ServiceNow Inc
NYSE:NOW
| US |
|
Johnson & Johnson
NYSE:JNJ
|
Pharmaceuticals
|
| US |
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
Financial Services
|
| US |
|
Bank of America Corp
NYSE:BAC
|
Banking
|
| US |
|
Mastercard Inc
NYSE:MA
|
Technology
|
| US |
|
UnitedHealth Group Inc
NYSE:UNH
|
Health Care
|
| US |
|
Exxon Mobil Corp
NYSE:XOM
|
Energy
|
| US |
|
Pfizer Inc
NYSE:PFE
|
Pharmaceuticals
|
| US |
|
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
| US |
|
Nike Inc
NYSE:NKE
|
Textiles, Apparel & Luxury Goods
|
| US |
|
Visa Inc
NYSE:V
|
Technology
|
| CN |
|
Alibaba Group Holding Ltd
NYSE:BABA
|
Retail
|
| US |
|
3M Co
NYSE:MMM
|
Industrial Conglomerates
|
| US |
|
JPMorgan Chase & Co
NYSE:JPM
|
Banking
|
| US |
|
Coca-Cola Co
NYSE:KO
|
Beverages
|
| US |
|
Walmart Inc
NYSE:WMT
|
Retail
|
| US |
|
Verizon Communications Inc
NYSE:VZ
|
Telecommunication
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
643.29
1 148.42
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
|
|
Johnson & Johnson
NYSE:JNJ
|
US |
|
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
US |
|
|
Bank of America Corp
NYSE:BAC
|
US |
|
|
Mastercard Inc
NYSE:MA
|
US |
|
|
UnitedHealth Group Inc
NYSE:UNH
|
US |
|
|
Exxon Mobil Corp
NYSE:XOM
|
US |
|
|
Pfizer Inc
NYSE:PFE
|
US |
|
|
Palantir Technologies Inc
NYSE:PLTR
|
US |
|
|
Nike Inc
NYSE:NKE
|
US |
|
|
Visa Inc
NYSE:V
|
US |
|
|
Alibaba Group Holding Ltd
NYSE:BABA
|
CN |
|
|
3M Co
NYSE:MMM
|
US |
|
|
JPMorgan Chase & Co
NYSE:JPM
|
US |
|
|
Coca-Cola Co
NYSE:KO
|
US |
|
|
Walmart Inc
NYSE:WMT
|
US |
|
|
Verizon Communications Inc
NYSE:VZ
|
US |
This alert will be permanently deleted.
ServiceNow Inc
You don't have any saved screeners yet
Good day, ladies and gentlemen, and welcome to the Q4 2017 ServiceNow Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.
I would now like to introduce your host for today's conference Mr. Michael Scarpelli, Chief Financial Officer. Sir, you may begin.
Good afternoon and thank you for joining us. On the call with me today is John Donahoe, our President and Chief Executive Officer. I'd like to apologize if my voice is not clear today, or if I start to cough, as I'm suffering from a cold flu bug. Our press release, Investor Presentation and broadcast of this call can be accessed at investors.servicenow.com.
We may make forward-looking statements on this conference call such as those using the words may, will, expects, believes, or similar phrases to convey that information is not historical fact.
These statements are subject to risks, uncertainties, and assumptions. Please refer to the press release and risk factors and documents filed with the Securities and Exchange Commission, including our most recent quarterly report on Form 10-Q, for information on risks and uncertainties that may cause actual results to differ materially from those set forth in such forward-looking statements.
I would now like to turn the call over to John.
Thanks, Mike. Good afternoon everyone and thank you for joining us on today's call. We reported a strong Q4 today. Our best quarter ever, giving us terrific momentum as we enter 2018. Our teams did an outstanding job executing on behalf of our customers and I want to thank them for their exceptional focus and commitment.
We closed a record 41 deals, with ACV greater than $1 million. And we now have 500 customers doing more than $1 billion in business with us, up 43% year-over-year. And we have 50 customers doing more than $5 million per year, that's more than double it was than 12 months ago. And we ended 2017 with our biggest customer topping $20 million, reflecting the growing opportunity to be a strategic partner enabling customer success.
Our performance continued to be strong worldwide, with each region outperforming their plan for Q4 and for the full year. Our renewal rate remained consistently strong at above 97% and we added 23 new G2K customers, ending the year with 840. Our average ACV with G2K customers grew 10% sequentially.
Our consistent performance underscores our strong product portfolio. We create simpler, faster, better ways for people to get work done, enabling better business outcomes and delivering better customer and employee experiences. And our geographic footprint and strong partner ecosystem give us the ability to serve a diverse customer base and to drive global transformation for our largest customers.
In conversations with customers worldwide, I consistently hear how CIOs are being tasked with leading digital transformations across their companies and are looking to deliver great customer and employee experiences in the process. And CIOs are looking for the right strategic technology partners to help them.
ServiceNow has become a core strategic partner for CIOs and other C-suite Executives on their transformation journey. We are uniquely positioned to be the connective tissue that streamlines and simplifies workflows across the enterprise, eliminating silos, and creating more seamless interactions.
For example, companies are looking to transform the end-to-end employee experience. Employees have come to expect delightful mobile and digital experience at home and are increasingly looking for the same kind of digital experiences at work. This requires looking at the full end-to-end employee experience as an enterprise-wide initiative, which requires cross-functional collaboration and partnership and integrated digital solutions.
