Good day, ladies and gentlemen, and welcome to the ServiceNow First Quarter 2016 Earnings Conference Call. At this time, all participant lines are in a listen only mode to reduce background As a reminder, today's conference call is being recorded. I would now like to introduce your first speaker for today, Michael Scarpelli, Chief Financial Officer. You have the floor, sir.
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, and thank you for joining us on today's call. We're off to a strong start in 2016 with our best Q1 ever. Revenues grew 44% year on year to 306,000,000 dollars driven by strong demand for new business and a 97% renewal rate. Our Global 2000 business continues to grow at a consistent high rate with 22 net new customers during the quarter, including Tata Steel Limited and the Bank of Ireland.
Our average ACV per Global 2,000 customer was 906,000, a 4% sequential increase and a 21% year over year increase. There are 2 key trends worthy of note. 1st, upsells continue to be a leading growth factor as current customers expand their ServiceNow usage. We now have 2 49 customers, each with annualized contract values in excess of $1,000,000 an annual increase of 48%. We landed a record 13 upsells in the quarter, each with new ACV greater than 1,000,000 dollars And while Q1 tends to be a seasonally challenging quarter, we recorded 2 of our largest upsells ever.
An existing Global 2,000 customer signed a $20,000,000 upsell over 5 years increasing its commitment by approximately 3 80%. The upsell was driven by significant product expansion, including ServiceWatch, Platform and Project Portfolio Suite. Another existing Global 2,000 customer signed a $10,000,000 upsell over 5 years, doubling its initial 2015 contract value. And this upsell was driven by the adoption of an enterprise license agreement. The second key trend is excellent growth and customer traction within our Emergent products.
In Q1, we saw new ACV from IT Operations Management grow 166 percent year over year and represents 16% of total new ACV, up from 7% a year ago. This was driven in large part by the success of ServiceWatch, which was fully replatformed on ServiceNow in December. We have a tremendous opportunity to upsell ServiceWatch to our existing customers given the low penetration of this technology. The success of the ServiceWatch acquisition has pioneered a model, acquire strategic assets and talent that strengthen our overall portfolio and then reimplement the assets to leverage the full benefits of the ServiceNow platform. This is the same strategy we will use with our acquisition of ITEP earlier this month.
As more enterprise workloads move to public and hybrid clouds, we are in a strong position to provide customer with visibility and control of their cloud application services. ITEP represents the reinvention of operations management for a cloud hosted applications world. We expect to complete the replatforming of ITEP in 2017. Outside of ITAM, we are pleased with the early progress of security operations and customer service. During the quarter, we signed 11 new security customers, including 4 in the Global 2,000.
1 customer in a highly regulated industry brought in ServiceNow to eliminate its manual and unstructured security processes and decrease its overall exposure. The customer sees our solution as key to improving collaboration and getting better leverage out of its security investments. We landed 11 new customer service management logos in the quarter, including 3 in the Global 2000s. We're seeing good traction in the tech enabled industries, including software, telecom, managed services, financial services, government and healthcare. Customers are choosing us over CRM based products because of the holistic service management approach, which includes incident, problem and change management disciplines.
This provides a better closed loop solution, not only to improve the quality of the service, but also of the core product. Also worthy of note, we achieved FedRAMP certification in February, a significant milestone for our federal business. This multiyear effort to meet the government's most rigorous technical standard for cloud computing will have a material impact on our ability to sell into the federal market for years to come. CertusNow operates the only enterprise service management cloud platform granted this highest level of FedRAMP certification. And finally, I look forward to seeing you all at our Knowledge Conference next month in Las Vegas.
We expect to surpass 10,000 attendees, another record in the history of our conference. With that, I will now turn the call over to Mike.
Thank you, Frank. During today's call, we will review our Q1 financial results and discuss our financial guidance for Q2 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 have discussed today are non GAAP unless stated otherwise. 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 first quarter were $306,000,000 increasing 44% year over year. Foreign exchange rate fluctuations did not significantly impact our actual year over year revenue or billings growth. Of our total revenues, subscription revenues were $267,000,000 increasing 49% year over year and professional services and other revenues were $38,000,000 increasing 20% year over year. We are pleased with the continued evolution of our partner ecosystem and the expanding role they play in ServiceNow deployments. Our average contract terms for new customers, upsells and renewals were 32.0, 22.8 and 25.5 months, respectively.
Total revenues based on geography were $211,000,000 in North America, dollars 74,000,000 in EMEA and $21,000,000 in Asia Pacific and other, representing 69%, 24% and 7% of total revenues, respectively. Billings were $377,000,000 in the quarter, increasing 41% year over year. We realized approximately $1,000,000 in additional billings due to the increase in average foreign exchange rates during the quarter compared to the beginning of the year. Our average billings duration was 11.7 months for the Q1, unchanged from the same period in the prior year. Subscription gross margins in the quarter was 84% compared to 81% in the prior year.
