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ServiceNow, Inc. (NYSE:NOW)

Citi Global Technology Conference Call

September 4, 2013 13:35 ET

Executives

Mike Scarpelli - Chief Financial Officer

Analysts

Walter Pritchard - Citi

Walter Pritchard - Citi

Started here for the 1:35 session, I am Walter Pritchard, the software analyst at Citi. We are happy to have with us here ServiceNow. Representing the company is Mike Scarpelli, who is the CFO and I was going to run through some questions that I had for him and then with 10, 15 minutes less than the session, we will segue the microphone if you want to ask questions at the time, just go ahead and raise your hand and we will bring it around to you. So, Mike thanks for making the trip out.

Mike Scarpelli

Thank you.

Walter Pritchard - Citi

So, I think most people in the room probably fairly familiar with the company, maybe just since it went public what about 18 months ago, maybe a two-minute overview on just ServiceNow, maybe the elevator pitch and then we will get into the questions.

Mike Scarpelli

Sure. ServiceNow went public in June 2012. The company went through a pretty dramatic transformation over the last two years. The company was founded by an individual by the name of Fred Luddy. Fred used to be the CTO of Peregrine Systems. Fred when he left Peregrine in 2003, he went out to really create – he was really inspired by my who I Google how the average person could create their own page and do things. So, he was really believed in this whole concept of Citizen Developer. And so he wants to create, he wasn’t calling it as platform, but he wants to create something where the average person could develop application, so he developed this platform and he tried to sell this platform as soon as the old CIO friend and then also that’s great, but what can it do. This is the feedback from everyone was. It’s really hard to tell the platform standalone. So, what he tried to do, he went and built these ITSM suite of applications on top of the platform, why, because that’s the domain expertise that he has. What really surprised Fred very quickly was is how we were being obstructing by these large Global 2000 accounts, because it has such as pain point around the IT service management applications. They were all looking for a single system on record to some of our early customers, Deutsche Bank, UBS, they are the ones that really got the company to where it is today and we really do focus on those Global 2000 accounts.

Well, I still went through a very big transformation with the new CEO that came into the company in May of 2011. And historically, the company was really more just focused around trying to be more – they weren’t really looking at growth, they were looking more at spending as little money as possible to getting as much revenue for spending as little. And when Frank came on board, Frank really saw this opportunity he added up all new management team. He really realized the company was under investing in certain areas in R&D within our own cloud infrastructure investment in the sales and marketing organization. So, the company has grown from 275 employees in May 2011 to over 1600 and we have 1488 employees at the end of last quarter and we are trying to add roughly 200 people a quarter, but that’s very hard to actually add 200 people a quarter. Last quarter, we added 178, but we have been very successful in adding people in the sales and marketing this year, and we are seeing the benefits of that or growth we made some $128 million to $248 million, don’t quote me on those as pretty close. And then we are guiding right now to right around $400 million for this year. So with that, I will take questions.

Question-and-Answer Session

Walter Pritchard - Citi

So, I guess I will just ask you couple of the questions that I get most often from investors, because I think those are probably relative to the audience here as well. In terms of the total addressable market that ServiceNow is going after, I think there has been a lot of different spins on this, and I think for example sort of Gartner has come out and kind of originally pins you guys as to help that company and there is $1.5 billion or so in market there. You have added a lot of capabilities to the platform over the last five years and at this point that’s sort of an ERP for IT type of a suite. I am wondering if you can talk through how you look at revenue opportunity both and then both what you were placing in your customers at a commercial software product that purchased or is it a something they built themselves which maybe isn’t captured in much opportunity?