Increasingly, we see CIOs partnering with CHROs and other C-suite leaders to deliver this experience. It requires linking together multiple enterprise products and platforms into a seamless experience for their employees. This is what ServiceNow does.
In Q4, this enterprise-wide approach was reflected in the continued strength of our platform and product portfolio. 18 of our top 20 deals included at least four products, and our flagship ITSM product was included in all but one of our top 20 deals. And we saw strong results with our HR service delivery, CSM, and Security Operations products.
For example, a top 20 global financial institution bought our HR service delivery product to better engage several hundred thousand of employees worldwide. And we saw our largest Security Operations deal to-date with another global enterprise, which views us as a strategic partner to create a common global approach to security incident response management. This customer now uses six of our products.
Our customers want us to continue to lead and innovate with best-in-class out-of-the-box integrations and configurations and we're deeply committed to delivering customer success. World-class product experiences and customer success are top priorities for us, and we're investing in both.
Focusing on customer success, we recently aligned all of our customer success teams, customer success management, professional services, training and certification and our partner ecosystem team into one group under the leadership of our Chief Revenue Officer, Dave Schneider.
This integration will ensure that we optimize value for our customers. We're evolving customer success as a natural extension of our sales motion, continuing to land new customers and expand existing customer relationships in a healthy and sustainable manner.
In closing, I'm very pleased with our team's strong finish to 2017 and our continued progress and momentum as we enter 2018. I just attended my first ServiceNow sales kickoff meeting and it was an incredible experience.
The passion, energy and excitement of our people to engage new customers and expand how we serve our existing customers is palpable. And that's what makes ServiceNow such a special company; our deep commitment to helping our customers succeed. I look forward to continuing this journey in 2018 and beyond.
And with that, I'll turn the call back over to Mike.
Thank you, John. During today's call, we will review our fourth quarter financial results according to historical revenue recognition standard 605 and we'll discuss our financial guidance for Q1 and full year 2018 according to the new revenue recognition standard 606.
We'd like to point out that the company reports non-GAAP results in addition to, and not as a substitute for or superior to, financial measures calculated in accordance with GAAP. All financial figures we will discuss today are non-GAAP, except for revenues and revenue growth.
To see the reconciliation between these non-GAAP and GAAP results, please refer to our press release filed earlier today and for prior quarters, previously filed press releases, all of which are posted at investors.servicenow.com.
Q4 was our first quarter with more than $1 billion of total contract value signed, leading to combined backlog and deferred revenue of $3.9 billion or 39% year-over-year growth, giving us strong momentum heading into 2018 and on our path to $4 billion in 2020.
Subscription revenues for the fourth quarter were $497 million, representing year-over-year growth of 44% and an adjusted growth of 41%. And PS and other revenues were $49 million, representing year-over-year growth of 20% and adjusted growth of 16%.
Subscription billings were $684 million, representing year-over-year growth of 41% and an adjusted growth of 40%. I want to point out that this includes approximately $20 million of billings that we had expected in Q1 of 2018. Our PS and other billings were $50 million, representing year-over-year growth of negative 1% and adjusted growth of negative 4%.
Moving on to margins, our operating margin was 18%, and free cash flow margin was 27%. As disclosed in our press release and our presentation, we adopted 606 effective January 1, 2018. As a result, we restated prior periods for upfront revenue recognition for on-premise deals, deferral and amortization of commission costs, and classification of proceeds related to Knowledge as a reduction in sales and marketing expense.
Let's turn to guidance for the first quarter and full year 2018 under the new 606 accounting standard. For the first quarter, we except -- expect subscription revenues between $525 million and $530 million, representing 35% to 37% year-over-year growth and 31% to 32% adjusted growth. We expect subscription billings between $601 million and $605 million, representing 25% to 26% year-over-year growth and 25% to 26% adjusted growth.
As I mentioned earlier, this does not include approximately $20 million that we expected in Q1, but billed in Q4. And separately, Q1 guidance doesn't include approximately $4 million due to 606 accounting changes. And lastly for Q1, we expect 16% operating margin and 184 million diluted weighted average shares outstanding.
For full year 2018, we expect subscription revenues between $2.355 billion and $2.375 billion, representing 35% to 37% year-over-year growth and 33% to 34% adjusted growth. We expect subscription billings between $2.77 billion and $2.79 billion, representing 31% to -- 30% to 31% year-over-year growth and 29% to 30% adjusted growth.
Moving on to margins, we expect subscription gross margins of 85%, operating margin of 20%, and free cash flow margin of 27%. For the full year, we expect diluted weighted average shares outstanding of 185 million.
Before closing, please note our financial Analyst Day will be held on Monday, May 7th in Las Vegas in conjunction with our Annual Users' Conference, Knowledge18. In-person attendance will be limited, so if interested, please send an e-mail to ir@servicenow.com. For those who cannot join in person, we will hold a webcast of the event accessible on our IR website.
With that, operator, you can now open up the line for questions.
[Operator Instructions]
And our first question comes from the line of Kirk Materne from Evercore. Your line is now open.
Thanks very much and congrats on a great fiscal year. John, I just want to follow-up on sort of a statement you made about becoming more strategic for CEOs and other C-level decision makers. As you guys continue down that path, and you're obviously having a lot of success based on the large deals you're signing, what additional investments do you guys need to make as we head into 2018 to continue that progress that I know you're hoping to continue going forward?
