Good day, ladies and gentlemen, and welcome to the ServiceNow Q4 2016 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 conference is being recorded. I would like to hand the call over to Mike Scarpelli, Chief Financial Officer.
Sir, you may begin.
Thank you. Good afternoon and thank you for joining us. On the call with me today is Frank Slootman, our Chief Executive Officer. Our press release, investor presentation and broadcast of this call can be accessed at investors.servicenow.com. We may make forward looking statements on this conference call, such as those using the words may, 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 statements. I would now like to turn the call over to Frank.
Thanks, Mike. Good afternoon. Thank you for joining us on today's call. Q4 capped off an outstanding 2016 and we have strong momentum heading into 2017. Total revenues in 2016 grew 38% year over year to $1,400,000,000 making ServiceNow the fastest growing enterprise company with more than $1,000,000,000 in revenue.
The strong quarter was driven by acceleration of net new ACV and a 97% renewal rate. 3 41 customers now pay us more than $1,000,000 in ACV, an increase of $39,000,000 in the quarter and 24 customers now pay us more than $5,000,000 in ACV, an increase of $6,000,000 in the quarter. We also continue to track towards our 2020 revenue goal of $4,000,000,000 We added a record 31 Global 2,000 logos in the quarter, including General Mills, DNB Bank and Renault. Our average ACV for Global 2,000 is now approximately $1,100,000 a 9% sequential increase and our commercial channels continue to balance out our global enterprise business. There are 3 key themes worthy of note.
First, Q4 was punctuated by large deals. We booked a record 27 deals with net new ACV greater than $1,000,000 sale to a Global 25 customer representing our largest net new ACV deal ever. We are replacing fragmented on premise tools with a scalable platform that consolidates global ITSM and ITOM capabilities onto a single ServiceNow system. This transformation will reduce mean time to resolution and increase service availability, driving $100,000,000 of savings over 3 years and $44,000,000 annually thereafter. A key reason for the size and speed of this transaction was Inspire, our elite advisory team that helps executives transform their business on ServiceNow.
In Q4, Inspire contributed to 5 of our 10 largest transactions and in 2016 engaged with more than 30 Global 2000 accounts. In addition to large deals with end customers, 5 of our 10 largest transactions in the quarter were with our global partners. The highlight was formalizing our partnership with IBM, who is now a top 3 global strategic partner. We are teaming with IBM to bring world class solutions to clients across the globe. A multiyear partnership will drive ServiceNow products with IBM Services in a seamless and integrated engagement model.
2nd, 2016 saw an inflection in our expansion beyond ITSM, 46% of our Q4 net new ACV was non ITSM and 94 of our top 100 deals in the quarter included products beyond ITSM. The strong performance of our emerging products enables us to have multiple conversations across the enterprise. As a result, we've lined up our new website atservicenow.com and other marketing efforts around these conversations as well as the ability to easily more solutions over time. 3rd, intelligent automation has become a key discussion topic with our customers. We are in a unique position to drive actionable insights and cost savings because we have massive amounts of individual customer data.
Our data centers host more than 10,000 customer instances and our customers store critical volumes of operational data. Leveraging this data with machine intelligence will predict outcomes and automate actions. The ongoing disintermediation of workflows and business processes will bring on a new era of productivity and scale of operations. We recently developed ITSM benchmarks, which provides aggregated KPIs for more than 3,000 customers, filtered by company size and industry. Benchmark will also populate key recommendations for performance improvement and inject data insights directly into workflows.
Additionally, we acquired DX Continuum, which uses data scientists to build predictive models that auto categorize incoming requests from people and machines, increasing time resolution and reducing costs. We're in the process of replatforming the technology and we'll demonstrate the technology at Knowledge 17 in May. We will formally begin selling to customers later this year. Intelligent automation will become increasingly strategic for our customers given their broad operational reliance on ServiceNow. Finally, as was previously announced, our Chief Operating Officer, Dan McGee has stepped down.
We are thankful for his many contributions over the past 6 years. We are also excited to announce CJ Desai as our Chief Product Officer, who has assumed Dan's responsibilities. Lastly, we look forward to seeing you all at our annual conference Knowledge 17, the week of May 8 in Orlando, Florida. With that, I will now turn the call over to Mike.
Thank you, Frank. During today's call, we will review our Q4 financial results and discuss our financial guidance for Q1 and full year 2017. We'd like to point out that the company reports non GAAP results in addition to and not as a substitute for or superior to financial measures calculated in accordance with GAAP. All financial figures we will discuss today are non GAAP except for revenues. To see the reconciliation between these non GAAP and GAAP results, please refer to our press release filed earlier today and for prior quarters previously filed press releases, all of which are posted at investors.
Servicedown.com. Before beginning, I want to point listeners to our investor presentation posted on our IR website. We disclose revenue adjusted for constant currency and billings adjusted for constant currency and constant duration to enhance comparability from period to period. We calculate constant currency and duration by applying the rate in effect during the prior period rather than the actual rate in effect during the current period. Q4 was driven by a record 900,000,000 value, which led to combined backlog and deferred revenue of $2,800,000,000 at the end of 2016.
