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Service Now (NYSE:NOW)
Q1 2019 Earnings Call
April 24, 2019 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Jesse and I'll be your conference operator today. At this time, I would like to welcome everyone to the ServiceNow Q1 2019 earnings conference call. [Operator instructions] Michael Scarpelli, chief financial officer, you may begin your conference.

Michael Scarpelli -- Chief Financial Officer

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 first-quarter financial results and discuss our financial guidance for the second-quarter and full-year 2019.

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 the prior quarter's previously filed press releases, all of which are posted at investors.servicenow.com. We may make forward-looking statements on this conference call such as those using the words may, will, expects, believes or similar phrases to convey that information is not historical fact.

These statements are subject to risks, uncertainties, and assumptions. Please refer to the press release and risk factors and documents filed with the Securities and Exchange Commission, including our most recent annual report on Form 10-K for information on risks and uncertainties that may cause actual results to differ materially from those set forth in such forward-looking statements. I would now like to turn the call over to John.

John Donahoe -- Chief Executive Officer

Thanks, Mike. Good afternoon, everyone, and thank you for joining us on today's call. We delivered another strong quarter, continuing the momentum from our outstanding 2018 performance. We are focused on driving customer success, and we're expanding our footprint across almost 75% of the Fortune 500, enabling digital transformation as a strategic partner to the world's largest enterprises and we're delivering digital workflows that create great experiences and unlock productivity.

This is the future of work. Let's look at key Q1 results. In the first quarter, we closed 25 deals with ACV greater than $1 million. We now had 717 customers doing more than $1 million in business with us, which represents a 33% increase year over year.

Our renewal rate for the quarter continued to be strong at 98%. This quarter, we saw particular strength in the Americas region led by strong performance with U.S. federal agencies. Three of our top 10 largest net new ACV deals were with federal agencies, and we now had six federal customers doing more than $10 million in ACV with us.

These results show how the public sector is embracing cloud-based solutions, and it demonstrates our role as one of the core strategic partners to these government agencies, helping them digitally transform how they operate, serving their employees and citizens and delivering services. And our Q1 results also underscore our strong product portfolio. This quarter, Customer Service Management product saw significant growth with 28 customers now spending more than $1 million. Our customer workflow products enhance customer operations management.

That means that our customers are able to deliver better experiences and outcomes for their customers. In fact, Customer Service Management led to one of our largest deals during the quarter. This customer evaluated a number of competitors, including the legacy incumbent technology provider, and they chose ServiceNow because of our operations management capabilities. This is our sweet spot, managing inbound contacts to identify the root causes of customer issues, fixing those issues so that you can prevent future problems, automating self-help solutions.

And in other areas, our IT and HR products led a large expansion deal with Humana, a Fortune 100 company. Humana is now expanding their use of the ServiceNow platform across IT and HR to enable enterprisewide focus on improving productivity and enhancing their employee experience. Across our customer base, we saw a positive response to the launch of our Madrid platform release in Q1. Early indications show that customers are adopting Madrid faster than previous releases.

Madrid offers customers over 600 innovations such as new mobile-first experiences and digital workflows that unlock productivity for IT, for employees and for customers. This customer response shows our progress in making upgrades simple and easy, ensuring customers can quickly take advantage of our latest platform and product innovations. And I'm personally very excited about the mobile capabilities we're rolling out. We're delivering easy, intuitive, out-of-the-box mobile capabilities that enable consumer-like experiences across the enterprise.

These are the kind of experiences that employees expect and demand today. We've also made significant strides in our product organization over the past year led by Chief Product Officer CJ Desai. We have a great global product team, and they're driving continuous quality enhancements and customer-focused innovation across our platform and product portfolio. This team is also focused on building a strong pipeline of product innovation as we look to meet a broader range of customer needs and leverage the power of our Now platform across the entire enterprise.

During the first quarter, I had an opportunity to visit Israel and spend time with our product teams there. As you recall, we acquired SkyGiraffe in late 2017 to enhance our mobile capabilities, and that Israeli-based team is fully integrated now. I met with this team and many other tech entrepreneurs throughout Israel. Israel has an incredible community of outstanding world-class technology talent, and we're building a strong product and tech hub there with more than 125 employees to date.

I left Israel so impressed with the quality and caliber of our team and with the innovation happening there. I also traveled during the quarter to Amsterdam, Tokyo, and Sydney spending time with our teams and customers. My customer interactions worldwide continue to validate the business imperative of digital transformation. Customers continually tell me that the strength of our product portfolio and the capabilities of our Now platform position us as one of their core strategic partners enabling digital transformation.

Our focus on the Now platform and three core workflows: IT, employee and customer, are being well received by our customers. And it's empowering our product teams to focus on delivering even more integrated digital workflow solutions that drive great experiences and unlock productivity across the enterprise. A few weeks ago, we held our first CIO Advisory board meeting, spending two days with roughly a dozen of the top CIOs in the world. We had a rich discussion, reaffirming that we are on the right path with our strategies, our product vision, and our focus on customer success.

We've also been pleased with some of the positive feedback we've received throughout the quarter in response to our first-ever company brand campaign, which launched in January and continues through early June. As I have said before, this campaign is designed to increase awareness of ServiceNow more broadly with C-suite executives. The campaign is also resonating very well with our employees and enhancing our recruiting efforts from a talent brand perspective. We'll continue to invest in company brand awareness to position ServiceNow as both a partner and employer of choice.

