okay we're back this is Dave vellante Wikibon ugh i'm here with Jeff Frick this is silicon angles the Q 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 is the CFO of service now we're at knowledge great conference and extracting that signal from from all the noise in the industry Mike welcome to the cube thank you very much for having me today now you got to be thrilled with the progress 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 you know try to sort of Cordon them off behind the velvet rope I mean it's wide open here you got you know 4,000 people most our customers you got prospects here and so so congratulations on the progress thus far first your public company so you're never done you're you're all beginning yeah always you know the cusp so so tell me what what's the reaction been from the financial community that's had an opportunity to attend this event what are they telling you the the biggest feedback from investors was is they're surprised at the number of customers and large logo customers that we were able to have up on stage and talk glowing about the company and its beyond the whole itsm helped us because historically that's been the biggest push back we've gotten from investors there's a lot of kind of some of the more of the shorts that kind of push the limit at market size and the feedback was is now they get it how big the market size can be in the potential and many it's they feel it's endless the market size yeah let's talk about the TAM a little bit your your your main served market you're saying is the global 2000 you're about fourteen percent penetration into the global 2000 even though you've got 1600 plus customers so you've got a ways to go there there's definitely some some nice runway but the team is much more than that you certainly 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 team a little bit how should observers been thinking about the opportunity for service next well the way we look at it is we feel the traditional itsm market is at least a four billion dollar plus mark if you just do the math based upon our run our run rate our penetration and then looking at an hour penetration boasting in terms of the number of customers and this is just focus on large enterprise we think is 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 have served the MSP mark or 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 if you just look at that that would tell you we're somewhere around a 4 billion dollar market there in the platform we just announced the app creator to this a date that we've 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 I that's being very conservative talk to some analysts and they think it's a 20 billion dollar plus market yeah I mean I'm mice my senses that's very conservative because the big problem of the ITSM market is it's been it's sort of been forced on people you don't you don't buy the IT the legacy itsm products because you want to you're buying because you sort of have to and you sort of forced into it and they they just don't help me grow my business this is the painful environment so 20 billion dollar team that I don't know I mean that's 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 now if you saw Marc Andreessen on CNBC the other day did you know I never said no so say so he basically came on and said us 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 came did your IPO right after what he called the face plant yeah yeah so they had to make people nervous I I personally thought the facebook IPO was going to be a great thing for technology companies but when they overprice that it became not a great thing it wasn't Netscape it wasn't google it was faceplant so what's your take I mean obviously you've been performing ha what's it like being a public company what's the experience been like other than ringing the bell at the end why I see that much excited yeah you know things really haven't changed that much this is the fourth company have been the CFO public company what I will say today is probably the biggest challenge for being a CFO today and in any company is really the whole auditing profession with the PCAOB has really changed that the level of detail that auditors go into today has made it a lot more challenging for your quarterly clothes in your annual clothes and that's probably the most painful thing of being a public company from my perspective I I think it's great being a public come because we can have full transparency to our customers when your 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 you have time to talk to that's right so so that's really sort of why i asked the question because you know and reeses 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 small company they're underfunded 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 del one of the reasons why you want they want to go public is so they can make the right business decisions that's more for large companies have that struggle as a small company when you're in growth if you 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 we hired at a record pace last quarter we're expanding and 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 that you guys aren't profitable because you pour the money back into the business and that's that's by design right yours too if I understand what you're saying it's a better ROI than sticking it on the you know earning statement correct and in terms of the the profitability SAS companies are their profitability is mass given that we sign a contract and generally we signed 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 on the server with free cash flow but you want to see your deferred revenue growth you want to see the backlog bro and you've seen that every quarter are deferred revenue at 100 milli yeah we have about a hundred and don't quote me on this it's in the filing hundred seventy two million exactly okay so that's and that's a better a good observer should look at that that deferred revenue line item and other any others that observe it should be paying yeah in our mind the three things that we really manage our business by and it's as we talked at our Investor Day 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 2060 and we're going to get there at 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 this is we've been disclosing this in all of our filings once we get a customer we retain a customer we have north of a ninety-five percent 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 thirty percent of all of our business in any 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 we'll the average revenue per customer continues to increase what we're doing is we're much better disciplined around our 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 correct when you talk 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 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 was ninety-six percent last quarter now when we talk about that we're talking about units right that's not a value-based with you know it's a dollar we do lose so we have sixteen hundred and forty customers we exited last quarter we added 128 net new customers we lose any quarter somewhere between six to twelve customers has been as high as and those customers we lose we lose for three reasons we look customers go bankrupt as factors 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 prices those customers some customers never