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ServiceNow Inc  (NYSE:NOW)
Q4 2018 Earnings Conference Call
Jan. 30, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce to your host for today's conference, Mr. Michael Scarpelli, Chief Financial Officer. Sir, you may begin.

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 fourth quarter financial results and discuss our financial guidance for the first 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 for prior quarters, 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 quarterly report on Form 10-Q, for information on risks and uncertainties that may cause actual results to differ materially from those set forth in such forward-looking statements.

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

John Donahoe -- President and Chief Executive Officer

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 $1 million 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 a 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 performed well. Both our HR and customer service products, for example, now have more than 20 customers doing more than $1 million 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 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 on 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 is recently promoted to be our President, Global Customer Operations. Dave is an exceptional leader who is deeply committed to driving successful customer outcomes.

So as we enter 2019, we're also investing in increased awareness of our company to 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.

Michael Scarpelli -- Chief Financial Officer

Thank you, John. Q4 was our strongest quarter ever, and we have a lot of momentum as we begin the 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 headwind.

Q4 subscription revenues were $666 million, representing 35% year-over-year adjusted growth, 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 to grow seasonally stronger. It is our largest new bookings and renewals quarter each year, which compounds into larger Q4 billings over time. We expect this dynamic will continue and therefore will impact the seasonality of billings in other quarters throughout the year.

Our strong top line performance was driven by 51 new transactions greater than $1 million, six of which were new ServiceNow customers. IT transformations continue to be the catalyst for new customer relationships. We reaccelerated growth across our IT workflows throughout 2018, underscoring the massive opportunity remaining for ServiceNow to lead customers through their digital transformations. The remaining 45 transactions greater than $1 million were expansions of existing customer relationships across our full suite of enterprise workflow solutions, highlighted by every one of our products outperforming expectations.

Moving to Q4 profitability. Operating margin was 21% and free cash flow margin was 34%, which was driven by strong Q4 collections and improved DSOs.

Now, let's turn to guidance. For Q1, we expect subscription revenues between $715 million and $720 million, representing 35% to 36% year-over-year adjusted growth, including approximately $21 million of foreign exchange headwind. We expect subscription billings between $790 million and $795 million, representing 30% to 31% year-over-year adjusted growth, including approximately $23 million of foreign exchange headwind and $18 million (ph) of duration headwind.

We expect a 16% operating margin and 190 million diluted weighted average shares outstanding for the quarter.

For 2019, we expect subscription revenues between $3.215 billion and $3.235 billion, representing 34% to 35% year-over-year adjusted growth, including approximately $41 million of foreign exchange headwind.

We expect subscription billings between $3.705 billion and $3.725 billion, representing 31% to 32% 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, we are very pleased with the top line returns from investments made throughout the year and we'll continue to invest in the priorities John outlined in his prepared remarks. 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@servicenow.com. For those who cannot join in person, we will hold a webcast of the event accessible on our IR website.

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

Questions and Answers:

Operator

(Operator Instructions) And our first question comes from Kirk Materne with Evercore ISI. Your line is now open.

Stewart Kirk Materne -- Evercore ISI -- Analyst

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 G 2000(ph), 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 be more of an enterprise platform, 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 in billings and 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.

John Donahoe -- President and Chief Executive Officer

Yes, Kirk. 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, there's -- 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 we'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 is involved, but they're partnering with their CHRO or HR. They're partnering with facilities. They're partnering with finance. And so, I can give 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 really does help that workflow around each of the other systems of record in a way that allows the customer to get the benefit. So -- and I think our sales teams and our PLS (ph) 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.

Michael Scarpelli -- Chief Financial Officer

And Kirk, on your question on billing, Q1 is seasonally our lowest billings quarter. In 2018, we did see our billings increase. The growth rate was increasing every quarter. I will say a lot of that was driven by the strong outperformance we had, especially in the second half of the year last year. And I do expect that our billings will continue to get stronger as we go, but I'm not forecasting it to be as stronger growth as last year, just much bigger numbers.

