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ServiceNow Inc. (NYSE:NOW)

Q1 2014 Earnings Conference Call

April 24, 2014 5:00 PM ET

Executives

Michael Scarpelli – CFO

Frank Slootman – President and CEO

Analysts

Jennifer Lowe – Morgan Stanley

Brent Thill – UBS

Michael Turits – Raymond James

Walter Pritchard – Citigroup

Jason Maynard – Wells Fargo

Rob Owens – Pacific Crest Securities

Kirk Materne – Evercore

Matt Hedberg – RBC Capital Markets

Brad Sills – Maxim Group

Tim Klasell – Northland Securities

Greg McDowell – JMP Securities

Steven Ashley – Robert W. Baird

Alex Zukin – Stephens

Harris Heyer – Credit Suisse

Derrick Wood – Susquehanna International Group

Operator

Good day ladies and gentlemen and welcome to the first quarter 2014 ServiceNow Earnings Conference Call. My name is Estadon 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. (Operator Instructions). 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, Michael Scarpelli, Chief Financial Officer.

Michael Scarpelli

Good afternoon, and thank you for joining us. On the call with me today is Frank Slootman, our Chief Executive Officer. Our press release and a simultaneous broadcast of this call can be accessed at our website at investors.servicenow.com.

We may make forward-looking statements on this conference call, such as those using the words may, will, expects, believes or similar phrases to convey that information is not historical fact. These statements are subject to risks, uncertainties and assumptions. Please refer to the press release and risk factors and documents filed with the Securities and Exchange Commission, including our most recent annual report on Form 10-K for information on risks and uncertainties that may cause actual results to differ materially from those set forth in such statements.

I would now like to turn the call over to Frank.

Frank Slootman

Thanks Mike. Good afternoon and thank you for joining us on today’s call. We’re off to a great start in 2014 with strong execution and enterprise demand for ServiceNow. Revenues grew 62% year-on-year to a $139 million and billings grew 64% year-on-year to a $181 million.

Our installed base is now at 2195 accounts with 426 Global 2000 customers. Global 2000 accounts added in the quarter include Bombardier, BP, Société Générale, Thomson Reuters, Visa and Wal-Mart. We continue to see deeper and broader penetration of the large enterprise. Our average annual deal size for both new customers and upsells increased year-over-year for the third consecutive quarter.

We booked a record nine new transactions with annual contract value in excess of $1 million. The quarter also witnessed the two largest annual transactions in our company’s history, one of which had a total contract value in excess of $10 million. These increases are attributed to customers deploying as an enterprise service management platform, while IT service management usually as the catalyst for transactions. The largest transactions are driven by a much broader enterprise scope.

Building on our considerable presence in large pharma, AstraZeneca made a substantial investment in ServiceNow to execute on a global surface management model. They will deploy ServiceNow to consolidate their global IT services providing users with a consumer style self-service experience.

AstraZeneca then planned to deploy the service model into other demand such as finance and facilities. Another Global 2000 company chose ServiceNow can deliver service automation for their organization. They are in immediate need for an HR case and knowledge management solution that allowed us to demonstrate the broad applicability of service management in the enterprise.

This initial transaction will enable service delivery for a 150,000 employees. Starting with IT and HR the company as a global deployment across other service domains. The usability and agility of our platform was decisive in winning the contract with an annualized value of approximately $4 million.

The larger and broader upfront investments we saw in the quarter further reflect in the price wide adoption of ServiceNow. Before closing, please note our upcoming Annual Users Conference Knowledge14, in San Francisco, April 27 through May 1. 6,000 professional and ServiceNow experts will be coming for five days to share service management strategies and learn how others are achieving success in the enterprise.

As a part of the event, we will be holding financial analyst day on April 28th, for which many of you on the call today are already registered. Those who cannot join our Analyst Day in person, we will hold a webcast of the event on our Investor Relations website. This event is not to be missed by anyone who is an investor in ServiceNow or contemplated in becoming one.

With that, I’ll now turn the call over to Mike.

Michael Scarpelli

Thank you, frank. We’d like to point out as the company reports non-GAAP results in addition to and not as a substitute for financial measures calculated in accordance with GAAP. All financial figures we will discuss today are non-GAAP unless stated otherwise with the exception of revenue numbers which are GAAP. To see the reconciliation between these non-GAAP results 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 on website at investors.servicenow.com.

Total revenues for the quarter were $139.1 million, growing 62% year-over-year and 11% sequentially. Subscription revenues for the quarter were 117.4 million representing 64% year-over-year growth and 12% sequential growth. This growth was driven by strong bookings in prior quarters coupled with a retention rate of 97% in the current quarter. 34% of our annual contract value signed in the quarter came from upsells in our existing customer base. Our average contract terms for new customer upsells and renewals were 36, 23.2 and 24.2 months respectively, compared to an average of 34.3, 24 and 25.6 months on a trailing four quarters basis, respectively.