Mike Scarpelli

Sure. On the ITSM, you mentioned them helped us, we don’t view ourselves as helped that company, when you think of helped, if you think of someone picking up the phone and calling someone Citigroup, you guys are a good customer, you guys have close to 40,000 users on our system today. I can guarantee those 40,000 help desk people within Citi and let you guys generate over 70,000 instances a week and most of those are actually machine generated and our system will actually resolve a lot of those instances automatically without people actually touching it. That’s the type of thing an IT service management system does, but its well beyond how best to serve a catalog at CMDB, it’s software development lifecycle project and portfolio management. Those are the type of applications we do and we see that IT service management or this ERP for IT opportunity at least a $4 billion to $6 billion market opportunity. And then you touched on a little bit of the platform we think the platform opportunity is at least as large as that is not bigger, but we think overall not even including IT operations management, which is another adjacency think of the event monitorings and flip back. We think overall it’s at least a $12 billion plus market opportunity in front of us.

The type of things we generally see customers doing on the platform and I am just going to talk about the platform, because it’s investors that seem to just want to talk about the platform, but I really want to highlight the fact what gets us into a customer is not the platform, it’s our ITSM suite of applications is what gets us into the customer. And once ran IT is IT that then helps us get the platform into the lines of business. And why is that? We are already proven by the IT department to be secure, reliable, they tested it, they know how to use it, where we have all the user profiles for all the employees that are in the system, because they are already setup with an IT service management. So, it’s very easy to deploy custom application and I say custom applications don’t think of because there is force.com, there could be more third-party applications are developed on half of those platforms. It’s going to be very sophisticated applications, where you need to have a real hardcore developer.

The types of developer required to develop on the ServiceNow platform as I mentioned the concept Fred was looking at Citizen Developer is the average business analyst can learn how to write applications on top of our platform. Very quickly, people in my finance department play around with the platform and they will develop the application. We see that constantly that their business analysts in lines of service within our customers that have developed the application, not hardcore programmers. Yes, you understand Java Script, you can write very complex applications, but you don’t need to. You have to specialize whoever you would be replacing. As I said these are custom apps, they tend to be, in some case it’s a Greenfield opportunity, we are replacing what was done in e-mail or a sales report. We are now putting it into a true system of record, where you can actually run analytics on it. You can test your SLAs based upon the analytics that you are seeing in the system. In some cases, it’s Lotus Notes we are replacing or Sharepoint, there is lot of customers out there that have built thousands of applications on Lotus Notes. People want to start supporting Lotus Notes and that’s an overwhelming theme we see with customers trying to take those applications, but they have analytics now to put them on ServiceNow.

Walter Pritchard - Citi

Got it, got it. And we will come back to the competition in a second, it was more of a window in understanding, the tail is $12 billion how much of that is once let’s say a Gartner and IDC actually counts the commercial software not the home ground software that’s out there and it actually could suggest that (inaudible) was larger is one way…

Mike Scarpelli

I would agree. Even within the ITSM suite of applications, when we look at it I would say 40% to 60% of our wins every quarter come against BMC and HP and then the third is actually home ground systems. There is still even a lot of home ground systems within the ITSM suite of applications and home ground is very large independent customers whether its custom apps or ITSM.

Walter Pritchard - Citi

Got it. When you look at within the ITSM space when you look at customers that you come into, do you tend to sell to at Citi, it was many thousands of seats sort of upfront, do you tend to sell small and then go bigger and can you talk about how deals evolve as you go through the selling process of the customer?

Mike Scarpelli

Yes, there is really no set buying pattern by customers. We see some large customers want to buy all these needs for three years. What we think is all these need for three years and then we see them come back to the table very quickly. Given Citigroup, when you guys want some 3500 licenses to 35,000 in March 2012, I didn’t think you guys would come back to the table for another two years that I do understand you guys are over that 35,000. So, that’s an overwhelming theme we see with customers that I would consume quicker than what they think are going to consume, why is that? We find that employees actually getting value out of using our system within the ITSM suite of (inaudible) unlike some of the legacy Remedy and Peregrine we are employees I said you want to get off those systems and had reverted to going to using e-mail and other things to do their job rather than using the legacy systems, because they were very painful to use.