This represents year over year growth of 51%, up from 35% in 2015. Total revenues for the Q4 were $386,000,000 representing year over year growth of 35% and adjusted growth of 37 percent or an impact of $6,000,000 Total billings were $535,000,000 representing year over year growth of 46% and adjusted growth of 39% or an impact of $27,000,000 Subscription gross margin in the quarter was 84 professional services and other gross margin was 18%. Overall gross margin was 77% and operating margin was 17%. Free cash flow margin was 29% and we ended the quarter with $1,200,000,000 in cash, short term and long term investments. Let's turn to guidance for the Q1 and full year 2017.
For the Q1, we expect total revenues between $406,000,000 $411,000,000 representing 33% to 34% year over year growth and 36% to 38% adjusted growth or a $10,000,000 impact. We expect total billings between 490,000,000 $495,000,000 representing 30% to 31% year over year growth and 32% to 34% adjusted growth or an $8,000,000 impact. We expect an operating margin of approximately 11% and diluted weighted average shares outstanding to be approximately 177,000,000. For full year 2017, we expect total revenues between 1.82 $1,850,000,000 representing 31% to 33% year over year
$2,195,000,000
representing 28% to 30% year over year growth and 34% to 35% adjusted growth or a $93,000,000 impact. We expect subscription gross margin of 84%, professional services and other gross margin of 20%, total gross margins of 77%, operating margin of 16% and free cash flow margin of 24%. We expect diluted weighted average shares outstanding to be approximately 179,000,000 for the year and expect to add approximately 1200 net employees in 20 17. Before closing, please note our Financial Analyst Day will be held on Monday, May 8, in Orlando, Florida. In person attendance will be limited.
So if interested, please send an e mail to irservicenow.com. For those who cannot join in person, we will hold the webcast of the event accessible on our IR website. With that, operator, you can now open up the line for questions.
Thank And our first question comes from the line of Matt Hedberg from RBC Capital Markets. Your line is open.
Hey guys, thanks for taking my questions. Congrats on the strong end of the year. ACV growth per customer was particularly impressive. I think we grew 9% sequentially. It looked like Itom had a very strong quarter.
I guess, Frank, could you comment on what else is driving this? What other products are sales cycle shortening on some of these add on sales? Just kind of curious about that dynamic.
Yes. So it wasn't one particular product structure that sort of carried today. We were exceptionally strong across the board. Our core ITSM business was up like 25% sequentially. Itom, as you mentioned, was very strong.
All our emerging products, they've been very strong out of the gate during 20 16. It is true that some of the newer products have shorter sales cycles than our traditional ITSM business. So that's another attractive feature for our sales organization.
And then maybe one follow-up for Mike. Even on an adjusted basis, subscription and total billings accelerated year on year. I'm curious though, can you talk about the longer billing terms you're seeing? I'm curious what drove that? And should we expect that trend to continue?
I'm talking about like the subscription billings terms.
Yes. There was really only one customer and it's a rate regulated company that they prepaid 5 years that drove that. We were expecting a few, but I think that is kind of a one time with
that entity. Great.
Thanks a lot guys. Thank
you. And our next question comes from the line of Raimo Lenschow from Barclays. Your line is open.
Hey, if you as you think out about 2017, should we expect any big changes to on the sales force setup on sales force composition, sales force and how they got comped in terms of new products versus old products, etcetera?
No. I mean, there's not going to be any major changes on that front. The only thing that is beginning to change is that we're starting to structure in vertical industry focused sales teams. We've always had that where we are evolving in that area. So that's a theme that you will continue to hear from us about.
It's just the increasing verticalization of our business, very gradual process. It's not one big switch that we're throwing, but that's certainly a trend in how we're structuring our selling motions.
Okay, perfect. Thank you. That's it actually for me, Aure. It's well done. It's very clear results.
Thank you.
Thanks.
Thank you. And our next question comes from the line of Sarah Hindlian from Mark Leary. Your line is open.
Hi, thank you and congratulations on the quarter, Frank and Mike, really well done. It's Macquarie. A couple of questions, Frank, just to get started. You were talking to Raimo in particular about where you're adding some sales capacity. Could you give us a little bit more color in terms of where you're adding product specialists to support your quota carrying reps?
And then a quick question for you, Mike. So Mike, subscription revenue growth was really phenomenal year over year and ProServe not as much and it continues to be a drag. And I see your guidance for 2017, but is there any update you can give us in terms of where we should be thinking about your long term professional services mix, as you continue to sort of deemphasize that product?
So this is Frank. I'll try to answer your first question. Throughout 2016, we've been adding product specialization overlay both from a sales engineering standpoint as well as in terms of pure sales leadership for all the non IT ITSM segments. So there are teams for ITOM, there's team for customer service management, for human resource solutions, security operations. So all those plays have specialized sales teams that work with the broader sales force on the commercial enterprise side to drive that business and we expect to continue that process in 2017.
And Sarah, your question on professional services. To get our partners to do more and more of the professional services, have them invest in hiring people because if they hire people, they're going to have to drive more business to us because we're going to have to keep those people busy. We will see growth in professional services, but it's going to be at a much slower pace than what our subscription revenue growth is. And I would say longer term, it'll be sub 10% of our revenue.
