Robert Specker - General Counsel and Secretary Frank Slootman - Chief Executive Officer, President and Director Michael P. Scarpelli - Chief Financial Officer and Principal Accounting Officer

Walter H. Pritchard - Citigroup Inc, Research Division Jennifer Swanson Lowe - Morgan Stanley, Research Division Raimo Lenschow - Barclays Capital, Research Division Michael Turits - Raymond James & Associates, Inc., Research Division Brent Thill - UBS Investment Bank, Research Division Jason Maynard - Wells Fargo Securities, LLC, Research Division Nandan Amladi - Deutsche Bank AG, Research Division Rob D. Owens - Pacific Crest Securities, Inc., Research Division Stewart Materne - Evercore Partners Inc., Research Division Abhey Lamba - Mizuho Securities USA Inc., Research Division Philip Winslow - Crédit Suisse AG, Research Division Tim Klasell - Northland Capital Markets, Research Division Bradley H. Sills - Maxim Group LLC, Research Division Shebly Seyrafi - FBN Securities, Inc., Research Division

Good day, ladies and gentlemen, and welcome to today's Q2 2013 ServiceNow Earnings Conference Call. This call is being hosted by Mr. Robert Specker, General Counsel. My name is Sharlene, and I'll be your event manager today. [Operator Instructions] And now, I'd like to hand the call over to Mr. Robert Specker. Please go ahead.

Good afternoon, and thank you for joining us on today's conference call. This call is also being broadcast live over the web and can be accessed at our website at investors.servicenow.com for the next 30 days. With me on today's call are Frank Slootman, Chief Executive Officer; and Michael Scarpelli, Chief Financial Officer. After the market closed today, ServiceNow issued a press release with results for its second quarter of 2013. If you would like a copy of the release, you can access it online at our website. We would like to remind you that statements made on this conference call that are not historical fact may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements include, among other things, information concerning our possible or assumed future results of operations, business strategies, financing plans, operating model, competitive position, industry environment, potential growth opportunities, potential market opportunities and the effects of competition. Words such as may, will, expects, intends, plans, believes, targets, estimates and variations of these words are intended to identify forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause our results to differ materially from those expressed or implied by such forward-looking statements. The risks and uncertainties include any weakening of general economic and market conditions and customer budgets; our ability to react to trends and challenges in our business and the markets in which we operate; our ability to anticipate market needs or develop new or enhanced products to meet those needs; our ability to scale our sales channels; our ability to recruit and retain personnel; our ability to compete in our industry; and other risks and uncertainties described more fully in our documents filed with or furnished to the Securities and Exchange Commission. All forward-looking statements are based on information available today, and we assume no obligation to update these forward-looking statements. Any future product feature or related specifications that may be referenced in today's call are for information purposes only, and are not commitments to deliver any technology or enhancements. ServiceNow reserves the right to modify future product plans at any time. In addition, we will reference non-GAAP financial measures on this conference call. The company reports non-GAAP results for gross margins, operating margins, net income or loss, basic and diluted income or loss per share, free cash flow and billings in addition to, and not as a substitute for or superior to, financial measures calculated in accordance with GAAP. Management believes that this supplemental non-GAAP information is useful to investors in analyzing and assessing the company's past and future operating performance. To see the reconciliation between these non-GAAP results 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 on our website at investors.servicenow.com. I would now like to turn the call over to ServiceNow's CEO, Frank Slootman.

