ServiceNow, Inc.

Good day, ladies and gentlemen, and welcome to the fourth quarter 2018 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. If anyone should require assistance during the conference, please press star, then zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Michael Scarkelly, Chief Financial Officer. Sir, you may begin.

Good afternoon. Thank you for joining us. On the call with me today is John Donahoe, our Chief Executive Officer. During today's call, we will review our fourth quarter financial results and discuss our financial guidance we will discuss today are non-GAAP, except for revenues over to John.

Thanks, Mike. Good afternoon, everyone, and thank you for joining us on today's call. We finished 2018 with our strongest fourth quarter ever, continuing our momentum as a leading digital workflow company shaping the future of work. Our role as a strategic partner to the world's largest enterprises continues to accelerate, enabling their digital transformation by making work work better for people. Our teams continue to execute well and our continued focus and commitment to customer success shows in our strong results. Expanding our existing customer relationships will drive much of our growth going forward and we have ample opportunity. We are now helping to enable the digital transformation of almost 5,400 enterprise customers, including almost 75% of the Fortune 500. We now have 678 customers doing more than a million dollars in business annually with us. And we have 74 customers who are doing greater than 5 million, up 54% year over year. And the number of customers doing greater than 10 million has more than tripled year over year to 18, including three above 20 million. Our renewal rate for the quarter was a strong 98%. Our formula is clear. When we land our platform and products with the new customer, we begin delivering great experiences and unlocking productivity. That, in turn, is what drives our expansion. And our focus is on building long-term strategic partnerships with our customers that enable their success. And I'll point out that we still represent a small percentage of IT spend for most of our customers. That gives us tremendous opportunity to grow and deliver the business outcomes that our customers want and need. Strong performance across our portfolio and across every geography drove our momentum, led by accelerating year-over-year growth in EMEA. Our teams exceeded their plans for the fourth quarter and for the full year. All of our products perform well. Both our HR and customer service products, for example, now have more than 20 customers doing more than a million dollars. And 19 of our top 20 deals in the quarter included three or more products. Even more important, net new business in our core IT workflow products reaccelerated in 2018. This underscores the strength of our flagship product, the strategic partners we're building with CIOs, and the continued market opportunity to expand the impact of our core IT workflow products. We are very well positioned. In the fourth quarter, I had an opportunity to meet with 50 of the world's most respected CIOs. They reiterated common themes I've shared with you before and that I continue to hear in my customer conversations worldwide. The business imperative for digital transformation, the need for trusted technology partners, and the challenges of driving cultural change. These leading CIOs understand the power of our now platform and products. They view ServiceNow as a strategic partner. But as one CIO put it, he doesn't view us as just another cloud partner. He sees ServiceNow as the platform that creates a multiplier effect in his cloud ecosystem. Our enterprise capabilities link together other systems and platforms, enabling seamless digital workflows that create great experiences and unlock productivity. And that's what every C-suite executive I speak with is looking for. Ongoing product innovation is essential to enabling these business outcomes and continues to be a top priority for us. I feel very good about the progress our product organization is making in improving our user experience and user interface. creating simple, intuitive mobile experiences, and making our platform and products easier to deploy and upgrade. We're getting great feedback from beta testers in our upcoming Madrid release, and we expect to be launching significant enhancements in our mobile capabilities and user experience later this year. I also feel very good about the progress driving customer success, another top priority. We're driving customer success to be a natural extension of our sales motion and are committed to landing new customers and expanding existing relationships in a healthy and sustainable manner. We're entering this year with strong alignment across our pre-sales and post-sales teams, and we're driving a consistent approach to creating value for our customers and delivering their desired business outcomes. Leading this effort is David Schneider, who was recently promoted to be our president, Global Customer Operations. He's an exceptional leader who's deeply committed to driving successful customer outcomes. So as we enter 2019, we're also investing in increased awareness of our company through the launch this month of our first ever brand campaign. While many decision makers already know us well, This campaign is designed to increase awareness of ServiceNow more broadly with C-suite executives. The campaign highlights our focus as a digital workflow company creating great experiences and unlocking productivity. That is what digital transformation is all about, and that is the future of work. The intelligent and intuitive capabilities of our NOW platform and our IT employee and customer workflows make work simpler, easier, and faster across the enterprise. Simply put, we make the world of work work better for people. That's our focus and our commitment. So in closing, I'm very pleased with the strong quarter and year and our continued momentum. We are making continued progress against our strategic priorities, led by our focus on product innovation and customer success. And now I'll turn the call back over to Mike. Thank you, John.