Stewart Kirk Materne -- Evercore ISI -- Analyst

Superb. Thanks very much.

Operator

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

Matthew George Hedberg -- RBC Capital Markets -- Analyst

Hi, 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 to 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.

John Donahoe -- President and Chief Executive Officer

Yes, Matt. On outlook, I'm not sure that we had anything unique to say on that in that most of our customers are onto 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 then our focus is very much on demonstrating business value, demonstrating economic value. 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 I haven't seen any major changes in customers yet, but obviously, none of us don't know -- we don't know what we don't know. But focus on productivity, focus on business value, that's the long-cycle view.

And then on ITSM, this is -- to be honest, I think we -- the narrative got ahead of the reality around our ITSM when we started publishing it. 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 only one part of the company and so there's the opportunity to expand across the enterprise. And increasingly, I think as companies 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 enterprisewide initiatives.

So existing customers, that's driving expansion where we're -- already won enterprisewide initiatives. And in new customers, you're seeing -- they're starting off with more enterprisewide 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 -- I think I'm saying the same thing, better employee experience, better productivity, and it's kind of real.

Michael Scarpelli -- Chief Financial Officer

I'll also, Matt, that I think we're seeing the benefit of the investments we've made over the last few years on really improving our overall IT portfolio and some of the focus we've had around the whole user experience and other things. So it's really driving that with both existing customers as new customers.

Matthew George Hedberg -- RBC Capital Markets -- Analyst

Super helpful. Well done. Thanks guys.

John Donahoe -- President and Chief Executive Officer

And we're both really excited about the next step of that, that's coming here in mobile.

Michael Scarpelli -- Chief Financial Officer

Yes.

John Donahoe -- President and Chief Executive Officer

The kind of mobile experiences, consumer-grade mobile experiences we've coming out in the next -- a little bit in the next release, but then in New York this summer, awesome mobile experiences.

Operator

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

Sarah Emily Hindlian -- Macquarie Research -- Analyst

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. On that point John, I'm looking at the top 20 data and all the regional data, and the strength, it looks very broad based, but it's also the biggest fee you've had in, it looks like, seven quarters. So can you help just tone 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. With the shutdown in 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.

John Donahoe -- President and Chief Executive Officer

Sure, Sarah. I'll start that out. So, the performance this year. We really just saw strength across the Board as we said in all of our products. But all of our deals as well to. Every deal hit their targets, but what really stood out was EMEA had a fabulous year and a fabulous quarter. Americas which were the most penetrated having fabulous year and quarter as well too and APJ performed for the year. So I can't call out any one thing. I just think it's really the fruit of all the investments we been making over the last number of years and in particular some of the things we're starting to see with customer success is driving customer to buying more from it.

In terms of the federal business. The federal shutdown, I think that's where you're getting to and that potentially will have an impact, but we think we'll get the results before the end of the year. Q3 is obviously our big federal quarter. So defense (ph) is our biggest customer within the US government and this type of the shutdown really isn't being impacted that at all from what we see in talking to our federal sales team. (inaudible) as I said it's really Q3 and that's a big federal quarter in terms of our operating margin guidance we set that out at our Analyst Day and what the results of what we're seeing in 2018 give us the confidence that we should invest more because of the opportunity we're seeing. And hence why while we are giving the 100 basis points of operating margin expansion for the full year, so we said it was the minimum. We would do it in our Analyst Day and we're keeping our free cash flow margins flat to start the year out more really focused on growth and I think you've seen the growth in 2018. I don't think anyone probably could grow at the size we are at the rate that we've been doing.

Sarah Emily Hindlian -- Macquarie Research -- Analyst

All right. That's very helpful. Thank you so much.

Operator

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

Brad Alan Zelnick -- Credit Suisse AG -- Analyst

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 the 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 you're seeing the most adoption? And I've got a follow-up.

