Good day, ladies and gentlemen, and thank you for standing by. Welcome to the ServiceNow Q2 2016 Earnings Conference Call. And answer session. Our instructions will follow at that time. As a reminder to our audience, this conference is being recorded for replay purposes.
I would now like to hand the program over to Michael Scarpelli, Chief Financial Officer. Sir, you have the floor.
Good afternoon, and thank you for joining us. On the call with me today is Frank Slootman, our Chief Executive Officer. Our press release and the simultaneous 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 annual report on Form 10 ks 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. Total revenues for the Q2 grew 38% year over year to $341,000,000 driven by new customers, upsells to existing customers and a 97% renewal rate. We added 26 Global 2,000 customers, and we now have 272 customers paying us more than 1,000,000 in ACV, a record increase in the quarter.
While service management continues to be our principal selling motion and the main driver of these metrics, our emerging products are growing faster and capturing more net new ACV. Emerging products defined as everything except ITSM represents 40% of our net new ACV, up from 24% in Q2 2015. Additionally, 67% of our customers now license multiple products and 15 of our top 20 new deals in the quarter included 3 or more products. IT Operations Management or ITOM continues to be our 2nd largest product suite and represented 13% of our net new ACV, up from 10% in Q2 2015. One of the biggest trends we're seeing in Itom is customers licensing multiple products instead of 1 off products.
53% of Itom Itom net new ACV included product bundles and 28% included the entire suite. For example, we signed an $840,000 upsell to a state government that purchased the entire ITOM suite to improve governance remediation and self-service. Customer service management officially launched in May at Knowledge 16, where 1300 attendees 1300 attendees participated in 14 breakout sessions dedicated to this new service. We now have 40 total customers, 30% of which are new to ServiceNow and 31% of which are Global 2000s. Customer service management also participates in broader transactions.
For example, we signed a $500,000 deal as part of a larger $1,300,000 upsell to a medical equipment company. The customer also integrated field service management to drive down costs and improve service delivery. Security operations also has another strong quarter. We landed 18 new customers, including 9 Global 2000s and we landed our 1st net new ACV deal over $500,000 We now have 32 total customers since our December launch. In June, we acquired Brightpoint Security to accelerate our investment in security analysis and response.
Brightpoint allows customers to prioritize security threats by analyzing external threat data and by showing threat indicators with industry peers. Customers then remediate security threats using our security operations structured workflow. We expect to completely re platform Bright Point by the first half of twenty seventeen. Q2 was our strongest quarter ever for our human resources solution in terms of new business. Average deal sizes for this product continue to increase and we're encouraged by the outlook for the rest of the year.
The strong quarter was driven by a 1,400,000 dollars HR led deal to a new public sector customer in Australia. User experience was critical to the HR buyer and we won against an incumbent solution and 2 additional competitors. Future strength was also driven by our annual users conference, Knowledge 16. We set a new record with over 10,000 attendees, an increase of 31% from the prior year. Knowledge is our single largest customer prospecting event of the year and 87% of attendees were customers, prospects or partners.
We continue to branch out beyond the boundaries of IT as 24% of attendees were in roles outside of IT compared to 10% last year. In conjunction with Knowledge 16, we hosted our 2nd annual developer conference, CreatorCon. We saw 3,000 registered developers and application architects and hosted 51 workshop sessions, both an increase of more than 100% from last year. We expect significant growth next year as 94% of attendees indicated they will attend Knowledge 17 in Orlando. And finally, we are announcing that our founder, Fred Luddy, intends to retire from active duty before the end of the year.
Fred has been writing code for some 44 years and 13 whirlwind years at ServiceNow. We are thankful for his many contributions as without him we would not be here today. Fred will continue to serve in an advisory capacity as well as on our Board of Directors going forward. With that, I will now turn the call over to Mike.
Thank you, Frank. During today's call, we will review our Q2 financial results and discuss our financial guidance for Q3 and full year 2016. 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.servicenow.com.
Total revenues for the 2nd quarter were $341,000,000 increasing 38% year over year. Foreign exchange rate fluctuations did not significantly impact our actual year over year revenue or billings growth. Subscription revenues were $291,000,000 increasing 45% year over year and professional services and other revenues were $51,000,000 increasing 9% year over year. Our average contract terms for new customers, upsells and renewals were 30.8, 27.5 and 26.2 months, respectively. Total revenues based on geography were $234,000,000 in North America, dollars 82,000,000 in EMEA and $25,000,000 in Asia Pacific and Other, representing 69%, 24 percent 7% of total revenues, respectively.
Approximately 30% of our revenue is in foreign currencies. The majority of our foreign exchange rate exposure is related to euro. However, we have approximately 6% revenue exposure to the British pound. Billings were $375,000,000 in the quarter, increasing 33% year over year. Subscription billings were $333,000,000 dollars increasing 38% year over year and professional services and other billings were $42,000,000 increasing 4% year over year.