Professional services and other gross margin was 10% compared to 9% in the prior year. Overall gross margin was 74% compared to 70% in the prior year. Operating margin was 8% compared to 3% in the prior year. We ended the quarter with 3,991 total employees, a net increase of 305 in the quarter. Net income for the Q1 was $14,000,000 or $0.09 per basic and diluted share compared to net income of $2,000,000 or $0.02 per basic and $0.01 per diluted share in the prior year.
Our basic weighted average shares outstanding was 162,000,000 and our diluted weighted average shares outstanding was 170,000,000. Free cash flow margin was 22% compared to 19% in the prior year and we ended the quarter with $1,300,000,000 in cash, short term and long term investments. Let's turn to guidance for the 2nd quarter and full year 2016. Based on foreign exchange rates at the end of the Q1, we are not forecasting a significant impact to our expected year over year revenue or billings growth due to foreign exchange rate fluctuations. Additionally, we do not expect our recent acquisition of ITAP to have a material impact on our 2016 guidance.
For the Q2 2016, we expect total revenues between 332 $1,000,000 $335,000,000 representing year over year growth between 35% and 36%. This includes subscription revenues between $284,000,000 $286,000,000 representing year over year growth between 42% 43% and professional services and other revenues between $48,000,000 $49,000,000 representing year over year growth between 4% and 6%. Professional services and other revenues guidance includes approximately $11,000,000 related to knowledge with the related expenses of approximately $26,000,000 recorded in sales and marketing. Moving on to billings. We expect billings between $370,000,000 $375,000,000 representing year over year growth between 31% 33%.
This includes subscription billings between $330,000,000 $335,000,000 representing year over year growth between 37% and 39% and professional services and other billings of approximately $40,000,000 which is flat to the prior year. We would like to remind you that our average billings duration in Q2 2015 was unusually high at 12.2 months due to one large customer requesting multiyear billings. As noted on our Q2 2015 earnings call, this increased our billings by approximately $10,000,000 when compared to the same period in the prior year. For Q2 2016, we do not expect substantial customer requests for multiyear billings and our guidance assumes a billing duration of 11.7 months, which is in line with historical averages. For a year over year comparison purpose, at our Q2 2016 billings guidance included constant billings duration of 12.2 months, our guidance would have included approximately $14,000,000 of additional billings.
As a result, year over year total billings growth would have been between 36% 38% instead of 31% 33 and year over year subscription billings growth would have been 43% 45% instead of 37% 39%. For additional information on constant billings duration, please refer to our IR presentation. Turning to gross margin, we expect subscription gross margin of approximately 83%, professional services and other gross margin, excluding knowledge revenue of approximately 11% and overall gross margin excluding knowledge revenue of approximately 75%. We expect an operating margin of 7%, including net expenses of $15,000,000 related to knowledge and free cash flow margin of approximately 22%. We expect diluted weighted average shares outstanding to be approximately 172,000,000.
For full year 2016, we expect total revenues between $1,355,000,000 and $1,380,000,000 representing year over year growth between 35 percent 37%. This includes subscription revenues between $1,195,000,000 and $1,210,000,000 representing year over year growth between 41% 43% and professional services and other revenues between 160 $1,170,000,000 representing year over year growth between 2% 8%. We expect total billings of approximately 1,600,000,000 representing year over year growth of approximately 33%. This includes subscription billings of approximately $1,420,000,000 dollars representing year over year growth of 37% and professional services and other billings of approximately 180,000,000 dollars representing year over year growth of 10%. We expect an operating margin and free cash flow margin of approximately 12% 24%, respectively.
We expect diluted weighted average shares outstanding to be 173,000,000 for the year and we expect to add approximately 1,000 net employees in 2016. As a reference in our 8 ks filing last week, we have settled all outstanding litigation and have no ongoing expenses. There is no impact to our products or services as a result of these settlements. Under the terms of the settlements, we are prohibited from disclosing any information that is not explicitly stated in the 8 ks filing. All settlement amounts have been excluded from non GAAP results.
Please note, our Financial Analyst Day will be held in conjunction with our Knowledge Conference on Monday, May 16 in Las Vegas at the Four Seasons. Please send an email to irservicenow.com if you would like to attend in person. For those who cannot join in person, we will hold the webcast of the event accessible on our IR website. With that, operator, you can now open up the line for questions.
Our first question comes from the line of Kirk Materne from Evercore ISI. Your line is open.
Thanks very much and congrats on the quarter. Frank, I just want to ask you, obviously, last year you put in the commercial sales organization and that was a big undertaking. I was wondering if you could just talk a little bit about how that's going for you all in terms of bringing in net new customers that you maybe weren't talking to last year at this time? And then just talk about the strong start to the year this year in terms of just execution having everybody in place and how much of that was, I guess, reflected in the results today? Thanks very much.