Thanks, Rob. Good afternoon, and thank you for joining us on today's call. Q2 is another strong quarter for us with significant growth in all fronts. Revenues grew year-on-year 80% to $102.2 million while billings and deferred revenue were marked by strong growth, with total billings of $117.5 million, up 6% sequentially and 63% year-on-year, and a deferred revenue balance of $210 million, up 8% sequentially and 60% year-on-year. In the quarter, our average annual revenue per customer was $209,000, up from $173,000 in the second quarter of 2012, a 21% increase year-on-year. This increase was primarily driven by user growth within our customer base. One of the highlights of our quarter was our annual users conference, Knowledge13. Almost 4,000 attendees conversed in Las Vegas for a few days to learn, share and network. The event more than doubled its attendance year-on-year and its growth has generally kept pace with the company. Knowledge is a convention where our customers and prospects come to learn and share their experiences with ServiceNow. 93% of breakout sessions during the 4-day event were delivered by our customers and their program included the CIO track with 70 senior and key executives in attendance. Some of the largest companies in the world joined us on the keynote stage including AIG, Coca-Cola, Bristol-Myers Squibb, GE Energy, Eli Lilly, Intel, the New York Stock Exchange and the premier conference sponsor, KPMG. The attendance numbers are now such that we view this as an industry event, more so than just another conference. For those of you planning to attend next year Knowledge14 will take place April 27 through May 1, 2014, at the Moscone Center in San Francisco. In May, we announced our latest software release, delivering new capabilities to our customers. The 4 key areas of focus were…

Thank you, Frank. During today's call, we will review our second quarter financial results and discuss our financial guidance for the third quarter and full year 2013. Before we begin, I'd like to point out that all of our financial figures we will discuss today are non-GAAP unless we state otherwise with the exception of revenue numbers, which are GAAP. You can find a reconciliation of GAAP to non-GAAP results in our press releases on our website. With that, let us take you through some of the numbers. Total revenues for the second quarter were $102.2 million, representing 80% year-over-year growth and 19% sequential growth over the first quarter revenues of $85.9 million. Subscription revenues for the quarter were $80.4 million, representing 72% year-over-year growth and 12% sequential growth. Subscription revenue growth was driven by strong bookings in prior quarters coupled with a renewal rate of 94.2% in the current quarter. Our average new business contract length was 33 months and our average renewal contract length was 26 months compared to an average of 32 and 24 months on a trailing four quarter basis, respectively. Professional services and other revenues were $21.8 million for the quarter, growing 119% year-over-year and 52% on a sequential basis. Professional services and other revenues are generated primarily from fees related to the implementation and configuration of our subscription service, as well as training fees. In the second quarter, it also includes $5 million in registration and sponsorship revenue from Knowledge, our annual users conference. This compares to $2 million in revenue from Knowledge in the second quarter of 2012. Total revenues based on geography were $71.8 million in North America, $24.5 million in EMEA, and $5.9 million in the rest of the world, representing 70%, 24% and 6% of total revenues, respectively. By comparison,…

[Operator Instructions] And the first question comes from Walter Pritchard.

Just 2 questions here. One on the analytics side. Can you talk about how we should think about how much you can charge for such a solution there? And how broadly, you think something like that could be adopted within your installed base? And then, secondarily, you guys had talked about front-end loading the hiring this year. And you've obviously had 2 good quarters here and it sounds like the pipeline is good and I'm wondering how you're thinking about your hiring into the second half, given what you've seen here now for 2 quarters in '13?

This is Frank, Walter. On Mirror42, the way we're going to charge for it, this is an uplift to our standard process user license fee. We haven't determined the exact amount yet. We're not quite ready to talk about that but just view it as an uplift on the sort of that core pricing that we have. We do believe that the applicability of Mirror42 is extremely broad in our customer base. What Mirror42 really does is it really adds some dimensionality to our recording. It does keep performance indicators predictive analysis, especially for the executive audiences in our customer base, we think this is going to be incredibly important functionality. We did want to have this for some time. This really allowed us to move up the timetable on having it. On hiring, we're going to continue to hire according to our plan, as we did the during the first half. I would say that we're incrementally more confident about our ability to hire and convert our hiring to yield as we have established in our plan. So it's all systems go in the second half.

Should we assume then that you would be -- I know last year, you did slow down the hiring and you said all along that we shouldn't expect you to slow down in the same way, but you still would moderate, especially your sales hiring in the second half. Should we now expect that you don't moderate your sales hiring? Or maybe give us a color just on how should we think about versus what you were telling us 3 and 6 months ago there?

No, that's exactly what I said. You should not expect us to moderate. We're going to hire according to plan, as I said. We're incrementally more confident about our ability to convert our hiring to yield, which is something that held us back 1 year ago and gave us a little bit of a pause. We're not going to do that again.

