Good day, ladies and gentlemen, and welcome to the ServiceNow Q4 2015 earnings conference call. My name is Whitley, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. If at any time during the call you require operator assistance, please press star followed by zero, and we will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Michael Scarpelli, Chief Financial Officer. Please proceed.
Good afternoon. Thank you for joining us. On the call with me today is Frank Slootman, our Chief Executive Officer. Our press release, our quarterly IR deck, 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, pipeline, prospects, forecast, vision, addressable market, 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 in documents filed with the Securities and Exchange Commission, including our most recent quarterly report on Form 10-Q and our 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. With the close of fiscal 2015, ServiceNow became the second enterprise SaaS company in history to report more than $1 billion in annual revenue. This milestone was driven by solid execution across the board. Total revenues for the fourth quarter grew 44% year-on-year to $286 million. We continue to see strong demand from our customer base with a 99% renewal rate and a 39% upsell rate. The fourth quarter set a record for net new ACV. We now have 230 customers with ACV in excess of $1 million, a net increase of 24. Additionally, we have 638 Global 2000 customers, a net increase of 26. New Global 2000 logos include Michelin and The Hershey Company. Our average ACV per Global 2000 customer was $868,000, a 6% sequential increase.
At the beginning of 2015, we restructured our sales effort to increase focus on the commercial market. As a result, we grew our commercial business 48% in the quarter. In addition to robust growth, the commercial sales team also booked multiple transactions in excess of $1 million throughout the year. Our total addressable market continues to expand and is now estimated at $60 billion. With our latest software release in December, known as Geneva, we launched two major new services that expand our scope in the service management market, Customer Service and Security Operations, adding more than an estimated $13 billion to our addressable market. Our Customer Service offering provides a holistic approach that integrates customer engagement with the underlying engineering and operational processes. We already signed five deals for Customer Service, including Fiserv, a leading global provider of financial services technology.
We signed four customers for Security Operations, including Raymond James Financial, a leading diversified financial services company. This new offering connects security events for market-leading technologies with our advanced workflow capabilities. A key value proposition is the institution of a shared workflow between IT and security teams. Our focus is not on detecting, but on processing security incidents in a highly structured, expedient, and transparent fashion. This has been sorely missing in the battle for cybersecurity. In 2016, our focus on helping customers transform their businesses using a service-centric approach is intensifying. In this vision, everything becomes defined and operated as a service, and every enterprise will increasingly manifest itself as a software cloud. To help customers achieve this outcome, we stood up an elite consulting team to map out their journey.
This new team, which we call Inspire, is currently working with a large customer to develop a long-term strategy around the industrial Internet of Things. This customer plans to roll out a range of internal and external facing cloud services that will more than triple their segment revenue by 2020. This is an existing customer, but this new engagement changed the scope from an operational discussion to a strategic one. Another customer was in the midst of a corporate transformation, along with the integration of a major acquisition. Instead of focusing just on an ITSM rip and replace, the Inspire team showed them how IT could support the company's long-term transformation. As a result, we worked alongside the customer stakeholders to build the strategy, roadmap, and architecture for IT and a new business process service center.
That roadmap will have us replace seven systems in total, starting with IT and moving throughout the business. I look forward to seeing you all at the Knowledge16 the week of May 16th in Las Vegas at Mandalay Bay. I will now turn the call back over to Mike.
Thank you, Frank. During today's call, we will review our fourth quarter financial results and discuss our financial guidance for Q1 and full year 2016. We would like to point out that the company reports non-GAAP results in addition to, and not as a substitute for or superior to, financial measures calculated in accordance with GAAP. All financial figures we will discuss today are non-GAAP 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. Our total revenues for the fourth quarter were $286 million, increasing 44% year-over-year and 51% in constant currency, a negative impact of $13 million. Our average contract terms for new customers, upsells, and renewals were 31.9, 26.1, and 23.8 months respectively.
Total revenues based on geography were $199 million in North America, $67 million in EMEA, and $20 million in Asia Pacific and other, representing 70%, 23%, and 7% of total revenues respectively. Our calculated billings were $366 million in the quarter, increasing 33% year-over-year and 39% in constant currency, a negative impact of $16 million. Our weighted average subscription billings term was 11.9 months for the quarter compared to 11.8 months in the prior year. Combined backlog and deferred revenue at the end of 2015 was approximately $1.9 billion, increasing 35% year-over-year and 40% in constant currency, a negative impact of $65 million. Subscription gross margin in the quarter was 83% compared to 80% in the prior year. Professional Services and other gross margin was 15% compared to 16% in the prior year. Overall gross margin was 74% compared to 70% in the prior year.
Operating margin was 14% compared to 6% in the prior year. We ended the quarter with 3,686 total employees, a net increase of 284 in the quarter and 860 in the year. Net income for the fourth quarter was $33 million, or $0.20 per basic and $0.19 per diluted share, compared to net income of $5 million or $0.03 per basic and diluted share in the prior year. Our basic weighted average shares outstanding was 160 million, and our diluted weighted average shares outstanding was 171 million. During the fourth quarter, we generated $105 million in cash flow from operations, and we used $25 million for capital expenditures, resulting in $80 million in free cash flow. This compares to $39 million of free cash flow in the prior year. We ended the quarter with $1.2 billion in cash, short-term, and long-term investments.