Yes. Kirk, we're actually super pleased with the progress that our commercial sales organization, which we really stood up in the U. S, that's what our announcement a year ago was about. So we now have a whole year of experience under our belt. That organization grew in excess of 100% on bookings over the last year.
So that's really good. Commercial market is really important on a long term basis. We cannot just be driving our business from Global 2,000 accounts. So these investments have to be made, and I actually feel that they're paying off well ahead of schedule here. In terms of your second question, we've been diligently working on all the changes that we have to make at the company in terms of preparing ourselves to go to market with multiple products in multiple markets and multiple channels.
And as you can see from the results that is gradually paying off, but it's a marathon. 1 quarter is not the entire story. So we're pleased with the results showing that the investments we're making are yielding. So
Thank you. Our next question comes from the line of Matt Hedberg from RBC Capital Markets. Your line is open.
Yes. Thanks for taking my questions guys. Congrats on the quarter as well. Mike, in your prepared remarks, you talked a little bit about the ecosystem. I'm wondering if you can give us a little bit more detail there.
The SIs should certainly provide, we think, a benefit going forward here, not only to the services mix shift, but selling additional non sort of core apps. Can you talk about some of the progress you're seeing there?
So as part of our Financial Analyst Day, we're going to talk more about the impact of the GSIs. Right now, we're still trying to figure out some meaningful metrics that we can share with The Street. As I've mentioned before, in Q4, we were looking at some new metrics and how we would report that and we just haven't made any decisions and we'll start to talk about that at our Analyst Day.
Okay. And then maybe one more. I know headcount additions is always a critical metric for you guys adding talent. I'm curious, you had a nice headcount add in Q1 here and it sounds like 1,000 for the year, so it's pretty consistent. Did you are
you having less churn right now?
In other words, is there more capacity than you planned for going into the year?
No, I don't think there's more capacity. We did see kind of in the last kind of in March, we start to see some churn within our organization, but we're kind of where we need to be right now. There was a fair bit of wanted churn that we really worked on. You usually see that in Q1. It was more towards the end of the quarter, but we're comfortable with the capacity we have on hand now.
That's all reflected in our operating margin guidance for
the year. Great. Thanks a lot guys.
Thank you. Our next question comes from the line of Brent Thill from UBS. Your line is open.
Thanks. Frank, back to your comment about this being the best Q1 ever beyond the couple of mega contracts that you signed. Can you just give us a little more sense of what why you would characterize it as your best Q1? What are the other things that surprised you and stood out in Q1? Well,
the reality is that for a high growth company like ours, every quarter sort of has to be our best quarter ever. So this is not sort of out of the ordinary for us to observe that about our business. But as I said in the prepared remarks, one of the things that was super strong is our whole upsell dynamic in our business. I think we're unusually in the whole SaaS universe, how strong our upsell business is. So we have a really good ability to land, even with modest presence and have the ability to dramatically expand that in a relatively short period of time.
We really like that sales dynamic and the reason is it's much harder to do very large transactions from a start where you have 0 presence in account. So once we have established that Beachhead, our ability to sell and accelerate that presence is well established and we liked it a lot.
And then quickly for Mike, just on the 2 large mega contracts. Do you disclose what was billed versus booked here in Q1? Were all those some of that billed in Q1 or is that for later build?
Well, all of those contracts are, they're annual billings. There was, some co term that happened and on average they're coming in at about 11.7 months as factored into our overall billings guide.
Okay, great. Thanks.
Thank you. Our next question comes from the line of Raimo Lenschow from Barclays. Your line is open.
Hey, thanks for taking my question and congrats as well. Quick question. So now that you have and it's a focus for you guys as well to sell a broader product portfolio. How did you set up the sales force for this year? Are they carrying quotas for all the different products?
How do you incentivize them to kind of go out and continue to do the upsell cross sell that you're already seeing?
Raimo, this is Frank. Our people are carrying a global quota and they can choose how they retire quota. We obviously have overlays built into our sales model now, especially on the solution consulting side, but also on the sales side, people that have dedicated numbers dedicated to products. We are beginning to move in a direction where for product lines that are farther afield from our normal sales dynamic, where we're going to have dedicated teams. In other words, sales teams that can only sell that product line.
We haven't done that yet. We are moving in that direction. And that's sort of a new chapter in evolution of our sales model, if you will, and we'll report on that as we go along here. But generally speaking, no, there's one quota and they retire that in the best way they know how.
Okay, perfect. And then the last just to clarify like last year you obviously had quite a few changes in terms of sales territory and the split. Am I correct to assume that this year was very minimal changes? Yes. Thank you.
Thank you. Our next question comes from the line of Walter Pritchard from Citi. Your line is open.
Hi, thanks. Mike, as you think about the path to the $4,000,000,000 plan you've put out with the Global 2,000 customer growth, I think the one thing that strikes me there is you've had great traction in the U. S. You have really good market share in Europe as well and Asia still, I think it's 7% market share. Can you talk to us about specifically that geography and your competitive position there, sort of where you see the incumbents?
