Good day, ladies and gentlemen. Thank you for standing by. Welcome to the ServiceNow Q2 2016 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will host a question and answer session. Our instructions will follow at that time. If, during the conference, you do need to speak to an operator, please press star then zero on your telephone keypad. 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. 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-K, 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 second quarter grew 38% year-over-year to $341 million, driven by new customers, upsells to existing customers, and a 97% renewal rate. We added 26 Global 2000 customers. We now have 272 customers spending us more than $1 million 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, represented 40% of our net new ACV, up from 24% in Q2 2015. Additionally, 67% of our customers now license multiple products. 15 of our top 20 new deals in the quarter included three or more products.
IT Operations Management, or ITOM, continues to be our second-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 one-off products. 53% of ITOM net new ACV included product bundles. 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 Knowledge16, where 1,300 attendees participated in 14 breakout sessions dedicated to this new service. We now have 40 total customers, 30% of which are new to ServiceNow. 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 $1.3 million 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 nine Global 2000s, and we landed our first 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 sharing threat indicators with industry peers. Customers remediate security threats using our Security Operations structured workflow. We expect to completely re-platform BrightPoint by the first half of 2017. Q2 was our strongest quarter ever for our human resource solution in terms of new business.
Average deal sizes for this product continue to increase, we're encouraged by the outlook for the rest of the year. The strong quarter was driven by a $1.4 million HR-led deal to a new public sector customer in Australia. The user experience was critical to the HR buyer, we won against an incumbent solution and two additional competitors. Q2 strength was also driven by our annual users conference, Knowledge16. 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, 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 Knowledge16, we hosted our second annual developer conference, CreatorCon.
We saw 3,000 registered developers and application architects 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 Knowledge17 in Orlando. 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 second quarter 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, 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 for prior quarters, previously filed press releases, all of which are posted at investors.servicenow.com. Total revenues for the second quarter were $341 million, 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 million, increasing 45% year-over-year, and professional services and other revenues were $51 million, 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 million in North America, $82 million in EMEA, and $25 million in Asia Pacific and other, representing 69%, 24%, and 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 EUR. However, we have approximately 6% revenue exposure to the GBP. Billings were $375 million in the quarter, increasing 33% year-over-year. Subscription billings were $333 million, increasing 38% year-over-year, and professional services and other billings were $42 million, increasing 4% year-over-year.
Our average billings duration was 11.8 months for the second quarter, compared to 12.2 months in the same period last year, a negative impact of $12 million 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 million of revenue related to our Knowledge conference, where 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 million 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 second quarter was $26 million, or $0.16 per basic and $0.15 per diluted share, compared to a net income of $7 million or $0.05 per basic and $0.04 per diluted share in the prior year. Our basic weighted average shares outstanding was 164 million, and our diluted weighted average shares outstanding was 173 million. Free cash flow margin was 23% compared to 26% in the prior year, and we ended the quarter with $1.031 billion in cash, short-term, and long-term investments. Let's turn to guidance for the third quarter 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 third quarter, we expect total revenues between $350 million and $354 million, representing year-over-year growth between 34% and 36%. Our guidance was negatively impacted by approximately $2 million due to foreign exchange rate fluctuations during the quarter. We expect subscription revenues between $312 million and $315 million, representing year-over-year growth between 40% and 41%, and professional services and other revenues between $38 million and $39 million, representing year-over-year growth between 0% and 3%. We expect billings between $380 million and $385 million, representing year-over-year growth between 33% and 34%. Our guidance was negatively impacted by approximately $3 million due to foreign exchange rate fluctuations during the quarter.
We expect subscription billings between $339 million and $343 million, representing year-over-year growth between 38% and 39%, in line with the growth rate we saw in the same period last year. We expect professional services and other billings between $41 million and $42 million, representing year-over-year growth between 2% and 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 million associated with our ESPP purchase. We expect diluted weighted average shares outstanding to be approximately 174 million.
For full year 2016, we expect total revenues between $1.37 billion and $1.38 billion, representing year-over-year growth between 36% and 37%. Our guidance for the rest of the year was negatively impacted by approximately $4 million due to foreign exchange rate fluctuations during the quarter. We expect subscription revenues between $1.203 billion and $1.211 billion, representing year-over-year growth between 42% and 43%, and professional services and other revenues between $167 million and $169 million, representing year-over-year growth between 6% and 8%. We expect total billings of between $1.605 billion and $1.615 billion, representing year-over-year growth of approximately 34%. Our guidance for the rest of the year was negatively impacted by approximately $6 million due to foreign exchange rate fluctuations during the quarter.