Professional services and other revenues were $21.7 million for the quarter, growing 51% year-over-year and 7% sequentially. Over the past few quarters, we have seen the revenue mix of professional services and other decrease as a percentage of total revenues as we continue to focus on strengthening and supporting our growing professional services partner ecosystem. Our trailing 12-month revenue per customer was 241,000, an increase of 22% from the prior year and up 5% from the prior quarter. Our average total annualized contract value Global 2000 customers was 572,000 at the end of the quarter up 31% from the prior year and up 12% from the prior quarter.

Total revenues based on geography were $95.0 million in North America, $36.3 million in EMEA and $7.8 million in the rest of the world representing 68%, 26% and 6% of total revenues respectively, compared to 70%, 24% and 6% of total revenues in the first quarter of 2013.

Our total billings were $180.8 million in the quarter compared to $110.3 million in the prior year and $166.2 million in the prior quarter, representing 64% year-over-year growth and 9% sequential growth. Additionally approximately 4% of our billings in the quarter were for periods greater than one year, compared to 7% in the prior year and 5% in the prior quarter. In the future, we expect approximately 5% of our billings will be for periods greater than one year, one year is a typical billings term.

Before we turn to expenses, we’d like to point out that we ended the quarter with 2,103 employees, an increase of 834 employees from the same period in the prior year and an increase of 273 employees from the prior quarter. We would also like to note, we recorded a pretax amount of $29.2 million related to stock-based compensation expense and $7.1 million in expenses related to our convertible debt. This impacted our earnings per share in the first quarter by a tax adjusted amount of $0.22 per diluted and basic share.

Our subscription gross profit was $89.3 million, representing a gross margin of 76%, compared to 77% in the prior year and 78% in the prior quarter. During the quarter, we added 40 employees to subscription cost of sales, ending the quarter with 381 employees. Our professional services and other gross profit was $2.2 million, representing a gross margin of 10%, compared to 8% in the prior year and 13% in the prior quarter. During the quarter, we added 42 employees to professional services and other cost of sales, ending the quarter with 337 employees. Our total gross profit was $91.4 million, representing a gross margin of 66%, compared to 65% in the prior year and 67% in the prior quarter.

Moving to operating expenses for the first quarter. Sales and marketing expenses were $60.4 million or 43% of revenues, compared to $34.2 million or 40% of revenues in the prior year and $50.5 million or 40% of revenues in the prior quarter. In the first quarter, we incurred $2.7 million in expense associated with our annual sales kickoff event. It is important to note that in the second quarter of 2014 we expect to incur expenses in sales and marketing of approximately $15 million related to knowledge up from $8.3 million incurred for the event in the second quarter of 2013 due to a significant increase in the size of the event.

During the quarter, we added 115 employees to sales and marketing, ending the quarter with 730 employees. Research and development expenses were $23.3 million or 17% of revenues, compared to $12.9 million or 15% of revenues in the prior year and $18.7 million or 15% of revenues in the prior quarter. During the quarter, we added 58 employees to research and development, ending the quarter with 410 employees. General and administrative expenses were $14.8 million or 11% of revenues, compared to $9.9 million or 12% of revenues in the prior year and $13.3 million or 11% of revenues in the prior quarter. During the quarter, we added 18 employees to general and administrative, ending the quarter with 245 employees.

Our operating margin in the first quarter was negative 5% compared to a negative 1% margin in the prior year and an operating margin of 1% in the prior quarter. During the quarter, we recorded a non-GAAP tax expense of $5.8 million.

Net loss for the first quarter was $11.7 million or a net loss of $0.08 per basic and diluted share, compared to a net loss of $1.9 million or a net loss of $0.01 per basic and diluted share in the prior year and net income of $3 million or a net loss of $0.02 per basic and diluted share in the prior quarter.

Our basic weighted average shares outstanding were approximately 142.1 million. If we had operated at a net profit in the first quarter, diluted weighted shares outstanding would have been approximately 161.4 million. Fully diluted shares at the end of the quarter were approximately 172.3 million, excluding any shares potentially diluted on the conversion of our convertible notes.

During the fourth quarter, we generated $24.2 million in cash flows from operations. We used approximately $11 million for capital expenditures, resulting in $13.2 million in free cash flow. This compares to $4.6 million of free cash flow in the prior year and $20 million in the prior quarter. We ended the quarter with $924.4 million in cash, short-term and long-term investments, an increase of $34.5 million to the prior quarter. Our total deferred revenue balance was $308.5 million at the end of the first quarter, up 16% over the $226.7 million reported at the end of the prior quarter.

Let’s turn to guidance for the second quarter and full year of 2014. Please note that our margin guidance is on a non-GAAP basis which excludes stock-based compensation expense. For the second quarter of 2014, we expect total revenues between $160 million and $162million, representing year-over-year growth between 57% and 58%. Our total second quarter revenue estimate consist of subscription revenues between $128 million and $129 million and professional services and other revenues between $32 million and $33 million. Our professional services and other revenues outlook includes approximately $8 million related to knowledge with the related expenses of approximately $15 million reported in sales and marketing.

We expect subscription gross margin of approximately 77%, professional services and other gross margin of approximately 30% and overall gross margin of approximately 67%. We expect an operating margin of approximately negative 6%. To the full year of 2014 we expect revenues to be in the range of $652 million to $657 million representing year-over-year growth between 54% and 55%.