Our average billings duration was 11.8 months for the 2nd quarter compared to 12.2 months in the same period last year, a negative impact of $12,000,000 year over year. Subscription gross margin in the quarter was 84% compared to 82% in the prior year. Professional services and other gross margin was 33% compared to 38% in the prior year. This includes $13,000,000 of revenue related to our Knowledge Conference, while all related expenses run through sales and marketing. Excluding Knowledge revenue, our professional services and other gross margin was 10% compared to 19% in the prior year.
Overall gross margin was 76% compared to 74% in the prior year. Excluding knowledge revenue, overall gross margin was 76% compared to 72% in the prior year. Operating margin was 10% compared to 7% in the prior year, including net expenses of $11,000,000 related to knowledge. Our operating margin included higher than expected subscription revenue and lower than expected net expenses from knowledge. We ended the quarter with 4,241 total employees, a net increase of 250 in the quarter.
Net income for the 2nd quarter was $26,000,000 or $0.16 per basic and $0.15 per diluted share compared to a net income of $7,000,000 or $0.05 per basic and $0.04 per diluted share in the prior year. Our basic weighted average shares outstanding was 164,000,000 and our diluted weighted average shares outstanding was 173,000,000. Free cash flow margin was 23% compared to 26% in the prior year, and we ended the quarter with $1,031,000,000 in cash, short term and long term investments. Let's turn to guidance for the Q3 and full year 2016. Based on foreign exchange rates at the end of the second quarter, we are not forecasting a significant impact to our year over year revenue or billings growth due to foreign exchange rate fluctuations.
For the Q3, we expect total revenues between $350,000,000 $354,000,000 representing year over year growth between 34% 36%. Our guidance was negatively impacted by approximately $2,000,000 due to foreign exchange rate fluctuations during the quarter. $315,000,000 representing year over year growth between 40% 41% and professional services and other revenues between $38,000,000 $39,000,000 representing year over year growth between 0% 3%. We expect billings between $380,000,000 $385,000,000 representing year over year growth between 33% 34%. Our guidance was negatively impacted by approximately $3,000,000 due to foreign exchange rate fluctuations during the quarter.
We expect subscription billings between $339,000,000 $343,000,000 representing year over year growth between 38% 39%, in line with the growth rate we saw in the same period last year. We expect professional services and other billings between $41,000,000 $42,000,000 representing year over year growth between 2% 4%. Turning to gross margins, we expect subscription gross margins of approximately 84%, professional service and other gross margins of approximately 13% and overall gross margins of approximately 76%. We expect an operating margin of approximately 15% and free cash flow margin of approximately 16%. As a reminder, Q3 is seasonally low for free cash flow as we expect to spend approximately $15,000,000 associated with our ESPP purchase.
We expect diluted weighted average shares outstanding to be approximately 174,000,000. For full year 2016, we expect total revenues between $1,370,000,000 $1,380,000,000 representing year over year growth between 36% 37%. Our guidance for the rest of the year was negatively impacted by approximately $4,000,000 due to foreign exchange rate fluctuations during the quarter. We expect subscription revenues between $1,203,000,000 $1,211,000,000 dollars representing year over year growth between 42% 43% and professional services and other revenues between 167 $1,000,000 $169,000,000 representing year over year growth between 6% 8%. We expect total billings of between $1,605,000,000 $1,615,000,000 representing year over year growth of approximately 34%.
Our guidance for the rest of the year was negatively impacted by approximately $6,000,000 due to foreign exchange rate fluctuations during the quarter. We expect subscription billings between $1,427,000,000 $1,435,000,000 representing year over year growth between 37% 38% and professional services and other billings between $178,000,000 180,000,000 representing year over year growth between 9% 10%. Looking at operating margin and free cash flow guidance, we expect to accelerate investments in sales and R and D in the second half of the year, but we are maintaining our guidance of approximately 12% 24%, respectively. We expect diluted weighted average shares outstanding to be approximately 173,000,000 for the year, and we expect to add approximately 1,000 net employees in 2016. With that, operator, you can now open up the line for questions.
Thank Our first question comes from the line of Matt Hedberg with RBC Capital Markets. Please go ahead with your question.
Yeah, guys, thanks for taking my questions. Maybe to start with, it sounds like FX didn't have a big impact on your numbers here. I'm curious, there was no mention of the macros, given the timing of Brexit. Was there any impact to quarterly linearity or any thoughts on that, the potential impact on that on the guide?
No, we really haven't seen anything as a result of Brexit. And coming into this quarter right now too, we don't see any impact on our business today, but I think it's too early to tell.
Okay. And then that's great. And then Frank, maybe you highlighted in your prepared remarks, this is a record quarter for HR deals. Are we closer to an inflection point there on adoption?
And I think at the conference
you mentioned that 40% of your business is partner influenced. Are you getting additional leverage there on some of these HR wins?
I think that we're whether it's an inflection point or not, we probably need a quarter or more to see how that plays out. But what we're seeing in all our emerging product lines is that the sustained focus and investment that we're making is really starting to push us over the edge. As you know or you may recall that about 1.5 years ago, we really changed our model, how we built, how we support, how we go to market is really by product line now. And it just takes time for us to sort of reach critical mass there. And there's a tipping point where things really come together on a lot of different vectors and we're starting to see the effects of that.