In closing, I'm pleased with our strong start to 2019 and our continued progress against our priorities. We are committed to making the world of work, work better for people, and we're focused on building deep, trust-based customer relationships to enable their digital transformation and create the future of work. Now I know many of you are planning to join us in Las Vegas on the week of May 6 for our Financial Analyst Day and for Knowledge 19, our seminal customer event. We expect this year's conference to be our largest ever with 20,000 people registered to attend.

Spending time with our customers is always my favorite activity, and Knowledge is one of the real highlights of the year. I'll look forward to seeing many of you there. With that, I'll turn the call back over to Mike.

Michael Scarpelli -- Chief Financial Officer

Thank you, John. In Q1, we delivered another good quarter, strong top-line growth combined with margin expansion. After a strong 2018, it was very important that we started 2019 off on the right foot. Let's dive into the highlights on the quarter.

Subscription revenues for the first quarter were $740 million, representing 40% year-over-year adjusted growth, including $20 million of foreign exchange headwinds. Subscription billings were $810 million, representing 33% year-over-year adjusted growth, including $22 million and $18 million of foreign exchange and duration headwind, respectively. Our revenue and billings performance was driven by strong bookings in the Americas. In addition, accelerated revenue recognition from self-hosted deals related to our federal business drove revenue outperformance.

We continued to see traction across the product portfolio with 17 of our top 20 deals purchasing through more products as customers realize the power of the platform in an enterprisewide solution. We booked four Customer Service Management deals with more than $1 million of ACV, including its $3 million deal to a federal agency, our largest CSM deal ever. We also booked a $1 million HR Service Delivery deal with a federal agency to modernize their HR processes and employee experiences with our user portal and mobile capabilities being a differentiator.

Our U.S. federal business highlighted the quarter representing 15% of total net new ACV, up from 6% the prior year. We booked our largest Q1 deal ever with the federal agency with now doing more than $18 million in ACV. We expect the U.S. federal sector will continue to purchase throughout the year as they accelerate their use of modern technology to digitally transform how they operate.

We saw strong profitability in Q1 with operating margin at 19% driven by our revenue performance and expenses that will be realized in Q2. Our free cash flow margin was 40% and benefits from a seasonally high amount of collections from our strong Q4 billings. Now let's turn to guidance for the second-quarter and full-year 2019. For Q2, we expect subscription revenues between $778 million and $783 million, representing 35% to 36% year-over-year adjusted growth, including approximately $15 million of foreign exchange headwinds.

We expect subscription billings between $798 million and $803 million, representing 32% to 33% year-over-year adjusted growth including approximately $17 million of foreign exchange headwinds. We expect a 17% operating margin, which is impacted by Q1 expenses moving to Q2 expenses related to our annual users conference, Knowledge 19. We expect 193 million diluted weighted average shares outstanding. Coming off our strong Q1, we are raising our full-year 2019 subscription revenue guidance to between $3.235 billion and $3.250 billion, representing 35% to 36% year-over-year adjusted growth including approximately $45 million of foreign exchange headwind.

We are also raising our full-year 2019 subscription billings guidance to between $3.725 billion and $3.740 billion, representing 32% year-over-year adjusted growth including approximately $50 million and $22 million of foreign exchange and duration headwinds, respectively. While we are increasing our top-line revenue guidance, we are also increasing our investments and maintaining full-year 2019 margin guidance as follows: subscription gross margin of 86%; operating margin of 21%, which includes record hiring in Q1; and free cash flow margin of 28%, which includes the opening of a new pair of data centers in Japan expected for later this year. For the year, we expect diluted average weighted shares outstanding of 193 million. Before closing, please note our Financial Analyst Day will be held on Monday, May 6, in Las Vegas in conjunction with Knowledge 19.

For those who cannot join in person, we will hold a webcast to the event accessible on our IR website. With that, operator, you can now open up the line for questions. 

Questions and Answers:

Operator

Thank you. [Operator instructions] Your first question comes from Raimo Lenschow with Barclays. Your line is open.

Raimo Lenschow -- Barclays -- Analyst

Hey. Thanks for taking my question. Two quick questions. First, can you talk a little bit about the platform strength this quarter? Obviously, you mentioned federal, but the 17% you got from platform still kind of seems to be like a step-up from what we've seen before.

Michael Scarpelli -- Chief Financial Officer

Yes. Well, included in that group, platform was strong, but you also have Performance Analytics in there, Raimo as well and Performance Analytics had a very strong quarter, but platform was strong as well and we're seeing that in many of our customers.

Raimo Lenschow -- Barclays -- Analyst

OK. And then can you talk a little bit about -- you talked about the record hiring in Q2, Mike, but you still talked about Q1 expenses kind of that slip in Q2. Can you talk a little bit about what was going on there and the magnitude? Thank you.

Michael Scarpelli -- Chief Financial Officer

So it was record hiring in Q1 and the impact of that is going through Q2. It was very back-end loaded, a lot of that hiring, but SKUs as well. There were some other expenses that we are expecting to incur in Q1 that got pushed in Q2 because of timing and we weren't ready to spend the money efficiently so we pushed into Q2.

Raimo Lenschow -- Barclays -- Analyst

Perfect. Well done. Congratulations.

