way rather than a critical way. Thank you so much. Appreciate it.
Well, Kash, let me on IT spend, as I said earlier, to be honest, it's digital transformation investment that every company is needing to make. They're embracing software, they're embracing cloud and that's therefore driving IT spend. So we see continued strength there. I appreciate your question because I think it's a really important one. And 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. And then at the And typically those
would
be, on And typically those would be often it's a sales force 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 that helps enable the workflow all around these other systems of record. And they say 2 things. One, they want 1 plus 1 plus 1 plus 1 to equal 10. So it is not a zero sum gain in their minds. They view each of these core strategic platforms is additive and they want us to work effectively together, which I believe we can do and are doing.
And 2, our particular role is not just IT, it's workflow. And so we view our market opportunity is digitizing and automating workflows all across the enterprise. So we will never be an HCM system of record. We don't need to be. And we use Workday internally.
We think they're terrific. We'll never be a CRM system of record. We think there is 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 better than anyone is the workflows around those platforms.
And if we look at that opportunity, that market opportunity, we think it's an enormous TAM and offers tremendous growth opportunity to $10,000,000,000 and well beyond. So 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. And in particular, I think us is the digital workflow company.
We have a huge market opportunity that's additive to the others. And that's what we're pursuing. And to be honest, again, these 3 clouds, everything I'm talking about is not been thought up here in some windowless conference room. It's based out of 100 and 100 and 100 of conversations with 100 and 100 and 100 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. And a CIO of again, this case different one, but of a major industrial company, Fortune 25, Fortune 50 company said, this is his algorithm. He called it 1 plus 1 plus 1 plus 1 times ServiceNow equals 10 times.
And he talked about that in his tech stack, he has a sales force at Workday and Office 365, in his case in Oracle for financial ERP. And then he said, and we have ServiceNow, but instead of being plus 1, it's times 1. And the multiplicative impact we can have not just in IT, but when workflow around all those other clouds gives the 10 impact. And that directionally is what we're hearing and that's directionally what we're pursuing.
Very well put. Thank you so much, John. Thank you, Mike as well.
Thank you. Our next question comes from Alex Zukin with Piper Jaffray. Your line is open. Alex, please check your mute button. Okay.
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? And as you kind of move over to be talk more about platform and be more the workflow cloud. How do you as you think about 2019, how do you think about your go to market with your sales guys in terms of how they are positioning it?
What you do with your sales guys in terms of are they able to kind of get that message across? What needs to change there to kind of do kind of even do a better job there? And then 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.
Yes. Raimo, on your first question, I believe this allows us to even focus the sales teams even more. So obviously, our platform and IT cloud is our historical sweet spot, the CIO. And 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.
But 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 CRHRO who has to work with the CFO. And we often are sponsored introduced into that equation by the CIO, but we find ourselves working with that triad, that team more frequently. Because there is and sometimes you have a shared services, a shared business services person that often report to the CFO, but it's that triad is companies are trying to say how do we digitize our internal processes and digitize our internal employee experience. It needs to see CIO, CHRO and CFO or shared services. And so we're calling on that group.
And then 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. And so again, that's an area that's a natural and the CIO is often involved. So it's a more natural adjacency for us. And so 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.
And again, the CIO, as Mike said earlier, is increasingly involved in almost all of those situations. So it's our strength there is I think an asset.
And then Raimo on cash flow, I thought you'd be happy that it was giving or we were giving good cash flow margin increase for
the year. I am, I am. But it's driven
by a couple of things this year. Part of it is Q4 is off to a very good start in terms of the billings associated with the number of customers that I expect collections to be very strong this quarter more than what I was thinking earlier on in the year and 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. So that's really pushing some of our spending from a cash flow perspective into 'nineteen. 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, I'm not giving guidance for 2019 right now, but I do think operating margin and free cash flow will converge a little bit to growth. And then longer term 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. That's clear. Thank you. Congratulations.
Thank you. Our next question 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 2 product areas. 1, in Itom, how much do you think about going down the stack, down closer into monitoring and actually touching the infrastructure? And then one sub segment that's been active in M and A in the industry lately has been around IT notification, which seems to be where there's been some acquisitions there. I was wondering if that is in your sweet spot and if you're investing there.
So down the stack towards monitoring and touching the IT infrastructure and IT notification.