Q4 was our new year. During the quarter, we booked $1.5 billion in total contract value, and our total backlog, including deferred revenue as of December 31st, was $5.1 billion, representing 38% year-over-year adjusted growth, including $112 million of foreign exchange head including $7 million of foreign exchange headwind. Our Q4 subscription billings were $952 million, representing 39% year-over-year adjusted growth, including $11 million of foreign exchange headwind and $4 million of duration tailwind. And our Q4 total billings crossed the $1 billion mark for the first time ever. I'd also like to note that Q4 billings continues Thank you. Moving to Q4 profitability, operating margin was 21% and free cash flow margin was 34%, which was driven by strong Q4 collections and improved outstanding for the quarter. For 2019, we expect subscription revenues between $3.215 and $3.235 billion, representing 34% to 35% year-over-year adjusted growth, including approximately $41 million of foreign exchange headwinds. We expect subscription billings between $3.705 and $3.725 billion year-over-year adjusted growth, including approximately $45 million and $22 million of foreign exchange and duration headwind, respectively. We expect 2019 subscription gross margins of 86%, operating margin of 21%, free cash flow margin of 28%, and $190 million diluted weighted average shares outstanding. To conclude on our 2018 performance, Our goal is to build an enduring company, and we couldn't be more excited about the opportunity in front of us. Before closing, please note our Financial Analyst Day will be held on Monday, May 6th, in Las Vegas, in conjunction with our annual users conference, Knowledge18. In-person attendance will be limited, so if interested, please send an email to ir at servicenow.com. For those who cannot join in person, we will hold a webcast of the event accessible on our IR websites. With that, operator, you can now open up the line for questions.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the star, then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, that star, then one to ask a question. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. And our first question comes from Kirk Materni with Evercore ISI. Your line is now open.

Thanks very much, and congrats on a really nice fiscal year. John, just given the strength you're seeing in really big deals and the upsell momentum you're having in the G2000, I was just curious, are you starting to face off with different buyer sets in the customer base? Meaning, I think one of the opportunities has been to expand or take ServiceNow to being more of an enterprise business. not just sort of an IT platform. I'm just kind of curious where you think you are on that journey based on who you're speaking with these days. And then, Mike, to your point on seasonality and billings in the fourth quarter getting bigger, as we think about the full year, as we model billings, is there anything else we should take into account in terms of just seasonality as we get past the first quarter? Thanks.

Yeah, Kurt. I think what's happening is, frankly, largely driven by what's happening at customers, that as customers are embracing digital transformation, and digital transformation, I can't emphasize this enough, even in the time I've been here, it's not a business buzzword in these companies anymore. It's actually core strategic reality, in fact, survival in some companies. It's forcing them to think in a more cross-functional way. And so I'll just give an example. There's a lot more focus on the end-to-end employee experience for two reasons. One, that everyone wants to digitally connect with their employees in a world where you've got to recruit millennials and retain them. And everyone wants productivity. And so that requires an employee experience that's by definition cross-functional, where an employee doesn't really care if they're dealing with IT or HR or finance or facilities. And so we're seeing more and more customer initiatives where they're looking for cross-functional support to drive a better employee experience. So IT's involved, but they're partnering with their CHRO or HR, they're partnering with facilities, they're partnering with finance. And so I gave several examples where I was at major Fortune 100 customers, and all those people are in the room, and they're turning to us saying, we want to build an end-to-end employee experience, and we believe your platform connects effectively in with many of the other core systems of record, be it a concur for T&A or an ADP for payroll or Workday for an HCM or many others, and they look to us to stitch the workflow together. And so often these sales are joint sales. It's not like we're only in IT or only in HR or only in customer service. Increasingly, you're seeing kind of a shared services mindset. And I think we're benefiting from that because our platform is really does help wrap workflow around each of the other systems of record in a way that allows the customer to get the benefit. And I think our sales teams and our PLS teams are responding well to that, but it's in many ways the cross-functional message that is most powerful and distinct in our customers.

bigger numbers.