Our total annual revenues estimate consists of subscription revenues between $545 million and $547 million and professional services and other revenues between $107 million and $110 million.

With that operator, you can now open up the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions). It looks like our first question comes from Jennifer Lowe with Morgan Stanley.

Jennifer Lowe – Morgan Stanley

Thank you. The first question I had, I just wanted to touch on the sales and marketing headcount adds and it looks like maybe the additions in Q1 were a little higher there, at least where we were, so first question there is – more than 300 adds still the right level to think about for the year any thought toward changing that target and to the extent that you are adding adds, for the adds that you added last year. What’s the productivity ramp Mike?

Michael Scarpelli

Yeah, so as we have mentioned before, we are going to finance the hiring in 2014 somewhat to what we did in 2013. But with that we enter a year with the target, but that target can vary based upon how we see our actual results and ramping reps and one thing that we’re very pleased with is our productivity per ramp rep in Q1 over Q1 2013 increased nicely increased 20% actually. So with that, that gives us the confidence to hire people showing that we can ramp them.

Jennifer Lowe – Morgan Stanley

Great. And then maybe just one for Frank and I know we probably get a lot more on this next week. But I’m just curious if now that that I think we’re a little bit into this – at least the data or the invitation around with the new share offering just curious if there was any – any early feedback yet on people starting to use that to exchange framework at all?

Frank Slootman

Yeah we’re, as you indicated we’re going to announce that early and demonstrate early into this fully next week at our Knowledge 14 event. But actually this was the single most requested item of last year’s knowledge event. So there has been, this has been anticipated for quite some time we have some really good partners and customers that are early adopters and contributors and early design partners in developing this infrastructure and, we’re in the middle of populating it, most of their own content as well as content coming from customers and partners and we’re pretty excited about the prospectus, but it’s still early going, so we’re going to have a update as we go forward here.

Jennifer Lowe – Morgan Stanley

Thank you.

Frank Slootman

Welcome.

Operator

Our next question comes from Brent Thill with UBS.

Brent Thill – UBS

Good afternoon. Frank you mentioned the deal over $10 million, I’m just curious if you could give us the sense if that was from the new and existing customers, if you could just maybe walk through on the deal when you are getting deals that large I would assume that’s kind of an – all you can need transaction, how do you structure that transaction if you can just give – couple of more details? And I have a quick follow-up for Mike.

Frank Slootman

So that was of course another upsell or repeat that was initial transaction, quite significant. And the important thing was that this is the customer who actually intended last year’s rent and really took very strong notice, our positioning service management as an enterprise platform and really about that notion, which is what sort of dramatically expand it to transaction, it’s not – you can do any transaction, we believe that in this particular situation, we still have a ton of room up in terms of future expansion and upsize.

It’s just because of the positioning our enterprise level, that’s really that creates these deals to a levels that we have not seen previously because the user accounts are so much greater than what they are when you view them, they are in a narrow IT service management’s context.

Brent Thill – UBS

Okay, great. Thanks for the color. And just more of a question on the go-to-market, number of companies used Q1 that’s kind of reshuffle and refocus the direction, is there any change this year in terms of your go-to-market and how you are reaching the customers and the distribution model or is it more – a tweak in terms of how you are having represented to go after this opportunity?

Frank Slootman

There is really no fundamentals change, last year we did a lot of fundamental change, right because we really balanced between existing customers and new customer focus on, we are continuing that into this year. What it’s different this year that, we have a greater value of emphasis on populating new service areas internationally. But we are very, very intent on getting into Asia.

One-third of the global 2000 is in that hemisphere. So it’s very important for the company to establish itself it takes time to do that.

Brent Thill – UBS

Great. Thank you.

Operator

Our next question comes from Michael Turits with Raymond James.

Michael Turits – Raymond James

Michael Turits, I became Italian I like that. Michael Turits, Michael did you commented on any expectations for billings in the next quarter and also on the large deals we had build all of tranches at over time?

Michael Scarpelli

So the billings where – we are not giving any guidance on billings. We give enough information for you guys to calculate billings in your models. And in terms of that large deal the annual contract value is build up front. But that was a multi-year contract. And so it was included in our billings by just one year of that.

Michael Turits – Raymond James

Okay. And then you had – you talked about rolling out some kind of mid-year or down market product, where are we with that and how does that fit into the kind of market strategy in general?

Frank Slootman

This is Frank. That’s a product that we refer to as ServiceNow business edition. We have been running it in tests, now we have a half dozen paying customers on that platform. And what we are really heavily in a mode of getting the product right, giving the support model correct, the contract model and so on. It really is a mid-market product. Those are bunch of things that we learned in the process that were actively dealing with. That we expect to really scale and broaden we go-to-market effort around that product in the second half of the year.

We are not in that rush to get that think to market. We are selling it. We are able to sell it that we are not stepping on the pedal until we feel really ready to do that. It’s a very different approach than what you get in the enterprise side of ServiceNow you really scale down market in ever dimension of the product itself.

Michael Scarpelli

And I will also add Mike, we do not include the business edition product in our customer ads because those customers ads would give our enterprise customers.