Let's turn to guidance for the first quarter and full year 2016 based on FX rates as of the end of Q4. For the first quarter of 2016, we expect total revenues between $298 million and $303 million, representing year-over-year growth between 41% and 43%, and between 42% and 44% in constant currency, a negative impact of $2 million. We expect subscription revenues between $261 million and $265 million, and Professional Services and other revenues between $37 million and $38 million. As a reminder, we are increasingly focused on deploying our internal Professional Services organization as a strategic resource and relying on our partner ecosystem for service delivery. We expect billings between $360 million and $365 million, representing year-over-year growth between 34% and 36%, and between 36% and 38% in constant currency, a negative impact of $3 million.
We expect subscription gross margin of approximately 83%, professional services and other gross margin of approximately 9%, and overall gross margin of approximately 73%. We expect an operating margin and free cash flow margin of approximately 5% and 21% respectively. We expect diluted weighted average shares outstanding to be approximately 173 million. For full year 2016, we expect total revenues between $1.34 billion and $1.37 billion, representing year-over-year growth between 33% and 36%, and between 34% and 37% in constant currency, a negative impact of $6 million. We expect subscription revenues between $1.18 billion and $1.2 billion, and professional services and other revenues between $160 million and $170 million. We expect billings of approximately $1.6 billion, representing year-over-year growth of approximately 33% and 34% in constant currency, a negative impact of $7 million. We expect an operating margin and free cash flow margin of approximately 12% and 24% respectively.
We expect diluted weighted average shares outstanding to be 177 million for the year, and we expect to add approximately 1,000 net employees in 2016. As a reminder, our financial forecasts include anticipated attorneys' fees and expenses for our outstanding litigations with BMC and HP Enterprise, but not any forecasts related to their outcomes. The trials are currently scheduled for March 2016 and May 2017, respectively. Before closing, please note our financial analyst day will be held in conjunction with Knowledge16 on Monday, May 16th in Las Vegas at Mandalay Bay. After the event, we will open up our partner expo hall early to financial analyst day attendees, giving them an opportunity to see and speak with more than 100 ServiceNow partners. In-person attendance will be limited, so if interested, please send an email to ir@servicenow.com.
For those who cannot join in person, we will hold a webcast of the event accessible on our IR website. With that, operator, you can now open up the line for questions.
Ladies and gentlemen, if you'd like to ask a question, please press star followed by one on your phone. Your first question comes from the line of Michael Turits with Raymond James. Please proceed.
Hey, guys. Very strong margins, a little light relative to the billings guide, granted with a little bit more FX headwind. Anything that happened similar to last year in terms of restructuring around the sales force? I have a follow-up question, it's a housekeeping question.
Michael, this is Frank. We don't have any restructurings planned for this year. The realignment that you saw last year on the commercial organization, which, by the way, we highlighted in our prepared remarks, has really worked out excellent for our business. We're not planning on doing anything like that coming into 2016.
Mike, anything further on that relative to the billings at the low end of the guide, granted with a little bit more FX headwind?
Well, there's a number of things that go into billings that are both positive and negative when you're doing the forecasting. I will say that there was an error in our forecasting, and if that error did not occur, we would've landed within the midpoint of our range.
Okay. Then I just have a housekeeping question. Can you let us know what your expectations are for the non-GAAP tax rate for 1Q16 and 2016?
For Q1 and all of 2016, we're anticipating that it's going to be somewhere around 35%.
Okay. Thanks very much.
Your next question comes from the line of Brent Thill with UBS. Please proceed.
Thanks. Mike, just not to dwell on the billing, but just related to the error that you just mentioned, what was that? Can you just talk a little bit about how you're factoring in the macro condition for how you look at the billings guide? I think everyone's obviously obsessed with that metric. Was there any more conservative view that you put into that, or are you not seeing the macro at all show up in the pipeline in terms of the forecast that you gave to the street?
The error had to do with looking at the system for what was our renewal opportunity that we had, and it was clearly an error that we captured and identified on December 15th. Once again, if we had known that, we would've guided lower, and we would've ended within the midpoint of the guidance we would've given. I'll just say our guidance is based upon where we see the business for 2016 right now, and we're comfortable with the guidance we're giving.
Okay, no extra macro cushion that you've factored in.
This is Frank, Brent. We're not really seeing any macro effect yet. We're such a secular business. We have not really felt any effects up to this point, nor can we see it sort of down the road that is affecting our business. That's not in our guidance.
Okay, just one more clarification. Sales headcount outgrew total headcount in this last year. Do you anticipate your 1,000 net adds with the growth rate in sales hiring continue to outpace the rest of the headcount?
Yeah, we added roughly 405 people into the sales and marketing organization in all of 2015, and we expect in 2016, we're going to add about that same absolute number, give or take, depending on the quality of people we find.
Great. Thanks for the clarification.
Your next question comes from the line of Keith Weiss with Morgan Stanley. Please proceed.