Super. Thanks very much.

Thank you. And our next question comes from Matt Hedberg with RBC Capital Markets. Your line is now open.

Hey, guys. Thanks for taking my questions. Congrats on the results. John, obviously, your billings guidance was great. When you talk to executives, Can you give us a sense of what's sort of the overall view of tech spending in 2018? And then how do they think about prioritizing your avenue of digital transformation versus other areas of spend? And then maybe just a quick follow-up. You commented that ITSM reaccelerated in 2018. I'm wondering if you could put your finger on sort of what drove that reacceleration this year. Thanks.

Yeah, Matt. You know, on Outlook, I'm not sure that we had anything unique to say on that, in that most of our customers are under the gun, to be honest, to deliver strong digital transformation results. And digital transformation results, as I said a few minutes ago, include better employee and customer experiences and productivity. And so we still, as we look into 2019, we can't really forecast macroeconomics, and we're not going to try to, but we see companies continuing to invest in technology as a core enabler of digital transformation, and that our focus is very much on demonstrating business value, demonstrating economic value. You know, the fact is we automate workflows, and automating workflows, yes, provide better experiences, but they also drive productivity. And so even in an environment if spend gets tougher over time, we want to be at the top of the list as a productivity enhancer, And we believe that we are. And so without being able to predict the future, we're kind of going full steam ahead. And, you know, I haven't seen any major changes in customers yet, but, you know, obviously none of us don't know. We don't know what we don't know. But focus on productivity, focus on business value. You know, that's the long cycle view. And then on ITSM, you know, this is, to be honest, I think, the narrative got ahead of the reality around our ITSM when we started publishing, you know, we're in 75% of the Fortune 500, that the reality is we frequently land in a division or in a geography or in a part of a company. And so even with ITSM, we may land in only one part of the company, and so there's absolutely the opportunity to expand across the enterprise. And increasingly, I think, as companies expand, see the power of the ITSM product and see the power of automating and providing self-help for IT service management, that you're seeing more enterprise-wide initiatives. So existing customers, that's driving expansion, where we aren't already one enterprise-wide initiative. And in new customers, you're seeing they're starting off with more enterprise-wide initiatives. And that's sometimes in centralized companies, but it's also increasingly in decentralized companies, where you may have five or six different branded divisions are saying, you know what, there's only one way to do IT service management, and let's get to a common way so that we provide better, you know, again, I'm saying the same thing, better employee experience, better productivity,

Super helpful. Well done. Thanks, guys.

And we're both really excited about the next step of that that's coming here in mobile. Yes, the kind of mobile experiences, consumer-grade mobile experiences we have coming out in the next, a little bit in the next release, but then in New York this summer, awesome mobile experiences.

Thank you. And our next question comes from Sarah Hindleyan with Macquarie. Your line is now open.

All right, great. Thank you so much, John and Mike. John, congrats on your two-year anniversary, and to you both on the 50 million of outperformance. You know, on that point, John, I'm looking at the top 20 data and all the regional data, and the strings, it looks very broad-based, but it's also the biggest beat you've had, and it looks like seven quarters. So can you help just hone in a little bit on exactly what drove that? And then second, actually, I'd like to squeeze in two for you, Mike. But given the growth you're seeing, are you thinking at all differently versus your last update on margins given this significant growth? And then I need to ask about federal. I haven't heard it come up. You know, with the shutdown and your recurring model, can you just give us a little bit of color as to if anything and what you guys did see within your business? Thanks. I appreciate it.

Sure. Sarah, I'll start that out. So, you know, the Performance this year, we really just saw strength across the board as the federal business. You know, the federal shutdown, I think that's where you're getting to. You know, that potentially will have an impact, but we think it will get resolved before the end of the year. Q3 is obviously... I didn't think anyone thought we could grow at the size we are at the rates we've been doing.