Thanks Kirk. So, as I said in the script, I think I'm at -- final tally was something like 500 different customers last year. And what is really apparent is as the CIOs are dealing with the need to digitally transform their companies, right, CEOs are looking -- every CEO said, I want to do a digital transformation. And they're increasingly looking to the most technically literate person in the C-suite to lead that, which is, in many cases, the CIO.
And the CIOs, if I were to summarize what they're saying to me, they're saying, Look, we're embracing cloud. But as I drive this, I need a few trusted partners, a few trusted platforms that I depend upon. And they're making their choices down at the infrastructure level. They're choosing AWS or Azure, maybe a Google or an IBM.
And then they're looking for a few key strategic software platforms. And increasingly, we are one of those core strategic software platforms. And I hear that regularly. And they're looking to us to not only help them -- usually, it's initially an ITSM or an existing application. But increasingly, they're looking at cross-functional workflows.
I'll use the example of employee experience being one of them or an onboarding experience. But that's not the only one. They're looking at the -- and customer support. They're looking at that as a cross-functional workflow so that they can identify when they have an inbound contact, how they get to the root cause and fix it so that, that contact doesn't happen the next time.
And so as we think about ourselves as a strategic platform, what's interesting is they're pulling us into new applications. They're asking, what are your next out-of-the-box applications going to be? And so I would view our priorities, therefore, to take full advantage of that to be a couple-fold. And this is how we're -- if you were to look at our 2018 investments, they will be as follows.
One, we're investing heavily in our product and platform. And so we're investing heavily in deeply embedding machine learning and -- in our platform. I'm delighted that is actually now live in Kingston in CSM and ITSM; investing deeply in our platform around mobile end user experience; and investing in making sure all of our applications are continuously evolving with new products and features like Cloud Management.
Second area of investment is customer success. These large companies need help driving transformation and reengineering, redesigning their processes. And so -- and they're asking for us to play a more proactive role, partnering with third-party ecosystem providers and so the significant investment in customer success. And as I said, we put all the elements of customer success under Dave Schneider so that it is understood from day one to be an extension of our sales motion.
Third area of investment is talent. We're growing aggressively, adding people all over the world, needing to add new talents, new capabilities, people that have had experienced at the scale we are and at the scale we're going to. And I mentioned last call, we've hired Pat Wadors, our new Chief Talent Officer, who is immediately investing in leadership development, career planning, some of the basic fundamentals of strong talent organization.
And last but not least, we're also investing in our company brand. Our product brands are very well known with decision makers. Our product brands are very well known in the world of IT. But our company brand, we're the best kept secret on Silicon Valley or best kept secret across industries, and that's simply because we never really focused on building our company brand. And so I brought Alan Marks with me. Alan was the Chief Communications Officer at eBay for the last decade. I'd hired him from Nike. He's joined us and that starts with our core purpose. And you'll see us begin to do a little bit of experimentation around elevating our company brand, which, frankly, has as much benefit for recruits and employees as it does external parties, but it will help us raise our visibility at the C-suite a little bit. So, those are the four key areas of investment for 2018 and the plan that Mike outlined, and the expectations allow full funding of those priorities.
And if I could ask -- thanks very much, if I could a really quick follow-up for Mike. Just on the $20 million that sort of slipped into the fourth quarter that you expect in the first quarter, I assume that was all subscription billings. There wasn't any professional service revenue in that number?
Yes, that was 100% subscription. That's what I'm giving. I'm only guiding to -- we are only guiding to subscription billings because that's what we are really focused on as our PS business is transitioning more to our partners. And if you actually take that $20 million plus the $4 million I mentioned due to the 606 accounting change for on-prem, that $24 million added to our midpoint would be a 31% year-over-year growth.
Super. Thanks very much.
And your next question comes from the line of Matt Hedberg from RBC Capital Markets. Your line is now open.
Great. Thanks guys. Congrats on the quarter. John, in your prepared remarks you talked about HR, SecOps and CSM. I think they performed well this quarter. For my question, I wanted drill down into CSM a little bit. It seems like there's a lot of momentum there and I think particularly in B2B customers. And from what we've heard, a lot of that's due to your ability to do deeper root cause analysis. I was curious to get your take on that market opportunity.
Sure Matt. And you're lucky you're not sitting across the table from Mike because he's coughing. Poor Mike. If you can see him, the guy's got a fever and a flu. So, he's a trooper to be here.
The CSM market, the customer service -- I think this is an important distinction, by the way, what I'm about to say because it's how we think about ourselves as a company. CSM is a huge market, right? Customer service is a huge market. And the reality is our value proposition is really attractive for a portion of the market, not the whole market. And in particular, our value proposition is attractive in situations where you have a lot of high inbound contacts where the customer doesn't want to spend a lot of time on the phone, but rather wants to identify what the root causes are of those inbound contacts, get them fixed, so that next time those contacts don't come in or if the contacts, they can be automated and how the response is. And if they can't be automated, the customer can use self-help.
And so as you mentioned, high-volume B2B is one of the use cases where that happens. And you know what, customer value is -- and I think that's a very strong return on investment, is as that inbound contact comes in, it's not a separate customer support platform or customer service product. It's on the same core ServiceNow Platform, which allows a cross-functional workflow.
So, let's say for many, many companies in the digital world, the number one contact of inbound -- the number one root cause of inbound contact is password reset. So, for a company that's got that as an inbound contact and they want to fix their password process, fixing password reset is not -- one function can't do that alone. Legal has got to be involved in that. Compliance has to be involved in that. Security, cyber has to be involved in that. Obviously, product teams have to be involved in that. Technology has to be involved in that.