All right. Thank you guys. That's incredibly helpful. Great quarter.
Thank you.
Thank you. And our next question comes from the line of Walter Pritchard from Citi. Your line is open.
Hi, thank you. I'm wondering, Frank, if you could just give us some sense as to you talked about shorter sales cycles in some of the emerging products. As you look into this year, do you expect to make sort of change in momentum in some of those different products? And I don't know, I wouldn't think you'd hazard a guess in terms of where you come out in terms of 2017 around which of those products is doing best. But how can you sort of give us some color around the these different HR and security and so forth and relative momentum within that group?
Well, we're going to continue to these products came out of the gate very strong in 2016. We had high expectations, but they still managed to exceed that. So they're growing into numbers now that are substantially contributing to the overall result. In 2017, our goal is to maintain that momentum. And in other words, we're leaning in hard.
We're investing heavily in the selling motion because it's working so well for us. So we're really going to push it as along as fast and as hard as we can. The shorter sales cycles in some of those areas are good. Not all those products have that ERP replacement dynamic that we have in our core ITSM business, which there are longer sales cycles and everything is more complicated. We're used to that selling motion.
We're obviously pretty good at, but the newer products often have a much more rapid sell on motion and that's really good for our sales organization. Especially in security ops, those have markedly sales cycles than our average.
Got it. Great. And then Mike for you on the 2020 targets, I'm wondering if you could give us an update, I think probably the area we hear the most pushback or question is around the below G2K mix. And could you give us an update as to how that progressed in the quarter? And sort of as you look out to 2017, sort of how you think about the momentum in that business?
I think it's going to be half your rev mix in 2020.
Yes. Well, that other segment of our business, that other 50%. So remember, it's G2K that are 50% of our revenue and continues there. Well, there's still a lot of other large enterprises that aren't G2K in the public sector such that that accounts for about 30% of our revenue. In the commercial segment, those companies with less than 5,000 employees, that only accounts for about 20% of our business, but it's growing very fast.
And I think you're going to see a very similar mix through 2020. It's not all G2K. There's a lot of other large enterprise business out there in the public sector in particular.
Okay, great. Thank you very much. Welcome.
Thank you. And our next question comes from the line of Brent Thill from UBS. Your line is open.
Hey, Frank and Mike. The backlog reacceleration of 51% growth, I mean, we haven't seen that type of reacceleration in a lot of other stories that we all covered. Was there something that you would point to that drove that meaningful backlog acceleration? Or was it the confluence of several factors?
Well, the biggest was our net new ACV for all of 2016 that we signed up, but as well renewals is becoming a big piece of our contract value. We sell it, We sign every quarter as well. So it's the net new ACV as well as the renewals that really drove that backlog growth. And it's and why it was driven so much was obviously the new products that we have.
And Frank, you mentioned the verticalization of the team. Can you give just a little more color in terms of how widespread that will be in kind of the size or scope of that investment in 2017?
We set up a sales organization for what we refer to as SLEDMED. So it's state and local, higher eds and then the whole healthcare side, that's always been a really, really good business for ServiceNow. Those are just outstanding customers for us. And we felt that we could accelerate our presence in those vertical industry sectors by creating dedicated and specialized sales teams for that. Of course, we have a federal systems organization as well.
So it's not a change in our sales model. It's really a refinement. That's the way you got to think about it. We're doing it because we think we can develop demand faster with these kind of augmentations of how we go to market. I expect that over time, you'll see further refinement.
We have really strong critical mass in many areas, whether it's big pharma, whether it's big retail. So there's possibilities going forward. We're not doing any of that right now. We're not announcing any of that, but those are certainly possibilities because of the critical mass that we have in those verticals.
Thank you.
Thank you. And our next question comes from the line of Justin Furby from
Thanks guys and congrats on solid quarter. Frank, I wanted to ask about APAC and EMEA. It seems like those are 2 markets that are going to become increasingly important for the ITSM business in the next 3, 4 years. So I guess I'm just wondering if you could give some thoughts around what you're seeing in terms of pipeline build and confidence and being able to continue to penetrate into those two markets. And then when you look at the current international customers, do you see them adopting other products like Itom at a similar pace as what you're seeing in North America?
I guess just wondering if you feel like it'll be any harder or easier to cross sell those international customers longer term? And I do have one quick follow-up. Thanks.
Yes. So, the contribution of the Americas, I believe, is around 68%, which is relatively similar as what we've had. Obviously, there's been a big currency head. So in relative terms, the non U. S.
Denominated businesses have done really, really well for ServiceNow. And we're just we're pleased with the development of the business there. It is true that they are not as far along on the non ITSM product adoption, but we see that as nothing but upside opportunity going forward. They always have lagged in maturity and adoption relative to the Americas. So there's just more ground to cover for us going forward.
Doing very well outside of U. S. And we like our business there.
Got it. Thanks.
And then Frank, just on the Inspire program, it seems like that's paying early dividends. And I guess just wondering what your plans are if you look out over the next couple of years in terms of expanding that team and how incremental might that be to billings if you think that out over the next few years? Thanks again.