So Walter, our plan request for hires are north of 200 employees this quarter. We've never had a quarter that we've hired 200 employees, but we did just add 174. And we feel pretty confident, we'll most likely add close to 200 employees this quarter, with a focus on sales and marketing and R&D. And that's reflected in the numbers, by the way.

The next question comes from Jennifer Lowe.

I wanted to drill into the platform business a bit and it's great to hear some news, encouraging data points around the uptick there. But the question has been the ability to monetize some of those interest levels. So as you continue to see some of these traction in new customers, are you starting to get more comfort that customers are willing to pay for that functionality and getting more confidence around the revenue models there?

Again, this is Frank. The customers have been paying for platform all along, right. Process users or process user or process user, whether they are a process user in our standard application portfolio, ordering custom applications on the platform side. So they have always been paying. What we haven't been able to do, historically, is to quantify the contribution of that part of our business. So we've been charging for it all along and that's been a normal acceptable practice. But obviously, we've gotten more aggressive in terms of singling that out from the correlations. So that people are not just paying for incremental users, but also are paying for the incremental functionality. And that's the part that obviously is new and different. And we feel that our new customers are taking this in stride quite well. The conversation is, obviously, harder when you're dealing with existing customers who feel they were grandfathered into the licensing model that was there from the early days. But that's a smaller set than the set going forward, obviously.

And just one more quick one for me. So looking at Q2 results versus the guidance that we had coming in. Obviously, the revenue result was incredibly strong versus the guidance. But it looks like EPS was a little closer to the low end of the guidance there. Can you just comment a little bit about spending in the quarter and where maybe the spending came in a little higher than expected? Was that purely related to Knowledge and the acquisition or where there other expenses in the quarter that you hadn't anticipated initially as well?

No -- Jen, it's Mike Scarpelli. Probably the biggest impact on the operating margin line, we were fine on the EPS. I agree, we did come in at the low end of the guidance. That was really driven by the unexpected strength in the U.S. dollar creating a $1 million FX loss that flowed through the other income expense line. You'll see as well, the non-GAAP numbers with the income taxes because we don't get the benefit of stock options flowing through. There's artificially high noncash tax number flowing through higher than what I'd expected with the P&L. But on the operating system, we were below on those.

The next question comes from Raimo Lenschow.

Frank, can you talk a little bit about the cloud provisioning that you've kind of launched or started to talk about now this quarter? And how far deep do you want to go there and how do you see the competitive field are around that one?

Raimo, cloud provisioning is one of the applications that we built on our Orchestration platform. We view our Orchestration platform, sort of in a similar vein as we have our core ServiceNow platform in the sense that we feel we have to build application to really show customers really what the full scope and power is of that platform. What cloud provisioning really allows our customers to do, is it really provides an end-to-end service experience where our end-users can request virtual machines to be provisioned, either through a VMware environment or in Amazon Web services environment and have that fully managed through a ServiceNow service experience. Are we trying to go compete against pure play vendors in that space? Not really. That would really be distracting for us. It's really for customers that have really built their service experience around ServiceNow and want to have that functionality to be part of that. And that works really well. And it's also a priming the pump thing for us where we can really show people what the possibilities are with the Orchestration platform. They can see how it's built and obviously, be inspired to embark on other types of automation projects.

Perfect. And then just one quick one on -- if you talk about service relationship management as kind of almost like a new category and you mentioned a few very interesting, HR wins. Could we kind of think about it in the long-term that you kind of almost need specialized sales forces, kind of as you go into the different submarkets there? Or how do you want to tackle that?

I don't think that's on the horizon at this point. The one thing to always remember about ServiceNow, we typically end up in other service domains through the enterprise IT organization. Whatever we do outside of IT, typically, not always, but typically, we get there through the IT organization itself as being the influencer and the provider to other service areas within the enterprise. I think it will be long days off before we sort of really broaden our go-to market cadence beyond the IT organizations. It's been working exceedingly well for us that we get to other dimension of the enterprise through IT. So we want to strengthen that ability rather than sort of water that down and let people go to different parts of the organization. We don't really know how to speak HR all that well but we do talk to IT people very well.