Michael Scarpelli -- Chief Financial Officer

It's all of them in many ways. There's not 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 the products to be more in terms that align with how customers think about it and you heard me talk about this in Q4 where we're saying 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 were a platform with free workflows, right?

And we are first and foremost a platform. We have an IT workflow and 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 the IT experience. And then last is the customer service of workflow 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 the problem, fix it, so it doesn't happen again and when a problem -- 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 two workflows. It aligns more of how customers think about the business problems that they're trying to address. And CJ, kind of refined his product organization in Q, in 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 level.

I want to stress that this is really will not change external reporting for us. This is really just the way we deal with customers and talk to customers so don't explain changes there.

John Donahoe -- President and Chief Executive Officer

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

Brad Alan Zelnick -- Credit Suisse AG -- Analyst

Thanks so much guys. And just a 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 you're thinking on progress involved on corporate development in M&A since we talked about this topic at Analyst Day? Thanks so much.

John Donahoe -- President and Chief Executive Officer

Brad, as I said in Analyst Day priority one, two and three is to execute against our organic 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 with our affirmation of our NowX group which is 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 -- sorry 50 engineers in NowX. 100% focused on developing new products that will come out in two, three years.

And so, now 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 our 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 later in the year to $10 billion and beyond and often you have -- you can selectively use M&A to create other growth engines.

It's not out of meeting the by 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, hey, man if you guys -- we'd really like if you can help transform IT. If you can take a look at these types 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 added to our portfolio and positions us on that $5 billion to $10 billion we won't be shy about pursuing it.

Brad Alan Zelnick -- Credit Suisse AG -- Analyst

Fantastic John and Mike. Thank you so much.

John Donahoe -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Raimo Lenschow with Barclays. Your line is now open.

Raimo Lenschow -- Barclays Bank PLC -- Analyst

Hey, thanks for taking my question. And congrats from me as well. Can you talk a little bit because we are starting the new year about the changes or no changes to the sales organization. Maybe you kind of double-click on the 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.

John Donahoe -- President and Chief Executive Officer

Well, maybe I'll just talk a little bit about Dave and then Mike you can put changes in the sales organization the context that compared to previous years as well. So I'll just say first I'll say is Dave Schneider is just a spectacular leader. And he's known for along with Kevin Haverty, he's kind of a Godfather of the ServiceNow best-in-class go-to-market organization. I heard about that before. I've joined this company I had the privilege to see him up close and personal since I've been here. And seen 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 product 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 made -- Dave and the team made nice progress in 2018 and we're very excited. We just had our sales kick-off last week. It was the most aligned end-to-end customer sort of mindset that we talked about formula for success for our customers. And we're excited about taking that forward to 2019 and beyond. And you want answer how -- the (inaudible) their changes in the sales team?

Michael Scarpelli -- Chief Financial Officer

Yeah. What I would say Raimo there's no material changes -- its all through the structure of our sales organization going into 2019. If you recall the last major change was in Q1 of 2015. It will be just a normal tweaking of the sales organization. We're going to continue to invest in enterprise were (inaudible) were our focus is, we're still investing in commercial 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 real no decisions there. We're going to kind of try a few things, but no major changes at all to our sales organization, why? Because it's been working. And we don't want to mess that up.

Raimo Lenschow -- Barclays Bank PLC -- Analyst

Perfect. Thank you.

Operator

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

Justin Furby -- William Blair & Company -- Analyst

Thanks guys. And congrats on solid results. John, I wanted to ask about the ISV community. You guys are building and I think the platform's clearly a powerful part of your story I know it 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. Thus I'm wondering, if you can maybe give a sense for how big you think that opportunity can 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 sales force? So do you think of it, it in a different way? Thanks.

John Donahoe -- President and Chief Executive Officer

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.

Justin Furby -- William Blair & Company -- Analyst

Yes, I'm inside for sure.