I would add Matt to that $1,400,000 HR deal was actually through Capgemini. So we are seeing the big system integrators involved in those.
That's great. Thanks a lot guys.
Thank you. Our next question comes from the line of Brent Thill with UBS. Your question please.
Good afternoon. Mike, realize that billings is not the only metric health, but given kind of the decel that you saw from Q1 to Q3 and the billings growth, can you maybe just reconcile for everyone what's happening there? And is I know you don't give out the booking number, but is there any more color that you could just add to what is just a number one of many numbers we see, but certainly a focus for The Street. Yes.
I just want to remind people that one of the biggest components of billings is actually the renewals that happens in the quarter. And so the timing of renewals has a big impact. As I will give you an example, there was a few big renewals that didn't get signed until the 1st day of this quarter that really should have happened last quarter that impacted our billings and there was quite a bit that dollar magnitude of that. And I also want to remind people too that why Q1 in our business is relatively big relative to other companies is we do have this phenomena when a lot of our contracts start January 1, even though we booked the deals in Q4, we grossed down that AR and deferred revenue and recognized that in Q1 that artificially inflates the Q1 billings when you look at it that way when you try to compare us
with other companies.
Okay. Thanks for the clarification. And for Frank, with Fred's departure, obviously, some big shoes to fill, realize he's going to stay on the Board and continue in an advisory role. But can you maybe just talk a little bit about who will backfill as a leader for the product group?
Well, Fred's not a guy that can really be replaced. He's one of a kind. And the company obviously has grown up around him over the last 5 years. When I joined, there were got 250 people here. We're now at whatever we are, 4,300.
So there's a ton of talent over the years. And we have definitely sort of enabled Fred to sort of scale back his day to day because he's been doing some heavy lifting for a very long time. So we're actually thankful that we've had them as long as we've had them and we're really able to take this and strike. A lot of talented people, service now and a lot of different product lines in our platform. And I think the difference is Fred will be around.
He'll be in an advisory capacity. The only difference is he's not going to be writing code day in, day out. And I think he's earned that break.
Okay. Thank you.
Thank you. Our next question comes from the line of Kirk Materne with Evercore ISI. Your question please.
Yes, thanks very much. I guess first, Frank, you saw obviously a really nice jump into that other category in terms of the bookings contribution. I assume most of that contribution is coming from some of the HR and the customer service management modules that you're offering that you've been talking about earlier in the call. I guess was there anything else in that bucket that we should be aware of that contributed this
quarter? It was actually strong across the board. We highlighted HR, but we highlighted security, we highlighted customer service management. But one area that was particularly strong was the whole business management area where we do project portfolio management combined with financials, combined with analytics. They had an exceptional strong quarter as well.
So it was very much across the board versus having one outlier. So the bigger theme here is that the model is working really well for us the way we built and go to market.
Okay. And then just one quick one for Mike. Obviously, the Q3 for you guys is a big quarter in the federal vertical. I guess, do you feel like the setup for that is still pretty healthy heading into this quarter in terms of just pipeline? What you're seeing in the pipeline, just normal build into the end of their fiscal year?
Thanks.
I would just say, in general, we feel very good about the Q3 where we are sitting today and looking at the pipeline across the board, not just federal.
Thank you. Our next question comes from the line of Sarah Hindlian with Macquarie. Your question please.
Yes. Hi. Thanks for taking my questions, Frank and Mike. Frank, maybe you could start by talking a little bit about the deal mix in the quarter. And particularly, I am wondering about new customers and where they're landing.
So in ITSM and expanding into Icom or HR services, are you landing any clients with automation beyond IT? I saw one of the top 20 appears to be landed outside of ITSM and was looking for some color beyond the top 20 deals. And then, Mike, another question for you. Maybe you can address a little bit where you're expanding partnering in security operations and what's driving the traction there with 5 of the top 20 deals including security operations?
I'll go first. It's Frank, Sarah. So in terms of how we land, the preponderance of deals, we're landing with Service Management. So it's been true. It is still true.
The vast majority of our top transactions ITSM, Service Management is core. That said, we have a lot more clubs in the bag now and our sales team is capable of landing with other products. And I highlighted that in the prepared remarks that we have a whole bunch of brand new logos now, for example, on customer service that are not ITSM customers. So this ability to land with different products in different accounts is a very powerful new dynamic for the customer because we have demonstrated historically that we're very good at upselling customers once we land. We just have many more opportunities to land.
And we think that our overall performance in landing Global 2,000 accounts was definitely boosted by having this portfolio of products.
So Sarah, I apologize. I didn't quite understand your question you were asking on the security side, the partners. Could you maybe clarify that question?
Yes. On the security thanks Mike. On the security operations side, I know you've announced several partnerships. I was wondering, are those really what's driving uptake? Where are you getting some traction to have it was pretty remarkable to see 5 of the top 20 deals, including that security operations.
And I thought the sales team was relatively new. So I was just looking for some more color around this.
Yes. Terry, it's Frank again. On security, I think most people don't realize, but this is really a very close adjacency to our core business. It's very typical that CSOs, Chief Security Officers report to CIOs many, many times when we host large customers here at our executive briefing centers, the CISO is there. We often now these days, we're actually making sure that we invite CISOs in.