We expect subscription billings between $1.427 billion and $1.435 billion, representing year-over-year growth between 37% and 38%, and professional services and other billings between $178 million and $180 million, representing year-over-year growth between 9% and 10%. Looking at operating margin and free cash flow guidance, we expect to accelerate investments in sales and R&D in the second half of the year, but we are maintaining our guidance of approximately 12% and 24% respectively. We expect diluted weighted average shares outstanding to be approximately 173 million 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 you. Ladies and gentlemen, if you would like to ask a question over the phone, please press star then one on your telephone keypad. We would like to ask that everyone please limit themselves to one preliminary question and one follow-up. Again, to anyone who would like to ask a question over the phone, that is star then one to ask a question. Our first question comes to 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 the potential impact on that on the guide?
No, we really haven't seen anything as a result of Brexit. Coming into this quarter right now, too, we don't see any impact on our business to date, I think it's too early to tell.
Okay. That's great. 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? I think at the conference, you mentioned that 40% of your business is partner influence. Are you getting additional leverage there on some of these HR wins?
I think that whether it's an inflection point or not, we'll probably need a quarter or more to see how that plays out. 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 a year and a half ago, we really changed our organizational model. How we built, how we support, how we go to market is really by product line now. It just takes time for us to sort of reach critical mass there. There's sort of 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 $1.4 million HR deal was actually through Capgemini. We are seeing the big system integrators involved in those.
That's great. Thanks a lot, guys.
Thank you. Our next question comes to the line of Brent Thill with UBS. Your question, please.
Good afternoon. Mike, I realize that billings is not the only metric health. Given kind of the decel that you saw from Q1 to Q3 on the billings growth, can you maybe just reconcile for everyone what's happening there. I know you don't give out the booking number. Is there any more color that you could just add to what is just one of many numbers we see, but certainly a focus for the Street?
Yeah. I just want to remind people that one of the biggest components of billings is actually the renewals that happens in the quarter. The timing of renewals has a big impact. As an example, there was a few big renewals that didn't get signed until the first day of this quarter that really should've happened last quarter that impacted our billings, and it was quite a bit, that dollar magnitude of that. 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 book the deals in Q4. We gross down that AR and deferred revenue and recognize 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. For Frank, with Fred's departure, obviously some big shoes to fill. I realize he's going to stay on the board and continue in an advisory role. Can you maybe just talk a little bit about who will backfill as the 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 five years. When I joined, they got 250 people here. We're now at whatever we are, 4,300. There's a ton of talent Over the years, and we have definitely enabled Fred to scale back his day-to-day, because he's been doing some heavy lifting for a very long time. We're actually thankful that we've had him as long as we've had him, and we're really able to take this in stride. There's a lot of talented people at ServiceNow, and a lot of different product lines in our platform. 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 and day out, and I think he earned that break.
Okay. Thank you.
Thank you. Our next question comes to the line of Kirk Materne with Evercore ISI. Your question please?
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's coming from some of the HR and the Customer Service Management modules offerings 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. 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 exceptionally strong quarter as well. It was very much across the board versus having one outlier. The bigger theme here is that the model is working really well for us, the way we built and go to market.
Okay. Just one quick one for Mike. Obviously, the third quarter 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 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 third quarter, where we are sitting today and looking at the pipeline across the board, not just federal.
Thank you. Our next question comes to 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'm wondering about new customers and where they're landing. In ITSM and expanding into ITOM 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. 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 five of the top 20 deals, including Security Operations.
I'll go first. It's Frank, Sarah. In terms of how we land, the preponderance of deals we're landing with service management. It's always 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. I highlighted that in the prepared remarks that we have a whole bunch of brand-new logos now, for example, on Customer Service Management that are not ITSM customers. 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.
We think that our overall performance in landing Global 2000 accounts was definitely boosted by having this portfolio of products.
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?
Yeah. Thanks, Mike. On the Security Operations side, I know you have announced several partnerships. I was wondering, are those really what is driving uptake? Where are you getting some traction? It was pretty remarkable to see five of the top 20 deals including that Security Operations.
Yeah
The sales team was relatively new, was just looking for some more color around this.
