 Okay, we're back, this is Dave Vellante at wikibond.org. I'm here with Jeff Frick. This is Silicon Angles theCUBE. We come to events, we extract the signal from the noise, we share with you, our audience, the best guests that we can find. Mike Scarpelli is here, he's the CFO of ServiceNow. We're at Knowledge, great conference, and we're extracting that signal from all the noise in the industry. Mike, welcome to theCUBE. Thank you very much for having me today. Yeah, you got to be thrilled with the progress. You're coming off obviously a very strong quarter. You had your financial analysts here at the event, which is great for them. They get to see the customers. You guys are very transparent about giving access to customers and try to sort of coordinate them off behind the velvet rope. I mean, it's wide open here. You've got 4,000 people, most are customers. You've got prospects here. So congratulations on the progress thus far, because you're a public company, so you're never done. You're always on the cusp. So tell me, what's the reaction been from the financial community that's had an opportunity to attend this event? What are they telling you? The biggest feedback from investors was, is they're surprised at the number of customers, and large logo customers, that we're able to have up on stage and talk glowing about the company. And it's beyond the whole ITSM help desk, because historically that's been the biggest pushback we've gotten from investors. There's a lot of kind of some of the, more the shorts that kind of pushed the limited market size, and the feedback was, is now they get it, how big the market size can be and the potential. And many, they feel it's endless the market size. Yeah, well let's talk about the TAM a little bit. Your main served market, you're saying, is the global 2000, you're about 14% penetration into the global 2000, even though you've got 1,600 plus customers. So you've got a ways to go there. There's definitely some nice runway, but the TAM is much more than that. Certainly you can serve a small and mid-sized customers. Plus, you're approaching this new opportunity with platform as a service, if I can even use that term. So talk about your TAM a little bit. How should observers be thinking about the opportunity for service now? Well, the way we look at it is we feel the traditional ITSM market is at least a $4 billion plus market. If you just do the math based upon our run rate, our penetration, and then looking at and our penetration boost in terms of the number of customers, and this is just focused on large enterprise. We think there's about 12,000 large enterprises in the world that are ideal customers today where we're going after. We really don't go after the SMB market directly. We let some of our MSP customers, like Dimension Data and some of the others that serve the SMB market. And then within our customer base, even within IT, we still see many G, for example. We're not in all the divisions of G, so we know there's more room to grow. And we think we're somewhere about a third penetrated. And if you just look at that, that would tell you we're somewhere around a $4 billion market there. And the platform, we just announced the app creator to this date that we really never enabled our customers to really deploy custom apps. They did it on their own. Now with the app creator, it's much easier for customers to now play with it. And so we think the market is at least double the ITSM market, and I think that's being very conservative. Talk to some analysts and they think it's a $20 billion plus market. Yeah, I mean, my sense is that's very conservative because the big problem with the ITSM market is it's sort of been forced on people. You don't buy the legacy ITSM products because you want to, you buy them because you sort of have to and you sort of forced into it and they just don't help me grow my business. It's just a painful environment. So $20 billion to him, I don't know. I mean, that sounds like it's a great possibility for you but as you start to go into the business lines and new applications, who knows, it could be even much larger than that. So talk about what it's like to be a public company. I don't know if you saw Mark Andreessen on CNBC the other day, did you hear about this? No, I never saw that, no, what did he say? So he basically came on and said, oh, it's horrible to be a public company and it's very challenging and the number of public companies is down and of course it was self-serving but a lot of what he said is true. Now, Frank and his keynote said, you guys did your IPO right after what he called the face plant IPO so they had to make you a little nervous. I personally thought the Facebook IPO was going to be a great thing for technology companies but when they overpriced it, it became not a great thing. It wasn't Netscape, it wasn't Google, it was face plant. So what's your take? I mean, obviously you've been performing. What's it like being a public company? What's the experience been like other than ringing the bell at the NYSE? That must have been exciting. You know, things really haven't changed that much. This is the fourth company, I've been the CFO of public company. What I will say today is probably the biggest challenge for being a CFO today and any company is really the whole auditing profession with the PCOB has really changed that the level of detail that auditors go into today has made it a lot more challenging for your quarterly close and your annual close. And that's probably the most painful thing of being a public company from my perspective. I