Yes. The Inspire team, it's been really great. They've been able to engage with customers really around innovation and transformation, really aiming for higher impact than what people might normally expect. This is much more of an elite consulting type team. Now going forward, we're going to aim them specifically towards strategic transformations.
It's really for organizations that want to really move up the maturity scale, really transform their businesses. That is not an easy thing to do. It's not for everybody, but Inspire team is really for the leading edge of our customer base that really wants to push that envelope in terms of automation and really go on light speed. And we're developing standard models, standard metrics to do that and the Inspire team is going to sort of lead the charge. And the whole theme behind the Inspire team is that they blaze the trail and then they hand off to the broader organization to really execute on the methods that they develop and then apply that to the broader business.
Got it. Thank you.
Thank you. And our next question comes from the line of Kurt Materne from Evercore. Your line is open.
Thanks very much. Thanks guys. I guess, Frank, obviously a lot of large big deals and obviously the ACV growth in the bigger customer base was really impressive. I was just kind of curious, obviously these are still long sales cycles. So as you've gone through from a lot of these deals probably started, I imagine 9, 12 months ago.
Did the size of the deal grow as the deal progressed through the funnel? I'm just kind of curious if you guys are doing a better job of sort of as you get into negotiations bringing in sort of the Itom experts and others So that really what we saw at the end of the year was sort of the buildup happened over the course of the year. I assume that's the case, but I was just kind of curious if you could comment on it.
Yes. So the very important thing to understand here is that ServiceNow is a platform, not a portfolio of applications, okay? So that means we're always selling the full platform, the full range of options that are available to our customers. And in both the primary selling motion and the upsell, it has a tendency to expand the transaction. So it's very important to understand is that we don't go to market strictly for an HR opportunity or strictly for a security opportunity.
We do that, but fundamentally, we start off by presenting ServiceNow as a platform with a full range of capabilities and driving the full adoption of the platform rather than just one thing, which is why we emphasized in our prepared remarks how many customers are buying multiple products. So that selling motion is working exceptionally well for us. We are being seen by our customers as a platform, not a bag of tools.
Okay. And then, Mike, obviously, I assume AR going up this quarter had more to deal with just the big deals coming at the very end of the year. And if I was going to just sort of move that forward in the Q1, I assume that means we're going to get a little more seasonality in terms of a strong Q1 cash flow numbers. Is that the right way of thinking about it?
Q1 is a strong cash flow because of the fact there were a lot of billings that went out at the end of the month that weren't due as of December 31. However, month 1 is a month that we make a lot of investments in terms of we it's usually one of our largest hiring months. We also do our sales kickoffs. So a lot of that cash receipts, there's a fair bit of disbursements with their incremental expenses in Q1.
Okay. That's helpful. Congratulations on the quarter. Thanks.
Thank you.
Thank you. And our next question comes from the line of Michael Turits of Raymond James. Your line is open.
Hey, guys. Good evening. One for Frank, one for Mike. Frank, which of the newer products are you beginning to land with that you're selling independently of service management? And then for Mike, you've got free cash flow margin up a point into next year, but then to get to those 2020 targets, you've got to accelerate that and really start to see some leverage.
So can you walk through how and when you get that free cash flow margin leverage?
This is Frank Michael. We're able to land with all products, but the standout product that we have landed with in 2016 that is new is service management. So the external facing customer service management products, and that's since that is a very new selling motion for us, different type of customer that we're talking to, it's been super encouraging for us that those people bought ServiceNow for the very first time in that class of solution.
And then Michael, on your question with regards to cash flow with our 2020 targets as we laid out in our investor deck at our Analyst Day last year and it's on Page 18, our framework for growth, we're still 6% for next year. So we're kind of right at that 35%. So we're only planning to add 0% to 1% in free cash flow. And if our growth slows down, you'll see more dropping to the bottom line and the free cash flow as well too. So I feel very comfortable with that framework.
Okay. Thanks guys.
Thank you. And our next question comes from the line of Keith Weiss from Morgan Stanley. Your line is open.
Excellent. Thank you guys for taking the question and very nice quarter. I think probably one of the things that is going to most surprise you guys about this quarter is your ability still actually increase the number of G2K customers that you're adding in the quarter with 31. I wanted to dig into that a little bit in terms of you give us some detail into the characterization of those G2K customers. Are we still talking about all guys who are starting with ITSM?
Or is it broadening out more that you get into G2K with other products today? Then if we think about the 2020 targets of getting to 1,000, is that 2020 or getting to 2,000, does that 1,000 is that all going to be ITSM G2K customers or is that more of a portfolio of across your solution?
So I'll talk first and then I'll let Frank. So the vast majority of the G2ks that we landed all start with ITSM as one of the products. They have many products and it's no different from what we've seen in other quarters. We are starting to see though some of our G2Ks buy a lot of other products and make some big purchases day 1, ITAM in particular, when they're buying ITSM. And we're also seeing a fair bit of upsells into our Global 2,000 existing customers is driving that incremental growth with our newer products.