Yeah. Sarah, it is Frank again. On Security, I think most people do not realize, this is really a very close adjacency to our core business. It is very typical that CISOs, chief security officers, report to CIOs. Many times when we host large customers here at our executive briefing centers, the CISO is there. We often now these days, we are actually making sure that we invite CISOs in. The whole offering is about combining the IT and Security teams into a single system, single workflow, single set of analytics, and so on. 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.
There is a lot of exciting aspects to that business, and that is why we are also making acquisitions in the space. We think it is going to be a very strong business for us over time.
Thank you very much.
Thank you. Our next question comes from Keith Weiss with Morgan Stanley. Your question, please.
Excellent. Thank you guys for taking the question. Nice quarter. I wanted to sort of feel 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, the high end of the guidance range, it looks like you're seeing accelerating billings growth. We all see stuff like Brexit, 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?
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. 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 2000, many times this is a two-plus year sales cycle into these large accounts. That's what gives us the confidence in these deals.
Got it. Drilling in a little bit just on the commercial side of the business, you had a really nice quarter in terms of G2K assets with 26 new customers. Last quarter, we saw the commercial business ramp up really well. How has that been trending? How did that trend in Q2?
Commercial business continues to be very strong for us. We have continued to do some million-dollar-plus transactions in that space, we're very pleased with what we're seeing. We think it was definitely the right decision in 2015 to segment our sales force into a commercial and enterprise.
Excellent. Thank you very much, guys.
Thank you. Our next question comes on to Michael Turits with Raymond James. Your question, please.
Hang on. I guess I don't feel bad if it's Turits if it was Keith Weiss a minute ago. Hey, guys, thanks for taking the question. In any case, on the slipped deals, the slipped renewals, I just wanted to clarify, Mike, did they all get signed already, the ones that slipped?
Yes.
Is there any reason, 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, it was delays in procurement organizations who try to renegotiate deals many times. They've all been signed already.
Great.
Just to be clear, this happens every quarter.
Go ahead.
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.
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. My follow-up is on Fed. I can't remember if Kirk mentioned this or not. I think he brought up Fed next quarter, but you got a FedRAMP certification. Does that increase your confidence, your opportunity pipe likely to convert as you go into 3Q?
Yeah. This is Frank, Michael. We're not fixated on our federal business as the driver of our Q3 number. As Mike's already said several times, we're off to a very fast start, and we have tremendous visibility in this quarter. That's really what gives us the confidence, the federal business is part and parcel of that overall view of the business.
Okay, thanks.
Thank you. Our next question comes by way 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.
Yeah. I'm not going to talk about growth in ACV with service management. What I will say, and what Frank said before, if you just look at our 26 Global 2000, 24 of those 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. 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 of such smaller base.
Yep, makes sense. Okay. Thank you, Mike, for that. If I could ask a follow-up. Your margin guidance for 3Q and the full year implies that we might see flatter, slightly down margins in 4Q. I think you touched on it. You mentioned an increase in investment in sales and R&D. Could you elaborate a little bit on where the investment focus is? Thanks a lot.
Sure. As you know, we've been acquiring companies. For instance, we bought ITapp on the ITOM side. We just brought BrightPoint this quarter. We're making some additional investments in R&D in our core ITSM products. We're accelerating R&D hiring, and also we're pulling forward, especially around some of these new products from specialty sales, from Q4 into Q3. It's not changing the overall year, but it changes the timing of some of our salespeople 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 Ashley with Robert W. Baird. Your question please?
Perfect. I would just like to 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 well in that business. It is the second-largest revenue stream and bookings opportunity that we have next to service management. It's still a very new business to us. I know as we highlighted during the prepared remarks, the sales teams are really learning to sell the entire suite, the entire strategy. I think 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 are getting 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. ITOM 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 strongly. We just need to get better at rapidly deploying and rapidly getting the customer to value, and I think that will become a further enabler for growth in the ITOM opportunity.
Perfect. Thank you.
Thank you. Our next question comes to the line of Alex Zukin with Piper Jaffray. Your question, please.
Thanks. Second question. Hey, guys. Frank, first for you. You mentioned you doubled your customer count, basically, on the customer service side sequentially. I was curious how often you're seeing Salesforce, what your win rates are, and why typically you're getting chosen over them in these competitive engagements.
Yeah. Obviously we're still moving from a small base, but the response we have from the marketplace suggests that what we're doing is resonating. We're not a tit for tat with Salesforce. We really bring the holistic integrated service model to the customer, which really adds the engagement model to the engineering root cause analysis aspect too, to change operational processes, all one single integrated approach. For people that come from that world, which is typically the IT crowd, they go, "Yeah, that's the right way to do things." We often get traction where that integrated holistic model is viewed as a really core advantage. 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. Very excited about it.