think it's great being a public company because we can give full transparency to our customers. When you're a private company, you can give transparency but they don't necessarily believe what you're saying. As a public company, I can't hide behind the numbers. Well, the other thing too is as a private company they almost want to talk to the CFO and you don't have time to talk to them. That's right. So that's really sort of why I asked the question because, you know, Andreessen's angle I can understand but from your standpoint, you're competing with much larger players. And if I'm a sales guy, I'm going to say, well they're a small company, they're underfunded or it could be out of business in a while. So going public had to be a big brand boost for you. Number one and number two, it probably changes the way in which you look at cash flow a little bit. So the number one thing about being a public company versus a private company is once you set expectations for the market, you have to make sure you meet those expectations. So if you give long-term, if you're really giving long-term guidance in a technology company, it's very hard because you want to be dynamic, change on the fly. And if you are a public company and if you don't want to meet expectations, you may make the wrong business decision. And you saw Dell, one of the reasons why he wanted, they want to go public is so they can make the right to business decisions. That's more for large companies have that struggle. As a small company, when you're in growth, if you set the right expectations to investors, it's not difficult being a public company. Cash flow, we've told all of our investors, our goal is we have 330, 340 million in cash. Investors invested in us to grow that. I'm not looking to just grow it and earn a half a point of interest. You're going to grow that more if we invest it back in the business. And hence we hired at a record pace last quarter. We're expanding in more data centers and you're going to see in 2013 we've told the analysts that we're going to invest all of our free cash flow, operating cash flow back into the business. Yeah, I mean that's obviously a question that everybody's asking you guys aren't profitable because you pour the money back into the business and that's by design. If I understand what you're saying, it's a better ROI than sticking it on the earning statement. Correct and in terms of the profitability, SaaS companies, their profitability is mass given that we sign a contract and generally we sign a three year contract and we get annual billings in advance and you see the deferred revenue growing and you see that you want to see operating cash flow not necessarily free cash flow but you want to see your deferred revenue grow and you want to see the backlog grow and you've seen that every quarter our deferred revenue. A couple hundred million almost. Yeah, we have about a hundred and don't quote me on this thing. It's in the filing, 172 million or so. Yes, exactly. Yeah, so that's a good observer should look at that deferred revenue line item and are there any others that observers should be paying attention to? Yeah, in our mind, the three things that we really manage our business by and it's as we talked at our investor today is we want to walk before we run and we think we have a clear line of sight to get to a billion dollars sometime in 2016 and we're going to get there in three ways. It's really new customer acquisition, gaining new customers and the reason why that's so important is we've shown historically and we've been disclosing this in all of our filings. Once we get a customer, we retain a customer, we have north of a 95% renewal rate, dollar renewal rate for our customers and we've also been able to show once we get a customer, we further penetrate those customers. 30% of all of our business and on average in any quarter is new business to existing customers. Those are upsells that's further penetrating the ITSM opportunity and it's also getting users on the platform as well. And your average sales prices are up? Yeah, well the average revenue per customer continues to increase. What we're doing is we're much better disciplined around our pricing with customers such that we're not discounting, really haven't changed, our list prices haven't changed. Yeah, so that's more increased number of seats. Correct. Not charging more per se. Correct, correct. And when you talk about- Actually a lot of times you'll see when we, when customers buy more seats they start to get volume discounts. There's tiered volume discounts when they get to us. You don't reset all of your original seats. There are a few original contracts that we had that we inherited, but most it's just incremental discounts on the incremental seats. And you have this massive, impressive renewal rate of 95 plus percent and it was 96% last quarter. Now when we talk about that, we're talking about units, right? That's not a value-based renewal. No, it's a dollar. We do lose. So we have 1,640 customers. We exited last quarter. We added 128 net new customers. We lose any quarter, somewhere between six to 12 customers. It's been as high as in those customers. We lose, we lose for three reasons. We let customers go bankrupt. It's a fact of life. Customers get acquired. And if they get acquired by one of our customers it's one of our existing. It's still a customer, but it's a lost customer because it's now going into one. And then customers, we have a lot of small customers. We signed up historically that we're, as we're increasing our price of those