The next question comes from Michael Turits. Michael Turits - Raymond James & Associates, Inc., Research Division: Can you talk a little bit about seasonality on billings? This quarter, you had mid-single-digit growth in June and the June quarter. As we go into the third quarter, any thoughts on how that billing seasonality should play out? Should that be mid-single digits or even, I mean, it's been double-digits but I'm wondering what kind of seasonality we might see.

Sure. In general, Michael -- it's Mike Scarpelli by the way. In our business, Q4 is such a strong quarter and we have so many of our contracts that start January 1. We always see a big uptick in billings in Q1, which is contrary to the actual bookings. But from a billings perspective, Q1 is always strong. Going into Q3 and Q2, they're pretty much flat from a bookings perspective with one of those, so you'd expect bookings or billings are going to be pretty much flat this quarter and then you'll see an uptick in Q4 and once again, you'll see another uptick in Q1 2014. Michael Turits - Raymond James & Associates, Inc., Research Division: Okay. So flat pretty much year-over-year -- I'm sorry, quarter over -- quarter-over-quarter?

Quarter-over-quarter from 2 to 3. Michael Turits - Raymond James & Associates, Inc., Research Division: Okay. And then just one clarification, you guys were talking about headcount before. You actually talked on the last call about getting to do around 74 -- 740 headcount, that's totaling 215 in sales and marketing. I just wanted to clarify are we still on track to that?

Yes.

The next question comes from Brent Thill.

Frank, you mentioned the record numbers of large transactions this quarter. I was curious if you could just drill in a little bit more and talk maybe about how the platform played into that. And did you have any outside transactions in that over $1 million count?

We're -- in general, the deals are getting larger. I mean, we have also deals that we're pushing in the $1 million mark, fairly close, that we didn't count. So in general, the deal is getting larger. And one of the key drivers for deals getting larger is that the populations that we license are going much beyond the typical ITSM crowd, right. We typically said, the ITSM audience, if you will, is a multiple [indiscernible] historical help desk audiences. But we now really go for that whole notion of ERP for IT, whether we're really licensing everybody in IT. And not that subset, that typically is associated with the ITSM model. This is really why you see deals getting larger because everybody in IT is getting involved with ServiceNow on our platform. It becomes their system of record. All the work of IT gets managed through ServiceNow. So there's more and more people involved, the actors and participants in the workflow in ServiceNow. That's why that is.

The next question is from Jason Maynard.

I just have a couple of questions. First, with all the stuff around BMC, does that cost customers or have you seen any customer behavior modify, given they see what's happening there? Do they accelerate? Do they change planning assumptions? And how does that benefit you? And then the second part, on the SRM opportunity. How much of that right now is customers effectively being smart enough to pull you through into these new service opportunities where they're building these apps in various domains versus, say, the rep at ServiceNow are articulating, hey, I think you guys, you have this project that you're trying to solve over there, use our stuff to go and take care of that.

Yes. This is Frank, Jason. Yes, I think the BMC dynamic is a little bit overblown. I don't think that we could attribute a whole lot to BMC being public or private. I think as time goes on, I think the BMC situation becomes more untenable because the software is aging more and more and more and it's becoming less and less acceptable to sort of the contemporary audiences that we address. But we don't really have seen a real step function in dynamic from BMC, quarter ago versus what it is now. And so we don't want to look into too much on that. In terms of SRM, you're actually correct. We wish we could take credit for it and our brilliant salespeople who are driving all these initiatives, and sometimes that's true. On the whole, our customers have really recognized that the IT service model can be repurposed for these other service domains and typically, that happens because once they roll out an IT service management system, other areas very quickly recognize, hey, we could use that exact same Incident, Problem and change cadence for our service area. And of course, the IT organizations are really happy to oblige and help them implement the service model that is exactly analogous to what they have done on the IT side. So it's really interesting because in some of these other service domains, there are specialized vendors that try and do that sort of thing. But the IT organization is now really driving a much more standard service model, really across the enterprise to all these different service areas. And some of our customers -- and this is why we always encourage people to attend our Knowledge conference, you get a real sense of how broad and deep and widespread the adoption of the service models really is.