Walter Pritchard - Citi

Got it. Turning now to the competition talking about it from that angle, we have seen some of the competition struggling for quite sometime, can you talk about where you are in terms of at this point you said 40% to 60% of the deals are coming from displacement? How much of the volume could you think you picked from displacing Remedy and Peregrine, which isn’t out there for a while and how much opportunity do you still see in the perspective of customer base?

Mike Scarpelli

Just 40% to 60% is coming from just BMC and HP.

Walter Pritchard - Citi

Right.

Mike Scarpelli

The vast majority are there are no Greenfield opportunities in the large enterprise of what we are doing. So, they said that Remedy had a installed base of about 8,000 customers. We have 1,778 or 1,788 customers as of June 30 roughly I will say 40% of those were probably BMC accounts. So, we think we have a lot of runway in front of us to go out for that BMC installed base.

Walter Pritchard - Citi

Got it. And when you are in – when your sales force is in selling to the customer, what ends up in the compelling of assets that drives the customer too or the series of compelling of assets customer to look at that alternative?

Mike Scarpelli

Couple of things, generally, it used to be that it was right when the customer was coming up to an upgrade cycle that they were being forced to upgrade. And what they were finding is there is a lot of customers had struggled to upgrade on both the HP and the BMC Remedy products and that drove them to want to consider ServiceNow because they try to fail on those old systems. The other thing is overwhelming theme is consolidation. A lot of these customers have tried to consolidate all of their IT service management systems into one. I will give you an example, Johnson & Johnson took 157 systems into one Coke consolidated 143 systems into one, even Citigroup your overwhelming theme with consolidation as well too. I think you are pretty much now every country in the world, but maybe one that is not on ServiceNow, so consolidation is an overwhelming theme and you make that why ServiceNow, why not Remedy, your HP, because they failed miserably trying to consolidate all those systems into one, because those systems will never – they are all client server based architectures, they were never designed to operate in a modern internet world taking into account the latency of the internet when you are having thousands of people around the world accessing these systems at once and ServiceNow was architected to take that into account.

Walter Pritchard - Citi

Got it.

Mike Scarpelli

And it also is we are one platform, one total base, one set of user profile, most of these legacy systems are a bunch of point solutions that have been coupled together. And then when you try to upgrade one it breaks one of the interfaces somewhere else and makes it very painful.

Walter Pritchard - Citi

Got it. Last question on the competition on BMC is going private now mixed story is that R&D has been offshore and do you expect kind of costs coming down, have you seen in the last quarter or two sort of any sort of uptick around competitive displacements given what’s been some trouble at your largest competitors?

Mike Scarpelli

We’ve continued to see our win rates in BMC accounts still they are in the number one person we take market share from every quarter. We haven’t really seen any difference, yes, we had a really good quarter last quarter that we added 24 Global 2000. Vast majority of those were BMC accounts, but was that because they were going private, I don’t know that will be speculation. And I think customers actually make decisions based upon that.

Walter Pritchard - Citi

Got it, got it. And not to be just the platform been hard here, but did want to ask you, you had your user conference back in June, May, May and the platform was a focused area, you formalized some of the tools around building on the platform. You have come out with pricing I think it’s $25 a user per month about a quarter, which your pricing is on your ITSM process users, could you talk about where we are in the kind of formalization and selling of the platform as a product as opposed to having it just existed as it did in the past?

Mike Scarpelli

Sure. I think we are still very much early and into this we are still doing a lot of market discovery. What we are realizing is we work on the outlook pricing of $25 per end user for unlimited app development. We expect its Street price going to be somewhere in that kind of $9 to $12 range to normal discounting. But the fact that the matter is there is a lot of customers when you don’t want to try to sell the platform, there is no clue they won how many applications they plan on developing on it and they want to plan to do one app at a time and focus to be you get into negotiation with customers very similar than what we see with other platforms out there.

Walter Pritchard - Citi

So, you can’t charge $25 a user you might start out smaller and limit them by the number of applications right now?