Excellent. Thank you for taking the question. Two questions, one on the top line, one on the bottom line. On the top line, if we look at your guidance for the full year, particularly the billings and guidance, you guys have a very good sustainability of growth throughout the full year, stating mid to low 30s growth throughout the full year, which isn't too much different from what you've done in the most recent quarter on a constant currency basis. What gives you confidence in the sustainability of that growth? What are you seeing in your pipeline in terms of the opportunity that could help you sustain that high-level growth despite the fact you guys are coming to a pretty big scale here at over $1 billion? Really nice free cash flows this quarter.
Anything one time in nature or anything we should keep in mind in terms of forecasting cash flows on a going forward basis that might need to be caught up at some point? Do you think these sort of cash flow margin improvements are durable on a go-forward basis?
I'll answer the cash flow first, Keith. You are going to get some variability in cash flow on a quarter-to-quarter basis, and the two quarters where we're going to generally have our lower cash flow is going to be Q1 and Q2. A lot of that has to do or Q1 and Q3, and that has to do with our ESPP plan and the way that that gets funded. You can see that on the cash flow statement. We feel pretty good about showing some more leverage in our cash flow this year, and hence why we're guiding to 24% for the full year. There's nothing big that's going to happen there. CapEx as a % of revenue is going to be somewhere in the slightly down from last year. I think we're about 9.5%, 9.4% in 2015.
I'm expecting it's going to be somewhere around 8%, 8.5% in 2016. In terms of your other question, in terms of what we're seeing in our pipeline, and I'll let Frank talk about what gives us the confidence there.
Yeah. The confidence comes from the fact that we now have quite a few years of operating history under our belts. We've seen those patterns are very persistent in terms of the way our renewals are working, the way our upsells are working, the way we land new logos for average deal sizes, the whole cohort analysis. When you take all of that into account, we really have quite strong visibility in how the business plays out from one quarter to the next. It's a nice thing about a SaaS business where you have also pick, pack, flush, and defer that it's really rock solid that way. We really don't depend on one quarter or another being an outlier either to the positive or the negative.
It's really a function of our history in the business and the persistence of the patterns that we've been able to observe.
Excellent. Thank you, guys.
Your next question comes from the line of Matt Hedberg with RBC Capital Markets. Please proceed.
Thanks, guys. I guess I'm wondering into year-end, I know there's always some deals that move in and out of the quarter, was there anything abnormal, guys, this quarter in terms of large deals that may have slipped into 2016?
There's always deals that slip from one quarter to the other. Likewise, you're always pulling deals in. I will say, like most Q4s, it was a very back-end loaded quarter. As Frank mentioned, we had record net new ACV in Q4, and we were very pleased with what we saw.
Okay. In terms of the full-year guide, services revenue, I think, was about $30 million light of consensus in our number. Obviously, you're having some success this quarter. Is that accelerating to the SI channels, and is that something that we should sort of continue to bake into our model longer term?
Yeah, it's definitely something you should bake into your model. As we've been saying for a while, the SIs are becoming more important to us for doing service delivery, and we don't want to be seen as competing with the SIs. As I mentioned, we're trying to make our own internal PS resources kind of more strategic. We would like the basic implementation work to be done more and more by our partners. Hey, that's why the guys like CSC bought Fruition and Accenture bought Cloud Sherpas, and we're going to let those guys continue to grow their businesses. We're more interested in the long-term subscription revenue from our customers. We just need to make sure that our partners are doing a good job of standing up our customers, and we're going to really focus on that.
Maybe just a quick follow-up to that then. With this offloading to the SIs, is there anecdotal evidence that you're seeing an acceleration then in that SI business due to Cloud Sherpas or Fruition or things of that nature?
Yeah. This is Frank. There is an acceleration. Our SI business used to be opportunistic. In other words, when the opportunities presented itself, they would bid on these opportunities. It's different now, because these organizations, they have bought companies, they've made investments, and they now have real plans around the ServiceNow business, and they're driving it to target. They're much more disciplined, much more methodical, much more goal-driven in the way they go about pursuing the ServiceNow business. That's very different from the way it was in years past. As Mike said, we really want to make room for them, make sure that we enable them. They also play a strategic role with our customers, and that's really important. We want our customers to have really a broad variety of choices. Oftentimes, we partner with these SIs as well.
In other words, we will sub them, or sometimes they sub us. It's a very collaborative relationship that we have with them, with our customers.
Thanks, guys.
Your next question comes from the line of Walter Pritchard with Citi. Please proceed.
Hi. Mike, I just wanted to dive into the question or the statement you made in the release. You just mentioned on new ACV being at record levels, which I guess we'd expect of it. It's a Q4 and you're a growing company. I'm wondering, if I look at deferred commissions on the cash flow statement, it looks like the cash impact of that was roughly flattish year-over-year. Your billings, I think we talked a little about the forecasting, but your billings definitely benefited from the 99% renewal rate, which I think is an all-time high for your company. Just wondering how we kind of quantify the new ACV, and it grew, but did it grow at the rates that had grown earlier in the year? Because it seems like maybe it slowed down a bit right there.
Well, I guess the first thing, Walter, is we don't disclose the actual net new ACV, but you can see in looking at our deferred revenue and backlog that we just signed, you can see the gross increase in backlog and deferred revenue. Doing an apples-to-apples comparison of 2014 deferred commissions to 2016 is not an apples-to-apples, or '15 is not an apples-to-apples, because the '15 comp plan was not nearly as rich as the '14 comp plan. I will say in our guidance going forward for 2016, we're making our comp plan a little bit richer next year. Then it all depends. I would say in 2014, we had a lot of reps who really blew their number away with acceleration. This year, we had guys into acceleration, but they weren't blowing the numbers away as much in acceleration.