That's very helpful. Thank you so much.

Thank you. Our next question comes from Brad Zelnick with Credit Suisse. Your line is now open.

Excellent. Thank you so much for taking the question. Really impressive results for the quarter and for the year. And it was quite impressive hearing every product outperformed expectations in the quarter. But specific to emerging products, now representing 30% of net new ACV versus 25% a year ago, can you maybe drill down a little bit into which one of these products are seeing the most adoption? And I've got a follow-up.

I mean, it's all of them in many ways. There's not a massive variability across them. Interestingly, one of the things, and we began talking about this in Q4, we are refining how we're sort of positioning our platform and products to be more in terms that align with how customers think about it. And you heard me talk about this in Q4 where, in essence, we're the digital workflow platform. That's what we do. That's our unique role in the sort of modern tech stack of the future. And we're a platform with three workflows, right? And we are first and foremost a platform. We have an IT workflow. And what that's all about is helping the CIO create the IT department of the future, help them move into the future. And that includes ITOM, IT business management, IT analytics, and many of our IT-related products. Our second... major bucket, if you will, is employee experience workflow. And this gets to what I was talking about earlier in the call, where customers are thinking about is how do they deliver a strong end-to-end employee experience? And so, frankly, we put ITSM in there, along with HR case management, employee onboarding, and our other products that tie together to enable that IT experience. And then last is the customer service and that's where a growing number of customers want to replicate for their customers what we enable them to do with their employees, namely get to the root cause of a problem, fix it so it doesn't happen again, and when a customer does contact them, enable self-help and automation wherever possible. And so by grouping the 10, 12 products we have into those three groups, if you will, those three workflows, It aligns more with how customers think about the business problems that they're trying to address. And CJ kind of refined his product organization into the beginning of this quarter to align with that. And so I think it's going to enable us to continue to, in some ways, simplify our message and get to the right decision makers at the right strategic levels.

expect changes there.

And we're not reorganizing sales team or product line specialists because that go-to-market motion is working. So this is just a matter of sort of simplifying and ensuring that various products stitch together in an effective way.

Thanks so much, guys. And just to follow up, I get a lot of questions from investors as we look out on the horizon to achieving $10 billion and beyond. Can you give us any update on how your thinking and progress has evolved on corporate development and M&A since we talked about this topic at Analyst Day. Thanks so much.

You know, Brian, as I said at Analyst Day, priority one, two, and three is to execute against our organic growth opportunities, which continue to be enormous. And so shame on us if we take our eye off the ball against our organic growth opportunities. Priority two is to invest in additional organic innovation and and with our formation of our NowX group, which is, you know, went during 2018. This is one of the areas that we're investing in, as Mike talked about earlier. We've gone from two engineers in NowX to 20 engineers, or I'm sorry, 50 engineers in NowX, 100% focused on developing new products that will come out in future years. And so, you know, with knowledge this year, I think we'll launch one to two new products, and we'll try to do that routine. So organic innovation has been one of the, remarkable hallmarks of this company and is one we're committed to continuing to pursue. And then as we look forward, as I said, in the spring, and we did more work on it later in the year, to $10 billion and beyond, often you can selectively use M&A to create other growth engines. It's not out of needing to buy growth or out of defensive necessity. It's about how do we, in a very strategic way, find additional growth engines over time. We're not in any rush to do it. Interestingly, our customers are pointing us to some. Our customers are saying, man, if you guys would really like it, if you can help transform IT, if you take a look at these kinds of companies or those, and we see some others. So we'll continue to monitor. Nothing's imminent, but when we see something that we think is additive to our portfolio and positions us, on that path to $10 billion, we won't be shy about pursuing it.

Fantastic, John. And, Mike, thank you so much. Thank you.

Thank you. Our next question comes from Remo Linchao with Barclays. Your line is now open.

Hey, thanks for taking my question, and congrats from me as well. Can you talk a little bit, because we're starting a new year, about the changes or no changes to the sales organization, maybe kind of double-click on Dave Schneider getting a bigger role as well and how that will play out for you. And then I had a follow-on for Mike.