Mike Scarpelli

So, one of the things we are I think you are going to see pricing continued to evolve over the next kind of six months to a year. On this line of things, we are looking at now based upon feedback we are getting from customers and kind of what we think is acceptable. I think we still will have this concept of a process user plus an end user, but process user pricing will be much less. One of the common applications we see customers wanting to deploy is HR case management applications front end, work there with PeopleSoft or SAP in this regard and think of the people in HR who are living in a system and they will be in that process user. So, that pricing will be roughly at $25 will be the list price for process user and there will be a much lower price per employee that is in that system.

Walter Pritchard - Citi

Got it. And can you talk about from a sales perspective, are your sales people incentive at this point to try to drive sales of platform or is it dollar still a dollar and when do you turn on that if you are not today?

Mike Scarpelli

So, for 2013, a dollar is a dollar for all graphs whether you sell platform or you sell ITSM applications, we did kind of just rolled out of the sales management level like the senior management level, country manager and above. They do have a quota for Q3 and Q4 around what percent of new business has to be platform. If they have those numbers, there is bonuses that are paid, because one of the things that we find it’s not something we are not selling the platform, but because a dollar is a dollar rest irrelevant then as long as they are maximizing the dollar, they don’t necessarily get the SKUs right. I think what customers are buying, so we are making it a management responsibility to make sure that we are expecting every single deal and making sure that they get categorized properly.

Walter Pritchard - Citi

Got it. And one thing that we have heard about is the contracts, the pool of contract because in the past, sometimes give a customer right for the platform, sometimes they don’t, sometimes you have to try to make changes there, can you update us on that process and…?

Mike Scarpelli

Sure. So, we have roughly 1000 contracts that are on you want to call our legacy contracts, they guess whether the customer get the platform development rights for free or not. Our new contracts over the last year and a half are very clear that you are licensing the ITSM suite of application. That was the biggest misunderstanding of why investors as a lot of people think, because they have the right to use the platform we weren’t getting paid for. No, to the extent, it lead to more process users, we would be monetizing it based upon the process users, additional process users required to support that custom app and so we were getting paid, but we just don’t think we are getting paid enough as an example, Stern. Stern is one of our early customers who have done a lot of extensive platform development. There is like 50,000 scientists at Stern that access all these custom apps. Stern is licensed for 1,000 process users or people in IT, 600 of those process users are supporting all the custom apps. So, we are monetizing.

The problem is we came out with this whole process user licensing, because we are competing with BMC and HP and that’s how they sold their licenses on a process user. So, we have to come up with the similar process user concept and that was predicated on roughly a 1 to 15 IT person to employee in the company. When you get into the custom apps, there is not as many process users required to support these apps, so we know we are leaving money on the table and we are working on them. When it comes times for renewal, it gets in through this biggest into a negotiation with customers, but at the end of the day, we want to have happy customers. Our customers are going through for a new licensing model. We will abide our old licensing model even in the renewals, but then we tend to up price per process user to maximum extent we can. But all of our new contracts is very clear that he will pay on an unusual basis.

Walter Pritchard - Citi

Got it. Can you talk about who the buyer is here I mean you mentioned HR, HR on-boarding or HR as a used case in the platform in some cases, you traditionally sold to the ITSM type user and now you are looking to sell potentially another zero organization who ends up making the first decision there?

Mike Scarpelli

Yes. So, ITSM is still very much we are selling into the IP organization, the CIO or the VPU IT operations, but it’s the CIO that’s bringing central lines of business, it’s IT that is going to be doing those deployments to those custom apps, so it will be an HR budget under the CFO at the facilities or whatever, but ITs are big advocate in helping us get that sales. So, we are still much involved with the CIO organization in that sale process.

Walter Pritchard - Citi

Got it. So, the line of business is going to have to get the apps that they are trying to develop anyway, so it’s either build a forming or use the ServiceNow platform?

Mike Scarpelli

Yes.