Michael Scarpelli -- Chief Financial Officer

Thank you.

Operator

Your next question comes from Brad Zelnick with Credit Suisse. Your line is open.

Brad Zelnick -- Credit Suisse -- Analyst

Excellent. Thanks so much and congrats on a great start to the year. My first question is for John. John the momentum you're seeing in U.S.

federal is really impressive and Mike's comments suggests you're seeing a lot more demand in this market throughout the year. Can you help us understand the size of opportunity in context of 15% of ACV mix today where can it go? And how do you think about this translating to other governments around the world, looking to transform the citizen engagement the way government employees work?

John Donahoe -- Chief Executive Officer

Well, Brad, I think that's -- I think the way you put the question's exactly the right way to think about it because if I just step back, let me describe this as the public sector. And included in public sector will be federal, state, regional and local governments. In the first quarter, I think in my global travel, I met with all flavors of that. Simply put, those institutions are under more pressure than ever to deliver better experiences for their employees and their citizens and to drive real productivity in a time of economic challenge.

And the key thing is that they are now realizing that cloud is a great way to do this. And by and large, they've largely overcome their security concerns around cloud. So whether it's the U.S. federal government, other federal government, state regional, local, we see a pretty aggressive appetite to both understand and embrace cloud.

And so as you know it, let me just now zoom in on the U.S. federal a little bit. We, over the last several years, have built a dedicated U.S. federal team.

We've been focused on both orienting and packaging and ensuring that our platform and our products conform to the requirements of the U.S. federal agencies. And in 2018, that was roughly 10% of our ACV, and as Mike mentioned, in Q1 this year, it was roughly 15%. And over time, I -- it's hard to gauge any given piece, but I think Mike and I will both say that overall public sector, when you add not just the U.S.

federal government but other federal government, state and local, could be up to 20% of our business over time.

Michael Scarpelli -- Chief Financial Officer

I would agree there's no reason why it can't be 20% for us from what we're seeing right now.

John Donahoe -- Chief Executive Officer

And one of the interesting things, Brad, that is to me one of the most exciting pieces of this is that interestingly, these government, public sector organizations are often some of the most innovative users of our platform. And what's interesting is these federal agencies and many of state regional in Australia, the U.K., in other markets think platform first and they see the power of our platform to adopt their ability to have better experiences. Let me give you an example. The Veterans Affairs U.S.

agency has -- adopting a ServiceNow-first philosophy both for their employees and for their customers who are veterans. And so, for instance, they've got a global service desk for over 550,000 Veterans Affairs employees powered by ServiceNow, and they're using ServiceNow to allow their customers, that is the veterans, to help schedule some of their procedures in their respective hospitals. So because our assets are in the Veterans Affair CMDB, if a veteran has to schedule an MRI, ServiceNow's platform can help that veteran figure out which hospitals have which openings with which equipment and actually schedule their appointment. So I find it very energizing to spend time with whether it's the defense-oriented federal agencies or other federal agencies because they are some of the most creative and innovative users of our platform.

Brad Zelnick -- Credit Suisse -- Analyst

Thanks very much for that color. And, Mike, just a competitive question for you, but more in the context of pricing especially in HR and customer service cloud's where you're seeing large players stepping up investments, can you talk a bit about pricing trends and average discount specifically in those clouds? Thank you.

Michael Scarpelli -- Chief Financial Officer

Yes, we haven't seen any noticeable from a -- if you're talking specifically about HR as we like to say our employee experience. And we really take different approach to those other vendors. Those other vendors are more specific around HR more and more around enterprise service delivery for our employees. And we're still seeing adoption by our customers jointly with whether it's in Workday or SuccessFactors or even extend that life of the Peoplesoft implementation.

So, no change there.

Brad Zelnick -- Credit Suisse -- Analyst

Excellent. Thanks again.

Operator

Your next question comes from Kirk Materne with Evercore ISI. Your line is open.

Kirk Materne -- Evercore ISI -- Analyst

Thanks very much and thanks for taking the question. I guess, John, just to start-off with, given the success you'll had in the federal government in related to someone unique how are you thinking just about the broader virtualization of your sales organization as you go deeper into big enterprises sort of being able to speak the language of industry and be able to serve help them solve their biggest problems? I guess, how are you thinking about that evolving as you look out maybe over the next 12 to 24 months?

John Donahoe -- Chief Executive Officer

Yes. Well, Kirk, it's an area that we're leaning into. And as you mentioned, federal was sort of the first area where we really focused on it, and that is both a go-to-market motion where you have dedicated people who speak the language but also tailoring the product, making sure we're meeting the federal security and other requirements. Second area as I think you know is we have a dedicated we call Med/SLED team but a dedicated team around some of the healthcare market, again both to meet the go-to-market expectations of those customers to -- that we understand their deep needs and to ensure that our product complies with the regulatory compliance requirements in the healthcare sector broadly defined.

And obviously, there are several subsectors within healthcare. The third area where we have a, I would call, a quasi formal vertical financial services. Now this is just by virtue that a large portion of the financial services world is either in New York or London. And so if you were to look at our New York and London teams, you see a lot of dedicated resources toward the financial services sector.