Maybe I'll just talk a little bit about Dave, and then, Mike, you can put changes in the sales organization in the context compared to previous years as well. So I'll just say, you know, first thing I'll say is Dave Schneider is just a spectacular leader. And he's known for, along with Kevin Haggerty, kind of the godfather of the ServiceNow best-in-class go-to-market organization. I heard about that before I joined this company. I've had the privilege of seeing that up close and personal since I've been here and seeing Dave's incredible leadership and followership he engenders. And Dave has always been someone that cares a lot around the customer results, not just selling in. but understanding that if our platform and products help customers get results, then expansion becomes a healthy and sustainable opportunity. And so what we are doing is not trying to do sales and customer success in two different parts of the organization, but Dave is stitching together the full end-to-end customer life cycle. And we think there's a real opportunity to do it differently and do it well. And so we may... and we're very excited. We just had our sales kick off last week, and it was the most aligned end-to-end customer sort of mindset. We talked about formula for success for our customers, and we're excited about taking that forward into 2019 and beyond. And you want to answer how specific changes the sales team?

Yeah, what I would say, Remo, is there's no material changes at all. It will be just the normal tweaking of the sales organization. We're going to continue to invest in enterprise reps is where our focus is. We're still investing in commercials, so that will involve splitting territories but not moving reps from one class to another. And we will continue. We continue to look at verticalization. because it's been working, and we don't want to mess that up.

Perfect. Thank you.

Our next question comes from Justin Furby with William Blair & Company. Your line is now open.

Thanks, guys, and congrats on solid results. John, I wanted to ask about the ISV community you guys are building. I think the platform is clearly a powerful part of your story and always has been, but my sense is that, it's still sort of an untapped opportunity in terms of building out the store and monetizing it. And so I was wondering if you could maybe give a sense for how big you think that opportunity could be for you when you look out over the next five, seven years. And is there any reason why you think longer term it couldn't be something like it's become for Salesforce? Or do you think of it in a different way? Thanks. Thanks.

Thanks, Justin. First of all, I don't know if you're based in Chicago, where I grew up, but if you are, please stay inside and stay warm.

Yes, I'm inside for sure.

Yeah. My father and sister and family are there, and they've been saying it's a little chilly. You know, let me just start with platform. We are fundamentally a platform company, and it's significant, and our customers recognize that. That was one of the things that struck me most when I first joined the company, how many customers led with it. They'd say things like, well, I love your products, but I really love your platform. It's easy to build on, it's fast, and it's extensible. And so already we have many developers in our customers building on our platform. And so we're continuing to make investments in the platform to enable that. We call it platform as a business. Josh Kahn took over that product earlier this year. And it's an important area of investment because when customers build their applications on our platform, the propensity for them to buy our prepackaged applications and to expand is simply hard. And it provides a growing, really, product development laboratory for us because we see where customers are building and where they want us to build something out of the box. Our ISV program, as you said, is still relatively in its early stages. We've got a good, strong leader there, Anish. And I characterize it in early days. We're trying to encourage people building vertical solutions. We think that's one of the real sweet spots where our platform is fundamentally horizontal. As Mike mentioned, we're kind of verticalizing our go-to-market a little bit. But there are certain industry use cases that, to be honest, we're never going to build a specific use case for that industry. And so we're trying to find and encourage partners who can build something that's customized to a specific industry use case. And that creates a win-win for the end customer, for the partner, and for us. And so I think the analogy you talked about earlier is very much possible and achievable, maybe even more so, in a world where platforms are becoming more and more important. And, you know, the number of apps in our store grew 100% last year. The number of ISV partner transactions grew 124%. So the metrics are good, but it's still on a pretty small base, and, you know, we want to continue to focus on it. We think it's one of those organic growth opportunities that we think is still in its early days.

Got it. Thanks very much. I appreciate it.

Our next question comes from Rob Owens with KeyBank Capital. Your line is now open.

Great, thank you. And while you're on the topic of partners, maybe you could share some of the success you saw this year with what was partner influence. And it picked up, I think, over the first three quarters relative to percentage, but still is modest overall. So just like an update, I guess, relative to fourth quarter contribution and what's partner influence and how we should think about 2019 relative to that metric.