customers, some customers never fully deployed it and saw the value because they had too small of an IT shop and they decided to go with something more of a ticketing system. Okay, so mathematically your renewal rate could be over 100%. Correct. Okay. I might be going to ask you. Well, we don't know. It can't mathematically be over 100%. Well, if you raise prices. No, we don't include, so that's actually a good point you raised. Some companies mix upsells and price increases in their renewal rates. Ours is a dollar for dollar renewal. If they originally renewed at $100, or if they originally bought at $100 and they renew at 102, the 100 goes into the renewal calculation. The two goes into an upsell because we pay our reps on those upsells. Oh, I see, okay. So it's actually more conservative calculation the way most people do it. Good, thank you for that clarification. Now, you work for a company that sells primarily to IT, CIOs, you're a CFO. So you have some street cred on this question, but should the CIO report to the CFO, the CEO, the CO, do you have an opinion? I do have an opinion on this. I'm happy to give up IT to report to someone else. Yeah, yeah, yeah, yeah, yeah. You know, I've had, for some reason, if you look at history, IT historically in most companies has reported into the CFO. And why was that? Because people looked at the cost and they thought it was something you needed to really manage costs and so it went into the IT. In my mind, it doesn't really matter who you report into. The important thing is that whoever you have leading your IT organization, whether you want to call them a CIO or VP of IT or a director of IT in a smaller shop, is that they have open access to, not the CEO, quite frankly, a lot of times the CEO is not going to be the one driving your IT decisions and your information system divisions. Who it is is going to be the other members of the executive team, whether it's the VP of engineering or the VP of support or the VP of sales with your CRM. It's so important that your IT leader is able to communicate and get feedback from all of the executives in the company. Let's talk about comparable. So you must love the fact that you're like one of the big three, Salesforce, Workday, ServiceNow, great business models, Workday, especially you guys are comparably sized on a similar meteoric rise, legendary founders. Can you talk about that a little bit? I mean, are those fair comparisons? You know, the real comparison between the three is we're sass, other than that, there's so many differences between the companies. You look at a Workday, Workday really is focused on right now the HR. Yes, they are working on financials, but I think it's going to be a couple of years before they have a, and I'm not saying this, anything bad, Workday? I just think it's going to be a few years before you're really ready for large enterprise. Yes, you can sell to smaller businesses today. And that's a segment of the market we really don't play in at all. And if you look at- And they don't sell to IT. And they don't sell to IT. No, who they go into, and I know, we were actually, in my prior company, we were customer number five at Workday. I think it's a great product. And then at ServiceNow, we are now a customer again. And I think it's a great product. It's really your record keeping place for all of your HR records, but we front-end it many times with our own product. It doesn't onboard and off-board employees. It doesn't interact with your systems internally, that when you have a, whether you want to do a password change, or you want to sign someone an active director, you want to shut them down when they leave the company, we can do it seamlessly through our own product. Workday doesn't do that. In terms of Salesforce, once again, I think Salesforce is a great company. And I got to give them credit for they're the ones that really paved the road for the adoption of SaaS. We go about it a very different way. They start at their business really more as an SMB and then grew up into a now they're doing. They've been doing it for quite some time, but now they sell into the large enterprise. But if you look at their average revenue per customer, it's much lower than ours. And that's because they were selling, they have a lot more SMB customers than we do. But once again, a very, very different delivery model. It's not as mission-critical. I know my last company, we used Salesforce, couldn't go without using it. However, it was down pretty much every Saturday where you couldn't use it or on a weekend or on an end of quarter when you were trying to close the deals and end up where your pipeline is and what deals close, you're hitting refresh, refresh, refresh. That doesn't work with our customers. They want instantaneous feedback. And hence why we have a different architecture for our cloud. We have what we view as a, we call it enterprise cloud, as Arna and others have talked about this week. So we were talking about the Tamil earlier. Frank talks about these sort of vectors that you're on. You talked about it as well. Transformation, consumerization and automation as the three sort of real opportunities that you're approaching. I wonder, is there a fourth in your view as I hear things like app creator is this notion of a business line penetration? Is that potentially a new vector? Is that part of one of these three? One could argue that it's a new vector but I think it kind of falls into all three of those a little bit. It's a slice through them. Yeah, no, I just think it's, even internally we use our own product