In 2020, we really haven't modeled out what the composition of revenue from the different products is going to be within our Global 2,000 because right now for us, dollars 1 is a dollar. I'm really not that hung up as to what product it relates to. Obviously, our GMs who have these numbers, they want it all to be their product. And I'll let Frank talk more about it.
Yes. I was going to emphasize that as well that vast majority of our Global 2,000 ads are ITSMITOM OM cells. The one thing that we are seeing is that the Global 2000s have a a tendency to really buy into the ERP for IT, which means it's not just ITSM, it's the combination of ITSM, ITOM, IT Business Management, it's analytics. They're really trying to put together a full on ERP for IT that can globally consolidate and standardize their operations with. And that's a very powerful high value selling motion that we have in these very big accounts.
Got it. And then if I could squeeze in one last one.
When we're talking
about the solutions outside of the IT department, outside of core ITSM and IT operations Management. Can you talk to us a little bit about the competitive environment? Who are you coming up with in those engagements? Is it going to be someone sort of from a traditional vertical perspective like a salesforce.com and a customer service engagement? Or are there other platform vendors who are coming at the equation from more of a workflow standpoint like you guys are?
I would say, I've seen a lot of customers last year as well as in the last quarter that when it comes to IT, I mean, I think customers are starting to drop all pretense that there really is anybody else in the mix. It used to be that some of the legacy people like BMC and HP were used as sort of a pawn in the negotiations. That seems to be less and less of a factor and people are just conceding that you guys are the ones and we go from there. So we're getting deals done is not a walk in the park obviously because these are big ERP style implementations and projects, but they don't necessarily have sort of the competitive frictions and pressures that we have historically have had. You get into other parts of the businesses, there's totally different competitors in the mix when you talk about security, very different dynamic.
Customer Service Management, obviously, we're now dealing with people like Oracle and Salesforce and so on that have big businesses in those areas. So it varies depending on what part of the business we're talking about.
Excellent. Thank you very much guys. Great quarter.
Thank you. And our next question comes from the line of Robert Owens from Pacific Crest Securities. Your line is open.
Great. Thanks for taking my question guys. Frank, you talked about as you go to market presenting the platform and I guess I'm curious, you mentioned sales cycles for some of the new modules being quick, but as you look at customer acquisition and people looking at multiple modules, if you will, of the platform, do you see any extension
in sales cycles? And I guess that drives a second question, if I
can get them both in. In terms of new logos per customers where you're running well ahead of your kind of 17 per quarter expectation to get to the 2020 number. Is there anything in the pipeline that suggests any slowing that you might see in terms of new customer acquisition in the coming year?
I'm not sure that we're expecting any change in that dynamic, Mike.
No, I don't see any slowdown in new customer acquisition. Obviously, every year upsells becomes a bigger and bigger component of our overall net new ACV. ACV by virtue of the fact that our installed base grows every year. But definitely new customer, new logo acquisitions is a key focus of our sales organization.
Your other question was about do incremental services added to the deal slow down the transaction. I don't think we have any real evidence of that slowing down our deals. If anything, it tends to cement transactions because people are really buying into the platform strategy, which is obviously exactly what we're aiming for.
All right. Thanks for the color guys.
Thank you. And our next question comes from the line of Kash Rangan from Bank of America Merrill Lynch. Your line is open.
Hey, congrats guys. Let me just rattle off a few questions very quickly if you don't mind. 1, did you have any pull in from Q1 to Q4? And also related to that, Frank, you mentioned verticalization, specialization quite a bit. Wondering if there means that you have any possible sales force reorg happening in the quarter?
And finally, your perspectives on public cloud, how your customers are prioritizing the public cloud visavis investing deeper in ServiceNow? Thank you.
I'll start with first. There was nothing unusual in terms of pull in or push out in the quarter. There was nothing unusual in terms of early renewals with customers. We just had a very, very solid quarter. And what I would say is, typically, you see deals as you get towards the end of the quarter push out some deals that happens every quarter.
I would say this quarter was nothing that pushed out. And I think our sales force did a really good job of executing and calling out the number internally to us.
So in terms of your second question, there really is no massive restructuring on the sales side. There's just a specialization where we have an organization that only calls on this particular vertical industry class of accounts versus them being spread across verticals. So from standpoint, it's very benign and very moderate. You're not going to notice a whole lot of difference there. And I'm trying to remember your last question.
The public cloud, how are your customers are prioritizing their investments in public cloud visavis deepening their commitment ServiceNow, which may seem a little bit of odds with each other, but wanted to get your perspective. I
have tons of conversations with customer and that just never comes up. It's not a vector that they are sort of torn by and is top of mind. I mean, their use of public cloud versus ServiceNow, it's not viewed as 1 or the other or one as a substitute for the other or prioritized differently. For our customers, they're buying the service, right? And whether they're buying an infrastructure service from a public cloud vendor versus they're buying the services from ServiceNow, they're 2 totally different things.
They're not viewed as competing or sort of contesting for resources.
And also if you could, iTom, it was a fantastic quarter, but is this business lumpy or have you hit an inflection point? That's it for me. Thank you.