Maybe a follow-up on that is how much have you seen from your SI partners expanding into some of these service domains? Have they started to grok that opportunity yet or are they're still doing maybe, call it, the more traditional implementations?

We have some specialized partners that really focus on taking ServiceNow into these new service models. But I would say, on the whole, especially our larger SI partners, are very much focused on IT transformation. That's really the conversation that they're driving with our customers and their customers.

The next question comes from Nandan Amladi.

Two questions, both related to Mirror42. So the guide -- the guidance says, losing [indiscernible] in the quarter. Should we assume those revenues are coming from Mirror42? And then the second part of the question is, Mirror42 had a pretty large number of partners and both in profit and several other products. So where do you see that going?

Yes, with regards to the revenue raise, the revenue attributable for the second half of the year associated with Mirror42 is going to -- is not going to be material at all, right now. It's more of the expenses that we're picking up. We're associated with the people that we assumed in that acquisition and the incremental investments we're going to be making into the Mirror42 product is what's incorporated in the model.

What was the second question again?

Oh, the second question was the partnerships that Mirror42 had with a whole bunch of other products or inter-working with other products with the EMCCA, Salesforce.com, various other product platforms. Do you plan to continue the partnerships or should we expect some sort of a change?

Yes. What we're going to do is we're going to continue to honor our customer commitments for 1 year associated with those and then going forward, it's going to be purely just the Mirror42 with the ServiceNow platform. We're not making any additional investments into any of those other third-party partners they had. And we've already notified most of those customers already.

The next question comes from Rob Owens.

You mentioned in your prepared remarks, 17% penetrated into the Global 2000. And Frank, you talked a little bit about these new populations that you're licensing. Can you give us a sense within those larger customers just how penetrated you are?

Yes. Rob, we've historically said that, conservatively speaking, we are less than half penetrated. If not below even 30% or 40%. So there's a long way for us to go and usurp the opportunity in the large enterprises. And the irony is, we upped the count of Global 2000 enterprises and we didn't even realize that these customers actually belong to much larger entities. So that shows you how much incremental upside there still is in those opportunities. So we continually come to realize is that we're -- not just related to some of the other service relationships that we've been talking about. Even strictly in the IT sphere, we have just so much room still, to -- so much runway and so much room to expand our business in these large accounts. And that's one of the reasons, by the way, why we changed our sales model or modified our sales model going into January is to have a much more direct focus in our sales organization. We will pursue that business because we were historically, strictly, sort of a new account selling organization. And we've come to realize that we need to have much more balance to make sure that we don't under invest in these opportunities.

Great. And then second around the platform, realizing it's still early but customers that you are actually charging, can you give us any kind of sense as to what kind of lift or how it's augmenting HCD?

Yes. So Rob, as we said before, we're going to be reporting that in Q4 when we report our Q4 results. I'll just say we are starting to see more and more deals and we're being a lot more diligent as we go into renewal opportunities with customers with bifurcating the piece associated with the platform and the traditional IT service management.

Great. And then Mike, last, just around the DSO. Is this kind of the new normal in the low to mid-80s here? And as we think about that on a year-over-year basis, is that really a function of either linearity or just the size of transaction you're seeing?

No, that has to do with some operational issues within my own finance organization that we've got fixed and subsequent to July, we've seen the cash collections. The last couple of quarters in AR have been very disappointed with that. There's no issues we've been collecting and we've now collected a fair chunk of that, subsequent to July 1. I expect it to come down next quarter, the DSOs.

The next question comes from Kirk Materne.