Yeah, what I would say, Rob, is there's a partner involved in almost every one of our large deals that we do. In terms of, as you know, very little of our business goes through the channel, but our deals are heavily influenced by our partners. And we think it was somewhere for the full year or for Q4, if you look at our top deals, it was 79% influence. And sourced was 29%. That's where it's through the channel. Sure.

But what I would say where we're getting better, again, we have a nice new strong leader in our partner ecosystem, David Parsons, who's joined us in the fourth quarter. And just in the last 60 days, we've had top-to-tops with three of our top four SIs. And I can tell you that they're all saying comparable things to us, namely that ServiceNow is one of, if not the largest practice. or I'm sorry, one of them is not the fastest growth practice. We want to become the largest practice. That's the aspiration. But we're getting better in partnering with them, and that's on both sides. You know, I might say 12 months ago we might have had alliance people talking to alliance people. And today we have, I'll take Philip Bender, who runs our European business, he's made a real effort to ensure that our UK leader and specific account execs on UK accounts are talking to their partner counterparts on those accounts. So there's more joint planning at accounts. There's more joint sales campaigns. And so I think we are, in some ways, I use the reference inside, then on a scale of 1 to 10, We're 10th world class. We've gone from a 2 to a 4 in the last year. We're twice as good as we were a year ago, but we're a 4 and we want to be 10 and world class. And the partners feel the same way. So it's getting increased attention. I think strong leadership from Dave Parsons. And our line organization is now embracing partners, recognizing that you can't get to digital transformation with just software, just a platform. You need a really strong partner to help re-engineer the processes and ensure that the implementation is done in a high-quality, out-of-the-box manner. So partners are very important to our success, and we are going to continue to get better and better at making sure we operate strategically and effectively with them.

Great. And then, John, since you provided the segue again for me, I guess on the international front, You talked about the acceleration. Any changes behind that international acceleration? Is it just maturation, or is it more in your go-to-market efforts?

You know, I think, Philip, I mean, there's no simple answer to that, but I'll just make maybe one or two observations that these are not silver bullets, but they're among things. Our European team's done a really nice job of being innovators inside of our company. And so Philip and team were the first that they identified – the top 35 strategic accounts in Europe. And they did the best account planning. One of our leaders, Michael Moss, there, has a template that we just rolled out at a sales kickoff. Michael ran Northern Europe, and he has a template of how we build a strategic plan with the customer, a shared strategic plan around their company's strategic priorities, around the CIO's priorities, around the business outcomes they're trying to drive in digital transformation, and how the Now platform It's helping them achieve those outcomes to achieve the results. And so I guess I haven't looked at the math of those exact 35 accounts, but I think the kind of account coverage and dialogue and elevating their way into the strategic, into the C-suite, they've done a really nice job in Europe. And as well on the front lines, how our PF people partner with customer success people who partner with the product line specialists who partner with the The Inspire team, you know, in some places in the U.S., we're in different buildings from one another. Often in our European offices, they're on the same floor. And so it really has helped us lead the way in some ways internally about best practices, about how we can have a real strategic conversation with the customer and drive toward customer value and outcomes. And then that leads to the expansion. And that is not rocket science, but it's a formula that's proving its way up. Anything you'd add, Mike?

I would add, too, that I think a lot of the investments that Philip has made over the last few years in new sales leadership in Europe is really paying off as well, too, because remember, this is a long sales cycle. When you change a leader many times, And so I think leadership is really what's been driving a lot of the outperformance in EMEA. Thank you.

Thank you. Our next question comes from Samad Samana with Jefferies. Your line is now open.

Hi. Thanks for taking my questions. So I wanted to ask about the six $1 million-plus deals that were new customers to service now in the quarter. A couple questions. First, Of those deals, were any of them driven by non-core ITSM where the customer came in because of either HR or CSM? And then the second question I have on that is, was there any change in who ServiceNow was competing against and or what they were replacing in those deals?