And so what our platform can uniquely do is take that inbound contact, route the problem to the right area, in the right sequence, in the right way so that all those functions can work effectively together to improve the password reset process so that next time someone has a password reset problem, they can get it addressed in an automated fashion, much like happens in the consumer Internet world, right, where you can reset your password, reset in about 20 seconds, wherever you are all over the world.
And what the customer then gets is a lower number of inbound contacts, more satisfied customers. And thus, they put a high return on investment in our product that way. And so we're really targeting industries like telecom, tech, B2B, financial services, where they have those attributes.
And it's a large market, as you mentioned. The product's got a lot of momentum. It had 4 million plus deals in Q4. We released machine learning. We're calling it Agent Intelligence. Remember last call, I talked about how when we used it on our own, we used our own machine learning on our own inbound contact, it took issue categorization, issue routing and in 14 days, improved it materially. And now customers have that available to them. So, a bit of a long-winded answer, but it's a product and an area that we're really excited about and a big market opportunity.
That's super. And then maybe just a quick on the SIs. John, when you're talking to the Accentures and the DXCs of the world, what did they tell you in terms of the size of business that ServiceNow can be within those brands? I mean can you be in the same breath of a Microsoft or an SAP or a Salesforce in terms of these SI -- the SI business development?
Well, that's certainly the goal that both they have and we have. We consistently hear that we're -- if not the -- if not one of or the fastest-growing practice in their portfolios. And that's just -- you just have to look at our growth rate. It's just -- that is sort of obvious.
But what I think they're excited about working with us on is we're creating -- our platform, right, is all around redesigning workflows. And it's really hard for these companies to redesign workflows on their own, and so having a valued SI, a valued partner to do that in Accenture, a DXC, a Deloitte -- I was actually with Unisys this morning that's got a huge government business in the security area.
And when customers are buying ServiceNow, to get real value out of ServiceNow, they want to reengineer their processes, redesign those workflows. So, you're not just slapping old workflows on a cloud platform. You're redesigning the workflows and wall putting them on ServiceNow's platform, and that delivers maximum value to the customer.
It also generates healthy, high value-added business for the third-party partners. And so we're looking to lean in with them and work side-by-side at the customer to help the customers realize real value and help grow both of our businesses in healthy and sustainable manners along the way.
Thanks a lot John.
And our next question comes from the line of Raimo Lenschow from Barclays. Your line is now open.
Hey, I have avoided the question for Mike. I hope you feel better soon. John, you talked earlier about the changes to the success group and bringing everything under Dave Schneider. Can you talk a little bit more on the change that you're doing there? If you've seen that historically, like you have like at least short-term issues in terms of responsibility, who's doing what, what's the P&L structure there, et cetera? Just maybe double-click on that one a little bit. Thank you.
Yes. Well, it's a great question and it's one where I would characterize us to be in an important learning year because what we ended up doing is saying, all right, if you started and you work your way backwards, how does the customer really realize success using our platform? It's very much what I was talking about in the previous answer, which is for them to really get real value, they have to reengineer their processes, be it an ITSM process, be it an onboarding end-to-end employee experience process or the CSM process I talked to in the previous answer. And so that means you need us and highly trained, highly certified, third-party partners to do that.
And so we've taken, as I mentioned earlier, our training and certification business, broken it out so it reports directly to Dave, investing heavily to ensure that we're expanding the number of highly qualified, certified ServiceNow partners out there in the geographies and in the products we need around the world.
Similarly, as I mentioned earlier, we need a really strong partner ecosystem. And so we're leaning in on building strong sets of relationships. So, we have our top five, our gold tier. And we've also raised the bar at the bottom. And so we're actually going to have fewer partners because we're saying if you're not current on your certifications of our full product portfolio, then you will no longer be a recommended and qualified partner. So, that's partner ecosystem.
Our own PS organization, as you know, went through some adjustment last year because we said we're not going to try to compete with our third-party partners. But there are circumstances where PS -- our own PS, is the right answer for a customer. And those tend to be early products, right, where there's not a lot of experience in the market and we want to help build implementation playbooks or large, multiproduct buys where they're using us in a sort of cheap architect adviser role, helping the third-party ecosystem partner. And there are some customers who would just rather deal with their own PS organization. So, that's the third piece of this equation. Then Dean Robison is leading our early experimentation of providing sort of more dedicated -- or quasi-dedicated post-sale solutions architects and implementation experts.
And then lastly, and this last piece is quite important, is our strong investment in what we're calling our customer success center, which is -- we refer to this as the tech touch portion of customer success. There's a high touch or human touch portion of customer success where you're actually touching the customer, but this is -- and you're already seeing some early examples of this on our website, the Value Calculator, right?
This Value Calculator is live on our website. Check it out. That's helping an IT leader begin to have a return on investment discussion among IT and with his/her CFO and CEO. We'll be capturing best practices in one place and making it available to customers, to partners, to our sales team. We'll be making all of the learning we have across the third-party partner ecosystem and our experiences available to our customers on our website and through digital means.
And so all of that needs to work in a seamless way. And Dave Schneider, who obviously built the world-class presales team we've got today, along with Kevin Haverty, Dave's now putting the same kind of energy and focus in this post-sales motion. And we're trying to ensure it doesn't feel like two different things to a customer. It feels like one continuous end-to-end trusted partner that they can count on and deal with.
And so we're investing in it. We'll do a lot of learning this year. We'll determine where the leverage points are, how we calculate the right kind of return on investment framework. So, we're in a position to really scale it further in 2018, confidently and reliably.