Yes, I said that earlier, in the Global 2,000 accounts, the pairing of the entire ERP of IT platform play, which is ITSM, ITOM, IT Business Management Analytics that bring together the entire ERP is a very, very strong selling motion. It used to be that a customer would get started with ITSM, and then sort of over time, they would gradually build out to some of the other modules. Now they're biting off the whole concept. And the pairing of ITOM and ITSM is very, very strategic. And it's a key reason for customers to really sort of swallow the entire ServiceNow strategy as it relates to IT versus some subset of the capabilities.
Beautiful. Thank you.
With PayCash, though, ITOM deals tend to be bigger deals and bigger deals tend to be a little bit lumpier.
Beautiful. Thank you.
Thank you. And our next question comes from the line of Derrick Wood from Cowen and Company. Your line is open.
Great. Thanks. And you may have just answered the question, but I just want to see if it's clear. I mean, you obviously had a breakout quarter for deals over $1,000,000 And historically, it's come from expanding the installed base. But are you seeing a trend of initial deals starting to be a lot bigger, out of the gate?
And it sounds like that that's the case and especially driven by Itom, but just wanted to get confirmation on that.
Actually of the 27 deals that we did over $1,000,000 only 3 were initial new customer deals were north of a1000000. And so it still is a lot of times that it's the customers will buy and they may make big buys initially to get to know us. And then there's some really big add on sales and that was highlighted by Frank when he talked about that one Fortune 25 account that we did $11,000,000 plus ACV deal with. They were already $1,000,000 customer for us.
Okay. And then I guess also a follow-up on the last question. Itom was has been lumpy. Do you see that starting to get a little bit more fluid in 2017? And maybe, Frank, if you could just give us perspective on kind of how the motions played out and progressed with ITOM in 2016 and how you see it taking place in 2017?
Well, ITOM and ITSM are cousins. They share a common data repository. They go hand in hand. It's historically been true. And it is absolutely true in terms of our selling motion.
ITOM is a different business from ITSM as much as they're closely related, it is very different because we do go on premise. It's really a cloud on prem relationship. From a deployment standpoint, it's different. It's a very different professional services engagement as well. We have historically not been as mature in that aspect of our business and we've been working pretty hard on that and we continue to work pretty hard on that.
But that business doubled, damn near doubled year on year. So we're going to be investing as hard and as fast as we can to keep that up in
2017.
Great. Thank you.
Thank you. And our next question comes from the line of Matt Lemenager from Baird. Your line is open.
Hi. Thank you. And we just talked about Itom a lot, but I have one more question. The attach rate jumps this quarter had been ticking down, jumps to 21. I was wondering was this mix of Itom close to what your expectations were for the quarter initially or was Itom maybe a bigger piece than you thought and got bigger traction?
Thank you.
We are very pleased with what the final results were for Itom. And I would say it was tracking ahead of plan as well as all of our newer emerging products are tracking ahead of plan. I think we've said before, we really feel, our GMs in those groups, with what we're seeing in sales, we're firing on all cylinders there. We're very, very pleased. So, you guys are just focused on ICOM.
We're focused on all of our products, which have been doing phenomenally well for us.
Right. Makes sense. And then maybe one for Frank. Any is there any ASP lift that comes from layering on automation and machine learning into your product as you bake in or replatform the DX Continuum. I'm wondering if that's something that gets monetized or is AI something that kind of just becomes table stakes and companies have to have strong AI and machine learning capabilities to offer a best in class product like you do.
Just wanted to hear your thoughts on that.
We're actually debating that pretty hard internally. We haven't come to final conclusions on that. I certainly feel that those are core platform capabilities because that can be applied to any kind of data. It really doesn't matter what it is. It's very generic technology in that sense.
I mean, it's been applied to CRM systems and we're going to apply it to any data source. It has a very high productivity impact because there's direct correlation between what those capabilities provide and the staffing that exists around service desk operations. So, there's going to be a very good relationship between cost savings and the business case, it's going to be super compelling for our customers, which of course leads our sales force to believe that they can charge extra for that. But we don't want to grow up and become a customer that is become a supplier that nickels and dimes are customer for every new thing that's coming out. So we're going to sort of exercise some caution and good reason there before we pull the trigger on exactly what we're going to do there.
But we are excited about this entire strategy and the benefit that our customers are going to get from it.
Great. Thank you and congrats again.
Thank you. And our next question comes from the line of Karl Keirstead from DB. Your line is open.
Thank you. Question for Mike. First, congrats on the billings numbers. I wanted to ask you though on free cash flow, just to go back to that question. If you hit your guide for 2017, if we look at the period 2015 through 2017, operating margins will have gone up 600 basis points, but free cash flow margins will be flat to up 100 basis points.
And I just wanted to make sure I understood that dynamic is whether this is sort of the normal narrowing of the operating margin and free cash flow margin given the SaaS or ratable model? Or is there just anything you would flag that might be keeping the free cash flow margins flattish despite that great billings and margin performance? Thank you.
Yes. You got to remember, there's a couple of components that come into free cash flow. Obviously, there's the operating cash flow, which is strong, then you have your capital expenditures. When you're adding, we added close to 1200 employees last year, 1100 and something. We're going to add 1200 plus employees this year.