Michael, again, the way I'll answer that is we're listening intensely to the customer and listening intensely to how CIOs, how VPs of infrastructure, VP of application envision running and leading IT over the next 5 to 10 years. Because 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. And so, there's we have very strong demand for ITOM this year. And that can be discovery, service mapping, just as they're trying to get a robust CMDB. And I think there is some appetite for us to explore as you've 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 have they can build more have fewer applications and then more applications on our platform is
the way I would
say it. And so we're when you look at our roadmap, when you look at any M and A we may do, we're simply listening to our customers and saying, how do we continue to build out our ITOM and other IT capabilities to help ensure that CEO I'm sorry, CIOs can run IT in a modern way. That's because they got this they have this barbell effect where they have a lot of this legacy stuff. And the legacy stuff is not going away overnight. And yet they have modern platforms like ServiceNow and other modern applications and modern mindsets around agile and DevOps.
And CIOs want our platform to bridge help them bridge both. And so they can't walk away from legacy. We help them address that. But also we're increasingly helping them run IT in a modern way. And so that will continue to drive not only the organic growth and organic roadmaps rather that for our IT related products, but also our M and 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.
And then IT notification, to be honest, I haven't really that maybe I haven't heard that specific request, but and CJ is not in the room with us. It very well could be on the road map. It's just not do you know Mike?
Yes. There's a lot of people that play in that market. There was you've got Atlassian bought Ops, Genie, you have Zendesk bought that Zendesk, you got Victor or Ops 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 Furby with William Blair and Company. Your line is open.
Hey, guys. This is actually Vinay on for Justin. Thanks for taking my question. Congrats on the quarter and continuing on the product theme. If you look at the HR services or case management market specifically, Just kind of wondering how do you see the pace of spending or deal sizes trending there?
And how would you
characterize the competitive environment? Thanks.
Well, the HR are what we have been describing as their HR product increasingly I consider it a component of our employee experience. And as you know, performed well, we've got 20 you asked magnitude and we have to think it's something 20 customers over $1,000,000 And again, where we tend to get involved is when there's an employee experience initiative. And that's when you want to combine the many of the finance system records, the HR, HCM system of record, things like payroll, T and E and other things into a seamless experience for employees. And increasingly companies are realizing that they want what I would have called a shared services portal, but they want to have their employees go one place where they can report problems, get knowledge, get their questions answered and get things resolved. And 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 and that's what employees don't like that and increasingly organizations don't like it because it's high cost.
And so, 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. And 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. And so that's the pull, that's the underlying business pull we feel and that's the situations where our platform, our workflow platform is relatively unique. So that may start with HR case management, that may start with our onboarding and offboarding, it may start with the shared services portal. We had a customer, a large top 5 UK bank.
It's a global bank based in the UK and they went live with our an end to end employee experience that we were fueling in this case alongside SuccessFactors for with 173,000 employees. And I think from start to finish, they got it live in something like 6 months. It might have been a little more than 6 months. And so and 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. And our platform is a cross functional workflow platform was the sort of a foundational element.
And the fact that we work well with all the other supporting platforms is really and so that's what's driving our that's what's driving that's why calling employee experience, I think, some more accurate depiction and will also drive our incremental roadmap priorities.
Got it.
Helpful. Thank you.
Thank you. Our next question comes from Matt Hedberg with RBC Capital Markets. Your line is open.
Hey, guys. Thanks for taking my questions. Congrats on the results. I wanted to ask about Friendly Data. It looks like it's bringing natural query language or natural language query to the platform.
It seems like that could resonate well with some of your non technical users. I think you guys mentioned that you're re platforming it. Can you comment a bit about what this means to the platform? And maybe any feedback from customers when this acquisition was announced?
Yes, Matt. This is, I think it's now our 4th, I'll call it AI related acquisition, starting with DX Continuum. And look, here's what customers are saying. They're saying 2 things. 1, they want to build experiences that are really easy to use and are really easy to build.
So low code, no code kind of capabilities for the developers inside the company. And they want to have experiences that their employees can get automated or self help kind of functionality. And so what this particular acquisition does, as you said, sort of language processing just helps you translate just helps you natural language search helps you translate voice or voice text would be my simple way of saying it, but it was natural language and receive responses in charts or graphs or text. And so it's a form of chatbot is the way I think about it. But you make a request in one mode whether that's voice or text or verbal.