I think they could be stronger today there than you are as well as your the evolution of your go to market organization and your ability to ramp the market share in Asia like you have in these other two geographies?
Yes. This is Frank, Walter. Asia is sort of a tale of 2 regions. We've done exceptionally well in Australia. We got in early and we've really outperformed our own expectation in that market.
It's really, really great accounts and really great presence. It's a very, very mature organization. Now that's in contrast to what's going on in Asia and Japan where we got a much later start and where we are still relatively immature. Those are very different routes to markets, and we're still in the mid stuff of really figuring out how to best do business there. We are making headway.
We are selling. We are getting customers. But as you observe from the percentages, it is not yet kicking in in the way we would like it to.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Keith Weiss from Morgan Stanley. Your line is open.
Excellent. Thank you guys for taking the question and nice quarter. I wanted to drill into the legal settlements from 2 sides, if you could go into it. 1 from a top line perspective, do you think there's any pent up demand behind settling those lawsuits of people who were maybe sitting on the sidelines or sales cycles that got extended because of what you guys had to do to convince people that there wasn't viability or there wasn't risk behind those. That's on one side of the equation.
Then on the other side of the equation, is there any OpEx that was sort of in the budget in the model for this year that now comes out that, gives you a little bit more room for investment or margin expansion, that we should be aware of?
So Keith, this is Frank. I'll answer the first question and then I'll let Mike answer the second question. So the answer to your first question is really not. The litigation was a slight overhang in the sense that it caused some distraction and some friction. I'm not aware of it causing any business not to happen.
So I don't think there is any pent up demand that we're envisioning that's going to free up here with the settlement.
And in terms of the costs associated with the litigation, we have incurred costs in Q1 through the settlement and actually into April. The budget has in essence been reallocated for the ITAP acquisition and that's why we said ITAP acquisition. We don't expect to have any material impact on our guidance the year and hence why we left it at the 12% operating margin. So you will see a shift between G and A and R and D, but that's not going to drop to the bottom line.
Excellent. That's helpful. Thank you.
Thank you. Our next question comes from the line of Alex Zukin from Piper Jaffray. Your line is open.
Hey, guys. Two quick ones for me. First off, congratulations on the quarter. If you look at your pipeline from ACV perspective, from new versus existing customers, how does it look like this year versus the prior year?
Well, as our installed base of customers gets bigger, up sells becomes a bigger piece. So obviously, our pipeline is bigger this year for new customers than it was last year. And it's bigger for two reasons. 1, because our installed base of customers is bigger, but also our sales force is a lot bigger now.
Got it. That's helpful. And then any update on the App Store initiative, how that's been trending versus your expectations? And any sense of what percentage of revenue or bookings is coming from platform license at this point?
This is Frank. That continues to trend upwards. We are realizing substantial amounts there, but it's not of the order of magnitude where we think we need to call it out in our prepared remarks and so on. It's a long term investment. You'll see at our conference in Vegas last month, next month that we have a good portion of the conference dedicated to platform enablements, the store, really helping people monetize their investments that they're making on the platform.
But we are not view depending on this or viewing this as a major impactful source of business in the current timeframe.
That's helpful. Thank you, guys.
Thank you. Our next question comes from the line of Michael Turits from Raymond James. Your line is open.
Hey, guys. Michael Turits. Two questions. One, Frank and Mike, you've rolled out a lot of new applications, including security and others. And now you're also talking about rolling potentially rolling out some sounds like some overlay sales force.
This seems like it's working really well. Is there any more costs associated with this as opposed to what seemed like your earlier strategy, which was more of a platform strategy with customers and partners developing application?
Yes, Frank, Michael. No, not really because the way we view it is, we look at how well we develop pipeline, development
of
that drives the development of demand the quickest. So there's really we can either continue to simplify territories or we can move them into product classes. And at this point, we're seeing demand developing faster when we start dedicating more resources to these new product opportunities. So it really is not incremental in terms of cost.
Okay. And then a follow-up question I had in a sort of different direction, but you raised the revenue guide, but not the billings guide. It sounds like you've got clarity in terms of duration going into next quarter. But last quarter and Q4, there was some duration issues, especially to the shorter end. Do you feel like you've got a handle on where duration is going?
Any risk that you could have customers looking for much shorter durations even sub-1 year? And is that part of any lack of visibility on the billings for the full year?
No. Well, what I would say is there's a lot more judgment that goes into billings, forecasting billings than there is in subscription revenue, just because of the it's very easy to pull in renewals, customers can delay renewals. And if a contract is signed the last day of the quarter or the day 1 of the next quarter, that can if it's a big contract, that could have a $5,000,000 impact or a $5,000,000 contract for revenue on the last day of the quarter has zero impact on your revenue. Hence, why we said at the beginning of the year, our full year's billings guidance is approximate. Last year, we never gave you billings guidance for the full year into the second half.