Obviously within that, you've got banking, you've got insurance, you have other subsectors. And there, I suppose, the go-to-market motion, also some focus on the encryption and other security requirements required for compliance and regulatory capabilities. And then -- so those three, I would say, we're furthest along, and we're increasing to invest in those and making sure that they're becoming more globally oriented in our ability to share experience, in our ability to ensure that we're trying our road maps to them. And then we have a set of next verticals too.

Telecom is an area where the needs are very common globally, whether you're Telstra in Australia or AT&T or Verizon in the U.S., or SoftBank in Japan. And so that's an area where, I would say is next on our stage of building out a global -- a bit of a global vertical focus. I'll also say I think there's a --

Kirk Materne -- Evercore ISI -- Analyst

Great. Thanks very much.

John Donahoe -- Chief Executive Officer

Sure. I'll just finish up, Kirk. There are a couple of others, a variety of others where it's more packaging and communicating that we understand the industry. We speak their language, we can share best practice, and those will be further down the load.

Kirk Materne -- Evercore ISI -- Analyst

Very good. Thanks very much. I'll pass it on to others. Congrats on the quarter.

Operator

Your next question comes from Sarah Hindlian with Macquarie. Your line is open.

Sarah Hindlian -- Macquarie Group -- Analyst

All right. Great. Thank you so much and thank you for taking my questions and congrats. I'll add my congratulations on really nice start to the year.

My first is for you John. John, as you're looking at digital workflows, how are you thinking about the next near adjacencies for you guys? And maybe you could give as an update on how you're thinking about your M&A strategy as well as this time? And then, Mike, I have a follow-up for you. It would be great if you could give us a little bit of incremental color on what you're seeing in terms of new logo addition, I think in particular, in international market? Thanks guys.

John Donahoe -- Chief Executive Officer

Yes. Sarah, on the first part of your question, in terms of organic product innovation, I think we talked before that we, at the beginning of last year, formed something we call NowX, which is a dedicated team focused on defining and building products that will launch one to three years out. And what's interesting is we have an abundance of ideas. So -- and it's ideas that come from our customers, ideas that come from developers, ideas that come from our people.

And frankly, many of these ideas come from examples where customers have built a automated workflow on our platform, and they come to us and say, "We just did this -- we built this for our own use, but we would love it if you build it out of the box." And so what the NowX team, which is now up to well over 100 people, do is they take all of these ideas on top of the funnel. They prioritize, work their way down to basically build out working prototypes of, let's say, three to five, maybe eight of them and then actually get some early, I'll call it, alpha customers to see if they really resonate and then get a beta customer to see the -- if they come out and if they are -- have the kind of value we think they do. And then our goal is each Knowledge to announce one to two, I don't know if you call them new products. I would call them extensions, adjacent extensions of our product portfolio and you'll hear about one of those at this coming Knowledge.

So I think you'll see a series of incremental new capabilities and new products that come out of us each year. And building that organic innovation muscle is really important. And then M&A, M&A to date has largely been focused on what I would call -- we call acqui-hires. That's probably defined as acquiring technologies, teams that help build out and accelerate the abilities of our platform.

We'll continue to do those. But if and when we see opportunities to acquire adjacent capabilities, acquire new growth engines, we'll -- obviously, we've got the resource to do it. We'll act on it. One of the luxuries we have is the luxury of choice and time because we have such a strong organic innovation agenda.

Michael Scarpelli -- Chief Financial Officer

And then, Sarah, on your question with regards to new logo acquisitions. What I'll remind you, is roughly 80% plus of our net new ACV comes from existing customers. So the new logos don't contribute a big piece of net new ACV in any point in quarter but that is the future for those up-sells. With regard to new logos, we did add about 200 new logos in the quarter and that compares with all of 2018.

We had about 1,000, I think. If you look at that, it was about 50% North America and 50% rest of the world. I will say North America was really driven by our federal as we said earlier; it was the one that really outperformed in our net new ACV. I would say EMEA and APJ were a little light, but that's because they came off such a fabulous 2018 and we knew Q1 going into that, when we gave guidance, is going to be a tiger quarter.

Sarah Hindlian -- Macquarie Group -- Analyst

All right. That's great color. Thank you so much. Appreciate it.

Operator

The next question comes from Matt Hedberg with RBC Capital Markets. Your line is open.

Matt Hedberg -- RBC Capital Markets -- Analyst

Hey, guys. Thanks for taking my questions. Congrats from me as well. And I guess, for either of you ITSM was included I believe in 15 of the top 20 deals this quarter.

And I think you talked last year about how ITSM reaccelerated. I guess, I'm wondering, did you see that same trend this quarter? And can you put a finer point on maybe what's driving such strong results in your core?

Michael Scarpelli -- Chief Financial Officer

I would say, the ITSM, there was no reacceleration in ITSM in Q1. But ITSM was -- ITSM and IT products in general were extremely strong for us and continue to be the big driver of net new ACV. We expect that to continue throughout the year, especially when we're landing new logos, but there's still a lot of room for expansion with our existing customers within ITSM.

John Donahoe -- Chief Executive Officer

And just building on that, Matt, what Mike was saying is that here's what I think can be a little misleading. And I think, frankly, us as an -- we as an organization really embraced this aggressively last year, maybe late 2017 but throughout last year. We may have an ITSM presence in a large global bank, but it may be in the private wealth business and not yet enterprisewide, or it may be in Europe but not in the other regions. And so when we look at -- we have a strong ITSM presence and as I said earlier, 75 of the Fortune 500 are our customers.