But the whole offering is about combining the IT and security teams into a single system, single workflow, single set of analytics and so on. So this is actually a this is not a completely separate market, if you will, where we sort of have to start up a whole new selling motion. This is actually very high leverage of our core business. We have very good access to this opportunity. So there's a lot of exciting aspects to that business and that's why we're also making acquisitions in the space.
We think it's going to be a very strong business for us over time.
Thank you very much.
Thank you. Our next question comes from the line of Keith Weiss with Morgan Stanley. Your question please.
Thank you guys for taking
the question and nice quarter.
I wanted to sort of fill you guys out in terms of what gives you confidence in the guidance in the back half of the year. When I look at Q3, to high end of the guidance range, it looks like you're seeing accelerating billings growth. We all see stuff like Brexit as we get worried on our side of the fence. Where do you guys garner the confidence that you could actually see growth improve as we go into Q3, potentially at the high end of that guidance range?
So I'll reiterate from a billings perspective that you're looking at, the bulk of our billings is already contracted either with our contracted backlog or renewals that we know we're going to get. Remember, we have very good visibility into our renewals because if a customer is going to get off of ServiceNow, it's something we know well in advance. Second thing is, as I said, we're off to a very strong start to this quarter. We feel very good about what we're seeing and our pipeline that we're looking at, our Q4 pipeline, both our gross and weighted gives us that confidence. And I just want to remind you too, this is not a short sales cycle.
This is a very long sales cycle. We have very good visibility into deals. When we're selling into Global 2,000 many times, this is a 2 plus year sales cycle into these large accounts. So that's what gives us the confidence in these deals.
Got it. And then drilling in a little bit just on the commercial side of the business, you had a really nice quarter in terms of G2K ads with 26 new customers. Last quarter, we saw that commercial business frame up really well. How has that been trending? Or how did that trend in Q2?
Commercial business continues to be very strong for us. We have continued to do some $1,000,000 plus transactions in that space. So we're very pleased with what we're seeing. And we think it was definitely the right decision in 'fifteen to segment our sales force into a commercial and enterprise.
Excellent. Thank you very much guys.
Thank you. Our next question comes from the line of Michael Turits with Raymond James. Your question please.
I guess I don't feel bad this Turtis, it was Keith Weiss a minute ago. So, thanks for taking the question. In any case, so on the slip deals, the slip renewals, I just wanted to clarify, Mike, did they all get signed already, the ones that slipped?
And is
there any reason reason for the execution, longer sales cycles, anything we should worry ourselves about?
Once again, these were renewals that were supposed to have renewed right at the end of the quarter. And it was delays in procurement organizations who try to renegotiate deals many times. And but they've all been signed already.
Right. And then also And to
be clear, this happens every quarter. There's deals that get pushed and pulled every quarter on the renewal side. I would say this quarter, there tended to be more that got pushed.
And that leads into why you have more confidence or strong confidence in this Q as well, right, on the billing side?
I'll just say we're off to a very good start for Q3 right now, where we're sitting today.
Great. And then my follow-up is on Fed. I can't remember if Kirk mentioned this or not. I think you brought up Fed next quarter, but you got FedRAMP certification. Does that increase your confidence, your opportunity pipe, like they put to convert as you go into 3Q?
This is Frank, Michael. We're not fixated on our federal business as the driver of our Q3 number. Mike has already said several times, we're off to a very, very fast start and we have tremendous visibility in this quarter. That's really what gives us the confidence in the federal business is part and parcel of that overall view of the business.
Okay. Thanks.
Thank you. Our next question comes from the line of Karl Keirstead with Deutsche Bank. Your question please.
Thanks. I just wanted to return to the new ACV mix data. Obviously, phenomenal growth in the other category. But at the risk of looking at the glass half empty, I want to look at the service management piece, 76% a year ago, it's now 60%. Mike, did that grow in terms of new ACV dollars?
And could you just update us on how you feel about that core service management piece in terms of new ACV? Thank you.
Yes.
So I'm not going to talk about growth in ACV with service management. But what I will say and what Frank said before, if you just look at our 26 Global 2,000, 24 of those were they started with ITSM. That is what lands us in the door. It is still the bulk of our revenue and will continue to be the bulk of our revenue for quite some time and it will continue to grow in our revenue. And so that business is still very strong.
It's just the fact of the matter is these new emerging products are growing faster because they're off a such smaller base.
Yes, makes sense. Okay. Thank you, Mike, for that. And if I could ask a follow-up. Your margin guidance for 3Q and 4Q implies I'm sorry, 3Q and the full year implies that we might see flat or slightly down margins in 4Q.
And I think you touched on it. You mentioned an increase in an investment in sales and R and D. Could you elaborate a little bit on where the investment focus is? Thanks a lot.
Sure. So as you know, we've been acquiring companies. For instance, we bought Itap on the Itom side. We just did Brightpoint this quarter. We're making some additional investments in R and D in our core ITSM product.