You didn't have as big a commission payments being paid out. Net new ACV was up quite nicely year-over-year quarter.
Got it. Just a quick clarification on what Matt asked on the impact of services. I guess if we look at the delta between where you guided ProServ revenue and sort of where we were at, I'm wondering, is the delta, the impact on the lower ProServ to ProServ billing the same? In other words, the impact, that 1.6 number, just trying to get a sense as to how the services may have impacted that number.
Well, the services, pretty much any services revenue that is recognized flows through immediately into billings. There's nothing upfront with that.
Okay. Just wanting to make sure that's still the case.
Yes.
Thank you.
Your next question comes from the line of Kirk Materne with Evercore ISI. Please proceed.
Hi, this is actually Ted Lin on behalf of Kirk. Just wanted to ask, can you guys talk about whether you saw any extension of deal cycles, or if you saw the initial size of deals change over the course of the quarter?
No, really didn't see anything different in terms of deal cycle and deal sizes was pretty consistent from what we've seen in the past. We had about 10 deals that were north of $1 million, and that's been pretty consistent in that range.
Okay, thanks. Just a quick follow-up. Can you talk about any sort of momentum trends that you're seeing with respect to your app store?
This is Frank. That continues to grow quite nicely quarter-to-quarter. I don't have the numbers right off the top of my head. The number of apps that have been contributed to the store, number of downloads, all those metrics, they move sequentially quite a bit. I think there's about 140, 150 applications up on the store now. It's going to be quite active. It's good progress there since we introduced it in the summer.
Great, thank you.
Your next question comes from the line of Alex Zukin with Stephens. Please proceed.
Hey, guys. Thanks for taking my question. Just two quick ones. Maybe one for Mike first. Was there anything that you were disappointed by in the quarter? If I look at the net new customer adds in 4Q versus 3Q, they were down a little bit, 176 to 174. If I look at the Global 2000 adds, they were also down sequentially a little bit. Obviously deferred revenue sequentially, the growth was a little weaker than the last two years. Is there anything at all that you were disappointed by outside of kind of the error around billings guidance?
Really just the error in the billings, I take full responsibility for that.
Okay, got it. Frank, maybe just a question about product. One, we've heard a lot about verticalization in the industry, particularly from Salesforce mostly. As you look at the global SI channel and how important certain verticals are for you guys, can you talk at all about the strategy around verticalization, either from a product perspective or from a go-to-market perspective in 2016?
Yeah. You're correct that the SIs, of course, have a very strong verticalized go-to-market motion. We've not had that. The changes that we introduced during 2015 is that we went to a business unit structure. ServiceNow used to be single product, single market, mostly single channel type company. Last year, that all changed. We've broken our whole organization into business units that are not verticalized. We're organized by product. We've seen the effects of that quite dramatically because the emerging products have taken off very strongly over the year. The business mix is changing very rapidly for ServiceNow because these new products are taking off with a lot of momentum, that is in part because of the organizational structure and the resources that are behind it. We're executing in that mode right now.
I'm certainly not excluding the possibility that we will have a vertical vector to our go-to-market motion as well. We're still in the middle of going through the transition to product, which is working out really well for us, really happy with the progress we made in 2015, because it was really a big transition for the company to execute in that mode. I did talk about Customer Service. That's certainly something that initially is going to get really focused on technology-type businesses because we have very strong fit with the product there. In the fullness of time, I think that will take on a vertical focus as well because that business is very different from one vertical to the next.
Got it. Then maybe on competition, as you launch customer service and the adjacencies between you and Salesforce grow, how often do you see Salesforce in deals? What's that competitive framework look like going forward?
Well, we see Salesforce in a number of places. Obviously, we've had sort of a border skirmish around a product that they call Remedyforce, which is really a product by BMC that Salesforce also markets that's based on the Force platform. That's not been a big competitive factor between us and Salesforce. Where we've seen them more is in platform opportunities where customers are standing up custom applications, and they're trying to figure out whether they're going to do it on Force or they're going to do it on ServiceNow. What I will tell you is that with our entry into Customer Service Management, that's a head-on collision with Service Cloud. I said in the prepared remarks we've done Five or six major transactions already, and most of them were contentious with Salesforce.
There's no hiding from that reality, it's going to become more intense between us and Salesforce as we get further into 2016.
Got it. Thanks, guys.
Your next question comes from the line of Abhey Lamba with Mizuho Securities. Please proceed.
Hi, thanks. This is Siti standing in for Abhi. Are you seeing customers implement the Geneva release for any new use cases? Any color on the possible effects of the release on ACVs would be very helpful. Thanks.
Well, Geneva just came out in December. All new projects that have gone live since that time, they're going live. Hopefully, most of them will be on Geneva. Typically, our customer base shifts gear quite rapidly. In terms of new applications in Geneva, they're the two that I mentioned. Security management, there is a huge amount of interest in that new product because it's such a no-brainer to layer that on to the platform strategy that our customers have with ServiceNow. Then the other one that's a little bit further afield positioning-wise around customer service. We were quite surprised how rapidly that took off as well, because that's a different sales motion for us traditionally than selling to core IT. IT has always been a conduit and something that we can leverage very strongly to get into these new use cases.