But in many of those cases, we landed in a division or a geography or a certain part of the organization, and we're in a world where increasingly customers want to drive platform adoption across the enterprise. And so some reasonable portion of the ITSM growth or the reacceleration is simply existing customers saying, "You know what we got great results in division A. Let's drive this enterprisewide." "We got great results in geography A. Let's extend that to be a more global rollout." And so that's why I don't think it's -- you can consider it a "mature" product.

I think that's significant opportunity.

Matt Hedberg -- RBC Capital Markets -- Analyst

That's great. Maybe just one more quick one about GSI momentum. I know we've talked about it in the past in terms of how significant GSIs can become for you guys. I'm wondering if there's any update there.

And perhaps, was that some of the strengths in platform sales this quarter?

Michael Scarpelli -- Chief Financial Officer

Well, what's interesting, I was with Mike Lawrie from DXC yesterday. We had our quarterly top to top. I was with Janet, the Chairman of Deloitte, last month. We had a half day top to top.

I'll see Andrew Wilson from Accenture next week at Financial Analyst Day, and I think he'll even be a guest of honor there. And in each of these conversations -- and obviously, the same with KPMG, IBM, are some of our -- basically, what they're saying is they see the same digital transformation opportunity and need. They see ServiceNow as one of the fastest growing portions of their practice. And I think we've gotten significantly better over the past 12 to 18 months of basically calling on, selling to, and serving customers in a coordinated way with these GSIs.

And that's actually healthy for customers because, in many cases, to get full value out of the ServiceNow Platform, you need to reengineer your processes. It's one thing to lift and shift historical processes and put it on the ServiceNow Platform. And you get some benefits of that, but the real power is when you take time to also reengineer how you operate. That's how you get digital transformation to operate.

And so our platform is increasingly at the epicenter of that not just in IT but across many of the various products and services. And some of these GSIs, DXC, who -- I was talking with Mike yesterday, they have platform GFC, right? They are building their own platform of which ServiceNow is core component along with some of cloud providers and others. And so we sell both with these GSIs directly to the customers where there's a direct ServiceNow instance. And in other situations, the customer is buying the platform, if you will, from the SI of which ServiceNow is a piece of it.

And frankly, we're indifferent, whatever allows the customer to get the best results. So they're a critical part not just of our future but I think, frankly, a critical determinant about whether digital transformation actually transforms customers' businesses and drives significant improvement and results. It's got to require us working closely with the GSIs. I think they see that.

We see that. And so they're stronger focused on energy than ever on making sure that happens. I'm also delighted -- I forget if I mentioned this last quarter. We hired David Parsons to run our partner ecosystem.

He's just a fabulous leader in this area, and so I'm really pleased with the progress that our teams are making in this area.

Matt Hedberg -- RBC Capital Markets -- Analyst

Well done. Thanks again guys.

Operator

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

Walter Pritchard -- Citi -- Analyst

Hi, thanks. Question for John and question for Mike. John, on the CSM side you mentioned legacy incumbent replacement. Could you talk through the competitive landscape there, what you're seeing given the success this quarter? How much is the big sales force in the market versus legacy and then some of the small emerging players in that space?

Michael Scarpelli -- Chief Financial Officer

Yes, so most of the CSM deals that we're doing is we're not replacing modern technology. We're replacing legacy technology. And that could be a legacy Oracle implementation from the placebo implementation, may be there is a lot of remedy that was used out there as well for CSM or their own solution. And that's typically what we're seeing.

There usually is modern technology competing at the table for the same business we're going after. It's really about our approach to CSM, why customers choose us, when they do choose us is because they like the fact that we are all about understanding root cause analysis within our system, a lot more collaborative with people in the organization to resolve the problem, so you never see what it's doing. And that's just a very different approach to Customer Service Management from a CRM-centric approach.

John Donahoe -- Chief Executive Officer

Let me -- Walter, let me just build on that. CSM is clearly a huge segment, huge market, $20 billion market. And I think way too many people think that somehow it's all the same, and it's not. There are distinct segments in that market.

And different providers align better with different segments. So as Mike said, we're not focused on going after the full $20 billion. There are certain segments of the CRM -- I'm sorry, the customer service market that require a strong CRM-based system, right? We're not the best provider of that. Salesforce is the best provider of that.

But there are other segments that want to take inbound contacts; identify root cause, which is a cross-functional workflow. Fix what the problem was, which again requires cross-functional coordination workflow so that, that problem doesn't happen in the future and segments where you want the customer to be able to address in a self-help or automated fashion, resolving their problem, understanding where it stands. And our platform is well geared for that segment of the market. So if you were to see where we focus our go-to-market teams in CSM, it's not across the entire CSM market.

It's against the subsegment of the market where our product lines up well with needs. That tends to be B2B technology company services businesses and ones where there is, I would call, sophisticated customer needs to be served. And so I think this is not a zero-sum market. It's a $20 billion market.

And as Mike said, there's a lot of old legacy software there, and so I think there will be multiple winners in this segment.

Walter Pritchard -- Citi -- Analyst

And then, Mike, on the upfront business, you had a strong quarter there with the Fed. How should we think about what you're expecting as we move throughout the year? It seems like that was light in Q4, and then it was stronger this quarter? Any way for us to get expectation there for the year, thinking about how it will vary quarter to quarter?