Walter Pritchard - Citi

Okay, got it. And then last platform question for you, just sales force as a platform, Microsoft has the elder platform, probably one of the most overused sort of acronyms right now with platform in the service, can you compare and contrast which of these platforms do you compete with, do you compete with any of them or?

Mike Scarpelli

So, if we are competing with those platforms, one of us is in the wrong space generally. There will be some friction as we get closer, but generally the type of app on the ServiceNow platform is going to be the custom app, but workflow oriented application not a very complicated application as I said the Citizen Developer of the business analyst, but force.com yet to be a pretty hardcore programmer to develop on that. And as the real platform, it had to be a real program to develop on that with very, very different type of target audience for the type of upgradation we are doing. We are not even talking internally now if you heard Frank (inaudible) service relationship management, we kind of view we are talking more of a service relationship management rather than calling it platform.

Walter Pritchard - Citi

Okay, okay. And then just another topic here I think has been an important part of investment story for service now is sales capacity expansion when you and Frank came to the company I think I heard the story you had like three territories globally and the CLA sales force was subscale versus even the revenue was doing at that time and you have added a lot of capacity can you talk about where you are in that process today and are you still adding capacity as fast as you can from a sales perspective?

Mike Scarpelli

So, we entered 2013 with 350 people in the sales and marketing organization. We added 162 people in the first six months. We are going to add give or take 10, 80 our target is to get to 600 by the end of the year because that target has been the hard target we will be opportunistic with people who hire and more and we are going to hire less we on the purpose we front-ended loaded 2013 the reason being is the second half of 2012 we have slowed down our hiring because we have a lot of attrition and we are trying to kind of figure out why are we having so much attrition and why weren’t we seeing advance in productivity, so we spend a lot of time in the second half of 2012 focused on how do we on-board people better and how we ramp them faster and trying to figure the international expansion roughly half of those hires in the first half of this year were going into the international markets I expect that we will probably front-end load 2014 as well as long as we see the market opportunity in front us we will continue to hire the best case in the sales and marketing.

Walter Pritchard - Citi

Got it. In terms of your base you have 1700 customers now you have contracts starting to come up for renewal, how are you using that renewals and to up-sell and how in general what do you keep talk about renewal rates that have been well into the 90s. Should we expect that that retention rate can continue if you have a larger volume of contracts coming up for renewal?

Mike Scarpelli

Sure. So, historically our renewal rate has been right around the mid-90s plus which is extremely high renewal rates in the industry. The way that we are trying to get our sales reps more involved in the up-sell opportunity as we changed our commission plan for 2013 that we actually paid reps on renewals albeit so much lower commission rate, the reason we are doing that is to get them more involved in the renewal process to get back in front of those customers and to work on the up-sell opportunities, because I had a comments from one investor today, we will catch you to have that done by an inside sales person on the phone. He still need to get in front of your customers. It would be one thing if you are selling into the SMB or more of the mid-type so when you sell for large enterprises, you need to be in front of the customer talking about everything that the product can do. And so we have been finding since we have the sales people that were topping them on renewals are getting more actively involved in getting back in front of the customers, but they have to sign a three-year renewal for them to pick count as well too, so that helps with retaining those customers longer as well. You may think it’s still administratively bright either just to invoice the customer annually. In fact we get them to sign a new contract every quarter or every year, so we want those longer term renewals.

Walter Pritchard - Citi

Got it, got it. And then from a go-to-market perspective, you have also put a significant emphasis on the SIs guys like KPMG and Accenture, can you talk about it still feels like we are pretty early though in that process, can you talk about sort of how much attention the SIs are devoting to ServiceNow at the same point and how much leverage you are getting out of those relationships?

Mike Scarpelli

Yes. So, I think we are still very much in the early innings with the SIs who are doing very well with some of the big Indian outsourcers the guys like HPL, Cognizant were doing very well with interest rates. We are starting to see seem uptick with them KPMG and EY. We have been very successful the problem though is they are rebuilding their consulting practices actually having spun them out. They don’t quite have the global reach with the number of people in their consulting practices, but we are seeing some good traction with them and they are making commitment. Now, (inaudible) go on that we need to get them to make some real commitment. We are making some progress, but we need to spend more time with them in 2014. It would be a key system arena that we will be spending a lot of time with get them to develop that practice within (inaudible).