We have very high expectations to continue on selling a lot of operations management software applications. This was very strong in 2015. It will be very strong in 2016. We have great expectations of these new services with Geneva in 2016 as well. We just had our global sales kickoff in Orlando last week, and they were introduced to our sales organization for the first time. There's a lot of energy brewing behind those initiatives.
Great. Thanks.
Your next question comes from the line of Raimo Lenschow with Barclays. Please proceed.
Thanks for taking my question. Two quick questions. Frank, you talked about IT Ops there in your last answer. Can you talk a little bit about how do you see that evolving in 2016 with Geneva in terms of how meaningful will that be for you guys? Is it just a first step for customers to go in there, or do you think that's going to be already meaningful? I have one follow-up for Mike.
Well, IT operations management I think last year went from 10% to 12% of our business. It's not easy to do to grow your share of the pie, considering that the whole pie is still growing at a blistering rate as well. IT operations management is an ideal add-on opportunity for our sales organization. It's just a natural leverage of the core platform. We're only, for example, with ServiceWatch, which is a product that we acquired about a year and a half ago, we just got done in the Geneva release with completely re-platforming that acquisition. That means that it runs on our clouds. It's reimplemented in our platform, our UI framework. It is a completely native ServiceNow service. You can't really tell that that was acquired or that it has origins from another company. We only have penetrated 5% of our customers with our products so far.
It's a red-hot product, there's enormous upside for us to not just sell that, but it leverages everything else. It's used by a security product. It's used in event management applications. Operations management, there is an enormous amount of runway for us there, and we're going to be building other assets and potentially acquiring assets in that area as well.
Okay, perfect. Interesting. Then a question for Mike. Mike, if you keep the hiring on sales and marketing constant, in a way that kind of means if unless sales productivity for the existing guys keeps going higher, that basically means you have a glide path going down. What's the puts and takes on your plan for 2016 to kind of say, "Oh, keep it constant because it's difficult to find new people," versus, "I need to increase this if I want to keep the growth rate higher for longer?" Thanks.
Well, the driving factor behind adding roughly 400-plus people into our sales and marketing organization in 2016 is we still truly do believe we are more market-constrained, or I mean, distribution-constrained than markets. There's still a lot of markets, especially in Asia-Pacific, where we're just starting to go into China and some of the other emerging markets in the world. South America, we actually had a very good quarter in South America last quarter, and we have high hopes. Remember, this is a long sales cycle, so it's going to take a year when we hire these people to really see were we able to get these people productive. Based upon the opportunity we see, we think that's the right number to continue to add people at that pace.
Yeah. The acceleration can only all of these are in greenfield markets where you have to kind of seed the market and grow the market, then you could do something with something more. Is that the right way to think about it?
Well, that's part of it. Remember, we are as well continuing to split territories in North America and EMEA because we are not saturated with salespeople. Listen, we still don't even have 50% of the Global 2000 in North America. There's a lot of those that still aren't covered yet. We need to have more people.
Okay, perfect. Thank you.
Your next question comes from the line of Karl Keirstead with Deutsche Bank. Please proceed.
Thanks. One for Mike, one for Frank. Mike, just to be clear, I think it's a question that Walter was trying to drive at a little bit earlier. If you look at your billings guidance for 2016 of 33%-34% in constant currency, is there any way for you to quantify what the slower growth in services and narrowing your services focus is having on that constant currency growth? If you would encourage the Street, as a result, to focus a little bit more on subscription billings? For Frank, I'll just throw it in now. Investor interest in AWS Azure and the public cloud shift is very high. It's probably very early for you guys, but I'm curious, among ServiceNow's customers that are making that journey, have you seen any impact?
Are there any ITOM or other tools that could actually see a demand lift as customers move workloads? Thank you both.
I guess, Karl, I'll answer first. The bulk of our billings comes from subscription, not from professional services. If you look at where our professional service guide in revenue, that is pretty much dollar for dollar what our total billings is going to be for professional services. When you look at the balance which is left there, which is the bulk of the $1.6, the subscription, most of that is actually coming out of billing our contracted backlog, then renewals, and then new business. Our guidance is the $1.6 billion, and that's what we're comfortable with right now.
Karl, it's Frank. Your question about public hybrid cloud. We actually think that that trend is very beneficial to ServiceNow. The reason is, we have never really focused on managing deep infrastructure. That's more been the legacy focus of companies like BMC and HP and IBM and CA. What we've always done, we've always focused on the service orientation, understanding the operational characteristics and availability performance of the services. That is just as important, actually it's even more important in a public cloud type of environment because customers will be deploying and redeploying constantly between these different platforms. Understanding what services are affected by what cloud is what we do, and that's going to be really important. Secondly, I will tell you that our focus on service integration, which really means is that we can really create a single service experience for all these different cloud resources.
All the requesting of these resources, the provisioning of these resources, that's becoming an intense focus of our business as well. We are the company to provide that service integration infrastructure for the public cloud. These are things that are going to help and fuel our business as opposed to become an impediment to our business, because we're really not focused on deep infrastructure. That's where the legacy companies have been. That's not where ServiceNow has been or where we're going.