Michael Turits – Raymond James

And I have one follow up on that billing for that that’s always $10 million deal any sense kind of what you said exactly how many years, what portion that $10 million was a contribution to billings this quarter?

Michael Scarpelli

So that was a multi-year contract and that was a three year contract with some professional services in that and it was just under $4 million is what the contribution of the length was.

Michael Turits – Raymond James

This quarter?

Michael Scarpelli

Yes.

Michael Turits – Raymond James

Great. Thanks a lot.

Operator

Our next question comes from Walter Pritchard with Citigroup.

Walter Pritchard – Citigroup

Thanks. Frank and Mike, I’m wondering if you could talk a bit about your descendents around upsell versus new – you saw a great billings and the customer account increased year-over-year or the incremental customer can increase year-over-year. But you are adding about same customers as you were a year ago, I’m just wondering, how you are thinking about those two drivers of your growth both this year and then beyond this year?

Frank Slootman

It’s good question. Walt its Frank. The important think, if we have to realize, we do not measure or incentivize or hold accountable or sales organization – put a number of ads. I mean we start managing that way. We get a very different model in terms of how people try to connect with the business. The organization has been very, very successful in connecting with the contract values and they are doing sort of that in a way that really optimizes the result and what you are seeing is the most optimal model for us to report this kind of results.

Now, are they naturally gravitating toward the large enterprise apparently yes. So for sure I guess the large upsell on the large enterprise where we are the most productive in terms of deploying our sales people. Now, are we keeping an eye on this particular issue, we absolutely are. And we are looking for ways of balancing that out. But we are not going to be hard over. I mean without managing the world goes per se not all the accounts were created equal. I mean that’s an understatement by the way because you are some [indiscernible] large versus the domains when you go market, you now become far more insignificant.

So that is how we are thinking about it. So we are looking to balance it a little bit but we are super freeze with the bookings performance of our sales organization on the last several quarters. The last thing we want to do is metric some that works extraordinarily well for us.

Walter Pritchard – Citigroup

Got it. And then Frank related to that, I’m wondering when you entered your heart of the developers, and if you [indiscernible] occur in that market. I’m wondering on the upsell success you are seeing, is it possible to talk about what areas of IT, headcounts or the organization you are doing a better job in penetrating the trend in terms of what are you seeing this quarter here?

Frank Slootman

Well, that’s also good say, particularly inflection this quarter that’s different from other quarters. In the main thrust of ServiceNow in the marketplace and we see it in action and we see it working is that we are really expanding people’s perspective of service management from an IT context to an enterprise context. I mean that’s what our customers are looking at and that’s what they are moving into some kinds of doing IT plus HR or plus some specific applications other times they would be really going hook line and tinker and really are viewing it much on a global level and its really up to us as a sales and marketing organization to make the case for that. But I think what you’re seeing is that we are increasingly more successful in doing that. We super excited about that because that I s main mission of the company to make that transformation in the marketplace from IT service models to enterprise service models.

Operator

Our next question comes from Jason Maynard with Wells Fargo.

Jason Maynard – Wells Fargo

Frank, can you talk a little bit more about your non-ITSM or service desk sales cycle and maybe as you continue to penetrate these accounts what are you seeing in terms of the competitive dynamics just some of it guidance moving from do it yourself to onto your platform? Are you seeing other competitors? And how does that just impact what your reps are communicating to customers out in the field? Thanks.

Frank Slootman

It’s Frank here, Jason. The really, really important thing to understand is there is not a separate sales model or sales approach or message for ITSM versus non-ITSM. We don’t make that distinction. Service now is one platform. It is a platform that holds service management applications.

IT is just one specific variant, one specific instantiation of that service model. So our people go to market with that message. We are pitching one thing, not two things. It is true to ITSM is usually the starting point with people replacing a lot of legacy systems, but our whole goal with the customer is to really expand their view, the opportunity of what’s possible, right, that’s the game we’re playing after we’re increasingly more successful of that.

So we don’t sort of go banging around opening the door at facilities, one at procurement one at HR, we really go in through the front door, we use the IT organization as our lining post, if you will, and then we are advocated by IT into the larger enterprise. And that’s sort of a very, very unique strategy, that has relative to the enterprise as opposed to trying to breaking doors open with various departments throughout the enterprise. So we’re landing in IT and then we are literally advocated into the balance of the enterprise through that organization. That’s how we operate.

Jason Maynard – Wells Fargo

What do you see though from say maybe a when you get to that non-IT who is looking at the platform any date yet that you can scorch on?

Frank Slootman

Yeah, we see differences for example between HR and IT. We’ve done a lot of IT and HR implementation that’s probably the service model that we are most familiar outside of IT. And they’re actually very different. The HR people are very information centric. So they’re really focused knowledge management and so on whereas IT service models are very much focused on defects and things that are not working. So the service models are different and the issues that people are focusing on in the mitigation strategies are different in these service domains. We expect that, right. Every service demand is a little bit different that are fundamentally deploying a very, very similar type of service model.