internally, probably not the best of our ability but we're really focused on it. As we talked about, we're kind of like the cobbler's son. We're now really focused so on and we have a number of interesting initiatives but what really blows me away about this product is my finance guys, my business analysts, my FPNA guys, they've been playing around with this and they've been creating an app where we can track our whole closed process where we can put a lot of the whole documentation for our SOX controls. Things that I would have never thought of doing in our product but what was amazing about it is it's done by finance people. It's not done by programmers. IT hasn't been involved in this at all. They did all the apps, your guys. Yes, they're just playing with it. And they're not Python programmers. They are not Python programmers, no. That to me is what is amazing about this. That's what I'm saying. I personally think your TAM's way bigger than four billion. I mean, you're going to say that, who knows, right? You don't know but it just seems to me that IT is such a large opportunity for you and that piece alone, it's unique in the marketplace. There's really not another organization out there and the closest I think is Microsoft Excel. And we all know, we love it and hate it. The other thing is we hear about developers, the rise of developers, the enablement of developers. There are things about the developers but no one except for Fred talks about citizen developers. I've never heard that phrase in all the conferences we've been to. It's about the developer, but you know, he kind of took it down a notch in terms of technical expertise as a citizen developer. And that was, that's a unique twist on it. Well, this is what it opens it up to the lines of business. Any business analyst can create apps on our platform and that's what makes it so much more approachable. And it's, I've just never seen another company like that. The other thing I wonder too is this, we talked to Fred about this a little bit and this is way off in the horizon, this notion of the internet of things, G.E. calls it the industrial internet, potentially service now having a role there. We talked about the big data meme and so forth but there's going to be a lot of data, a lot of complexity. Complexity seems to be your friend and so who knows, that could be just yet another wave of potential growth for a company like yours. You just, you don't know sometimes, right? I mean, you're going to reinvent yourself, selves over the next several years like many successful companies do. My last question is, you know, the classic what keeps you up at night, what worries you? I mean, you're working with Frank Slutman so he's throwing gasoline on the fire. We know Frank from other days and he knows how to scale companies so I'm going to speak to you guys pretty hard but so what keeps you up at night? What worries you, what are you looking out for? You know, these days the two things that worry me the most as a CFO is IT and I'll explain why in a little bit and facilities and the reason being is we are growing so fast and the problem unlike my last company was that most of our growth was in one location so it's a lot easier to project your growth and the requirements for IT requirements for facility. In this company we are so geographically dispersed with all of our offices in the US and what we're doing around the world. It's as you're adding last quarter we added 192 net new employees. We're going to add around 200 this quarter as we talk. Where are all those people going? And trying to get the, I think some of the managers whether they're in R&D or whether they're in sales or they're in our support organization they're great at telling me the number of people they need but they're not necessarily great at telling us exactly where they will be located and it puts all kinds of challenges on the. Well, that's just reminding me you guys are what, 70% of your business is North America? 70% of our business is North America from a revenue perspective. Just a number of those customers are global customers so the way we do it is based upon where the PO is actually generated so that doesn't mean that 70% of our users are in North America but we're growing rapidly internationally and we have such a focus half of our ads from a sales and marketing perspective are going into international markets. Isn't that how, for instance, IBM would do it? Maybe you don't know, I don't know necessarily either but and IBM's, I think the majority of its business is not IBM but not a $100 billion company but the majority of that large company's business is overseas, I would imagine they do it the same way. I'm not sure. But they do but when you look at other SaaS companies out there whether you're looking at Salesforce and stuff, most of Salesforce is still and yes they've done well in Japan but their users tend to be more where the company is. It's easy for them to just add on seats from that corporate PO, okay that's the kind of difference. All right Mike, well listen, it was really a pleasure having you on and thanks for helping educate us about your business. We're really excited that you guys had us here, it's been a fantastic two days, we're going another half day tomorrow but so thanks very much, it's a pleasure meeting you and thank you for having me today. Thank you. All right everybody, keep it right there. We're going to do a quick cut, we're going to check out what's happening at Google I.O. in San Francisco and we're going to be back to wrap. This is theCUBE, we're right back after this.