Perfect. Thank you.
And our next question comes from the line of Sarah Hindlian from Macquarie. Your line is now open.
All right, great. Thank you so much both John and Mike. I was jumping between calls, so I apologize if you've hit on any of this. But John, I know we talked in December about ServiceNow approaching becoming a much larger strategic partner for its customers. And I'm wondering how you are -- how you're feeling about maybe even moving towards the focused account list and how that's going.
And then I also wanted to talk to you a little bit about some of the feature sets that are coming out in Kingston because we're hearing some very exciting things there about the release. And then I have a follow-up for Mike.
Great. Mike's going to chew the cough drop to get ready for your question.
That's okay.
Sarah, so yes, as I said earlier, we are being asked to play more of a -- I would call it, strategic partner role. And I would say what is, in essence, a natural evolution of our company given the size and scale we are is to have what you described as a focused account list. We call it select accounts. Where these are -- we are now -- we have almost -- we have, what, 840 of G2K. We have so many large, global, multinational companies for whom we're a strategic partner that we're learning how to cover them more effectively. And that's what, in essence, customer success is. It's the ability to sort of cover them in an end-to-end basis and ensure they get value, and we're highly confident that that's going to increase and accelerate our ability to expand our relationships with them.
And we already see some early evidence of that. I mentioned we have one $20 million customer. By the way, that $20 million customer, we now account for, I think, 0.5% of their total IT spend.
So, I think if you think about the magnitude of impact our platform can have, reengineering processes, which can drive measurable, demonstrable return on investment, which will increase their likelihood of investing more in the ServiceNow Platform and applications. And so we're trying to evolve our coverage models and some of our disciplines, fundamental discipline, account planning, and then account planning, a new muscle for us.
And so Dave and Kevin and our teams are -- we're taking a few of our select accounts this year and we'll be building prototypes. Does that
That's very helpful.
And Kingston, yes, Kingston.
Yes, please.
Kingston is very -- the feedback on Kingston is -- just been fabulous. Interestingly, it's been live for less than a month, and we have 90 customers already implement it, which is already upgraded, so which is a nice indication that the upgradability, once you -- we're improving in the speed and quality of our upgradability so that you can upgrade quickly, customers are able to upgrade quickly.
And the reason customers want upgrade is, as you mentioned, some of the feature sets in that, probably most notably is just machine learning. There are a lot of talk in the industry about machine learning. As you know, we bought DxContinuum about a year ago, rebuilt it into our core platform, and now machine learning's available for ITSM and CSM on real problems that real customers have. It's not a solution looking for a problem. It's inbound categorization and routing. It's an ITSM. It's helping to drive greater automation and productivity. And so machine learning in each of our applications is sort of one big feature of Kingston.
The second is you've heard both CJ Desai and I talk about we're going to get serious about user experience. And we're going to get serious about user experience using consumer Internet standards, not just enterprise software standards. And to be honest, we have a long way to go.
But Kingston was our first step in this direction, and our customers are seeing material improvements in our user experience. And that will continue through London and Madrid this year, where you'll see a significant improvement in the fulfiller experience as well as in the end user, whether that's an employee or an end customer, our customers' customers' experience.
And that -- remember last year, we bought Telepathy. We've recently hired some outstanding user experience talent along with Telepathy. So, we're investing in user. We bought SkyGiraffe, which is mobile. We fully intend to have mobile capabilities native into the platform this year.
Our mobile capabilities, I think, are good by enterprise standards. I think they can be so much better. And so those are -- Kingston is really the beginning of what I think will be a rolling thunder, a rolling stream of improved user experiences.
And then the last thing that is kind of a fun to mention, you know our Founder Fred Luddy had this vision of allowing -- what he used to call regular people being able to automate workflows. You didn't have to be a developer or someone in IT. And so we built what we're calling no-code development, where someone outside of IT can automate a workflow. And that's interesting because I would say probably a third of our use cases are not in our core platform because our customers are taking our platform and they're using it in workflows and in areas that we never even envisioned or imagined.
And so increasingly, whether you're in facilities or you're involved in Internet of Things or you're involved in legal, people in those departments are building really fun and new and exciting automated workflows on top of the ServiceNow Platform. And this no-code development capability enables that.
Okay, that's very helpful. Thank you so much John, I appreciate it. Mike, one more really quick one. I'm sorry, you're sick, but I just want to drill into you. The $24 million in subscription billings, even when I back that out, the sequential decline you're guiding for in Q1 still looks a little bit steeper than usual. Is there anything there other than seasonality that we should be thinking about?
So, first of all, there's $20 million from Q4 that should have been in Q1. That $4 million is purely a 606 accounting that does not impact Q4. And we had such a banner quarter in Q4 that pulled forward a lot of business from Q1 into Q4. You see that $20 million I was referring to is really early renewals and prepayments from customers that drove that, which had no real economic impact on our financial results other than billings and free cash flow part of that.
So, as we are getting bigger, we're definitely seeing more seasonality in our business. And if you look at the way that our quota is being distributed throughout the year, Q4 is definitely the big quarter for us.
All right, that makes perfect sense. Thank you for clarifying that.
Thanks Sarah.
And our next question comes from line of Walter Pritchard from Citi. Your line is now open.