Walter Pritchard - Citi

It is just a matter of you becoming a bigger company and therefore there are being more services revenue that comes our way or it’s what you do to (inaudible)?

Mike Scarpelli

It’s really to show them the revenue opportunity and they are starting to see that now right now like last quarter, we outsourced about $1 million of our professional services costs were being outsourced to guys like Fruition and (inaudible) right. CloudShare business whether we take that and make a commitment to an Accenture whatever that hey, if you go back to school guarantee $10 million or $15 million a year on revenue, those are the types of things we are going to have to do to get some of those guys to move a little bit to make some investments.

Walter Pritchard - Citi

I see. I am going to pause for a second to see if there is any questions in the audience I have a number of questions myself but to make it an interactive discussion if you wish. None, okay, well I will go to the next one. And can you talk about your M&A strategy or kind of I mean there hasn’t been much M&A at this point I think you’ve done one acquisition, can you talk about and I think you have also benefited from organically to building a lot of your platform, so maybe a natural aversion to it, but what role does M&A play in the future product strategy?

Mike Scarpelli

Yes, I don’t see M&A playing a critical role in product strategy, I think where M&A will play a role is more finding engineers with domain expertise and Mirror42 is a prime example with that deal. There were 12 people that had some real core knowledge around analytics and reporting and having worked in the States for a long period of time, they really didn’t have a product, they had technology, they had a product, but we are taking that and completely residing and on top of our platform, because it’s key to us that everything is fully integrated into as one platform, one code base, one set of user profile. So, when we do have any type of upgrade or anything it’s seamless to our customers. And that’s one of the reasons why we have been successful competing against Remedy and Peregrine, because of the fact they are probably because they are point solutions. So, I don’t see us M&A is not key to our revenue growth, but I think it could help us some of our R&D.

Walter Pritchard - Citi

Got it. And two markets that you are in, but maybe not in a major way, so the first one just around the software development lifecycle, I think your CEO, Frank Slootman sort of grew up first stage of his career in that market. Can you talk about what you need to do to drive more traction in your customer base around the application development or software development?

Mike Scarpelli

Yes, so SDLC is still on our usage, it’s kind of down near the bottom of our usage and that’s really just more, because it’s not that mixture of a product that’s been out there. We continue to spend time within our R&D group is making more feature-rich unless I can’t get down to the individual product level and tell you exactly what it’s lacking. I do know for instance our internal ID, we use our own SDLC module for doing all of our deployments when we rolled out SAP and when we have done a number of things we use, but we use PPM internally as well, which is our project and portfolio management. And you may say well, why wouldn’t you go to Microsoft project down when Microsoft project is designed for experts and project management to do? A nice thing about PPM, the average user can use it, the average user can’t use Microsoft project, I tried to use it, I can’t but maybe I am just not that sophisticated for us.

Walter Pritchard - Citi

And then the second market we don’t need to get too technically deep in it, but in the so the operations management base, so where you have it’s always devices trying to figure out what’s going sort of listening to the alert to throwing off the things like that. You have a number of companies that are even the CAs and BMCs and each piece of the world have products like that is I know you have alluded to having some tools to use internally to do that in your infrastructure, any update on product sizing from those tools in entering that market more directly?

Mike Scarpelli

So, event monitoring is the core thing obviously that we have to do as we have thousands of production instances on our own datacenters and we have to be monitoring at all time. So, we have developed some interesting tools internally. And we will be kind of trying to productize those more in the future, but nothing right now on our roadmap to kind of put out publicly, that’s an area that we are focused on. We are partnering more in that area though.