Michael Scarpelli -- Chief Financial Officer

Unfortunately, it depends upon the new business that's happening. Renewal business, we know, for instance, I know in Q2 there's a pretty big renewal that will take place that's on-prem. We did suspect that this business was going to happen in the quarter, but we kind of hedged that a little bit, because I just don't know if it doesn't come in. It was really driven by the federal government, a chapter of our federal government, roughly 50% of our federal business is self-help, because they can't be in a public data center and that would consider ours to be a public data center, even our fed ramp data center they're not comfortable being in, because of the security they require, and so it's hard to forecast.

I will say it's about 7%, 6% to 7% of our revenue for the full year associated with self-hosted deals.

Walter Pritchard -- Citi -- Analyst

Great. Thanks.

Operator

Your next question comes from Jennifer Lowe with UBS. Your line is open.

Rakesh Kumar -- UBS -- Analyst

Hi. Thanks. This is Rakesh Kumar sitting in for Jen Lowe. I wanted to talk about this Adobe partnership that you discussed a couple of weeks ago.

What does this specifically mean for ServiceNow and what more can we expect in the future?

John Donahoe -- Chief Executive Officer

Well, Rakesh, this, frankly, came to Shantanu and my attention based on our respective customer business. It wasn't something -- even though he's a very good friend of mine, it wasn't something we thought of in isolation. We both came back from the ongoing customer business we do and had a growing number of customers asking, "Hey, could you connect some of the ServiceNow Platform with some of the Adobe capabilities we had?" And Shantanu was hearing the same. And we're a big Adobe user ourselves internally.

So we got our platform team and to a lesser extent, our CSM team together with the Adobe team about how can we ensure that a shared customer that's using Adobe and ServiceNow, we make one plus one equals three, making it easier to use, getting more value and it's often about linking the data. It's -- Adobe provides tremendous marketing analytics and other data. Our platform has a lot of data. And if you're going to get a 360 view of the customer, you're going to get the kind of the actionability.

Adobe generates the insights. We often -- the system of action. And so linking them together is, wherever possible, making it easier for customers to get value sort of with the spirit. And so Shantanu announced that their customer conference feedback from customers has been strong and our teams are excited about it.

We think it causal can offer some incremental opportunity for each company.

Rakesh Kumar -- UBS -- Analyst

Great. And then I have one more. You talked about adding two new data centers in Japan. Does that potentially accelerate G2K penetration in that region?

Michael Scarpelli -- Chief Financial Officer

Well, the whole reason we're building those data centers because we think it's going to drive business and there are a lot of G2Ks in Japan specifically. And based upon our feedback to get into some of those larger entities, they require data centers to be in Japan because of the data sovereignty requirements. So yes.

Rakesh Kumar -- UBS -- Analyst

Thank you.

Operator

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

Sanjit Singh -- Morgan Stanley -- Analyst

Thank you. This is Sanjit Singh for Keith Weiss and congrats on a nice start to the year. I have two questions and maybe we can start off with a question on Madrid. John you mentioned the about 600 new features with this release.

And I think the highlight was sort of the mobile application, making it easier to build application on top of the platform. Do you see any of these new features or capabilities sort of force multipliers for some of your core products or does that sort fuel will growth in just the overall platform business?

John Donahoe -- Chief Executive Officer

Well, Sanjit, I'm very excited about mobile, right? In my prior life, I had the chance to have a front row seat in the consumer mobile revolution and got to see firsthand well how born-in-the-cloud applications like an eBay, like a PayPal, like Amazon, Lyft have completely transformed our lives at home by taking what's complex and are personalized and making it simple, easy and intuitive. That's now going to happen in the enterprise. And with Madrid was the first time we launched, in essence, the replatform SkyGiraffe native mobile capabilities in the ServiceNow Platform. And Madrid started with facilitator experience.

And so I see some nice pickup by our customers who are excited about that. New York, which comes this summer, has the employee experience. And so you'll hear us talking at Knowledge about how the mobile employee on-boarding capability, this true enterprisewide onboarding. But we're using it internally now at ServiceNow and it's awesome.

And then secondly, the, what I would call, shared services portal back in a mobile lab, I think you're seeing the most progressive companies realizing that employees don't care if they have an IT problem, an HR problem, a facilities problem, a legal problem, a finance problem. They just want to get their problem addressed. They just want to get their questions answered. And so if you're going to get people to migrate from -- change their behavior from picking up the phone and calling, they're going one place, get their questions answered and their problems addressed, that must be our shared services portal, internally branded, right? So we see that.

We have that as a web product today. In New York, there will be I think just a killer mobile app that'll be out of the box, low code, no code requirement for the customer, branded in the customer's name where they can then allow their employees to go one place to get their issues resolved. And so will that lead to an acceleration? You called it an acceleration of ITSM and HR case management, some of the other products, I think it will be -- certainly be an answer and we hope and accelerator and it is -- you see more and more companies taking a shared services mindset to driving a great and employee experience. And I think mobile, I think mobile will be an accelerator of that.