Thanks. Questions for -- sorry, Mike, two questions for you. One, on 2020, it looks like you're sticking with that -- those goals, in the 25 G2K customers a quarter you're on pace. Can you talk about just as it relates to the salesforce and how you're incenting folks. Are you doing anything to try to either further penetrate the installed base or drive logos given, I mean, when you look at where you were versus a couple of years ago, you have a much bigger product line. I'm curious if you're doing anything different there. And then I have one follow-up.
Yes. So, right now, for our core sales reps, $1 of new ACV pays the same commission no matter what product we have today. That may change in the future, but we find that's the right way to do it. We do have our product sales specialist who focus on the different products to help our salespeople that have goals associated with the product and there aren't -- which, by the way, is consistent with what we've been doing for a number of years.
And in terms of incenting new logos or G2K, we have always paid bonuses based upon new logos and stuff to our reps. I don't expect that to change. That's a very small piece of their overall compensation and don't expect any material changes there. We'll continue with that.
Got it. And then just on 606. Just any comment on margin impact in terms of the 20% you're giving. And then as it relates to disclosure around the revenue backlog number, is the $3.9 billion number that you're showing there, is that a 606-type backlog number that we can start thinking about using? I heard you did say first $1 billion bookings quarter. I'm just wondering how we should start thinking about the bookings that could come from that metric.
Yes. So, the backlog and deferred revenue is under 605. Our auditors are still working through that disclosure, and that will be put out for the first time in our Q for March quarter. And we will be discussing more at financial Analyst Day kind of how we're seeing how we expect that's going to look.
And you'll see the disclosure for the first time, the new disclosures around how your deferred revenue and backlog is going to roll off into revenue in the Q1 period. Did I answer all your questions? I think I forgot one--
Yes, that makes sense. No, that's good. Actually, just margin impact on the 20%, yes.
Yes, you did ask that. So, the 606 in 2018, we're estimating that is going to impact us about -- the adoption of 606, around 1.5%, 1.6%. A lot of that depends upon the timing of and the amount of on-prem revenue. We know the deals we have they're going to be renewing. What I don't know are new customers that may, at the last minute, decide to go on-prem and whether they do one-year deals or multiple year deals because that can materially impact that as well because most of that drops to the bottom-line.
Got it, okay. That makes sense. Thank you.
And our next question comes from the line of Keith Weiss from Morgan Stanley. Your line is now open.
Good afternoon guys. This is actually Stan Zlotsky sitting in for Keith Weiss. And a quick two-part question. First one, the 42% of new ACV mix that is now allocated to the other line, that was a very impressive uptake. If you were to stack rank the products that made up the 42%, I know you mentioned HR, SecOps and customer service, how would you stack rank those products within that 42%? And then I have a quick follow-up.
Yes, those three products are in there as well as our platform and our analytics. And all five of those are kind of between 5% to 10%. They make up that -- and we're not going to go down and guide to individual products.
But they're all growing impressively. I mean, it's not as though one of them is carrying the other ones. It's pretty stunning to see the consistency with growth rate, at least to-date, across those five.
And what I will say is all of those exceeded their plan for the year.
Understood. Got it. And then the other thing that really stood out to us was the 10% increase in ACV from the G2K customers that we saw. What drove such a big increase? And should we think about this as the typical seasonality going forward as you sign more of the large customers in Q4? Thank you.
As I was talking at investor conferences after last quarter, we had mentioned that we felt pretty confident Q4 we're going to make up for that because we had a lot of contracted upsells as well as we sell our pipeline. Q4 tends to be a quarter where we do a lot of upsells to our existing customers.
If you look at Q4 of 2016, that was a 10% sequential growth as well. Whether that seasonality stands or not, what I can say is I feel confident, on average, we will continue to grow that 4% sequentially between now and 2020. There will be variability.
Got it. Thank you.
And our next question comes from the line of Keith Bachman with Bank of Montreal. Your line is now open.
Hi. Thank you. I'm going to start with a question that relates to the previous question. The ACV is very strong. The customer adds was a little bit lower this quarter. I assume it's still a lumpy number, but Mike, you still think you're on target as we look out to 2018 to realize the customer adds you need to keep the model going to those 2020 goals. Is there anything you want to call out in the 23 adds this quarter that was either better, worse or unusual?
Well, what I would say is when we put this goal in place in 2015, we had to add, on average, 20 per quarter. We've been adding well in excess of that now. We just have to have another 160 between now and 2020. So, it's less than 15 per quarter, and I feel pretty good about that as well.
Yes. And the customer adds in the first three quarters were really strong.
They were.
Let me ask -- I wanted to ask about -- follow and ask a competitive landscape question. And the question is as follows. Some of the application vendors, particularly in the SaaS world, are -- seem to be earmarking workflow within their applications and perhaps even across their applications as a target market and even mentioning ServiceNow in some discussions as a vendor that perhaps they want to replicate or even begin to compete against. How do you think about the competitive dynamics as you look out now, including some of the narrative provided by some of the application vendors?
Keith, I still say our number one competitor is unstructured workflow, helping customers use software where they're not currently using software. And if you look at a significant portion of our growth, it's simply that.
In some cases, we're replacing an old ITSM, legacy-based, prem-based solution. But in many of these onboarding -- customer onboarding, there is no solution out there for that -- or I'm sorry, employee onboarding. And so that's still the largest [Indiscernible].
My view on this is, I think, relatively simple. And again, it comes through the eyes of the customer. What I heard CIOs saying is, I need a few trusted platforms, and I need those platforms to work well together. I need each of you to do what you do really, really well. And you don't have to pretend to be something you're not and the more you can -- the platforms can deliver a seamless experience to the customer and not put all the implementation and integration burden on them across platform, the happier that customer is going to be.