Frank, along the lines of the platform, a lot of the partners we talked to are very excited about the opportunity longer-term. And to your comments, they're really focused more on IT transformation right now but -- I guess the thing holding them back to go bigger into the platform is just sort of a shortage of skills around it. I was just wondering, coming away from Knowledge, can you talk about sort of the training efforts you have going on, to get more people trained up on the platform. And then just secondly, on the new customer count this quarter, you're obviously not quite as up sequentially as much as we've seen the last couple of years. I was just curious if that had to do more with sort of shifting the fiscal year to December and that's just -- we're going to see a bigger lift in that. Perhaps at the back of the year. I realized average deal size is up, but I'm just kind of curious on that as well.

Kirk, this is Frank. Actually, we weren't all that thrilled with the new customer count, our sales organization. It's always easier to sell an existing account than it is a new account, right? And then, sales people are always going to go in the line of least resistance. And that's typical for SaaS enterprises in general that they become very focused on their existing accounts because it's such good hunting grounds. So we have to redouble our efforts that we don't get sort of undue influence on our installed base, which by the way, it's a whole market on to itself because that's the fastest way to the revenue. So I sort of agree with your observation and we've already had that observations ourselves inside here. But we think where we have a ton of opportunity. We're going to make sure that we're disciplined, that we're providing proper incentives for people to do the harder deals, as well as the ones that are not as hard. On platform, you actually put your finger on one of the more strategic issues for ServiceNow, that is for us to be able to sort of raise the roof on the overall capacity in professional services and resources in our ecosystem. And it's not just about ServiceNow [indiscernible] in the way professional services resources ability entire ecosystem can provide. The reality is that all our professional services capacity is consumed continually and that's why that business is growing as rapidly as it is. It is not such that new customers consume a portion of it, rolls on to the next account. Typically, we get in and we stay in this ongoing services relationship with our large customers. So there's more and more pressure on continually expanding the ecosystem. And this is a very big priority for us. We have started to provide incentives for our ecosystem to be trained and certify that's actually quite far along that process. But we view it as a very, very critical aspect because it is going to slow us down if we do not continually get ahead of the curve here. We even see a lot of our customers' technicians in our customer, are eventually moving into the professional services organizations, which also is not necessarily healthy dynamics. So we got to go new bodies that are newly qualified, newly skilled to tackle these opportunities. It's a good problem to have, but it's certainly something that we have our eye on.

The next question comes from Abhey Lamba.

Frank, you discussed the expansion of your footprint to all IT employees within your new customer base. Can you talk about your ability to expand beyond IT to other areas and what other areas do you think your customers can expand your usage to?

Yes. So from an -- the extension from IT is really -- sort of full-blown system of record for all IT operations. And some of the key applications there are project portfolio management, asset management, everything, government risk compliance and then there are typically, I mean, this is really, really important for the strategy. IT organizations use our platform and to build the applications that we do not stand and provide. Many of them are related to vendor management, procurements, sourcing, licensing. There are literally lots and lots of things that IT organizations built themselves that sort of fills in the gaps that they have in their organization relative to everything that they need to have a full-blown system of record. So we have a whole bunch of more applications that we stand and provide beyond our core ITSM model. But then our customers are adding on to that themselves, to really build a very complete ERP grade system, if you will. So that's the typical dynamic and that allows us to license a lot more people than you normally would expect through ITSM. As I said during the prepared remarks, the expansion beyond the IT organization really comes from the observation that the IT service model can be very quickly repurposed and adapted to other areas. So it's not terribly hard for HR organizations to build a service model on the ServiceNow platform because it's so analogous to what goes in IT organizations, same for travel and legal and procurement and finance facilities. You name it. All the service relationships that exists in the enterprise are suitable for the ServiceNow platform. Often going also external as well, either customer-facing, partner-facing, facing audiences outside of the perimeter of the enterprise itself.

Got it. And very quickly, on the international opportunity. Can you talk about what investments you're making. You're talking about one big customer in Japan, but what are the other investments you're making and when should we start seeing more meaningful bookings from that front?

Yes. So we're opening up our Mexico data center, we're actually expecting it to be open last quarter, but it got delayed. That's one of the reasons why our subscription margins came in a bit higher. We will be opening a data center in Singapore at the beginning of 2014. We've now opened up in Hong Kong, Japan, Singapore, we're looking at some other countries in that region such as South Korea and we're putting a lot of the infrastructure in place in terms of people there to support the sales organization. As well, we continue to grow in certain geographies within EMEA and some of the more emerging markets in EMEA.