So what I would say is in those deals there was some CSM and HR in there, but IT was in all of those deals. things as well. It's the regular people that we're replacing all the time. It's still in these large accounts. They tend to be HP or BMC depending on what the company had chosen. We're still seeing those replacements.

Some of the smaller accounts are seeing CSM. Certainly in the commercial segment, there are a number of new customers starting with the CSM product and then migrating their way. And that's often because they have a chief operating officer who oversees all elements of that, but not as much in the upper level.

And then maybe, Mike, just one follow-up. In terms of, was there any on-premise revenue in the quarter? I think you called it out for the third quarter. I know federal tends to drive more of that than your enterprise customers, but just how much was the on-premise revenue this year in the fourth quarter versus last year? In the

requirements.

Great. Thanks again, guys. That was a great quarter.

Our next question comes from Walter Pritchard with Citi. Your line is now open.

Hey, my question is for Mike. I'm just wondering on the metrics here as we look forward now, you know, you've had about a year and some time to look at the backlog number and and help maybe us understand how to think about that would be helpful. We've, I think, become accustomed to looking at billings as a sort of leading indicator. How are you thinking about billings and backlog now as you've had more time under your belt to look at how those play out?

We will continue for 2019 to give guidance around billings, and you will see the backlog in our queues when we file our queues as required under 606.

And just maybe a follow-up to that, Mike, and just in terms of managing the business, how do you think about sort of managing on those two metrics and as we orient our models going forward, should we – Actually, the way we manage the business and always have managed the business is net new ACV.

And you see that annually in the proxy, and you will get a – That's how we manage the business. Great. Thank you.

Thank you. Our next question comes from Michael Turretts with Raymond James. Your line is open.

Hey, guys. Good quarter. One from Mike and one for John. First for John, how do you think about expansion strategically in two areas, one security and two in ITOM? And for Mike, just a clarification, with IT – 58% of new ACV this quarter. Is that only because everything else grew so fast, or if we did the math, would we come out with less growth in the fourth quarter there? I know you said you did well for the year.

Yeah, Michael, I'll say what I always say. We start with the customer in mind, and we listen to our customers. And as we think about the IT workflow, that group of products, What we're asking CIOs and what they're asking us is how we can help them build the modern IT shop of the future. So our ITOM business, our ITOM product, which had a very strong year, is an increasing, whether it's service mapping or some of the other products within ITOM, they view as important. And so we're investing in that and we're trying to ensure that we have both modern, we have both legacy ITOM capabilities and modern ITOM capabilities. So I think that will continue to be an area of investment and focus. And then in security, it's, to be clear, we play a, I'll call it a fairly narrow role or a specific role in security. We do incident response and vulnerability response. And in many ways, that's just taking the core competence of what our platform does and applying it to security use cases. And so I don't see us getting into fundamentally new areas of security where there are already solutions existing. If there are natural extensions of our platform that help a CIO or a CISO build a better overall security experience or better overall security portfolio, then we'll look at them. But it's not a market segment per se. We're going to say, oh, let's pursue it. Because it's a very crowded and, frankly, fragmented arena. An area that we do see, and we initially had this in our security organization, but it's really partly security-related, but it's, I think, somewhat distinct, We see a lot of demand for GRC, governance, risk, and compliance, governance, risk, and compliance. And as audit committees and CIOs, CCOs, CFOs look for greater scrutiny around those three separate but related areas, our GRC product and our platform we think has enormous opportunity. And so GRC product grew very aggressively. In 2018, I think we'll continue in 2019, I'll just tell one small story of the kind of thing I think we can see more of. I had a CIO of probably a Global 20 company call me last year. He said, you know, John, ServiceNow is my one source of truth for our GRC. And I have to report to the audit committee every quarter on our enterprise risk. Why can't I just show the ServiceNow dashboard to my audit committee as the authoritative dashboard, authoritative source of the enterprise-wide risk data? And could you work with our accountants, and in this case it was Pricewaterhouse, to see if you could get it blessed and validated? on it, but more it's the kind of customer demand where they're saying, we've got so much going on in governance, risk, and compliance. If I can pull it together into a coherent set of metrics and dashboards, I can run my business, manage and avoid risk, and ensure that we're compliant. That's an area, I don't know if you call that security or not, but that's an area we think there's a lot of opportunity for ServiceNow and

So on your question with regards to growth, IT was very strong for the full year. It was strong in Q4, but emerging growth was very strong in Q4 that shadowed that. And you can see that in the IR deck.