And then the second half of this year, we'll give you a more accurate or an actual range of where we think the billings guidance is going to be for the full year.
Great. Mike, thanks very much. Thanks, Frank.
Thank you. Our next question comes from the line of Jesse Hulsey from Goldman Sachs. Your line is open.
Yes. Thanks guys. Appreciate it. Itap, Frank, can you talk about the acquisition and the timeline for integration? Also when you think about how this Itom portfolio of solutions evolves over time, how much is going to be driven by M and A versus internal development?
Thank you.
So the whole notion of cloud management has been on our radar for years, and we've had our own internal development in this area as well. And a bunch of our customers are using our provisioning capabilities for AWS and Azure and things like that. But we have prosecuted opportunities to buy technology in this area for a while now. And we're pleased that we succeeded in acquiring this company. We are going to fully replatform, meaning that this is not getting integrated.
We don't do integration. We do reimplementation. And that means it's going to run on our cloud, on our platform, in our UI framework. There really will be no seams, no separation between these services and the ones we have built previously. That's going to be completed sometime during the first half of twenty seventeen.
This is not trivial technology. It takes time to mature it because there's just a ton of variables that this kind of software needs to take into account. It's not a simple application at all. We think this is a marketplace or a segment of the marketplace that is in its infancy and it's going to take considerable amount of time for people to learn, understand how to deploy this. It's a complete reinvention of how operations management and system management really works in a cloud hosted environment.
So we need to own this. It is strategic to us. The reason is that it is a key resource that gets requested and provisioned through our platform. So the ability to provide that is very, very important. We cannot not be in this marketplace.
We got a very strong response from our large Global 2,000 customers saying this is exactly the right thing for you to be doing. So it's nice to see that kind of validation of strategy when we announced this deal.
Thanks Frank.
You're welcome.
Thank you. Our next question comes from the line of Sarah Hindlian from Macquarie. Your line is open.
Thanks. It's Hindlian. Congratulations guys on the quarter. Thanks for taking my questions too. I was wondering if you could give us some color around what drove your strong upsell.
Do you really view that, Mike and Frank, as seat expansion or are you thinking about that in terms of ARPU growth? And when we're considering this upsell, could you give us a little bit more color as well on where you're seeing the most traction? And then maybe I can sneak in one more question, but maybe this is a little bit redundant. But are you seeing any seat contraction in the core ITSM product from any sort of public cloud usage at all?
Well, Frank, the answer to your last question is no, not at all. But the answer to your first question in terms of what drives the upsells, what's really going on is that in our customer base, people are really gaining the confidence to have longer relationships and bigger relationships with us. They're stepping up in a much more strategic sense. The notion of I'm just going to replace some legacy apps, do some modernization. That's sort of in the rearview mirror.
They're moving with much stronger strategic intent on ServiceNow as a key platform in their overall technology portfolio. And that's really what's driving. And big upsells really reflect strategic intent on the part of our customers, which is why we called it out in our prepared remarks because we think it's really core to what's going on with our company.
With those upsells, we're seeing both seed expansion and new products as we introduce new products, especially Itom and some of the newer products with customer security and customer service.
Thanks, Mike.
Thank you. Our next question comes from the line of Rob Owens from Pacific Crest. Your line is
I want to drill down just a little bit into the security operations opportunity. And I think you had said you had 4 customers in backlog or in trial when you release the product. You mentioned 11 new security customers. Curious as to exactly what they're doing. You mentioned eliminating manual security processes.
So is this automating changes within infrastructure? Is it more automation of IT task? Number 1. And just maybe at a high level customer examples of
how they're using it. Thanks.
Yes, the reps, Frank. This is really incident management for security events. That's the simple way to think about it. What's going on in the world of security is that enterprises and institutions make huge investments in detection and scanning and all the companies that you're familiar with in the universe. But as the scanning and detection takes place, the ability to process and act on those events is incredibly immature.
The security operation centers is comprised of just people sitting around desks staring at screens and spreadsheets and texting each other and talking to the IT department, there's really no sense of discipline and structure and workflow to dealing with these alerts. Now on the IT side, we have that because we have matured that over the last 10, 20 years. We're very, very disciplined in that area. And the reason we've had to be that way is because of the sheer volume. Well, that reality is now sinking in on the security side of the house as well.
And the second reason is that security and IT have to work together. There is no other way. And the reason is when security people need something done on the IT infrastructure, they do not have the authority or the ability to make those changes or those are going to run through IT. So making sure that the workflow is integrated between security and IT, that is what we do. That is what this product does.
The response to the basic concept of what this new product does has been incredibly strong and there's been a lot of action in the marketplace as well. IBM acquired a competitor. There's been a number of acquisitions in this area. Everybody is waking up to this basic capability. We just happen to be very, very well equipped with an extremely mature, rich platform to be able to tackle this.