And so we're accelerating R and D hiring. And also we're pulling forward, especially around some of these new products and specialty sales from Q4 into Q3. So it's not changing the overall year, but it changes the timing of some of our sales people as well too because of the opportunity we're seeing in some of these newer emerging products.
Okay, good. Thanks a lot.
Thank you. Our next question comes from the
line of Steve Asha with Robert W. Baird. Your question please.
Terrific. I would just like ask about the Itom business and specifically what I'm going to refer to as new Itom, which is ServiceWatch and Event Management and some of the newer things you're doing. Maybe you could comment on what kind of traction you're seeing with those newer products?
We continue to do really, really well in that business. It is the 2nd largest revenue stream and bookings opportunity that we have Next to service management, it's still very new business to us. As we highlighted I think that's it's going really well. The harder part I think that's it's going really well. The harder part about Itom for us is that from a deployment standpoint, in other words, that is a very different motion than what we're used to on the service management side.
That has certainly triggered some growing pains on the part of our organization to really become highly proficient on that. We've made a lot of investment on the services side of our organization. And we actually think that represents opportunity and upside to us. I think we're going to we are getting way, way better at the deployment aspect of that business, which we think then in turn becomes an enabler for even better growth in that business. Because if you can't install rapidly, your follow on deals obviously take longer.
So Itau is a different kind of a business, but because our core products have such strong value propositions, as you mentioned ServiceWatch, but really the entire way we do things with the CMDB being the core repository there, has resonated very, very strongly. We just need to get better at rapidly deploying and rapidly getting the customer to value and they think that will become a further enabler for growth in the ITM opportunity.
Perfect. Thank you.
Thank you. Our next question comes from the line of Alex Zukin with Piper Jaffray. Your question please.
Thanks for taking the question. Hey guys. Frank, first for you, you guys, you mentioned you doubled your customer count basically on the customer service side sequentially. And I was curious, how often you're seeing sales force? What your win rates are?
And why typically you're getting chosen over them in these competitive engagements?
Yes. So I mean, obviously, we're still moving from a small base, but the response we have from the marketplace suggest that what we're doing is resonating. We're not a tit for tat with sales force. We really bring the the holistic integrated service model to the customer, which really adds the engagement model to the engineering, root cause analysis aspect to the change operational processes, all one single integrated approach. For people that come from that world, which is typically the IT crowd, they go, again, that's the right way to do things.
So we often get traction where that integrated holistic model is viewed as a really, really core advantage. So that doesn't apply to every single customer service opportunity, but in the world of IoT and expensive capital equipment type of service models, I think we have the right approach.
And we're seeing the traction.
We're very excited about this. As you know, this is a very large business. It's probably the single largest market that we're operating in. So I mean, we can really invest in this area for a long time to come. We are replacing a lot of legacy systems, homegrown systems.
It's not that different in that regard from what we're doing on the service management side and the operations management side, very similar dynamic. We typically take out stuff that's very, very old.
Got it. And then maybe one question, kind of the opposite question of what Keith was asking. If you look at your guidance for subscription billings for the year, any reason or maybe remind us why we should see the kind of growth deceleration in the 4Q period that's implied in the guidance?
You're getting into law of large numbers, Alex, and the guidance is what we think is appropriate right now. It's still quite substantial growth over 2015.
Got it.
Thank you, guys.
Thank you. Our next question comes from the line of
Justin Furby with William Blair. Your question please.
Thanks, Frank and Mike. I was just wondering if you could give more detail on what you saw by geography in terms of new bookings in the quarter. And Frank, I think I've heard you talk about in 2020 that you expect something like fifty-fifty mix in terms of new ACV from ESM and non ESM. And it seems like you might be tracking to get there sooner than you thought. And I'm just wondering if that's the case, how it impacts the model, if at all, in terms of margins or growth over the next 4 to 5 years?
Thanks.
This is Frank. I'll start. I think you're correct. We're facing a little at least if you seem to if you meant to imply that, we are facing a little bit ahead of where we thought we'd be. But that doesn't mean that it will continue at this blistering pace to sort of the mix substitution that we sort of seen over the last couple of quarters.
I think we have so many irons in the fire now. We have a lot of hot products. There's just a ton of opportunity for us to prosecute and deploying the resources to be able to do that is really what we're focused on. I don't want to get too far ahead of myself of knowing exactly how that mix is going to play out here in subsequent quarters. We're just happy to be able to go to market with a lot of interesting value propositions that make a lot of sense together.
And I would just add, Justin, your question on the performance in different geos. EMEA and APAC had very strong quarters, above what we were expecting and the Americas came in pretty much where we were expecting, so.
Got it. And then just one more if I may. I think in Europe, I think you made some changes at the sales organization level over the last 6 to 12 months. So just hoping you might be able to comment on what you're seeing from those changes. Thanks.
Yes. This is Frank. We actually made 2 major theater leadership changes last year this year, both for the Americas as well as for Europe. And we believe there has been a very significant impact to that. One of the things we're super pleased about in 2016 is that the fidelity of forecasting, our sales organization's ability to guide the business has dramatically improved from 2015 and that is in no small parts because of the leadership changes that we've made.