Our next question comes from Keith Weiss with Morgan Stanley. Your line is now open.

Hi, this is Sanjay Singh. Thank you for taking the question and squeezing me in. I wanted to revisit some of the topics that were addressed a little bit earlier and get a sense of which of these opportunities you feel is going to be most impactful to the business. On one hand, you have, John, as you said, you mentioned helping CIOs reinvent IT. And then on the other side of the equation, you're seeing, you know, you're helping customers digitize the front office. And maybe a way of framing it, if Michael came to you, John, and said, you know, we have an you found another $100 million in the budget, where would you deploy that $100 million in terms of those two, in terms of the various opportunities you have in front of you first?

Characterize those two again for me so I make sure I understand.

Yeah, so just if you think about this is the core IT business and helping customers reinvent the IT department and IT operations, and then in areas like HR and customer service where you guys are seeing large-sized deals, which of those sort of opportunities broadly do you think is going to be the most impactful to the business, whether it's in our ROI or durability of growth or any way that you want to frame it?

The answer to your question is yes.

I would just say that I think IT will continue to be extremely impactful to our business for a very long time. That is the core of our business. And as we've said before, we're very excited about CSM and HR because they land new opportunities for us without being in IT. But we're excited about all of our emerging products. And then your question around if we had another $100 million, where would we invest it? Where would you double down on customer service management? That would be a massive opportunity.

Yeah, I mean, we have five. I mean, just one other comment I'd make. You know, the software for the last, 30 years has been very functionally defined and functionally bought. And that may have improved operations and functions, but it didn't really drive great productivity and better experiences at work because actually most business processes at work for employees and for customers are fundamentally cross-functional in nature. And what a cloud platform like ServiceNow does is it enables a cross-functional, using software, using platform to drive cross-functional processes And so I think what we're seeing is even the distinctions, the historical, back to the first answer I gave in this call around the end-to-end employee experience. When you think digital transformation inside a company, you've got to think cross-functionally. Even our customer service management product is when a customer has a problem, you're getting to the root cause of that problem. The root cause often touches product, legal, compliance, engineering, marketing, and so it's cross-functional in nature. Our platform is uniquely positioned to drive cross-functional workflow. You won't see IDC or Gardner, Merrimacko's cut like that, but I do think it is one of the things that's fueling our growth is unlocking that kind of productivity. As for the incremental $100 million, we've got five priorities. And the five priorities remain in 2018. We're investing in our product and platform, number one. It's priority number one in our investment. Organic innovation, ensuring we don't take our foot off the gas in innovation. Number two, we're investing in an end-to-end go-to-market motion. I would put both sales and customer success in it. I guess these are four. Number three, talent. We're growing out our talent globally. Talent's the lifeblood of any company that wants to build and endure for the long term. And then Investment priority number four, which we just really for the first time are doing, is our brand and doing things to elevate our company brand. I hope you've seen the fabulous ServiceNow TV commercial that we've been running on CNBC and the Golf Channel. As I mentioned in my remarks there, there's another way we can raise our visibility with C-suite executives.

I appreciate the thoughts, John. Maybe just one quick follow-up. As we head into the Madrid release, how should we think about pricing and potential price increases as a driver in terms of your organic growth in 2019?

Price increases are not a driver of our growth. We've never tried to really optimize for price per user. We've always tried to get more usage by our customers and drive what we're extracting out of a customer of that way when they see value in what they're getting out of ServiceNow. So that does not play into 2019 at all.

Thank you, and congrats.

Thank you. Our last question comes from Cash Rangan with Merrill Lanch. Your line is now open. Pardon me, Cash Rangan, your line is now open.

Okay, I guess Cash had to drop off the line. So thank you, Operator. As a reminder, a replay of this call will be available as a webcast in the Investors section of our website. Thanks for joining us today, everyone.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone have a wonderful day.