The next question comes from Phil Winslow. Philip Winslow - Crédit Suisse AG, Research Division: I just wanted to touch on some of your newer products, beyond just the platform, via discovery, via run books, automation, I think you're calling, putting as part of Orchestration now. I'm just curious what you're seeing from uptick of the installed base of those.

It's Frank, Phil. As we said earlier during the prepared remarks, those products are gradually gaining acceptance and adoption in our customer base. And by the way, this is also the effect of having a sales organization that is now in part focused on existing accounts because when they have purchased the core set of applications, it's only natural that the sales organization starts to focus on these other products as incremental sales opportunities. So we see this growing quarter-on-quarter. It's a good thing we're investing in these technologies as well. Talked about cloud provisioning and things of that sort. Do you think that CMDB is very foundational for ITSM and in general for running IT system of record, it's just essential to have that foundation in place. So we expect that to be very important in our future. We talked about project portfolio management. That is actually an area that sort to have language historically but that we have focused on in recent times. That has taken on -- we fixed some key gaps that we perceived in product and we're now gaining traction in that area as well. This is a lot of blocking and tackling. ServiceNow has a fairly broad product portfolio. We can't focus on everything at the same time, but as we deepen and broaden functionality in some of these areas, we see the effects of that in our business.

I'll also say that Discovery and Orchestration are now accounting for this quarter, just above 8% of our net new ACV. So we're very pleased with how that has come around. And if you remember before, I was saying historically, it was accounting for less than 5% of our revenues, so we do have high hopes for those 2 products.

The next question comes from Tim Klasell.

Just a quick question on App Creator. Historically, I have always sort of thought ServiceNow being used by the IT department, then extending into -- the IT department extending into other departments. Does App Creator change the dynamics here where people can start from other departments and create their own applications, and are you seeing that in your customer base?

This is Frank, Tim. That is absolutely the intent. We've sort of gone down to a concept that Gartner Group, I think in vendor, which is referred to as Citizen Developer. Addressing the Citizen Developer is really a model where IT bosses say a development platform. But then, brings that into the end user environment for end users to develop on people that really do not have programming skills but have fairly good understanding of relational concepts, tables, rows and columns and so on. So it's the same levels of skill that you would have for Microsoft Access or Excel and things of that sort. So that creates a really -- it really brings another level of extraction to our development environment and makes the platform even more approachable for that class of user than it was for the typical IT user that has historically always used ServiceNow. Now we're still at early stages of that, but I'm just giving you what our aspirations are and what we're aiming for with the strategy.

Okay, great. And I think at Knowledge, they mentioned that this increases the developer community by about 25%. Do you guys believe in that as well?

Well, we think that's one of the great things about ServiceNow is that we dramatically expand the population of people that can actually build meaningful applications on our platform because we do not require programming skills for people to be successful. So we are going after the entire Excel crowd out there, which is literally hundreds of millions of people. That's really the innovation around ServiceNow is that we have really lowered the bar and democratized access to a platform where you can build real record keeping, data entry, reporting, workflow, applications, and that's really what it's all about.

The next question comes from Brad Sills.

Just following on your point, Frank, on the Citizen Developer. Are you finding that the platform is being used more for new custom applications or more so for replacements? And if replacements, where are you seeing platforms, which platforms are you seeing most often replaced?