So we're feeling very good where we are and we're feeling very good at what we're looking at for the second half.
Got it. Thanks guys and congrats.
Thank you. Our next question comes from the line of Derrick Wu with Cowen and Company. Your question please.
Thanks. Mike, great job on the subscription gross margins, but had a question on the services side. Looking at your Q3 guide, it looks like PS margins are going to be under some pressure. Is that due to the just kind of intentional slowdown on the services side or are there other factors at hand? And I guess with regards to your focus on driving more services from the channel, how has that been tracking relative to expectations?
And what are some of the things you guys are doing to accelerate more enablement from your partners?
Sure. So we've done
a few changes within our professional service organization. A, we elevated the leadership to being a direct report into our CEO, Frank, so that it's outside of the sales organization. We hired a real GSI leader and to run that organization who just started in the last kind of 3 months. He's making some changes in that organization and we're working through the transition of that right now. But I feel very good we're going to have more of a global delivery model for our professional service organization.
But with that, I just want to remind you, we try to have most of the services delivered by our partners. We're really focused more on new as we have our emerging products, we have to be the one delivering those implementations because our partners don't know how to do them yet. Once our partners get up and running and trained, we expect they'll do more. And we're pleased with what we're seeing with the amount of business our partners are taking on.
Okay. And if I could throw 1 in there, given the settlement with BMC, anything changed in terms of velocity of win rates or sales cycles? Or would you consider it to be immaterial in terms of what you're seeing in the field?
Frank, no real change there. Nothing that we want to attribute to that.
Okay. Thanks.
Thank you. Our next question comes from the line of Walter Pritchard with Citi. Your question please.
Hi, thanks. Frank, I wonder if you could talk about sales productivity generally and you talked about accelerating some sales investments. It sounds like that's more of a shifting around, but could you comment on sales productivity and how it's faring versus a year ago and especially as you look towards the second half of the year where you expect to see things accelerate?
Yes. I think you've heard me say this in prior quarters. When sales productivity is where we like it, we tend to accelerate hiring. And when it's not where we like it, we tend to sort of take our foot of the pedal. And since we are moving, hiring up in the year, it's a clear indication that we're happy with the way things are going and the opportunity that we think our reps are having.
And the big thing about hiring and productivity is that we hire people. We got to see our way clear that these people become productive because then we all start making money and the whole scheme works for us. So feeling good where productivity is at and we're feeling even better what we think we can do for the balance of the year.
And then Mike, on the deal slippage on the renewals, it sounds like those have closed. But how are you treating those in your forecast? I guess we haven't heard actual renewals slipping impacting your forecast. It seems like that's more of a new business thing. And were those sort of very much one off events?
Or were those the types of things you see normally and you just saw more of it?
So first of all, the renewals and these things slipping one day have virtually no impact on revenue at all. The only thing they have is an impact on is billings. And as renewals become a bigger portion of our overall business, we're now at the stage now where renewals is bigger than what our net new ACV we sign in a year. This is the transition year right now that will have a bigger impact on billings because if it slips from a June 30 to a July 1, we don't get that billing. So, yes, it was a pretty big number.
We saw that slip. But as I said earlier, this has happened all the time. We're always pulling renewals in and renewals get pushed out. It's just this quarter, it tends to be a little bit bigger with a couple of big ones. Usually, they're smaller deals.
They are signed as of today.
Yes. Got it.
Thank you. Our next question comes from the line of Rob Owens with Pacific Crest Securities. Your question please.
Great. Thanks for taking my question. You guys have been running well ahead on new customer acquisition, the Global 2,000. I think you laid out a goal of 18 per quarter, obviously ahead of it this quarter, but have been for some time. So what are the potential impacts on the model?
Does this give you confidence you can start to drive upside? Are these deals typically the same size they have been? Are you seeing customers take down, I guess, smaller chunks upfront with higher renewals as they come back?
So a lot of the Global 2,000 that we added, we added is I think about 8 of them were in APJ this quarter. And I expect that more as a percent will be in APJ because that's probably the one area where we're the most underpenetrated and we're relatively new into that market. A lot of APJ deals start out low. But I just want to remind you, some of our biggest accounts like GE, I think they started out at 80,000 a year. So it's not uncommon for customers to start small and then they grow.
Just look at our cohort analysis slide that we put in our investor deck again. That continues to be the case that once a customer buys, they very quickly grow. And so for us, it's all about quality of customers we land, and we think all of those Global 2,000 that bought this quarter are going to grow to be substantial customers.
2nd on the security ops front, who are you replacing as you're going in?
This is Frank, Rob. We're replacing people staring at spreadsheets all day long. There's nothing there. I mean, this is it is the most amazing thing that in the world of cybersecurity, there's been so much focus, so much investment on enforcement, on vulnerability scanning, on detection. And then what happens in the back end in terms of the analysis and response, it's a complete dearth of solutions.
And those teams typically the SOC, the security operations center, being completely separate from the NOC, the network operations center where the IT guys live, the immaturity of how people respond is just incredible. And this is what presents us with this extraordinary opportunity. And because security lives so close to IT, it doesn't take people very long to recognize the significance of what we're bringing to the security equation. That's where our excitement comes from. It's not a replacement market.