Our sweet spot is workflow. This company was founded upon workflow. Our platform was architected for workflow. It's what we have a proven track record of doing. It's what customers are using our out-of-the-box applications for as well as in a huge number of situations using our platform for workflows that, again, we couldn't even imagine in out-of-the-box applications.
And so others may be adding some kind of workflow functionality to their features, but it's a more horizontal mindset. Most of these other platforms -- and there are some great platforms there. They're great needed. We use some ourselves, are more horizontal in nature. We're more vertical -- or I'm sorry, they're more vertical in nature, I'm sorry. We're more horizontal.
So, I don't view it as a zero something. Cloud is an enormous opportunity, and I think the real responsibility we have is to make sure one plus one equals three for our customers, or one plus one plus one equals five, that the infrastructure providers plus the various software platforms work effectively together to deliver great experience for the customers.
So, they may be adding workflow. I know that's what a core focus is. That's what our number one focus is. That's what our -- how our platform is architected and that's what we're going to continue to do. And we intend to be best-in-class and provide outstanding return on investment for our customers.
All right. Make sense. Mike, hope you feel better.
Thank you.
And our next question comes from Kash Rangan from BoA Merrill Lynch. Your line is now open. Your line is now open.
You want to take this one, Mike, or should I think this one? I think we'll go to the next one, operator.
And our next question comes from the line of Jennifer Lowe from UBS. Your line is now open.
Great. Thank you. I guess this is going to be for John.
Thanks for being here Jennifer.
I show up. That's what I got. So, I had a quick question just around this broader discussion people have been having on tax reform and whether that potentially frees up some more dollars to go into IT budgets. And in particular, it seems like digital transformation is potentially a place where this incremental budget could go to the extent it materializes.
I'm curious in your conversation with customers, how are they feeling about IT budgets for 2018? And is there any thought yet whether they might see some benefits from tax dollars being freed up a bit?
Jennifer, it's a great question. It's too early to tell. I will say that yesterday afternoon, I was in our EBC with the CIO of a -- certainly a Fortune 100, large, global, multinational in healthcare. And she said that she had gotten some incremental budget. She was quite excited. She literally got in an airplane, flew out here to talk with us about employee experience and about how she can put that to work on, again, on workflows that were cross-functional.
And coincidentally, I was in the EBC this morning with another large, global, multinational who -- again, in this case, it was, I guess, the Head of Infrastructure. And he was saying that he's got good budget this year to really drive cross -- again, cross-enterprise transformation.
And I think that's what's beginning to happen, is CEOs, CFOs are realizing that to get the real value out of technology, you can't just fund the vertical departments, the vertical silos. You can't just give IT their money, HR their money, marketing their money, that some of the real power and the value of driving a great customer experience, driving a great employee experience and driving great productivity comes from the cross-functional work. And I think that's what's beginning to get funded more and more, and I think that's somewhat reflected in our growth.
Okay, great. And I have a question for Mike. I apologize. So, hopefully, this is a quick one. And sort of in that same vein, given that tax reform has some incentives for CapEx type decisions and one of the things that determines whether some things are CapEx or an OpEx is if there's the potential to do that as an on-prem deal.
I know you'd mentioned, I think, in response the Walter's question that sort of one of the moving pieces is whether new business comes in and wants to have that on-prem optionality or not. Is there any thinking at this point whether the more attractive CapEx depreciation rules might cause you to see a few more on-prem-style deals than you maybe would have seen in the past?
So, I think that it's too early to tell whether we will see more or not. We still have -- a lot of the customers we sell into do have operating budget versus CapEx budget constraints. So, we do see very often that customers want to structure their deals such that they could use their CapEx budget and I do expect that will continue.
I'm not sure whether that's going to be any more or less than what we've seen in the past. One would think being able to get the tax write-off right away, you may. But it's too early to tell and we're not forecasting that.
Okay, great. Thank you. And I hope you feel better.
Thank you.
And our next question comes from the line of Rob Owens from KeyBanc Capital Markets. Your line is now open.
Great and thanks for taking my question. While I am tempted to ask Mike a six-part question, I think I'll defer to a callback on that front. So, maybe you can expand a little bit on the low-code, no-code opportunity and what that could mean just relative to the installed base and potential expansion there as well as your opportunity in the end market.
Yes, Rob, I think the short answer is we don't really know. But I think we have this platform that customers give us feedback that it's easy to use, it's fast to build on, it's extensible.
So, in addition to building outstanding out-of-the-box applications, we're trying to incent the spread of that platform across enterprise. We're going to do it a couple of ways. One, we're investing heavily in our platform-as-a-business. And our platform-as-a-business, that is platform as our product line grew, as Mike mentioned earlier, very attractively last year. So, people are buying the platform with the intent of using it outside of our core applications as well as our core applications.
Second, we are ceding the third-party development market, both inside companies and outside companies. So, our store, our ISVs in store grew 100%. 100% net new ACV growth from our partners through our store and OEM program last year. It's still a relatively small program, but it's a way where we can open up the ability to innovate on top of our platform.
And we're having a number of OEM partners like Nuvolo and Factor5 and Fairchild who have built applications on top of our platform, often a vertical solution or a specific use case that they're gearing it toward.
And then lastly, what the no-code platform is for, the no-code effort is to just make it easier inside the enterprise for non-IT, non-developer employees to extend the use of our platform in ways that even we can't imagine.