And it responds in the mode you want back. And so it's a nice team. It's a good team of engineering talent and a good platform and 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. And we think it accelerates our roadmap significantly and will be used across all products and will help drive platform adoption.
And we're thrilled to have the team really, really, really strong team, nice team. And 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 Dave Schneider is in the room there. Wondering on the sales capacity build as we look at that headed into 2019. Could you maybe contrast or compare how that ramp and the composition of that ramp compared to what we've seen in the last couple of years?
I expect it to be pretty similar in terms of what we're looking to add going into next year. I'm not expecting major changes to the sales organization next year. I will say most of our revenue 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. So 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, but there's a lot of opportunity still within the U. S. And EMEA to further penetrate our existing accounts and we still find that reps have too many accounts recovering and we need to hire more people. And so we're going to continue there and as well we're going to continue to add more product sales specialists as well to support our emerging products within our sales organization.
And then on the product side, relative to security, I'm wondering if you could update us on success there and your thoughts on it. You're sort of a fairly narrow player in that market if you have any ambitions in terms of expanding your addressable offerings in that area.
Well, I'll take this. Mike, you can add on. So inside what we characterize as security are really currently 3 use cases. One is GRC, which by the way, there's a lot of demand for you call that security or
not security. It's often driven
by the audit committee. And it's there's a growing focus on governance, risk and compliance. And I might even add privacy to that in this day and age too. And so we think that that proper we know that product is getting a lot of demand. And increasingly, audit committees, CIOs are being brought 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 and the ServiceNow platform is a great way to get one source of truth for that.
So that's driving that piece of the equation. And then we have incident response and vulnerability response as the 2 core use cases in our security suite. And we see, I'd say strong demand for both. And I view it consistent with your question. It's complementary to the many other security platforms and tools in that space.
And so 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. And so 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 be will help the workflow around security. But 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 with Macquarie. Your line is open.
Great. Thank you so much for taking my question and great job on the quarter. So, a 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. So 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 you can share with us? Thank you both. Appreciate it.
So Sarah, I'll start with professional services. That is absolutely true. We do hear from partners that they can't find enough service now to train people. And as a result, and 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. We're training rolls up in there. And 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 it 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 Service and we think that is the right thing to do, and we'll continue that way.
And John, I'll let you talk about brand.
Yes. I'll just piggyback, Sarah, coincidentally, Mike mentioned, we hired Kat Lang, who is just a fabulous leader of our training certification. She joined us about a year ago and she happens to have her team, her global team in town today and I was done with them this morning. And 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. And so big effort to certify their existing employees, but whether it's in the Europe or the U.
S. Or trying to work with a Deloitte, within 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. And so, I think we're I hope 2019 is the year we go from defense to offense on that to help fill the void that of to have a large enough pool certified professionals. And then 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. And 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. And it helps to be named the most innovative company in the world by Forbes.
It helps to be one of the Fortune's top 3 companies of the future that's raising our visibility. But 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 wrapping up our digital marketing a little bit. And so still I think relatively early days, but it is an area that we feel like it's both appropriate and the time is right to ramp up our investment in brand. And 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. And so 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. But 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 JPMorgan. Your line is open.
Hey, guys. This is actually Ugam Kamath on for Sterling. So just to dig deeper into the fat traction that you saw in the quarter, if you were to rate which are the products that have been the has seen the highest adoption amongst the fat customers, how would you rate them?
Well, ITSM and ITOM, IT in general is still the predominant product that is in the federal government. With that, we did mention platform is becoming increasingly more important. And actually, our largest platform customer is now a government agency. But by and large, IT and ITOM are still the bulk of what's in the federal government. We have seen some CSM as well in platform.
Don't really think we've seen it and looking at HR. And we've seen HR in the think
that what I mean 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 of their because this is the military service because of the specific use cases. Similarly, this is not the U. S. Federal government, but ironically several airports use ServiceNow to help manage. Again, it's a municipal, a more local government or regional government.
And the 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. And as a follow-up, if I were to follow on the contract land that we saw in the quarter, I mean, the new customer contract land and the up sell contract length actually shortened for the last two quarters. Anything that needs to be read into that? Or is it just a normal course of business?
It's a normal course of business. Q3 is a big federal quarter. Federal government signs 1 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. So that's just normal seasonality.
Awesome. Thank you, guys.
Thank you. And that's all the time we have for questions. I would now like to turn the call back to Mr. Michael Scarpetti 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.