Walter Pritchard - Citi

Okay, got it. I was going to talk to Mike about profitability and so forth, but I will open it here if there is any other questions on the down here in the floor, just get the microphone.

Unidentified Analyst

In the stock option expense money, the profitability question is a lot of your cash flow respectively stock options and the limitation. So, how do you think about that relative to where your stock price is moving and then kind of what is your business model going forward, Remedy is generating what BMC is generating more cash related to the revenues, so at what point in time can you throw off and show similar type of profitability to BMC?

Mike Scarpelli

So, first off, with regards to stock options relative to our stock price and how we do that, I really don’t think about it that way. I know investors do. I look more in terms of dilution in what we are doing and we at our Analyst Day we gave our long-term models for dilution and we will get down to kind of that 3% actually if you look at where we have been going. We have been granting a less stock option than what we had said we were going to as well. So, I am happy there. I do understand there was a cost advancing stock options in most of our equity compensation these days by the way as our issues versus stock options, which has to be more the senior people. They get stock options just because you want them to have a little bit of scaling again. (inaudible) as there is a lot more of attention value to that. In terms of our long-term profitability, I am not here to reiterate guidance or anything, but we have our model that’s out there. Long-term we do say we will be at 20% operating margin and I really had given no long-term guidance around cash flow. And when we have our conference call in January, we will talk about 2014 guidance.

Unidentified Analyst

Can you talk about just in terms of the levers that get you to the 20% you have, I guess, our assumption is that in the SAP space that you are spending a lot of company – a lot of money to acquire new customer and that the renewal base is quite profitable, I am wondering is that mass that you would endorse and in general, how are you thinking about getting to the 20%?

Mike Scarpelli

Okay, I would definitely agree with that as the renewals become the larger piece of our business, that’s where you really get leverage in the model, but there is – what we are really focused on the model is revenue growth, our gross margins, subscription gross margins. We did that datacenter migration, I think people are pleased to see the uptick in subscription margin, this year we got up to 77% last quarter, which is actually higher than what I would have liked to, because then just because the reason we got there is because there is a datacenter that can come online soon enough. I do expect that to come down this quarter, but we can get to that 70%, 80% relatively soon, which is target model there. On the professional service side even if you strip out their knowledge conference revenue we are at 12.5% margin, our long-term margin guidance is 13% to 15% we will be at that relatively soon. We get the real leverage in the model within the sales and marketing. In sales and marketing you get that leverage when our gross rate normalizes. We are growing obviously north of 50% this year target 60%. And obviously lot of large numbers at growth rate will come down next year, but we are still going to be at very high growth rates than it’s kind of when we get more on that 20% to 25% annual growth rate that you will see that leverage in this sales and marketing line.

Unidentified Analyst

That’s simply because at that point the amount of new business you are signing is not overwhelmed the profit is really, really open…

Mike Scarpelli

Correct. And as well, you are also not adding every year on adding more the cost that number of employees rather than a percentage of employees. So, that’s really your leverage as well, so.

Walter Pritchard - Citi

Got it, got it. Any questions out in the audience? No, it’s quite calm. You talked about your datacenter, I guess your migration from a wholesale model to a publication model and that’s substantially complete, can you talk about outside of Brazil some of the investments you are making to continue to expand geographically?

Mike Scarpelli

Sure. And it’s not just geographically felt when looking at our existing markets around how do we take comps out of those datacenters. And so markets we are looking at to expand, so we just opened up in Brazil this quarter. We will in early 2014 have the second datacenter in Brazil, because we always like to close things in a pair. We are opening up a datacenter in Singapore to be mirrored with one in Hong Kong and yet to see whether we are going to have to open up datacenters in Japan. Early on, it looks like we won’t have to, but that could change based upon customers that you bring on with data solvency issues. We are also looking at now in the co-lo facilities we are at right now, we pay on a per rack basis, we don’t pay based upon power consumption. Our type of application does not consume much power. So, we are talking to and where do you consider this to be a retail model for co-lo, we are looking at more of a wholesale model that we pay based upon power consumption and other things. So, we think long-term there are costs that we can take out of our datacenters within the U.S. and EMEA right now in our existing datacenters, but that will give us kind of more levers on our subscription as well.