Sanjit Singh -- Morgan Stanley -- Analyst

That makes a ton of sense. Looking forward to hearing more at the Analyst Day in a couple of weeks. My second question was sort of our around sales and with so many big opportunities ahead of the company whether it's ITOM or CSM or HR from a sales perspective were there any changes made this year to -- moving to more specialized sales force? Or do you really feel that the current sales force can go -- can go to a customer's who are selling it -- selling the entire platform, whatever use case the customer maybe interest in?

John Donahoe -- Chief Executive Officer

Well, I think the biggest change is -- I don't know if you classically call it sales, but it's the other parts of the full go-to-market motion, which includes post-sales coverage. So I mentioned in my remarks that we had, we met with 10 to 15 of the top CIOs in the world in the CIO Advisory Council. And one of the things our best and largest customers are looking for is dedicated ServiceNow resources who are solutions architects, who are on site, helping them ensure that they are architecting their implementation of ServiceNow to get maximum value from the platform and advising them on how to extend the platform. And so as we think about, if we think about our entire go-to-market motion, it's not just the -- a classic pre-sales disciplines, accounting exec solutions consultant, product line specialist, but we also now -- these solutions architects who are also often part of our professional services organization, training and certification and our partner ecosystem I referred to earlier.

It's that whole combination of capabilities that allows us to deliver the kind of end-to-end customer coverage that allows us to expand the customer relationships the way Mike described earlier in a healthy manner. And in our case, we're quite fortunate that all of that reports to Dave Schneider. And so Dave is architecting right from the very beginning a seamless experience where -- when we both sell to a customer initially and then serve them, expand our relationship and help deliver real value to them over time. We're doing that bringing the full breadth of our capabilities to bear, that full end-to-end, we call it, go-to-market experience and includes customer success solutions, architects and coordinating with our partners.

And so in that sense, yes, our -- one of our sales motion is evolving, and Dave's doing a great job and his team, as I mentioned, Dave Parsons, Jimmy Fitzgerald, Cath Lang, who are on the post-sale coverage areas coordinating along with Kevin Haverty and the really strong presales team we have. And it's now increasingly -- we aren't even talking about presales, post-sales. We're just talking about customer coverage.

Sanjit Singh -- Morgan Stanley -- Analyst

Got it. I appreciate the thoughts. Thanks.

Operator

Your next question comes from Samad Samana with Jefferies. Your line is open.

Samad Samana -- Jefferies -- Analyst

Hi, good afternoon. Thanks for taking my questions. I wanted to ask about traction for the add-on products outside of the U.S. or maybe if you could give us a little bit more color around whether you're seeing more traction for CSM and HR Service Delivery in the U.S.

or outside of the U.S.? And within the New York products what's having more success with your international customers?

John Donahoe -- Chief Executive Officer

We're really not seeing any difference from a customer adoption of the emerging or platform. It's pretty much the same profile in the U.S., in EMEA and APJ. At the end of the day these tend to be global, large enterprises that all have the same problems. So, I'm not seeing any noticeable difference.

Yes, one quarter you may have because there's big deals in CSM or HR or maybe stronger in one regional than other, when you look at it over a year there's really no difference that I've been able to see.

Samad Samana -- Jefferies -- Analyst

Great. And then maybe just one follow-up. The ITSM pro SKU, I believe that's priced quite higher than the core SKU. I'm curious if that's having an impact on the size of new deals? And as existing customers come up for renewal, maybe you could comment on whether they're upgrading to higher dollars, if that's driving a positive impact on getting them to adopt additional products rather than eating up price increase? So, maybe it will be helpful if you could just walk us through that as well.

Thanks.

Michael Scarpelli -- Chief Financial Officer

Yes, so I can say the pro bundle was really a way to monetize the investments we've made in artificial intelligence in machine learning. And we have definitely seen an uptick in that pricing has been able to keep pricing higher on customers who are likely to do that with new customers, and we are seeing success on renewals with our customers, but it's still very early. Remember our renewals take over a number of years, typically a customer signed three-year contract. And I think it's going to take a little bit more time to see what the uptick is with our installed base of customers, but it's definitely getting traction with new logos.

Samad Samana -- Jefferies -- Analyst

Great. Thanks for taking my questions today. Congrats on the quarter.

Operator

Your next question comes from Derrick Wood with Cowen. Your line is open.

Derrick Wood -- Cowen and Company -- Analyst

Great. Thanks, John. Given the brand marketing you've invested in over the last few months, I know you mentioned its increased awareness with the C level executives. What I'm curious has this already helped in the field surface new conversations and engagement at the C-level? And I guess if we were to fast forward a year or two from now is one of the hopes that it drives more executives to be buyers of ServiceNow or how do you think it could help transform to high-level engagements?

John Donahoe -- Chief Executive Officer

Yes, Derrick, I think it's too early to point out that direct cause and effect. But I can tell you, for instance, as I engage with C-Suite execs, either as customers or just more generally, the number of people that said, hey, I saw that ServiceNow ad. Boy, that was funny. That was great, which is exactly what the point was.

Alan Marks, who's sitting here next to me, is our chief brand creative officer and was the real architect behind these commercials. And again, here's the simple -- the way I think about it and I think Mike and I would think similarly about this. But a year from now when a CIO or CIO and CHRO are bringing to a CFO a $10 million contract for ServiceNow, we want that CFO to say, yes, I've heard of ServiceNow. And so there's just a general awareness as being one of the top strategic platforms that we're trying to build.