Now we're not a security company by background, but we have staffed up an entire organization all with security people to go and prosecute this. And as I said earlier, we're also going to adapt our selling motion to make sure that we fully explored the opportunity that is presenting itself. And are there any go to market or technology partners then from a content perspective and I assume you're talking about the Resilient Systems acquisition by IBM or is this more from the pure workflow perspective? This is from the pure workflow perspective. There is a huge ecosystem play here because all the folks that you know that are on the detection and scanning side in terms of Palo Alto, networks, FireEye etcetera.
Those all become key partners for us in this game as is Splunk and so on. But we think security is such a fragmented, diverse world. Having a single integrated workflow is going to be incredibly important for that whole process to work and be functional. I think everybody knows that a lot of the big breaches that we have seen advertised on the front pages of The Wall Street Journal is not due to our inability to detect them, it's due to our inability to act on them. And that's really where we come in.
Great. Thanks for the color.
Thank you. Our next question comes from the line of Steve Ashley from Robert W. Baird. Your line is open.
Thanks so much. I just wanted to ask on Itom, which modules are you seeing the strongest adoption for here in the early going?
This is Frank. Itom, actually the great thing about Itom is, we're selling it as a suite. So, in other words, it's not in individual pieces. Now that said, Discovery is a core capability because that's what populates the CMDB. I mean, we believe everybody has to have that.
Orchestration is really the ability to bring about change in the on premise infrastructure. So the penetration on that has grown a lot. ServiceWatch has been a runaway success for the company as we highlighted in the prepared remarks yet and the value of the transactions is quite high yet the penetration in our customer base is still single digits. So we have an enormous opportunity yet to go with Itau. But the whole thing is it's a very holistic approach.
It's not a point product sell for us.
Great. And then I'd just like to ask one follow-up question on the sales force organization. You talked on the last conference call about the fact that last year you transitioned and you had to go to more of a business unit kind of a structure. Raimo asked earlier, you talked about having dedicated sales teams for certain products. Can you give us just a little more color on the current sales force structure around how it's laid out today?
So the sales force structure essentially has sort of 4 quadrants, if you will. We have a global accounts organization and we both have a new logo organization or resource or focus, if you will, as well as an existing accounts focus in organization. We have the same thing on the commercial side, right? We have a new account hunting focus in the commercial organization, and we have one that takes care of existing customers. That model is very is quite mature in North America.
When you get over to Europe and Asia, where we're not as mature, we don't have the mass to bring about that entire focus. You see the separation at the rep level, but not yet at the organizational level. That will happen in the fullness of time because those model will eventually carry through the way that I described. But the 2 vectors are commercial versus enterprise and the other vector is new accounts versus existing account. That is fundamentally how we break down.
The product business unit structure that you referenced is on the product side of the house, not on the sales side of the house. But what I did say earlier is that we are now starting to make the first steps in having some dedicated focus for product lines that we view as farther afield from our core selling motion. ITOM is not far afield from our core selling motion, which is why we're not separating that out and it's worked very well for us. There's no reason to change that. But on the security side, customer service side, as I said, we'd like to see those pipelines grow faster and we think we're definitely going to achieve that with a dedicated sales focus.
Perfect. That's helpful. Thank you so much.
Thank you. Our next question comes from the line of Justin Furby from William Blair. Your line is open.
Thanks guys and congrats. I want to ask about bookings mix. I guess if you were to look at new ACV coming in the door, it sounds like it was 16% from IT ops this quarter. I'm wondering if you were to add up the other areas like platform, CX, GRC, security, the other 9 ITSM products. Are we at a point where it's 40% or more of new bookings?
And what did that maybe look like a year ago? And curious what you think it looks like a year out from now? Thanks.
This is Frank. It was actually about 30%. And a year ago, it was about 82%. So that's the breakdown.
Sorry, it was say that one more time, Frank. It was 82% a year ago of bookings that came from other non ITSM or ITSM was 80%?
ITSM was 82%. It was 70%. Service management is what we're saying, and service management was 70% this quarter.
Versus 80% last Q1?
82%, 82% year ago.
And if you look at a year from now, what would be a guess of what you think it might look like?
Just curious.
Look, we have by the way, this starts to become just speculation to some degree. But we think that by 2020, Service Management will end up being about half our business. We may be underestimating, overestimating that, but that's sort of an end state that we're envisioning. At the rate that we're going, it could actually be less because the emerging products are coming online a lot faster than we had anticipated.
Got it. And then if you think about geographies within those different products, are there any areas if you look at the U. S, is it much more of a propensity to sell other products? Or what does it look like across U. S, Europe and APAC in terms of penetration into those newer products?