John Donahoe -- President and Chief Executive Officer

Yes. My father and (inaudible) family are there and they have been saying its roof chilling. Let me just start with platform. We are fundamentally a platform company. And a significant and our customers recognize that. That was one of the thing instructed most when I first joined the company how many customers led with it -- say things like I love your products, but I really love your platform. Its easy to build on, it's fast and it's extensible. And so already we have many developers in our customers building in our platform and that, and so we're continuing to make investments in the platform to enable that or we call it platform-as-a-business. Josh Callan 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 prepackage applications and to expand is simply hard. And so -- and to provide a growing really product development laboratory for us because we see where our customers are building and where they want us to build something out-of-the-box. And then our ISV programs you said is still relatively in its early stages.

We've got a good strong leader there, (inaudible). 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 is that to be honest we're never going to build the specific use case for that industry.

And so we're trying to find and encourage partners who can build something that's customized to specific into 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 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 started a pretty small base and we want to continue to focus on it. We think it's one of those organic growth opportunities is that we think is still in its early days.

Justin Furby -- William Blair & Company -- Analyst

Got it. Thanks very much, Donahoe. Appreciate it.

Operator

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

Robbie Owens -- KeyBanc Capital Markets Inc. -- Analyst

Great. Thank you. 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 ticked 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 on what's partner influence and how we should think about 2019 relative to that metric?

Michael Scarpelli -- Chief Financial Officer

Yes. 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 you look at our top deals. It was 79% influenced. And source was 29% that's worked through the channel.

Robbie Owens -- KeyBanc Capital Markets Inc. -- Analyst

Sure.

John Donahoe -- President and Chief Executive Officer

But, what I would say, we're getting better. Again we have a nice new strong leader in (inaudible) David Parsons who's joined us in the fourth quarter. And just in the last 60 days we've had talked to tops with three of our top four at size. 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 is that we -- fastest growth practice. We want to go comp (ph), the largest practice. That's the aspiration. But we're getting better in partnering with them and that's on both sides.

Mike said 12-months ago we not had aligned people talking to aligns people. And today we have I'll take vendor who runs our European business. He's made a real effort to ensure that our U.K. leader and specific account execs on U.K. accounts are talking to their partner counterparts on those accounts. So there's a more joint planning at accounts. There's more joint sales campaigns. And so I think we are in some ways use the reference inside than the scale of one to 10 where 10's from our past we've gone from a two to four over the last year.

We're twice as good as over a year ago, that we are -- a formal want to be 10 plus and the partner still in the same way. So it's getting increased attention. I think a strong leadership from Dave Parsons and aligned organization is now embracing partners recognizing that you can't get to digital transformation which is software. It's just a platform. You need a really strong partner to help reengineer the processes and ensure that the implementation is done in high quality out-of-the-box manner.

So partners are very important to our success and we're going to continue to get better and better at making sure we operate strategically and effectively with it.

Robbie Owens -- KeyBanc Capital Markets Inc. -- Analyst

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 of your go-to-market efforts?

John Donahoe -- President and Chief Executive Officer

I think on -- there's no simple answer to that, but I'll just make maybe one of two observations that these are not silver bullets, but they're among things -- our European team has done a really nice job of being in various 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 of one of our leaders Michael (inaudible) there has a template that we just rolled out in our sales kicked off.

Michael ran Northern Europe and he has a template of how we can build a strategic plan with the customer a shared strategic plan around their company strategic priorities around the CIO's priorities or in the business outcomes they're trying drive in digital transformation and how the Now Platform is helping them achieve those outcomes to achieve the results.

And so I guess my add and look at the math of those exact 35 accounts, but I don't 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 in the frontline tell our peer people partner with customer success, people with partnering with -- talk about any specialized who partner with the inspired team.

In some places in the US we're just building 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, it's not rocket science, but it's a formula that's proving its way out. Anything you want to add, Mike?