There's a lot of facility requirements associated with that. So and our plan is to continue to add quite a few employees because we see the opportunity in our business. That has a big impact on our free cash flow. And as long as we are growing at 35 plus percent, you're going to see 0% to 1% being added to our free cash flow every year. And you're going to see kind of that 2% to 3% in operating margin and we just guide it to that 3% improvement in operating margin and they kept the free cash flow at 1%.
Got it. Okay, that's clear. Thanks Mike.
Thank you. And our next question comes from the line of Jesse Hulshorn from Goldman Sachs. Your line is open.
Hi, this is Kevin Kumar calling in for Jesse. Thanks for taking my question. So analytics attached to the majority of large deals this quarter, how much of an uplift to bookings does analytics provide and what's driving the adoption there?
Well, we can speak to what's driving the adoption, right? I mean, what analytics do is really enable the top level visualization and actionable insights into what's going on in the business. So it's really, really important for our customers to have this. Otherwise, it's really data entry and reporting. So the visualization analytics.
Business has done really, really well. We have invested analytics. Business has done really, really well. We've invested a lot in it. We're going to continue to.
This is really an important part of our whole strategy. As I said earlier, it's the entire ERP platform that we're selling analytics is a core element of that.
Great. Thank
you. Thank
you. And our next question comes from the line of Abi Lamba from Mizuho Securities. Your line is open.
Hi guys, thanks. This is Parthav sitting in for a bye. I'll add my congrats for the quarter. Just a quick follow-up on a prior question. Can you give us any more color sort of more broadly across the installed base?
Any color around your mix assumptions for the full year outlook when it comes to sort of ITSM versus non ITSM?
ITSM, I will say in 2020 is still the majority of our revenue. That is what gets us in the door. The only thing we have said is that we think ITOM can be roughly 15% of our revenue in 2020. And what we have said before is it would need to average about 19% of our net new ACV to get to that 15% of our revenue. I have to tell you, you guys are more concerned about the product mix than we are.
We are happy. We really just look at total revenue. And as I said before, we are really hitting on all cylinders across our product line as well. ITSM is coming off a very, very strong quarter and year for us.
Okay, great. That's very helpful. Thanks again.
Thank you. And our next question comes from the line of Phil Winslow from Wells Fargo. Your line is open.
Hey, thanks guys for taking my question and congrats on a really great Q4. Frank, I just wanted to double click on your comments on the customer service side. Obviously, you highlighted that as an area of attraction in 2016 and obviously, that was a big highlight back at your user conference and Analyst Day. When you think about the wins that you've had in 2016, whether it be versus established vendors in the customer service space or call it just replacements of any sort of internal developed product. What's the kicker that gets people to choose all over, let's say, an Oracle or a salesforce.com.
I know you highlighted GRC integration, ITSM integration, but maybe you can help us kind of put some framework on that. And actually also how much of those are sort of driven by, call it, the front of the house versus you all leveraging your position with the CIO?
So that's my favorite question.
The positioning
that we bring to customer service is that we view it as a team sport. In other words, it's not just being used by customer service representatives, call center folks, we take a holistic view. So there is a single process that brings the customer service people, the engineering people in the back office that actually do really work on the underlying problem management and then the operational staffs that apply changes. So in other words, we don't view customer service as an isolated activity. It's a team sport.
It is completely integrated with engineering and operations functions. Now, this is not a new concept to CIOs because they come from the world of incident problem and change where that model is pretty much doctrine. We are bringing that doctrine to customer service and of course IT people recognize it and they go, that is absolutely the right way to do customer service. So we get a lot of traction with customer service management because it's really a hybrid, a merger, if you will, between customer service and service management. And that is a very highly differentiated positioning relative to what's available in the marketplace.
I wanted to go back to the ITSM for a second. You provided very strong billings subscription billings growth of to 38 adjusted for calendar year for FY 2017. When you think about ITSM, is it in the same neighborhood that you would envision it growing along the same lines? I would assume it would be less since you've had, as you said, triple digit growth in ITOMS. But if you could just give any directional color on how you see ITSM within the context of the subscription billings you provided?
Thank you.
Okay. As I've said before, we really don't look at our business that way. As Frank said, when we go into customers, we're selling a platform. They're not different applications. And we're not going to go down that path of trying to guide, to different product lines.
If you talk to each of our individual GMs, they all think in 2020 and this is outside of ITSM because we're already there. They think they can all earn in 5 years from now, they all think they can have be $1,000,000,000 revenue business. Now I'm not guiding to that, but that's how bullish these guys feel on their own product lines. And so we don't think we need to manage with the Street on different products. We're just it's a platform.
Okay. Well, let me
ask the question slightly differently on a philosophical basis. As you're landing new customers and understand the platform, you're able to sell a number of different products once you land the new customers. What's bubbling up, as you're landing those new customers with the most frequent product gaining that traction? Is it still to ITSM?
ITSM is in virtually every single new Global 2,000 account that we land and we do not see that changing at all.
Okay. All right. Thank you.
Thank you. And our next question comes from the line of Ryan MacDonald for Wonderland Securities. Your line is open.