From a comparative standpoint, sometimes when we go after sort of the spoke applications we may run to another platform player out there like Force but most of the time when we are really selling service management for the enterprise there really is not sort of a comparative confrontation. We are the only people out there that are really driving enterprise service management as an IT strategy.

Operator

Our next question comes from [indiscernible] with Barclays.

Unidentified Analyst

Hi guys, it’s actually Chris [indiscernible]. I just wanted to touch base on the shift that you are seeing and you commented on it, Mike, and the call of the service break that shift into partners. Obviously with the growth that you guys are experiencing, a lot of work that the partners are getting and we spoke to a couple that actually your highest designation this quarter. I mean, they are struggling to find capacity to get deals implemented. How are you managing that as the business is growing just rapidly as it is and you want to obviously shift a lot of that to partners given the opportunity but at the same time making sure that there is enough capacity in place of the ecosystem to get – to get deals done?

Frank Slootman

This is Frank, Chris. This has been a perennial challenge for a business like ServiceNow that’s being growing for ever at the rate. So the discount is scarcely a resource as long as we are growing – it’s not going to go away, right. We see partners growing talent, there is a lot of talent coming out of customer organizations and moving to the other side. So there is a lot of that ejection going on.

But fundamentally, I mean, obviously, we are adding a lot of talent industry, we have a very significant training activity, so we are training a ton of people, our own people but we are also training a ton of people among our customers as well as part of the community. I mean one of the big things of knowledge or conference that starts next week. It is a gigantic training event. And that’s what attracts a lot of people to the conference. So we are literally developing skills and experience and talent as fast as we can.

Important thing to notice, we are really very careful not to crowd out our ecosystem and to create ample room for our partners to develop their business. We have no goal of our own to grow the services businesses to a certain size, actually was their business to enable success with our customers and to enable the success for our partners. We don’t need our service business to be any bigger than it needs to be to meet that objective because now as everybody can tell it is a drag on the profit profile of the company as a whole.

So we are actually sort of quite pleased where it is in relative trends as well as others as a percentage of the total business. While we are going to stay there not really depends on whether we are meeting our objectives and enabling customers and partners out there.

Unidentified Analyst

That’s helpful. And then the one quick follow-up, one thing that we have heard, just from talking to some of those partners, specifically some that are maybe a little bit smaller, is that they are seeing – they have reach into customers and existing relationship with some more mid-market customers and they see a potential need for a mid-market solution. It’s some of that the push to introduce business addition, are you seeing some of that demand from partners or that maybe one-off conversations that we are having?

Frank Slootman

Well, this is a business actually product is built to require a very little services. If any that’s the whole point. I mean we should be able to deploy that in hours and days is the idea. If we have to add real professional services to that product definitely it’s going to defeat the product cost of it economically, it will make a whole lot of sense. So that good position is really going after mid-market. It’s much more of a turnkey product and sticky and go and that’s the whole idea behind it.

Unidentified Analyst

And you would be just able to just sell that directly you wouldn’t need any pointers involved at all essentially is what the implications to that or I take it?

Frank Slootman

Don’t have to but we certainly won’t mind having partners in the mix.

Unidentified Analyst

Got you. Okay. Thank you.

Operator

Our next question comes from Rob Owens with Pacific Crest Securities.

Rob Owens – Pacific Crest Securities

Yes. Thank you and good afternoon gentlemen. Couple of questions for staff, as you are seeing deals sizes increase materially and customers leverage the platform for increasing applications, what kind of customer pressure is there to do ELAs and what is your attitude towards ELAs?

Frank Slootman

A good question Rob. I mean we are getting mostly first four ELAs mostly because customers doing wealth managing compliance didn’t want to count users and having to sort of manage the top relation its sort of a easy to use feature. We have done a number of those kinds of transactions. It’s not that all you can need to know typically, I would just like to – so many users really good boundaries, you want how many users and we defined the functionality that was licensed to them for a certain period of time. And then they don’t have to manage complaints during that period of time but eventually of course we are back to removing upsell process and so on, so that relationship gets reset.

We are very open to doing them. But obviously, we are going into those deals with our eyes open and we have to also detect our downsides and deals like that. We don’t give away the store. So it’s a bit of push and pull there in terms of what the customer wants and that we need to get out of it to protect our side.

Rob Owens – Pacific Crest Securities

And then you talked a little bit about transitions service management from an IT context to an enterprise context, you have talked in the past about moving to HR and financials, are you seeing any applications written for the external community or external customers, so not enterprise facing, actually customer facing and any examples would be great?

Frank Slootman

Yes. Absolutely. I’d say that’s going to the customer-facing side is usually not sort of in the first place where customers know that we have a kind of examples and spend any time at Knowledge next week you’ll be confronted with them that we have won the medical equipment manufacturer, for example in Europe they’re actually using the CMDB not to store information about IT infrastructure but actually about their actual machines, MRI machines and so on.