Okay. Great color. Thank you both.
Your next question comes from the line of Mike Cassano with Pacific Crest. Please proceed.
Yeah. Hi, guys. Rob Owens at Pac Crest. Couple questions around the ITOM, the opportunity. You mentioned about a 5% penetration rate at this point. Can you help me understand, just with those customers, what it's done to ACV overall? I think 2016 was pointed to as kind of a critical year, an inflection point for ServiceWatch. What metrics should we expect to see out of that portion of the business? Thanks.
The only new thing that we're going to start to disclose with our K, which is going to get filed, as we've told people, is now we started tracking ITOM revenue separately because it is licensed different than the rest of our products. It's done on a per device or per script basis. For 2015, ITOM revenue was 8% of our total subscription revenue. I think for the quarter, it was actually 8.2% for Q4. That's the one new metric that you're going to start to see, and you'll see that in our quarterly numbers as we go forward for 2016.
If we think about that from a bigger picture, what's it typically add to a customer that's taken it in terms of ACV?
It depends upon the customer's environment. We have some customers that have almost doubled their ACV. We have a number of million-dollar-plus deals, and it's really ServiceWatch has been a key piece of that, but it's not just ServiceWatch. There's other things as well, too. We have another customer who is paying us over about $6 million, and almost two-thirds of that is ITOM. It depends upon the customer.
Thanks for the color, Mike.
This is Frank Slootman. We believe that the ITOM business is, from a revenue standpoint, a booking standpoint, is easily equivalent to what we've had in service management, and over time will be bigger than that.
Thanks, Frank.
You bet.
Your next question comes from the line of Greg McDowell with JMP Securities. Please proceed.
Great. Thank you. Just one question for you, Mike. We only get that backlog number once a year, so I wanted to drill a little bit into that for the full year up 40% constant currency. I just wanted to ask, there's been a pretty close historical relationship between the backlog and deferred and next year's revenue. It does suggest again that your 2016 revenue could be higher than your guidance you just provided. I was just wondering, is there anything different about the components of backlog this year than previous years and maybe how FX is impacting what's in backlog? Thanks.
As we did mention that our backlog, our reported backlog as of December 31st is $65 million year-over-year just because of FX is down. Once again, our guidance, we're comfortable with the guidance we gave for both our billings and revenue for 2016.
Okay, thanks.
Your next question comes from the line of Justin Furby, William Blair & Company. Please proceed.
Questions first on ITOM, Frank. I might have missed this, but can you call out in terms of new ACV in Q4 what that was, and what it grew year-on-year? Just curious, when you think about fiscal 2016 and your billings guidance and the different areas of potential upside, what you think maybe is the biggest opportunity, whether it's platform, ITOM, certain geographies, different package apps, just anything that may surprise you to the upside. Then I've got a follow-up.
Yeah, I think ITOM for the full year, I think, grew around 66%, somewhere around there. That's that number. As I said earlier, I have huge expectations of our efforts. We are doing very large transactions in this area. I think the market for ITOM is bigger, will be bigger than for IT Service Management. The combination of these products, especially with the way we are approaching it, which is very different from what historically has been done, is super compelling. ServiceWatch is a very catalytic technology because it helps customers understand what opportunities they have to really advance how you manage services in an enterprise versus just managing infrastructure. That's a big one. Obviously, we have a lot more irons in the fire right now. Our business is just becoming very exciting because we are just pushing on a number of different areas, and they are all moving.
We used to be a business that was driven primarily on the replacement of legacy helpdesk businesses, and we have come an awful long way since that time. We are just becoming a very strategic platform for our customers.
Got it. Frank, just a follow-up. You talked a little bit about, or I think maybe Mike did, about the different comp plans. I am just curious if you could give a little more color in terms of the thought process of fiscal 2014 versus 2015 and 2016, and why you sort of changes back and forth there.
You are always trying to tweak your comp plan. Through our sales organization, there were decisions to change the plan. Coming into 2016 now, we decided we wanted to make our plan a little bit richer because that will help attract people and retain people in our sales and marketing organization.
This is Frank. The one thing that I can add to that, you're probably wondering, well, why don't these plans all get cheaper consistently over time? Again, it's not a spreadsheet. Sometimes when we're adding territories where people are going to need more time to get productive, we are going to have an aggressive comp plan there, right? The bigger you get, the more you are in nascent territories, you have to tweak your plans to make sure that people have an opportunity to make money. Depending on what phase we're in, what territory we're in, you're going to see that move around. I think we're being just very thoughtful that we're doing it the right way rather than taking purely a spreadsheet mentality to that thing.
Got it. Thanks. If I could ask one more, just on Q4 billings, I hate to go back to it, services revenue, Mike, I'm just curious if the difference between you being the midpoint of guidance versus beating it, does it have to do with services? I guess, did it surprise you in terms of-
No
the deflection to the partner ecosystem, or was it in line with what you thought for Q4?
It was in line with what we thought for Q4, it was purely a subscription renewal error.
Got it. Thank you.
Your next question comes from the line of Jesse Hulsing with Goldman Sachs. Please proceed.