Michael Scarpelli -- Chief Financial Officer

I'd like to add to 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 the leader many times they change people out and I think we have a very stable sales organization in Europe. We may make some big investments in Germany in 2018 and I think they're going to pay off any time in 2019 and '20. And so I think leadership is really what's been driving a lot of the performance in EMEA.

Robbie Owens -- KeyBanc Capital Markets Inc. -- Analyst

Thank you.

Operator

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

Samad Samana -- Jefferies & Company Inc. -- Analyst

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

John Donahoe -- President and Chief Executive Officer

So, what I would say is in those deals there was a some CSM in HR and/but IT was in all of those deals as well too and it's still IT which is the main driver. One there was HR that helped drive it. And as I said this is the biggest project, there's other things as well. (Multiple Speakers) it's the regular people that we're replacing all the time. Its still, and its larger accounts it's pretty big and they tend to be HPE or BMC depending on what the company shows and we're still seeing those replacements.

Michael Scarpelli -- Chief Financial Officer

And I guess, some of those small accounts we're seeing CSM right there's down -- certainly in the commercial segment there are 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 obviously who oversees all elements of that. But not as much in the upper level.

Samad Samana -- Jefferies & Company Inc. -- Analyst

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 customer, but just -- how much was done from its revenue this year in the fourth quarter versus last year?

Michael Scarpelli -- Chief Financial Officer

In the fourth quarter, the fourth quarter was $29 million in comparison to $26 million in Q4 of 2017. That's actually down from Q3, Q3 tends to be our biggest on-prem because that's a big federal quarter and a lot of federal customers are on-prem due to security requirements.

Samad Samana -- Jefferies & Company Inc. -- Analyst

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

Operator

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

Walter Pritchard -- Citi Investment Research -- Analyst

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

Michael Scarpelli -- Chief Financial Officer

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

Walter Pritchard -- Citi Investment Research -- Analyst

And just -- and 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 then as we orient our models going forward? Should we be should -- actually (inaudible) or not?

Michael Scarpelli -- Chief Financial Officer

The way we manage the business and now we have managed the business is net new ACV. And you see that annually in the proxy and you will get a proxy for it by now seeing the backlog on a quarterly basis and the disclosures around what's going to roll up over the next 12-months. That's how we manage the business.

Samad Samana -- Jefferies & Company Inc. -- Analyst

Great. Thank you.

Operator

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

Michael Turits -- Raymond James & Associates, Inc. -- Analyst

Hi, guys. Good quarter. Just one for 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 then for Mike just a clarification with IT up 58% of new ACV this quarter. Is that only because everything else grew so fast or if we did the math what we come out with less growth in the fourth quarter? I know you did well for the year?

John Donahoe -- President and Chief Executive Officer

Yeah, Mike. let me -- 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 at the future. And so our ITOM business, our ITOM product which had a very strong year is an increasing with the service mapping or some of the other products within ITOM. They view is 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.

And 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 infinite response and vulnerability response. And in many ways that should take into core competence of what our platform does and applying it to IT use or -- I'm sorry, security use cases. And so, I don't see us getting into fundamentally new areas of security where there are already solutions existing.

If they're natural extensions of our platform that help a CIO or CISO build a better overall security experience or better all security portfolio. Then we'll look at it. But it's not a market segment per se. We're going to say, let's pursue it because it's a very crowded and frankly fragmented arena. In an area that we do see and we initially have this in our security organization, but it's really, it's partly security-related, but it's, I think some are distinct. We see a lot of demand for GRC government risk and compliance, government risk and compliance.

And as audit committees and CIOs, CISOs, CFOs look for greater scrutiny around those three separate, but related areas. Our GRC and our platform we think has enormous opportunity. And so, GRC product group grew very aggressively in 2018. I think, we will 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 point (ph) company called me last year. And it said, you know John, ServiceNow is my one source of truth for our GRC and how we -- 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 enterprisewide risk data? And could you work with our accountants and in this case it was quite far us to see if you can get it balanced and validated.