As you know, this is a very large business. It's probably the single largest market that we're operating in. 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 old.
Got it. Then maybe one question, kind of the opposite question of what Keith Weiss 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 Zukin, 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. Frank, I think I've heard you talk about in 2020 that you expect something like 50/50 mix in terms of new ACV from ESM and non-ESM. 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 four to five years. Thanks.
This is Frank. I'll start. I think you're correct. We're pacing along, at least if you meant to imply that, we are pacing a little bit ahead of where we thought we'd be. That doesn't mean that it will continue at this blistering pace, the mixed substitution that we've 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.
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 Americas came in pretty much where we were expecting.
Got it. Just one more, if I may. I think in Europe, I think you made some changes at the sales organization level over the last six to 12 months. I'm just hoping you might be able to comment on what you're seeing from those changes. Thanks.
Yeah. This is Frank. We actually made two major theater leadership changes last year or this year, both for the Americas as well as for Europe. We believe there's 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. That is in no small parts because of the leadership changes that we've made. We're feeling very good where we are. We're feeling very good at what we're looking at for the second half.
Got it. Thanks, guys. Congrats.
Thank you. Our next question comes line of Derrick Wood with Cowen and Company. Your question, please.
Thanks. Mike, great job on the subscription gross margins. 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? Are there other factors at hand? I guess with regards to your focus on driving more services from the channel, how has that been tracking relative to expectations? What are some of the things you guys are doing to accelerate more enablement from your partners?
Sure. 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 in to run that organization, who just started in the last three months. He's making some changes in that organization, and we're working through the transition of that right now. I feel very good we're going to have more of a global delivery model for our professional service organization. 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 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, if I could throw one 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?
This is 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'm wondering if you talk about sales productivity generally and you talked about accelerating some sales investments. It sounds like that's more of a shifting around. Could you comment on sales productivity and how it's varying versus a year ago, and especially as you look towards the second half of the year, where you expect to see things accelerate?
Well, 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 off the pedal. Since we are moving hiring up in the year, that's a clear indication that we're happy with the way things are going and the opportunity that we think our reps are having. 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. Feeling good where our productivity is at, and we're feeling even better at what we think we can do for the balance of the year.
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 renewal slipping impacting your forecast. It seems like that's more been of a new business thing. 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?
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. 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 30th to a July 1, we don't get that billing. Yeah, 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 big ones. Usually, they're smaller deals.
Okay. Thank you.
They are signed as of today.
Yep. Got it.
Thank you. Our next question comes to 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 2000. I think you laid out a goal of 18 per quarter, obviously ahead of it this quarter, but have been for some time. 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, or are you seeing customers take down, I guess, smaller chunks up front with higher renewals as they come back?
A lot of the Global 2000 that we added, I think about eight 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 under-penetrated and we're relatively new into that market. A lot of APJ deals start out low. I just want to remind you, some of our biggest accounts, like GE, I think they started out at 80,000 a year. 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.
For us, it's all about quality of customers we land, and we think all of those Global 2000 that bought this quarter are going to grow to be substantial customers.
Second on the Security Ops front, who are you replacing as you're going in?
This is Frank Slootman.
Hi, Frank.
We're replacing people staring at spreadsheets all day long. There's nothing there. 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. Then, what happens in the back end in terms of the analysis and response, it's a complete dearth of solutions. Those teams, typically the SOC, the security operations center, being completely separate from the NOC, the network operation center, where the IT guys live. The immaturity of how people respond is just incredible. This is what presents us with this extraordinary opportunity. 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 is there's nothing there.
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. Then the ability to execute on the workflow is what comes after that. This is really the whole back end of the cybersecurity workflow that we are addressing and investing in, and we think this is going to become a major market. It is inevitable. Somebody's going to do it, and it might as well be us.
Thanks, Frank. Thanks for the color.
Thank you. Our next question comes to the line of Kash Rangan 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%? I have a follow-up question. Thank you.
I would say, I haven't calculated the percentages, but net, we probably had about $6 million that slipped from this quarter into next quarter.
Got it. Okay.
That you can also look at it, too, for full year billings, we did take $6 million out of our forecast for FX.