The replacement cycle is really the legacy help desk applications, right. Those systems are 10, 15, 20 years old. That's really the hard-core replacement. And they're not replacing it with same, right. They're replacing it with a much more modern service model, a real high till set of processes. So it's not a straight replacement sort of snazzier version of what people were doing before, right. We're using service portals now. We're using automation. These are Internet systems or single systems. There is no redundancy, no fragmentation. So that's that part of the business. But what's going on in our customer basis is that they are automating workflows that have never been automated before. They typically have lived in the realm of messaging. In other words, e-mail. E-mail, text, voice, people who were executing service relationship through communications but they weren't managing them. So they're moving in front of the realm of messaging to the realm of record keeping. And that's a great opportunity because once you have a service relationship in the recordkeeping systems, now we can aggregate the records, we get real dashboarding, real reporting, real insight, we can structure the service relationships, we can define them, they can now become repeatable, auditable, they can be optimized. So this is what our customers are after. And once they have a recordkeeping system for a particular service relationship, the amount of insight that they gain literally overnight once the system is live is simply amazing. They've got control. They are able to hold people accountable and they get insight that they've never had before. So this is what makes a platform like ServiceNow so interesting to pursue some of these service relationships that before just live in the world of e-mail.

That's great. And then just one on Mirror42. I know it's early. But can you assess kind of the impacts that, that acquisition has had on the installed base and the pipeline just in terms customer reaction on the analytics front?

Yes, I made one comment during the prepared remarks. We got a very strong response out of our customer base. And in part, I think, our customers have felt that we could have done better and more in this area. So they were incredibly happy that we made this move. Secondly, Mirror42 was already known to a very good part of our customer base because they've been coming to all our user groups and our user conferences and so on. So it is a very, very natural addition to our portfolio. It can deliver value to our existing customers very, very quickly. So that is what makes it such a good addition to our family, we think.

The next question comes from Shebly Seyrafi.

Can you talk about where you might want to expand through M&A going forward point. I think Mirror42 is your first major acquisition in a while. That's one question. Another one is, your subscription gross margin is guided to decline. Sequentially, it's been around 77% in the last few quarters but you're guiding for higher revenues. So maybe you can talk about the drivers explaining that decline.

Sure, Shelby, it's Mike. I'll talk about the subscription. So the real issue with subscription is we've been behind in our expenses. A, we were behind in opening up our Brazilian data center, which comes online this quarter as well. We were expecting to add a lot more capacity into some of our data centers and take on some additional space, which is happening this quarter and in Q4. Hence, why we're guiding down in our subscription margin, we've gotten a little bit ahead of ourself. As a reminder, our long-term margin is 78% to 80%. I don't think the 77% is sustainable in the short term with some of the plans that we have within our cloud infrastructure. As well, we've been a little bit behind in the hiring in that group as well. And then, I'll turn it over to Frank for the M&A question.

Yes, I can't comment on specific categories of acquisition. But what I will tell you that our strategy, if you will, for doing acquisitions is very much based on acquiring talent and technology. We're not interested in buying businesses, per se. We just want to see enough evidence that we're dealing with viable talent and viable technology. The second thing I will say is, when we do acquisitions, we look for capabilities that really strengthen our overall platform. What I'm interested in is building a really big PowerPoint Slide with a lot of boxes and arrows on it. For us, it's not about the amount of stuff that we have in our portfolio. It's really about filling in critical capabilities that really make our overall platform more compelling to our customers. So I think Mirror42 is a very good example of how we'd like to do acquisitions on a going-forward basis.

Okay. And one more for me, if I can. You disclose your backlog every so often. And I think the last time you disclosed, it was up 81%, Q4. Can you talk generally about backlog growth, how it compared to your revenue growth this year or this quarter of 80%, your billings growth of 63%, just in comparison?

Yes, so Shelby, we will disclose backlog annually in our K and if we ever do any registration statements, we'll file it, we will disclose our backlog as well. Those are the only times we've ever disclosed it. What we have disclosed is our contract terms in both the initial licensing and renewals has been increasing. So we're very pleased with the growth in our deferred revenue and backlog combined. And you all just have to wait until January when we disclose our December backlog. Okay. Operator, you can turn it back or I'll finish it off right now. As a reminder, a replay of this call will be available as webcast in the Investors section of our website, as well as through the dial-in instructions contained in today's earnings release. Thanks for joining today's call. This concludes our call, and we look forward to our next update in October, following the close of the third quarter.

Thank you very much. Thank you very much for joining, ladies and gentlemen. This concludes your conference call for today. You may now disconnect your lines and thank you, once again, for joining.