Thanks guys. Congrats on the
great quarter. I just wanted to follow-up on what you're seeing in the security operations. I know it's a fairly early stage product there, but it's been, I think, a space in security and overall where we've seen, I guess, some shifts in spending. And just wanted to hear what your approach has been with that product since you introduced it?
This is Frank. Security a novel concept for our customers. They have heavily invested in enforcement technologies like firewalls and endpoint technologies and vulnerability scanning, all these kinds of things. I think on average the average account has like 75 different security tools that they own. And there is nothing on the response side.
There's just people sitting around with spreadsheets and accessing different websites, trying to do threat intelligence, sheets and accessing different websites, trying to do threat intelligence and so on. So we bring complete workflow discipline to the back end of the process of managing security. So this is a huge opportunity because everybody needs it and nobody has it in other than purely manual tools of email spreadsheets and so on. So it's exciting. It has a faster sales cycle.
It has very good average pricing to it and it is just wide open. There's no incumbency of any kind. So this is an example of the sort of thing that ServiceNow likes to do.
Excellent. Thank you very much.
Thank you. And our next question comes from the line of Tim Cassel from Northland Capital Securities. Your line is open.
Hey, I throw my congratulations in there as well on a great quarter. My question has to do with the application. I know you guys are probably getting beaten up a little bit or beating this one on maybe a little too much. But as I look at how the customers use the products, a few years ago, if you wanted to have a security response type product or what have you, you had to take your platform and build it yourself. Now you offer it and makes it a faster sales cycle, faster time to value, I'm sure.
But how about like the number of people using the product? Is your product broader so that there's actually more users and getting people getting more value out of it? Or is it more of a narrow product and just use to help them get up to speed faster? Maybe you could help clarify that for me. Thank you.
I'm not
sure that
I understood the question delineation that you're looking for. Can you elaborate?
Yes, sure. So let's say on a security incident response, maybe there might be in a large corporation 4 or 5 users of that process if they built it themselves because they maybe have a narrow scope that they're trying to address. Does your application come in broader so that maybe there's 10 users of that process, because you have more capability than what they would build internally?
Yes. It does come in broader because it's not just the security people that use it. I mean, what we do is, we really integrate the workflow between security and IT people, right? You got to remember that when action has to be taken, typically the actions are taken not by security people, but they're taken by IT people because they own network devices, database servers, system servers and so on. So there are typically way more people involved than just the security analysts that are trying to do threat intelligence and things of that sort.
So it is a much broader process than the way people have historically sort of prosecuted security response processes if they had them.
But I would say another way too, there always was a certain segment of our customers who would have built the application themselves. The vast majority though would not have and they probably would have been doing it in Excel. And so by virtue of having those products, it opens up so many more users for us to sell to.
Okay, great. That's very helpful. Thank you.
Thank you. And our next question comes from the line of Alex Zukin from Jefferies. Your line is open.
Hey, thanks guys. Frank, can you talk about maybe what the level of realization is that you're seeing around the overall ServiceNow value position, value prop from customers that are spending over $10,000,000 in ACV versus those that are spending $1,000,000 to $5,000,000 And I guess how many in your mind are ultimately going to be in position to do that?
Well, we believe that these Global 2000 accounts have they are like markets unto themselves. That is an almost an unlimited opportunity for all reasonable intents and purposes. When we get going with these large accounts, they're typically envisioning globalization and standardization across everything, all their geos, all their businesses. They want to have a single view of what's going on and then they really want to get into the ERP mode where they're layering on all the other incremental services in terms of business management and financials and analytics and project management on and on and on. So, I think the opportunity is, by the way, we just talked about security, that obviously is a sell that also very closely drafts that ERP selling motion.
So we will be able to come up forever with new opportunities to sell. And the only reason that we're slowing it down is we got to give our sales and marketing team because we could easily overwhelm them from the product side. And obviously that would not be in the interest of the business. So we're pacing ourselves, but we have a ton of opportunity in the pipeline to prosecute incremental opportunities.
Got it. And then maybe another question adjacent to that is, when you think about a platform, you think you look at other companies like Salesforce that have ISVs and other companies that are building on top of their platform. You have some of that as well. But can you maybe talk about strategically how you think about that over the next couple of years with your partners?
Yes. Well, we have and we talked about this at our conference last year Vegas very extensively. We have a conference just for professional application developers that will build applications that they will sell. We brought a lot of infrastructure, a lot of support for that. We started ServiceNow Ventures, who are actually investing and funding companies that are building applications on our ServiceNow platform.
So we're doing all the things to stimulate that entire trend. Obviously, it takes time for people to get going, build things, take it to market, but that's an ongoing process over here. So, we're certainly not of the mindset that we're going to do everything ourselves. We're very much entrusted in stimulating sort of broader adoption by application developers that are not us.
Got it. And then Mike, maybe if I could squeeze 1 in. Was there anything that didn't perform in terms of the product mix that you wanted to be maybe better in the quarter?
There's nothing that I could say I wish were better.
Perfect.
Thank you. At this time, I'm showing no further questions in the queue. I would like to turn the call back over to Mike Scarpelli for 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 your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.