Walter Pritchard - Citi

Got it. And you mentioned global expansion earlier on from a sales perspective, I think half of your people you are adding in sales were global and can you – and the datacenter investments are significant, should we expect that for the foreseeable future that the international business grows faster than the domestic business. Is that the point?

Mike Scarpelli

In terms of racks as a percentage of racks absolutely the international business will grow faster. This year we have already opened up in Italy, Spain, Brazil, Singapore, Hong Kong, Japan, we are going into South Korea, we are going into actually South Africa. We did hire someone in South Africa as well too and we are looking at Eastern Europe and we went into a couple of more of the Nordic countries and we’ll continue to look at geographies. We are probably going to open up in India sometime in the next kind of three to six months in terms of an R&D center as well. There is a lot of the Indian outsourcers are there and we need to be there close to them so.

Walter Pritchard - Citi

Got it. Alright I have one more question, but I will let the audience take it if they want, yes. Your focus on the large enterprise, I mean you do have customers, you mentioned 200,000 seats and we have heard it once that are smaller than that, but really haven’t gone after the 100-seat, 200-seat, 50 seat type of an opportunity and we have seen in the SAP space markets expand significantly when SAP solutions comes into the low end of the market and you start with salesforce.com, for example, I am wondering is there a plan in place to try to bring this solution down market at all and not into small business, but maybe into medium business and where are you with that?

Mike Scarpelli

So, we carry a bit most of company to actually start within the SMB…

Walter Pritchard - Citi

Right, that’s right, yes, but they expanded market?

Mike Scarpelli

Yes. So, we are looking at a market more for the midsized enterprise, but I don’t think SMB we service the SMB market today. The way the SMB markets gets service today is there are big MSP graduate dimension data had 38,000 customers on one end since that they all have their own. Well, they have their own through domain separation they all have their own instance that it’s all under one instance. So, all 38,000 of them will get upgraded at the same time. (inaudible) has the same thing too. So, we do service the SMB. We are looking at a product that’s going to be more of a scale down version, where you are not going to have all the functionality.

Walter Pritchard - Citi

Got it.

Mike Scarpelli

And the nice thing about that is those customers grow, they can seamlessly upgrade to our enterprise products.

Walter Pritchard - Citi

And so you need a different sort of sales model or channels to pick that to market and the inside sales force?

Mike Scarpelli

Longer term, it will have to be a channel so, just to get scale out of this, we are going to go and bring kind of that smaller price point we actually want to be dealing with thousands of invoices.

Walter Pritchard - Citi

Right, got it. Could you repeat your question?

Unidentified Analyst

I am on the Remedy force to help that enhancement. What they thought about your product and in fact you don’t feature integrated best practice documentation as interactive process, whether where we have the leaders (inaudible) service desk were helped with upgrades and give you a solution of today’s very complex network (inaudible) concept. Do you have any response to my personal?

Mike Scarpelli

Yes, well I can say, well we don’t partner with Salesforce, because I think the essential clash we will get on the platform side, so I don’t think that I would consider that to be a partner. We have never tried to partner with them. With regards to the best practices around documentation, I have no comment. What I would say though is on the Remedy force, I would challenge you to find an enterprise customer who is actually using it. They tend to be more…

Unidentified Analyst

(Question Inaudible)

Mike Scarpelli

As far as I know there is not a single Global 2000 account that uses that Remedy force and it tends to be more in the 40 to 60 seats of minimum deal size. It’s kind of in that 40 to 60 seats. You won’t go find 1,000 seats on that. Alright, that speaks for itself.

Walter Pritchard - Citi

Great, well Mike thanks a lot for coming out here for the event. Thank you all for attending the session. Have a good day.

Mike Scarpelli

Thank you.

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