And they use ServiceNow for all the doctors and nurses in the hospital use these machines to interact with them just to manufacture to provide the service model around it, that’s now a typical application, we fund over GNSG energy we talked about them in the past turbines and power plants. So those are examples and almost every hard and soft assets, what I want to say, it has a service model around it whether people are managing the service is not a question that use their service model and every asset has challenges it has problems, it has defects, it has questions around information, it has claims, it has warranties. So all these service models that exist have to be implemented and they are customer-facing and that’s definitely part of the business that we’re in and that we’re going to be in more so going forward.

Michael Scarpelli

Actually one of their customers on the panel at our Analyst Day Getty Images. They have a customer-facing, I didn’t talk about, you have a chance to talk to them at our Analyst Day next week.

Rob Owens – Pacific Crest Securities

Great. Appreciate the colors. Thanks, guys.

Frank Slootman

Welcome.

Operator

Our next question comes from Kirk Materne with Evercore.

Kirk Materne – Evercore

Thanks very much. I guess Frank, maybe some more related to Rob’s question. When you go and your talks with your partners right now it seems like a lot of them are building some templates on top of your platform right now. But I’m just kind of curious how far how do you think it is before you start to see people building sort of standalone applications that are built from a one to many on a one to many basis. Really that’s early but it seems like you’re going that way and some partners they built SRN showcases and things like that. So, I guess I’m just curious if is that something you think it start to occur over the next year or two or is it just too far out to start to think about that right now?

Frank Slootman

No, Kirk, I think we all going to start to see that, one of the things that we’ve done with a launch of the show the structure is exactly for that appropriate show because it’s one thing for us to enable our platform for external developers to build apps that can be sold over and over but we got to give them loves to market right and we have some loves to market certainly that conference is our – but having to share infrastructure allows them to really host content and that can be exposed to ourselves as a customer’s out there. So, it’s really because we’re at a platform so when they’re saying certainly they to sell the app to people that are running to show in our platform. Now maybe a triggers the sale of the platform but to the real nice love to market for truthfully software developers is selling in to the market that we already have, people are already are in shortlist now. So, I definitely it’s a focus area for us, it’s important for us and I definitely think we’re going to start seeing that and in the second half of this year and years to come.

Kirk Materne – Evercore

Yes. And then just second question, just around the bigger the nine deals over a million. I guess was there any sort of commonality in terms of you mentioned the one large deal is over a end user. I guess of the existing customers was it mainly functionality expansion user, expansion I really which one might be somewhat unique so there might not be any sort of commentaries but I was just kind of curious if there isn’t anything you are seeing happening within the bigger deals that you’re signing? Thanks.

Frank Slootman

No. I don’t think there was anything in social and inflection and things get sort of biggest interest and they needed the types of deals that we’ve been doing all along that this getting bigger and bigger and sort of spoken about the 7 figure line and as I said earlier, it is because we’re driving a larger scope for the platform as will drives up these yield size a different terms of composition they are somewhat to what they were before.

Kirk Materne – Evercore

Great. Thanks very much.

Operator

Our next question comes from Matt Hedberg with RBC Capital Markets.

Matt Hedberg – RBC Capital Markets:-Yes. Thanks guys. You clearly you guys are the leader in the ITSM market and there is obviously a lot of talk on how you guys are going to expand beyond IT. But, how do you think about penetrating other areas of IT perhaps like an application performance management area?

Frank Slootman

Yes. So, Matt this is something that we will actually be talking and demonstrating brand new software next week at our conference, the IT Operations management market is a market that’s very closely aligned to the IP service management market that, the workflow that exist in service management versus systems management are very, very close and for example on what you’ve done finished and your odd effects that are extremely close cost. So, many of our customers have already integrative our service management systems with their system management infrastructure and we’ve been watching this for quite a while now and we are now beginning to enable the integration of this workflow. So, if you’re not naturally there will be a whole lot of new things that we are going to show in that regard.

Matt Hedberg – RBC Capital Markets

That’s great. And then maybe for Mike. Given all the headcount additions you guys have been adding here, is it still safe to assume that we could see breakeven operating margins for the year?

Michael Scarpelli

Yes, for the full year, yes.

Matt Hedberg – RBC Capital Markets

That’s great. Thanks guys.

Michael Scarpelli

Welcome.

Operator

Our next question comes from Abhey Lamba with Mizuho Securities. Abhey, your line is open. Okay. Sorry about that. Our next question comes from Brad Sills with Maxim Group.

Brad Sills – Maxim Group

Hey, guys. Thanks for taking my question. I just want an ITSM within the existing sweet, are you finding certain services that has gained traction on attach outside of core incident and problem?

Frank Slootman

Yes. I mean there is lots of an asset management issue public management has taken off. We’re introducing whole bunch of new applications in our material release that we’re going to be showcasing next week as well as whole bunch of software that we’re releasing at the end of this year, new demand management, general management, problem management, applications, password reset. There is a autonomous stuff there that we do and I mean that the core ITO process is that you just mentioned is something that everybody has and everybody does but our customer base has expanded much beyond that it’s really that motion in our Q4 IT that we talked about previously is really the concept that they’ve think off when they think of show this now more so that in our definition of ITSM.

Brad Sills – Maxim Group

Great. Thanks, Frank. And then just one on the platform. Can you comment a little bit on tax rate in new deals versus renewals are you finding that customers are committing to the platform earlier now whether it’s in year one, year zero or later in the cycle?