It's the reality. There's nothing there. And I think everybody knows that we're pretty damn good in terms of detection and validating threats and all that kind of stuff, which is our ability to filter signal out of noise is incredibly impaired in the world of security. And it's done by people right now rather than by systems. And then the ability to execute on the workflow is what comes after that.
This is really a whole back end of the cybersecurity workflow that we are addressing and investing in. And we think this is going to become a major, major market. It is inevitable. Somebody is going to do it and it might as well be us. Thanks, Frank.
Thanks for the color.
Thank you. Our next question comes from the line of Kash Engen with Bank of America. Your question please.
Hi, thank you very much. If you look at the deals that slipped Mike, not to press too much on this, but if you were to normalize it, do you think the subscription billings could have been materially higher, meaning there was about 400 basis points of discrepancy between Q1 and Q2? Do you think you could have grown your subscription billings at just about the same pace as you did in Q1, which is I believe about 41%, 42%? And I have a follow-up question. Thank you.
I would say, I haven't calculated the percentages, but, net net, we probably had about $6,000,000 that slipped from this quarter into next quarter.
Got it.
And that you can also look at it too for full year billings, we did take $6,000,000 out of our forecast for FX.
Correct, correct. Also you have the duration, which is about 4 months shorter, I believe, right? Actually, 4 0.4 months shorter per your calculation, 4.2 to 11.8. And the other question was when you look at the percentage of new businesses coming in, Itom seem to have gone down a bit. I'm just wondering if the pipeline for Itom has shifted into the second half of the year, how confident do you feel that this could come back?
And also more of a strategic long 2017 question, Do you think your subscription billings growth rate is more of a reliable way to look at the growth rate of your business and help and trying to help understand what could be the future growth rate of the company? Thank you very much. Because you know this professional services emphasis particularly.
Okay. So answering your question about ITOM, we've mentioned before and I can't stress enough, these are long sales cycles. We tend to do bigger deals in ITOM, and it's just a matter of the timing of deals. We feel very good about what we're seeing in our ITOM business. This quarter, I think it's going to be a good Itom quarter.
And so we're not concerned there at all. In terms of what's a better proxy for estimating our growth, definitely subscription billings is a much better proxy because the professional service is something we want to push more of that off to our partners rather than see that business grow.
Wonderful. Thanks so much.
Thank you. Our next question comes from the line of Raimo Lenschow with Barclays. Your question please.
Hey guys, this is Andrew Kish on for Raimo. So obviously, as you said, you were getting to pretty large numbers and we're seeing growth maybe start to slow a little bit. But with that in mind, could you help us think through what you might do with profitability and cash flow and operating margins as that growth slows? I mean, this year, we're still looking at about 150 basis point increase on cash flow margins. I'm just wondering what that might look like in the future.
So if you look at our Analyst Day deck that we put out, you will see there is the framework for growth rates and how that relates to operating margin expansion and cash flow margin expansion. You can go look at our website and you can see that in our Investors section. Clearly defines it, what we're seeing.
Thanks. Thank you. Our next question comes from the line of Brian Schwartz with Oppenheimer. Your question please.
Yes. Hi. Thanks for taking my question. Just had one operational question. Frank, you talked a lot about the sales productivity trends that you're seeing that you're really happy with.
Just wanted to ask you about the hiring that you've done so far. And just wondering if you can provide an update on the progress year to date of onboarding the new sales hires versus your plans? Just wondering if you hit your target here through the first half of the year for your new sales rep hires? Thanks.
Yes. We did good on hiring this quarter. Attrition was also down. So I think the sales teams are where they like to be. And as a result, Mike already highlighted this, we're moving some of the hiring from Q4 to Q3.
And obviously, we're doing that with an eye towards 2017 as well as because we think we can take advantage of the opportunity. So we're in a good place.
Thank you.
Thank you. Our next question comes from the line of Jesse Hulsey with Goldman Sachs.
Yes. Thanks for taking my question guys. A question for Frank and then a quick follow-up for Mike. Frank, it seems like a lot of the newer products that you're selling are kind of, I don't know if evangelical is the right word, but you're going after new budget or trying to create budget versus ITSM, which was more of a replacement cycle sale. How does that shift your selling approach if it does?
And I was hoping you could walk us through that.
Well, that's actually for most of our products not the case. I mean, as I said earlier, customer service, we're always replacing something. On the project management side, we're replacing something, ITOM. We're definitely turning stuff off. So the vast majority of times we're turning stuff off.
I think where you are correct is on the security side, having this kind of a structured work flow capability to seamlessly integrated with the Palo Alto Networks and Splunks of the world, that is an awful idea. People have not done that before. That is a little bit more evangelical, if that's the word that you use. But good news here is it is incredibly evident to our customers that, that is an idea which time has come. And they need it in a hurry.
Just the ability to be able to track and analyze security incidents is like a whole new deal to them. That's because security and IT have lived in separate spheres and we're busting through those walls and really letting security really benefit from everything that's been learned on the IT side. So for the most part, it is a replacement process, which is a good sales motion to be in.