Whether that will lead to new leads across the C Suite, I don't know. I can -- frankly, that's not the direct goal because usually the new leads come from more direct selling activities. This provides kind of the air cover, legitimacy and brand building that establishes us as a leading innovative, very human with maybe a little sense of humor company. I also think, frankly, the value as much with -- on the employee brand side.

Talent is the lifeblood of any technology company, and we are growing rapidly and growing globally rapidly. And so it matters if students on the top universities have heard of ServiceNow. It matters if someone in a local market can say, go home to their parents, whether real/proverbial mother and say, yes, I'm joining ServiceNow and have -- his or her mother have heard of ServiceNow. You may laugh about that, but that kind of stuff matters as you're kind of scaling in the way we are.

And we are absolutely focusing in attracting and retaining top talent. And so the global brand building's also part of that, is -- both C-suite executives and talent. So good start. We're going to get the data in on our aided, nonaided awareness, which I'm sure has increased and we'll continue to invest to build that over time.

Derrick Wood -- Cowen and Company -- Analyst

Got it. Thanks. I was hoping to touch on the SecOps product. It doesn't seem to get as much attention a CSM or HR, but can you talk about how you see the opportunity is shaping up over the next 12 to 18 months? And maybe what you can do to help drive more penetration in the security budget?

John Donahoe -- Chief Executive Officer

Well, I mean I think interestingly one of the things that we've done is by bundling our products into the three workflows and SecOps in the IT workflow, I think that's a little more symptomatic or emblematic and aligned with how the decision-making often happens because where we thrive is when a CSO and a CIO are both jointly involved in the -- our products decision. We do vulnerability response, incident response and so as part of I think a healthy and natural ServiceNow bundle if you will, ServiceNow suite of solutions. I'll also say I mentioned earlier I was with Mike Lawrie, his team from DXC yesterday. They had some very interesting security offerings that they were saying that they believe ServiceNow can be a really important component to it.

So, I think partnerships like -- with people like DXC, with people like Accenture, Deloitte, the KPMG can also accelerate part of our business as we are offering the full security solution. We have an important component of it with our security -- our incident respond, our vulnerability response and to some extent our GRC capabilities.

Derrick Wood -- Cowen and Company -- Analyst

All right. OK. Thank you.

Operator

Your last question comes from Michael Turits with Raymond James. Your line is open.

Michael Turits -- Raymond James -- Analyst

Hey, Mike and John. I just want to talk about the mid-market and commercial market. Who are you seeing competitively down there? And are you adjusting your go-to-market in any way?

Michael Scarpelli -- Chief Financial Officer

We tend to see in a lower market, that's where you hear of more the Atlassian with their service desk and Zendesk. And you have Freshworks -- t's been the same people that we've seen there for a number of years, but it's a very small piece of our business. As you know, we tend to focus more on enterprise. The commercial segment now was around 20% of our business, and even of that, that's really the high-end commercial.

It's typically the 3,000 to 5,000 employees we focus on, and it still very much a direct selling model. We are trying to do more through the channel. But at the end of day, when you have customer data, they want to have a direct relationship with you. So channel partners are more involved in that segment, but we still have direct contracting relationships with those customers.

And I got to say there's really been no change in that market for the last five or six years that I've seen. But the one exception I would say is we used to hear more of Cherwell. We don't hear of Cherwell nearly as much as we used to in that segment.

John Donahoe -- Chief Executive Officer

And, Michael, just building on what Mike said, my observation would be, one, we have a terrific leader there, John Sapone, and he's got a really, really strong team, a talented commercial sales team. But what you see is there are certain businesses that are in that, we define commercial as 1,000 to 5,000 people that are high growth and are on their way to becoming an enterprise. And almost inevitably, the larger you get, the more you want a platform, and the more you want a scaled platform like ServiceNow. And that's really where we're strongest.

Some of them that's going to stay right at the 1,000 employees, be there three to five years from now. They have to make a fundamental decision. Do you want to go with one of the companies Mike mentioned earlier or do they want to go with ServiceNow? But where we -- what we really like about our position is those companies in that market are growing, understand that they need to -- that once you get to a certain size, you have to have the kind of fundamental platform that we offer. And so John and his team do a nice job of segmenting that market, ensuring they're focusing their energies on where customers have a real, legitimate need for what we deliver and offer.

But as Mike said, it's not -- OK.

Michael Turits -- Raymond James -- Analyst

Thanks very much, guys. Really appreciate it.

Michael Scarpelli -- Chief Financial Officer

OK. Thank you, everyone. 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.

Operator

[Operator signoff]

Duration: 60 minutes

Call Participants:

Michael Scarpelli -- Chief Financial Officer

John Donahoe -- Chief Executive Officer

Raimo Lenschow -- Barclays -- Analyst

Brad Zelnick -- Credit Suisse -- Analyst

Kirk Materne -- Evercore ISI -- Analyst

Sarah Hindlian -- Macquarie Group -- Analyst

Matt Hedberg -- RBC Capital Markets -- Analyst

Walter Pritchard -- Citi -- Analyst

Rakesh Kumar -- UBS -- Analyst

Sanjit Singh -- Morgan Stanley -- Analyst

Samad Samana -- Jefferies -- Analyst

Derrick Wood -- Cowen and Company -- Analyst

Michael Turits -- Raymond James -- Analyst

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