Frank Slootman

No. I don’t know if I have any subsequent data on that but what I will tell you is that last quarter we talked about the split between ITSM and non ITSM revenue because that time we said it was around 20% of the business was non ITSM and in this quarter it was more like 37%.

Michael Scarpelli

34%.

Frank Slootman

34%. It’s a – we view them better way that’s for new transactions leaving out the upsales and most...

Michael Scarpelli

Including the upsales leaving out the renewals.

Frank Slootman

Leaving out the renewals. So, we’re seeing a lot of activity. We saw a pretty big jump also in Discovery and old construction this quarter. So, there is just of ton of activity going on outside of the core ITSM functionality.

Brad Sills – Maxim Group

Great. Thanks guys.

Operator

Our next question comes from Tim Klasell with Northland Securities.

Tim Klasell – Northland Securities

Yes. Good afternoon everybody. Just a quick question on share, I don’t want to grab some of the buzz from the conference next week but how would partners monetize? Are you going to leave it up to them to set pricing or is that something that you will have a say in as your partners with content up on share?

Frank Slootman

Yes. So, good question. So, share is initially not intended to be really a monetization platform, that’s why it’s called, share is really intended for content to be broadly available to everybody in our community that once you see that. Now, that said anybody that wants to sell content obviously it can’t trans out offline one on one with whoever wants it. So, it’s much more of a marketing vehicle if you will right on a transactional or sales vehicle, it doesn’t exclude us in future from inserting our ourselves into a process with obviously you can’t tend – gets deployed on any of our customers instances that times to generate internal license revenue for ServiceNow because we are at a one-time platform.

Tim Klasell – Northland Securities

Exactly. And I know in the past you mentioned, you speak IT very well, you have to learn to speak HR and procurement. [indiscernible] it could get into a lot of other departments fairly quickly, do you foresee any challenges and having to learn the lingos of other departments and do you have any plans to address that?

Frank Slootman

Yes. It’s an interesting question. And here is the thing. We really believe that service management is the language that we have to real master and be excellent at. And service management is applied to many different demands. And it does vary as I explained earlier between HR and IT sort of different focus area, different definition and they certainly have a different nomenclature. And those kinds of things we have to learn fundamentally, we have to be expert as an organization at managing service – service models how that works because that’s what we bring to these organizations.

When you talk to an HR organization, they don’t really know about service models because they historically have not had them. The only organization that brings that to them and explains how this service model working off right. So that’s our expertise and value add in the process obviously. We do need to learn to speak. That’s more of a terminology nomenclature thing rather than fundamental concepts.

Tim Klasell – Northland Securities

Okay. Thank you very much.

Operator

Our next question comes from Greg McDowell with JMP Securities.

Greg McDowell – JMP Securities

Great. Thanks very much. Hi, Mike and Frank. I want to ask you guys about strength in certain verticals you mentioned 9 deals over $1 million. I was just wondering if you saw any particular strength in verticals and are you seeing any verticals starting to pull back on enterprise IT spend? Thanks.

Frank Slootman

We are seeing anything really. I mean this has really been strong both geographically diverse as well as in terms of verticals. While we have been really strong eyes in the financial sector, it’s a service model absolute everywhere in the large financial institutions. Also large insurance now. Pharma is exceedingly strong for us like retail. So I think we are very, very broadly represented in terms of verticals.

And to goes, we are trying to edge into Europe bigger and bigger every quarter. I mean, now, I think in north of 0.6% of our revenue mix. So that’s our best. We have an enormous amount of room up in Asia we feel. That is a focus area for us.

Michael Scarpelli

We have a very good pipeline with some nice size deals in Asia Pacific.

Greg McDowell – JMP Securities

Great. Thank you.

Operator

Our next question comes from Steven Ashley with Robert W. Baird.

Steven Ashley – Robert W. Baird

Thanks very much. I just like to circle back to the enterprise deals that you started to do. I was just wondering if you could give us maybe a little color of who is at the table when you are doing those deals. I’m assuming that even if it’s a new customer that IT may be an advocate for you. But are you meeting with the Chief Operating Officer, you are crossing over the line of business side, or you touching those budgets, are the representing, just some general color on how broad the audience is for those enterprise deals?

Frank Slootman

Yes. Very interesting question. For the most part we really aimed up in the CIOs office because these transactions are off a size and off a exposure and sensitivity that achieved the most executive in IT is a very key stakeholder. That wasn’t always the case. We often sort of launch – sort of a level below that have infrastructure and that person is still super, super important in the mix as well.

But we are seeing enterprises now where it’s going above IT and IT is just one of the user organizations now of ServiceNow. I mean, we are just seeing the very first evidence of that that’s definitely a new thing. And of course, when you see the contractual commitment they are involved in much large involvement of the broader enterprise that makes total sense that we are moving in that direction.

I lost trust even though we are seeing evidence of it. This is still fairly early in that evolution.

Steven Ashley – Robert W. Baird

Great. And then in October you made a number of pricing changes and you really trying to accomplish a number of different things. My very high level question is, is that generally worked out the way you would hope and I realized that’s still early. But, are you seeing the kinds of benefits from those changes that you are hoping to see?