Thanks. The more mature the market, the more you see diversified selling take place. In markets that are less mature, the initial selling motion is always around surface management because it's a well worn path, very well understood. So the more mature, the more penetrate, the more saturated, the more you see the diversified sale happening.
Got it. Thanks very much. Appreciate it.
Thank you. Our next question comes from the line of Kash Rangan from Bank of America Merrill Lynch. Your line is open. Hey, guys. Congrats on the quarter.
With respect to ITOM, what percentage of the sales force actually can sell ITOM? And are you really comfortable that the end market is at the point where somebody that is used to buying ITSM or a salesperson that's used to selling ITSM has made the appropriate contacts and introduction on to the IT operations side of the house because in large companies, these two divisions can be completely separate. How comfortable are you that we're at the point where the market is able to buy this as a suite from one salesperson who's carrying a combined quota for both these products?
Well, this is Frank. Actually think I don't think they are completely separate because the buying center is really fundamentally the same. And at the CIO level, it's one conversation. And I can make that very apparent to you because even if you look at the legacy companies, they all have operations management and service management product portfolios. And that's not by accident because there's very high leverage between these respective capabilities.
And the generation of software that we're working in now has very high degrees of automation. It is just essential that service and operation management, they're not just close cousins. I mean, they're completely integrated in terms of workflow and processes. And everybody that we talk to is viewing Service and Operation Management as bridges that they have to cross. This is the reason why we're in the business.
It's not optional for us to be in the operations management business because it's really 2 halves of a whole. That's probably the best way to say it.
Would you characterize that last year results were great, but we had a couple of quarters of good billings, couple of quarters of not as good billings. So would you think that we're at the point where ITOM, IT and some sales cycles seem to be converging, Salesforce has better shot at producing deals that we wouldn't have to worry about the traditionally tough quarter consistencies in terms of billings?
You know what, we got paid to worry about tough quarters. It's a hard fight out there. We take nothing for granted. We're pleased with the strength that we saw here, but we're now in the next quarter. These things are customers, they make major commitments.
It's not just that they pay us a lot of money. They also go through gut wrenching, re implementations, redeployments, big changes in their infrastructure. They can't always chew that off. They sometimes have to push that out. So this is a real world marketplace, right?
This is not Facebook signing up another 1000000 users. This is a real enterprise business.
Got it, Frank. And finally, why would you not raise your sales hiring plans given the success of the quarter? That's it for me. Thank you.
No, we're hiring as fast as we know how to do it in a productive fashion, right? And by the way, sales productivity is what we use as our guide to determine whether we're hiring faster or slower, right? We're always trying to drive sales productivity down because if it's going up, that means we're not hiring fast enough. So that's how we determine the pace and how we throttle the rate at which we bring people in. If you hire too fast, you're going to get unwanted attrition.
You start thrashing very unhealthy dynamics. So we're always sort of walking that fine line between a little too
much.
Our next question comes from the line of Greg McPowell from JMP Securities. Your line is open.
Great. Thank you. One quick question about the traction around customer service management. You mentioned some wins in the Global 2,000. I was just hoping you could give some color on what those deals typically look like.
Are they greenfield opportunities, replacement opportunities? How competitive are those deals? And maybe a second part of that question is, how should we think about the initial ASP of customer service management versus the initial ASPs of your traditional ITSM stuff? Thanks.
Yes. Frank, it's been a a really interesting couple of months for us to sort of see the initial transactions take place. Our positioning relative to customer service is different from the traditional CRM approach that you might get from the likes of Oracle and Salesforce because we're going at it with the service model as it has been defined and pioneered and matured on the IT side. It's a holistic model because it doesn't just care about the engagement model with the customer, but it also cares about root cause analysis, which is the engineering vector and it cares about operations. In other words, how do I change the product or service to make sure that it is higher quality and people do not keep calling me with the same set of issues and requests.
Now the IT customer understands this almost innately and intuitively. That's what we take advantage of. We really deal with people that have an intuitive understanding of why this service model makes sense. And the more the service model looks like what they deal with in an IT organization, the more people will come to that realization that this is the way to do it. So the initial transaction we've done is there's been very strong conviction on the part of our customers that the model, the philosophy, the way we do this has really been the driver.
All the other stuff, the omni channel engagement, that's sort of table stakes, everybody does that. But when you look at the service model, it's a very different offering. So we're not just showing up with a me too offering. We have a very different approach to coming into this marketplace.
Thank you.
Thank you. Our next question comes from the line of Philip Winslow from Credit Suisse. Your line is open.
Thanks, guys. This is actually Michael Barisic on for Phil. I was hoping you could dig in a little bit into the process of shifting some of the sales force to sell dedicated products rather than the whole suite at once. Are these going to be new hires coming in to do this? Are you going to repurpose part of the existing sales force?
And can you give us just sort of a general time line for when you expect this to be implemented? Thanks.