Correct. You had the duration, which is about 4 months shorter, I believe, right? Actually, 0.4 months shorter per your calculation, 12.2 to 11.8. The other question was, when you look at the percentage of new businesses coming in, ITOM seem to have gone down a bit, and 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? Also more of a strategic 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 trying to help understand what could be the future growth rate of the company? Thank you very much. The professional services emphasis particularly.
Okay. 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 is going to be a good ITOM quarter. 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 out of Raimo Lenschow with Barclays. Your question, please.
Hey, guys. This is Andrew Kisch on for Raimo. Obviously, as you said, we're getting to pretty large numbers, and we're seeing growth maybe start to slow a little bit. 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? This year, we're still looking at about 150 basis point increase on cash flow margins and just wondering what that might look like in the future.
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 investor section. Clearly defines it, what we're seeing.
Thanks.
Thank you. Our next question comes line of Brian Schwartz with Oppenheimer. Your question, please.
Yeah, 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 wonder 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.
Yeah. We did good on hiring this quarter. Attrition was also down. I think the sales teams are where they like to be. 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. We're in a good place.
Thank you.
Thank you. Our next question comes line of Jesse Hulsing with Goldman Sachs. Your question, please.
Yeah, 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, 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? I was hoping you could walk us through that.
Well, that's actually, for most of our products, not the case. As I said earlier, customer service, we're always replacing something. The product management side, we're replacing something. ITOM, we're definitely turning stuff off. 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 workflow capability that is 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 used. The good news here is it is incredibly evident to our customers that that is an idea whose 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. For the most part, it is a replacement process, which is a good sales motion to be in.
That's helpful. Mike, I didn't see in your investor deck this quarter your upsell rate disclosed. Was curious if you could provide that.
We're not really talking about the upsell rate anymore. We really stopped doing that. The reason we're not doing that, as we've mentioned before, as our installed base grows, upsells tends to be the bigger piece of our business than new customers. It's just not a metric that we're disclosing going forward.
Okay. Thank you.
Thank you. Our next question comes line of Abhey Lamba with Mizuho Securities. Your question, please.
Yeah, thank you. Mike, can you talk about penetration within the Global 2000 companies? What's the average ACV from that group, how high can it go? How high does it need to go for you to meet your 2020 target?
Our 2020 target was predicated on having 1,000 Global 2000 at the end of 2020, and on average, doing $2 million a year out of the Global 2000. You can see today the number is 900 and-- What's the actual number today? $941,000 on average we're getting out of the 681 Global 2000. We feel very comfortable that we're tracking towards that target. How high can it be? We're forecasting it to be $2 million on average, but there's many customers. If you look now, we have 272 customers. The bulk of those are Global 2000, but they're not all Global 2000, that pay us over $1 million, on an average, they're paying us about $2.2 million a year right now.
Got it. Thanks.
Clearly, it could be higher than 2 million.
Got it. Thank you.
Thank you. Our next question comes line of Ryan McDonald with Wunderlich Securities. Your question, please.
Yes, thanks, guys. Frank, you talked about earlier about the BrightPoint acquisition, and I believe that's going to be re-platformed, you said, by the first half of next year. Can you go a little bit more into what's going to be involved with that re-platforming and how BrightPoint is going to be enhancing the Security Operations offering as well?
Yeah. Replatforming is something that we do with every asset that we acquire. In ServiceNow, we don't integrate acquisitions, we replatform them. What that means is we just essentially take them apart and rebuild them on our cloud, on our platform. It's really indistinguishable from something that we built. This is really important because we don't want to saddle our customers with a plethora of different assets that represent the patchwork that they have to keep operable. That's sort of the bane of software existence that people have lived with over the last 20, 30 years. 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 works with B, with C, and so on. Replatforming is a really big commitment.
It sometimes takes us a year and a half to do it. 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 is the right way to do it. Otherwise, we wouldn't even want to proceed with the acquisition. Yeah, it's going to be somewhere in the first half of 2017. Hopefully, it'll 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, both of ITapp, which we 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.
We're excited about these assets coming into our fold.
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&A that you think that you'd be interested in in terms of additional replatforms for small tuck-in acquisitions?
Yes. 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. Most of our M&A activity is going to be in the context of those individual opportunities.
Thanks a lot.
Thank you. Our next question comes from Tim Klasell with Northland Securities. Your question, please.
Yeah. Most of mine have been asked, when you take a look at some of the newer applications in ITOM, normally those come 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, traditionally, 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, 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. These things all need to happen before the next opportunity can be triggered and pursued. I think it does happen that ITOM leads, 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.
Yep.
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.