Frank Slootman

That’s a two-fold answer. When it comes to a new customers, the answer is absolutely, yes. I mean we are this better at monetizing and when I mentioned earlier I were to assume much better revenue contribution from orchestration, discovery. We are upselling very successful as well. Really different customers obviously, it’s always a much taller order during an upside process or renewal process, forget them is to new models that it is one of them, we have to work through that. And sometimes we have to grandfather people in because there is too much friction.

But on the whole, we make it true and that’s just part of the business. It’s working for us. But I would certainly say it’s not without friction, but any kind of assurance would bring friction with it.

Steven Ashley – Robert W. Baird

And real quick Mike, just to clarify did you to the answer to a prior question when I asked about the percentage of business from non-ITSM that you would saw new and upsell average contract value in the fourth quarter was 20% non-ITSM and then this quarter was 34%?

Michael Scarpelli

Correct.

Steven Ashley – Robert W. Baird

Okay. Thank you very much.

Operator

Our next question comes from Alex Zukin with Stephens.

Alex Zukin – Stephens

Hey, guys congratulations on the great quarter. I wanted to ask first just about, are you starting to see any kind of vertical specific applications emerge that are being built on a platform kind of how you are thinking about that going forward?

Frank Slootman

Yes. That’s been going on for quite some time. We have seen them in insurance for exception claims handling. That we have seen in the oil and gas for Ocean violation reporting to federal government. I mean there is ton of examples that connectivity going on our eco system, very, very common.

Alex Zukin – Stephens

Got it thanks. And then on the competitive environment just one of the ask if you are seeing any changes is it becoming, or the sales cycles shortening because you are now looked out at as more of a standard bearer in the space?

Frank Slootman

Well, that shortens the sales into half, you are right. We are seeing as the attribute to platform, but and the relationships are viewed bigger and more strategic. You get more players in the game and sometimes as we – the opposite effect or sales cycles and contracts are viewed within immense amount of scrutiny as well because people know these 10, 15 years decision, right.

So having a legal complex with these relationships is exceedingly important to them and they are going to spend the time getting it right. So it goes both ways. He is going to trying to tell you.

Alex Zukin – Stephens

Understood. Thanks guys.

Frank Slootman

Welcome.

Operator

Our next question comes from Harris Heyer with Credit Suisse.

Harris Heyer – Credit Suisse

Hi, guys thanks for taking my question. I’m calling on behalf of Phil. Just had a quick question, you talked a little bit about pricing, can you give us an update in terms of the kind of pressing dynamics from a competitive standpoint and what you are seeing from HP or BMC?

Michael Scarpelli

Well, Frank I don’t take it a whole lot, I mean like the HP and BMC, if they are willing to let it go almost for zero dollars just to keep people like us out of the accounts because we are not as disruptive to the business in terms of ITSM. But also brings downstream like IT operations management stuff I talked about earlier. So surprising it’s not a factor, I mean the problem that the incumbents and the legacy vendors have they have no products. So price becomes pretty relevant if you don’t have products.

Harris Heyer – Credit Suisse

All right.

Operator

Our next question comes from Derrick Wood with Susquehanna International Group.

Derrick Wood – Susquehanna International Group

Great. Thanks. I wanted to touch back on the 34% figure. Are you seeing any change in the type of vendor or technologies you are displacing as you are kind of moving beyond core ITSM or is it more of mix of greater mix of greenfield?

Frank Slootman

This is Frank. It’s a much greater focus on greenfield, I mean you move it to HR. They know how to handle this thing. They just had email. They had the Excel. They had Microsoft Access. They really had Lotus Notes, right? That’s the stuff that’s being replaced. It’s like absolute nothing or some mix shift representation of some kind of a surface model, its mostly message base. So we are very much replacing really labor or substituting really labor for systems here.

These are brand new things for a lot of these organization. They never had service management system in the service domains before. And of course, it’s really, really impactful when you see HR organizations implement service model all of a sudden. The insight that they get in their workloads that they can do about it. IT has left this life for some time. They understand. They have matured. They are very adoptive. You get outside of IT, it’s a completely new world for this people out there that’s what we find so exciting about our business is introduce these concept to move service domains.

Derrick Wood – Susquehanna International Group

That’s great. Thanks. And then Mike, given the broader aspect of your platform today, should we expect contract sizes with initial wins that’s start trending higher or you still door focused on this learn and expand model?

Michael Scarpelli

Yes. We are still very much focused on the learn and expand, but with that said our average initial transactions size has continued to increase quarter-over-quarter. And we think they are trying to continue focusing on the enterprise not including the business edition product.

Derrick Wood – Susquehanna International Group

Got you. Okay. Thank you.

Operator

That concludes our question-and-answer session. I would like to turn the back over to Michael Scarpelli.

Michael Scarpelli

Thank you. As a reminder, a replay of this call will be available as a webcast in the investor section of our Web site as well as through the dialing instructions contained in today’s earnings release. Thank you for joining us today. And we look forward to seeing many of you next week.

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