Yeah, thanks for taking my question. Frank, when you look at the mix of opportunities on the service management side of the house, how is the mix trending between what you might call traditional ITSM and finance facilities, HR, kind of the newer platform opportunities?
Yeah, I don't have any sort of hard data to characterize that in a very fundamental way. More in a qualitative sense, the vast majority of our customers are now looking at service management really as an enterprise initiative, as an enterprise platform. They're looking at service integration strategies. They really don't want their organization to have to know that you have to go to IT for this thing, you got to go to HR for that thing. People shouldn't have to know what the boundaries between organizations are, especially when it comes to procurement. Does this go through IT? Does this go through facilities? Does this go through purchasing? That's where organizations are looking to put a service cloud infrastructure in place, where nobody needs to know what happens behind the curtain.
That's the whole nature of cloud, is that you obfuscate the whole back-end infrastructure, and you just don't need to know. You just submit your request, and it gets automatically provisioned. It works the same way as Federal Express and Amazon. Information will find you. You don't have to keep checking back. That's really what our customers are after. Yes, oftentimes, IT is the starting point. I think that will be the case for a long time to come because IT tends to be the leader in the organization that's really bringing the service model to the other service domain in the enterprise. We probably have 300 or 400 customers now that are on HR Service Delivery. That's growing in leaps and bounds. We have a whole business unit around it. Customer service also ties in facilities management.
That's a big area because that's now the external-facing side of service management. We just think that we have just tons and tons of opportunity. The days that this was strictly an IT function, they're well in the past at this point.
A quick follow-up. I'm looking at your investor deck. You've broken out your addressable markets and provided a lot of granularity about how you're arriving at those numbers. A lot of them are outside of traditional ITSM. Outside of ITOM, which you've broken out metrics for, which one of those buckets, whether it's Customer Service Management or PPM or another bucket, do you expect to have the most growth in 2016 into 2017?
Well, I don't have a crystal ball. All of those things are hot. They really are. They're on the move. Depending on who you ask, you'll get a different answer. Security is red hot. Customer Service Management surprised the hell out of us. The deals were very large. They were very rapid. They came from places that we didn't necessarily expect. We're learning all kinds of things. The combination of PPM, which is project management, and financials is becoming a very hot commodity as well. We have such a nice opportunity upselling from our platform with all these different services. It's great to be in sales at this company.
Thanks.
Your next question comes from the line of Steve Ashley with Robert W. Baird. Please proceed.
Thanks so much. Wonder if you could just comment, first of all, on ELA activity in the period, if there was much, and if you're seeing an increase in that.
No, we really didn't see ELAs in the period at all. It was our typical licensing.
Perfect. Great. Lastly, ITOM, everyone has been drilling on it, and you guys have pointed out that really there's a great enterprise opportunity. Is there also a commercial/mid-market opportunity with the ITOM products?
Oh, absolutely there is. I don't know if we've ever said something to the contrary. That really doesn't stop at the large enterprise doors. Our products scale down very nicely, even in Express. One of the things that we had to add to Express was our discovery capability. That was one of the things that was glaringly missing in the first incarnation of that product. People had to have that. You're talking about really small shops now that want to be able to discover all the laptops and desktops and servers that they have and be able to manage the operating histories. No, ITOM is integral to any service management deployment, whether it's huge or whether it's small.
Perfect. Thanks so much.
Your next question comes from the line of Kash Rangan with Bank of America Merrill Lynch. Please proceed.
Hey, guys. Thank you. I'm just looking at the stock down about 15%, big move. I'm wondering to myself, as solid as your growth is, there is a bit of deceleration in billings relative to where you were at the start of the year, whether you look at ACV of your G2K, the growth rate there, the sequential deferred revenue growth rate. On the flip side, you are turning way the hell more profitable than anybody expected about a year back or so. Clearly, your cash flow and op income generation are significantly ahead of people's expectations. The growth did decelerate a little bit. I do completely appreciate the point that had you known what you knew on December 15th, the numbers would've been right in line midpoint or even high-end perhaps.
Is this merely a conscious decision on your part to slow down the rate at which you're not slow down the rate at which you're hiring, but the second derivative of sales headcount, you're adding 400, you added last year 400. Is this a conscious decision that as you progress being a larger company going through revenue deceleration, that you get the natural margin expansion? Or is it that the market itself is somewhat limited that you have to slow down the growth rate and not necessarily keep up that billion-dollar business growing 50% as you have been at the start of this year?
This is Frank. Maybe, again, I can put a little bit of an angle to this. We went, and we are still going through, a bit of a transformation in the sense that we are becoming a multi-product, multi-market, and even a multi-channel type company. Before, we were literally scaling on a single product, single market, single channel. By the way, that went exceptionally well for us. The transformation, as I just described it, is not a trivial one. Over a year ago, we completely changed our product organization to be able to drive on multiple fronts at the same time, and we have gradually implemented that focus throughout the organization in the solution consulting teams, which is the pre-sales organization and the sales organization itself, so that we can bring that multi-product orientation to the entire company. That's not an easy transition to go through.