So, our goal is to unleash the next wave of innovation. Obviously, the more this happens, the stickier our platform becomes. It both opens up new doors of opportunity and makes it stickier. And so I think it's too soon to tell to see how much it's used.
Are there any specific plans to go after that type of base at this point? Or is it just a portion of byproduct of the solution you have?
Now, when you say go after the base, you mean--?
Of people who might be more apt to a no-code type of situation that would extend beyond your traditional IT user.
Yes, it's -- to be honest, this is -- one of the things about innovation is you have different horizons of innovation. We're driving a lot of innovation in our core functionality, fulfiller experience, the things that are very, very associated with our products.
And then by things like our ISV in-store, things like this low-code, no-code, instead of spending tons and tons and tons studying it and guessing, we're building what we think are great testbeds and great -- and we're going to follow to where customers lead us, which, to be honest, has been one of the secrets of this company success from the beginning.
Fred Luddy built just this wonderful platform. I don't think we ever thought up in some ivory tower that we're going to come up with an HR service delivery product or a CSM product or a security ops product. Frankly, customers pulled us into those applications and we followed them. Or they pulled us into those workflows and we followed them and built an application.
And so this is just another way to try to accelerate that penetration into different use cases. And we'll watch it, we'll learn. When we see an opportunity emerge, we'll make our out-of-the-box application. So, too soon to tell, but we -- it's some great engineering work done by Pat Casey and our platform team to build it.
Great. Thank you.
Our next question comes from the line of Michael Turits from Raymond James. Your line is now open.
Hey going guys. A quick one for John, a quick one for Mike. John, first, can I get your view on how things are progressing in the mid-market/commercial segment of the business? And any changes there in how you're doing competitively?
Commercial has had a good year. And I would say it's a very steady build-out of our team there. I think they're getting their sales motion down. We had a number of greater than $1 million deals in commercial. So it's, I think, $4 million deals in Q4, including three ITSM ones and one CSM one. And so that's where some of our CSM tractions also come.
So, commercial is an important part of our business and we'll continue to build it out. And what's also interesting is some of those commercial customers become enterprise customers, right? One of the areas they are targeting is high-growth commercial companies. That would have been ServiceNow a year ago. We would have been a commercial company. We just became an enterprise company. And so we're also trying to target what are those high growth commercial accounts that will then turn into enterprise companies through their success.
Thanks John. And Mike, a quick one for you. I understand why you want to move away from total billings and focus on subscription billings. But just to help us bridge into next year, should we -- what's the level of variability around the expectation for professional services revenues and billings? The Street was looking for like $200 million. Is that something that is roughly right? If we get some idea, then we can bridge to what we're modeling.
Yes. So, when you take out the Knowledge revenue from 2000 -- or from K17 out of that because remember, we re-classed it down into net against the expenses in sales and marketing, the professional service and training will be flat year-over-year roughly for the full year.
Okay. So, that's relative to the stated amount or netting it out?
When you net out the Knowledge revenue for 2017, 2018 will be flat to that.
Okay. Great. Mike thanks.
And our next question comes from the line of Alex Zukin from Piper Jaffray. Your line is now open.
Hi great. Thanks. This is Taylor Reiners on for Alex. Just had a quick question on security. One of the more interesting partnerships you've announced recently was your partnership with Okta. And I was wondering kind of how you're seeing your partner ecosystem of ISVs such as that drive both deal volumes and deal sizes.
That's interesting. I haven't thought of it that way. What I can -- maybe, Mike, you can think of that. What I'm struck by is the number of partners that want to integrate with our platform because you've got customers saying that they want to -- what I said earlier, our platforms work effectively together.
So, in the security area, there's so many different endpoint solutions, so many different platforms. CSOs are looking for how can we help them simplify by working effectively with others.
Yes. What I would say is these partnerships that are being announced by Okta is really a tech partnership and it's better for our customers when there's better alignment. These aren't sales -- these aren't our salespeople doing a partnership to increase our sales. It's delivering a better result for our customers together is what that is about.
And we think highly of Okta, use it internally quite a bit and we've been using it for quite some time. We've always had integrations with Okta, and we're just doing a little bit go-to-market with them for our customers to help with that.
I mean, if you think about our own use cases we have now on NOW, Okta is a key part of it. We also announced the integration with Slack in Q4, I believe it was, maybe it's late Q3, which is another example of the fact that our engineers and engineers in companies all over the world want to get tickets through Slack or at least have that option.
And so where we see those opportunities that are customer-driven, we'll do deeper, stronger technology alliances to make our products and platform seamless with others because that is what customers want.
Got it. And then just a quick follow-up on that. I was wondering, at the Analyst Day, one of the more interesting things you mentioned was that roughly half of your CSM customers were actually net new to ServiceNow.
And I'm wondering, now that we're seeing net new ACV growth from your other products match ITSM, I was wondering if you can talk about the volume of customers you're seeing that are coming from the other category that are net new to ServiceNow for the first time.
Yes. I would say in general, most of our new customers, typically, we land with ITSM. And CSM and others are add-on. What we have said is we are seeing deals where HR and CSM are leading and opening the door for new opportunities, which enables us to then sell our others. But that is not the norm.
Got it. Thanks.
Thank you. And at this time, I would now like to turn the call back to Michael Scarpelli for any closing remarks.
Thank you. As a reminder, a replay of this call will be available as a webcast in the Investors section of our website. Thank you for joining us today.
Thanks everybody.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.