That's helpful. And Mike, I didn't see in your investor deck this quarter your upsell rate disclosed. I was curious if you could provide that.
It's we're not really talking about the up sell rate anymore. We really stopped doing that. And the reason we're not doing that, as we mentioned before, as our installed base grows, upsells tends to be the bigger piece of our business than new customers. So it's just not a metric that we're disclosing going forward.
Okay. Thank you. Thank you. Our next question comes from the line of Abi Lamba with Mizuho Securities. Your question please.
Yes. Thank you. Mike, can you talk about penetration within the Global 2,000 Companies? What's the average ACV from that group and how high can it go? And how high does it need to go for you to meet your 2020 target?
So our 2020 target was predicated on having 1,000 Global 2,000 at the end of 2020 and on average doing, 2,000,000 a year out of the Global 2,000. You can see today where the number is 900 and what's the actual number today, 941 1,000 on average we're getting out of the 681 Global 2,000. So, we feel very comfortable that we're tracking towards that target. How high can it be? We're forecasting it to be $2,000,000 on average, but there's many customers.
If you look now, we have 272 customers. The bulk of those are Global 2,000, but they're not all Global 2,000 that on average that pay us over $1,000,000 On an average, they're paying us about $2,200,000 a year right now. Got it.
Thanks. So we
think it
could
be higher than 2,000,000
dollars Got it. Thank you.
Thank you. Our next question comes from the line of Brian MacDonald with Wunderlich Securities. Your question, please.
Yes. Thanks guys. Frank, you talked about earlier about the Brakepoint acquisition and I believe that's going to be replatformed you said by the first half of next year. Can you talk about a little go a little bit more into what's going to be involved with that replatform and how Brightpoint is going to be enhancing the security operations offering as well?
Yes. So replatforming is something that we do with every asset that we require. I mean, at ServiceNow, we don't integrate acquisitions. We re platform them. And what that means is we just essentially take them apart and rebuild them on our cloud, on our platform.
So it's really indistinguishable from something that we built. It's really important because we don't want to settle our customers with a plethora different assets that represents a patchwork that they have to keep operable. That's sort of the pain of some preexistence that people have lived with over the last 20, 30 years. So for us, it's all one cloud. We make sure that it's all implemented the right way.
And then when you upgrade from one version to the next, you don't have to worry whether A what works with B, what's C and so on. So replatforming is a really big commitment. It sometimes takes us a year and a year and a half to do it. But we bite that bullet. And then when we get out there with the product, it is exactly the way it needs to be.
We only want to buy assets where the team that we're bringing on is really in full agreement with us that, that is the right way to do it. Otherwise, we wouldn't even want to proceed with the acquisition. So yes, it's going to be somewhere in the first half of twenty seventeen. Hopefully, it will be in the earlier part of that because that really triggers the beginning of the sales process. There's a lot of interest in the capabilities, also of ICAP, which is a deal that we did earlier this year.
And then Brightpoint, of course, is such a natural draft on the security sales motion that we already have. So we're excited about these assets coming into our fold.
And as you look at just one quick follow-up. As you look at the other areas of say the emerging products, whether it be in customer service or in some of the business management areas or segments, is there any other pockets for additional M and A that you think that you'd be interested in, in terms of additional replatforms for small tuck in acquisitions?
Yes. I mean, we typically look at this in the context of all the business units that we have. Our business unit leaders all have a list of assets that they're tracking, monitoring, trying to determine what the strategic imperative is. We have a whole bunch of other requirements. When we have hot businesses like security, we're obviously going to be motivated to further enhance that.
We also bring in talent that are hardcore security people, which is really what we want, what we need because we're not a security company ourselves. We really have to build that up. The stronger our teams in these areas, the more confident and the more we want to support them when they want to do deals. So most of our M and A activity is going to be in the context of those individual opportunities.
Thanks a lot.
Thank you. Our next question comes from the line of Tim Klasell with Northland Securities. Your question please.
Yes. Just most of mine
have been asked, but we take a look at some of the newer applications in ITOM. Normally those come as sales as upsells to your ITSM customers. Are you seeing any of those becoming the wedge or beginning to lead into an account rather than following ITSM?
Well, I mean, traditionally, I mean, as we said earlier, ITSM is almost always our beachhead. It's how we start the relationship, not always. There are numerous exceptions to that as well, but the preponderance of evidence says that ITSM is how we land and then we evolve from there. ITOM has so far been the most natural progression for customers. Once service management gets implemented, It requires a very solid implementation of the CMDB.
Without a solid implementation of the CMDB, it's very difficult to really start on an ITOM journey. So these things all need to happen before sort of the next opportunity can be triggered and pursued. So I think it does happen that ITAM leaves, but most of the time, it's a natural progression from service management implementation.
The more common products that we see kind of leading potentially before ITSM is HR and customer service. We have examples of those already.
Okay, great. Very helpful. Thank you.
Thank you. Ladies and gentlemen, this concludes our question and answer session for today. I would now like to hand the call back to Michael Scarpelli for closing comments.
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, this does conclude today's program and you may all disconnect. Everybody have a wonderful day.