You just don't keep sort of ramming bodies and maintain the same momentum because they're different kind of hiring profiles, skill profiles, different organizations that absorb these people. We went through a ton of that transition in 2015. We feel we're in a really good place to be able to grow and expand with the structure and the model that we have. We'll be able to buy assets, we're able to build assets, and really add on to our model. That's probably the best explanation that I can give. Obviously, there's large numbers as well. We just cruised through the $1 billion full-year revenue. We haven't been there yet, right? We're also getting used to the scale and size of everything that's going on in this company. We have offices in 64 different places around the world.
It's becoming a good-sized business, and we're growing into it, and we're pushing hard. Feeling very good about where we are in our evolution.
Got it. One for Scarpelli. No change to close rates in Q4 relative to Q4 last year, or was there any change sequentially or year-over-year? If yes, what kind of close rate assumption are you using for your billings forecast, Mike, for 2016? That's it for me. Thank you.
First of all, we never disclose close rates.
Directionally at least
There was nothing unusual about this Q4 in comparison to last Q4, and I'm comfortable with the guidance we gave for 2016.
Great. Thanks, guys.
Your next question comes from the line of Derek Wood with Susquehanna International Group. Please proceed.
Thanks. Frank, you mentioned in your prepared remarks the strength out of the commercial business and the productivity you've seen there, didn't hear any commentary on the enterprise side. Could you just characterize the level of productivity tracking out of that segment?
One of the reasons I mentioned the commercial business is because you guys got so rattled a year ago, and it took several quarters to shake that off. I thought I'd just put some color on that business because it's been a very successful transformation for us. The reality is our business is sort of 50/50 large enterprise globals on the one hand, and then the commercial business the other half. We have to really drive both sides of that business equally hard. Our growth assumptions are based on both those businesses being able to sort of maintain that 50% share of the overall pie. There's no doubt that if you left everybody here to their own devices, we would gravitate towards the very large enterprise because those are the most productive, most lucrative business relationships that we have in this company.
That's the reason why we created the commercial organization, because we were not going to let that happen. We were going to make sure that we would have dedicated focus on these other markets. It's more fragmented, deals are smaller, but it's still outstanding business for us, and we like it.
Derek, just to support the strength in enterprise, we did add 26 Global 2000 in the quarter. It was actually 33 with adjustments, with acquisitions and stuff. We now have 638 Global 2000, and you saw that we now have 230 customers that pay us over $1 million a year each. I think the average is right around $2.1 million.
Okay. That's helpful.
That continues to grow.
Okay. Frank, you mentioned CSC and Accenture having acquired two of your biggest partners. Be curious to hear how those relationships have evolved. Has there been any disruption or vice versa? Are you seeing more tailwinds with resources and pull through? To hear about how those evolved would be helpful. Thanks.
Yeah. It's actually made our relationships with those folks more intense, more strategic. We've just become more important in relative terms to them as a platform than we were before they made these acquisitions, right? Sort of the fun and games is over with. We now have real live investments in it. They're real businesses. They have managers. They have plans. They have targets. Accenture was a premier sponsor at our global sales kickoff last week. This is a really big growth opportunity for them, and we're happy to be partnering with them. The nice thing about having folks like CSC and Accenture is they have transformational capabilities that they can bring to our very large customers. We're really raising the expectations on what outcomes people really should expect from a ServiceNow deployment. We're thrilled to have these people in our business, and our customers are happy as well.
They have a real good variety of choices, a very broad pool of talent to engage. That's been a complaint that we historically have had, is that we grew very rapidly, and we were always exhausting the resources in the marketplace. This is one of the reasons why we've carefully cultivated our ecosystem. We didn't want to crowd out our partners because we would really constrain our own growth if we did that. I think these relationships are great, and they're going to be growing and become more important as we go on here.
Thank you.
Your next question comes from the line of Phil Winslow with Credit Suisse. Please proceed.
Hey, thanks guys, for taking my questions. Frank, you mentioned this in continuing increasing TAM or just applicability of your guys' services, security, customer service, et cetera. When you think about just the go-to-market strategy here, is there anything changing as you just continue to expand the applicability, in 2016 versus 2015? I know it does on a comp plan, but anything structural to the sales force as a go-to-market strategy? A quick follow-up too, just for housekeeping items. I wonder if you just quantify the billings error there. Was it $4 million, $5 million? Just how much lower would have guidance have been?
The billing error was $5 million.
On your question, Phil, this is Frank. The structural difference that we have embarked on that's still going on is that we have a high degree of product specialization in the various organizations. We started that on the pre-sale side. We have it on the sales side. We have it on the professional services side. Obviously, this all started with the product team. Our whole organization has a fully built-out product dimension to it. Not all deals have the same amount of product specialization. That investment will be ongoing. As we scale, we'll be having more and more dedicated resources that relate to these specific areas. You can imagine, security management, we're not a security company by our DNA set, if you will. We stood up a product organization with nothing but security people in there.
We have always had security people in the field because, being a cloud company, security is a really big topic of conversation with our customers. We have to have very dedicated, very specialized people to be very effective and credible with our customers to drive those kind of businesses. The opportunity is so great, that for us to make those investments is a no-brainer, and that's what we're doing.
Got it. Thanks, guys.
There are no further questions in queue. I'll now turn the call back to Michael Scarpelli for closing remarks.
Thank you. As a reminder, a replay of this call will be available in the investor section of our website. Thanks for joining us today.
Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.