And so that's, whether that happens exactly or not we're working on it, but more yet the kind of customer demand where they're saying we've got so much going on in governance risk and compliance and if I can pull it together through a coherent instead 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 enough, but that's an area I don't if you call that security or not, but that's an area we think there's a lot of opportunity for ServiceNow our platform is uniquely positioned to help the strong solution on that.

Michael Scarpelli -- Chief Financial Officer

So on your question with regards to growth. IT was very strong for the full year. It was a strong in Q4, but emerging growth was very strong in Q4. That shadow that and you can see that in the IR net.

Operator

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

Sanjit Singh -- Morgan Stanley -- Analyst

Hi, this is Sanjit Singh. Thank you for taking the questions and squeezing me in. I wanted to revisit some of the topic that was said a little bit earlier and just to which of these opportunities we 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're helping customers to digitize the front office. And maybe a way of framing it -- if Michael (inaudible) but we haven't -- we 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?

Michael Scarpelli -- Chief Financial Officer

Trying to say it again. For me, to make sure I understand.

Sanjit Singh -- Morgan Stanley -- Analyst

Yes. So -- just -- if you think about this is the core IT business and helping customers reinvent the IT department or an IT operations and then areas like HR in customer service where you guys are seeing large-size deals which of those sort of opportunities you brawl you think are/is going to be the most impactful to the business whether it's in ROI or the durability of growth or anywhere that you want to frame it?

Michael Scarpelli -- Chief Financial Officer

The answer to your question is, yes. I would just state that even 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 an IT. And but we're excited about all of our emerging products and then your question around if we have another $100 million where would invest it? We will go down in customer service management -- I mean that's an massive opportunity.

John Donahoe -- President and Chief Executive Officer

Yeah, I mean -- Just one more comment, I'd make. 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 did really drive great productivity, 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 that enables a cross-functional using software, using platform to drive cross-functional processes.

And so I think what we're seeing is even distinctions and historical it's might -- back from 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. And so you won't see IC or Gartner really make us cut like that, but I do think it's one of the things that's fulfilling our growth is that 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 products 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 a, end-to-end customer or end-to-end go-to-market motion. I'll pick both sales and customer success in it. I guess this are for. Number three, talent. We're growing at our talent globally talent's are lifeblood of any company that wants to build and endure for the long term. And then investment priority number four in 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. If there's another way we can raise our visibility with C-suite executives.

Sanjit Singh -- Morgan Stanley -- Analyst

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

Michael Scarpelli -- Chief Financial Officer

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

Sanjit Singh -- Morgan Stanley -- Analyst

Thank you and congrats.

Operator

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

John Donahoe -- President and Chief Executive Officer

Okay. I guess Kash has dropped off the line. So, thank you operator. As a reminder a replay of this call will be available with the webcast in the investors section of our website. Thanks for joining us today everyone.

Operator

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.

Duration: 57 minutes

Call participants:

Michael Scarpelli -- Chief Financial Officer

John Donahoe -- President and Chief Executive Officer

Stewart Kirk Materne -- Evercore ISI -- Analyst

Matthew George Hedberg -- RBC Capital Markets -- Analyst

Sarah Emily Hindlian -- Macquarie Research -- Analyst

Brad Alan Zelnick -- Credit Suisse AG -- Analyst

Raimo Lenschow -- Barclays Bank PLC -- Analyst

Justin Furby -- William Blair & Company -- Analyst

Robbie Owens -- KeyBanc Capital Markets Inc. -- Analyst

Samad Samana -- Jefferies & Company Inc. -- Analyst

Walter Pritchard -- Citi Investment Research -- Analyst

Michael Turits -- Raymond James & Associates, Inc. -- Analyst

Sanjit Singh -- Morgan Stanley -- Analyst

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