So this is not a onetime thing. This is something that will start happening on an ongoing basis. We're going to start off at a modest level. There's probably a couple dozen people involved in certainly in the coming quarter that are going to get this kind of a sales dedicated focus. It may involve existing people.
It will surely involve new people. But that's up to the sales organization to decide how and where and who they're going to deploy against these opportunities. This is just the beginning. We're going to learn. We're going to see what works.
We're going to do some more of that. What doesn't work, we'll back out. So this is just the beginning of a journey, not a onetime structural change and it will be all said and done.
So stay tuned. And to be clear too, the costs associated with this are factored into our full year guidance for our operating margin already. Great. Thanks.
Thank you, Aaron. Next question comes from the line of Ryan MacDonald from Wonderland Securities. Your line is open.
Thanks for taking my question. Just quickly, digging a little bit more into the headcount. I think you said earlier that you're expecting to hire 1,000 people, net new employees for the year. Can you talk about what segments of the market or specific geographies that you'll be focusing on with that expansion?
Well, those people predominantly go into sales and marketing and then R and D. The R and D people, I'll start with most of those are going in North America. We're starting to add more people into India as well as our R and D facilities in Europe and Israel. The sales and marketing, it is skewed more towards as a percentage growth of people in our Asia Pacific and EMEA, but in absolute, the U. S.
Market is still such a vast market and there's a lot more room to split territories here that there'll be more of those
new security and customer service customers that you won during the quarter. Were those completely new customer wins or were they upsells from existing customers? And what was the, say, competitive dynamics involved with those deals?
On security side, I think they were all upsells. There really wasn't a competitive dynamic, because this is something that customers want to deploy on the ServiceNow platform because it's not viewed as a standalone service. It has to take advantage of event management capabilities, CMDB, everything that's the collaboration capabilities, notification, all that stuff plays into it. But on the customer service side, we've had some opportunities where these were not customers previously. So those are some new logo, new land type of opportunities, which has been interesting to see.
It's early going. It's fairly random in the sense that the patterns are not all crystallized at this point. All right.
Thank you very much. Congrats on the quarter.
Thank you. Our next question comes from the line of AFFE LAMA from Issuer Securities. Your line is open.
Yes. Thank you. Frank, in the cloud management space, who are the key competitors you expect to see and how do you plan to differentiate versus them? Also based on your earlier comments, it seems like it's at least a 2018 revenue event. Do you think you need to buy more technologies to round out the portfolio?
Or will it be all organic development as part of replatforming?
Well, when it comes to cloud management, we acquired what we needed and everything else we are going to build. I mean, an acquisition is not just about technology, it's also about the talent. And so we have this core group of people that have come into the company and we will expand that group of people to do what we need to do. In terms of competition, very early going, but as you have noticed, there's been a bunch of acquisitions in this area. Cisco just bought a company.
Oracle just bought a company. VMware has been a long standing player in this space. We believe that because of the ServiceNow platform that this is not a standalone marketplace at all. And we think that we come in with a very compelling advantage launching this service from the ServiceNow platform because again, this all runs through the catalog. It learns through all the orchestration capabilities, the way people consume IT as a service, the entire service experience around it.
Like so many things, they start off as one off standalone things and then people realize they're not separate assets, they're really services that operate in a broader framework. And
your comment, Abai, that it's a 2018 revenue, as we mentioned, it is being re platformed on our platform and we do 2 releases a year that should be in our April, May release. So it will start to have an impact on bookings in Q2 of
2017. Got it. Thanks, Mike. And any quick comments on the linearity during this quarter? Was it any different from the earlier 1st quarters?
Thank you.
No, it was good. We had a it was strong at the beginning in March on purpose. We were pushing to get deals closed sooner, and but nothing unusual.
Thank
you. Thank you. And our next question comes from the line of Jeremy Brando from Royal Capital. Your line is open.
I was curious about the impact that FX has on the updated guidance in the quarter. I think to start the year, you expected FX to have a negative impact on the top line. It sounds like that changed. So can you tell us how that impacted the guidance?
Well, for the year over year right now where we are, the average for Q1 of 2016 to the average for Q1 of 2015 was pretty consistent. Remember, we trade in about 5 different currencies, it's about 30% of our business that is foreign. And as we're going right now, we just we expect it's going to be similar.
Got you. When you initially guided for revenue, I think you estimated FX would be like a certain headwind for the year, but I believe has that changed?
I don't. I didn't. I gave guidance based upon where we saw the average rate was at the beginning of the year and that has not changed that much from where it is today, slightly up.
Good. Because I thought you said it
was a $7,000,000 headwind expected for 2016, but now it's not it's 0?
On 1 point $38,000,000,000
that's not
a very big number. It's roughly the same.
Got you. Okay.
Thank you. That concludes our questions for today. So I would like to turn the call back over to the management for closing remarks.
Thank you. As a reminder, a replay of this call will be available as a webcast in the Investors section of our website. Thank you for joining us today.