fully deployed it and saw the value because it had two 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 a hundred percent correct okay I'm not going to ask well we don't know it can't matter can't mathematically be over i miss prices in it no we don't include so that's actually a good point you raise some companies mix up cells in price increases in the renewal rates ours is a dollar for dollar renault if they originally renewed at a hundred dollar if they originally bought it a hundred dollars and they renew it 102 100 goes into reno calculation the two goes into an upsell because we pay our reps on those eyes so it's actually more conservative calculational way most people do good thank you for that clarification now you work for company that sells primarily to IT CIOs you're a CFO so you have some street cred on this question but should this should the CIO report to the CFO the CEO the clo do you have an opinion I do have an opinion on this I'm happy to give up IT to report something else 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 need to really manage costs and so it went into the IT 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 just 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 it's 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 is 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 work day service now great business models you know so you work day especially you guys are comparably sized on a similar meteoric rise you know legendary founders can you talk about that a little bit i mean those are those fair comparisons you know the real comparison between the three is were sassed other than that there's so many differences between the companies you look at a work day work day really is focused on right now the HR yes they are working on financials but I think it's going to be a couple years before they have a and I'm not saying this anything bad work day 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 plan at all and if you look at they don't sell that and they don't sell 2i t know who they go into and I know we were actually in my prior company we were customer number five it worked at any it's a great product and that service now 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 price it doesn't on board an 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 directory you want to shut them down when they leave the we can do it seamlessly through our own product workday doesn't do that in terms of sales force 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 SAS we go about it a very different way they started their business really more as an SMB and then grow up into and now they're doing they've been doing for quite some time but now they sell into the large enterprise but if you look at their average revenue per customers 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 and a quarter when you were trying to close the deals and then that where your where your pipeline is and what deals closed 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 week we call it in our enterprise cloud as erna and others have talked about this week so we were talking about the tamil earlier Frank talks about these sort of vectors that your honor you talked about as well the transformation consumerization and automation as the three sort of real opportunities that you're you're 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 you know potentially a new vector is that part of one of these three you know you one could argue that it's a new vector but I think it kind of falls into all three of those a little bit slice through them yeah no I just think it's 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 the Cobblers son we're now really focused so on and we have a number of interesting initiative fool it really blows me away about this product is my pie up my finance guys my business analyst my FP na guys they've been playing around with this and they've been creating a an app where we can track our whole closed process where we can put a lot of the the whole documentation for our socks 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 they develop the apps yeah your guys yes their work they're just playing with it applies on programs they are not 55 program no that's that to me is cool what is amazing about that's why i'm saying i think you know i personally think your Tim's way bigger than 4 billion I me are gonna say that you know it who knows right you don't know but it just seems to me that the IT is is such a large opportunity for you and that piece alone is its unique in the marketplace there's really not another organization out there in the closest I think it's Microsoft Excel you know and you know we all know you know we love it and hate it so the other thing is we hear about developers the rise of developers the enablement developers earnings about the developers but no one except for the Fred talks about citizen developers I've never heard that phrase in all the farmers as we've been do it's about the developer but you know he kind of took it down a notch in terms of technical expertise has the citizen developer yes 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 analysts 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 thing I wonder too is this we talked to Fred about this a little bit and this is way off in the horizon but this notion of the Internet of Things GE 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 gonna 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 if 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's luqman so he's throwing gasoline on the fire we know Frank from other days and you know set of scale companies so let's meet you haven't 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 it's just a lot easier to project your growth and the requirements for IT requirements or 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 and we tool where all those people going and trying to get the I think some of the the set of the managers whether they're an RD or whether in sales or the rent our support organization are graded 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 that just reminded me you guys are what seventy percent of your businesses North America is seventy percent of our business is North America from a from a revenue perspective just a number of those customers our global customers don't count so the way we do it is based upon where the p.o is actually generated so that doesn't mean that seventy percent of our users are in the in North America but we're growing rapidly internationally and we have such a focus half of our our ads from a sales and marketing perspective or going or now markets isn't that how for instance IBM would do it I maybe you don't know I don't know necessarily either but and IBM's I think the majority of its business is not you know IBM but 100 billion dollar company but yeah but the majority of a you know that large companies businesses overseas I would imagine they do it the same way I'm not sure is but they do but when you look at other SAS companies out there whether you're looking at Salesforce and stuff most of sales for us is still and yes they've done while 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 p oh right okay that's the kind of differences I Michael listen it was really a pleasure having you on and thanks for helping educate us about 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 a pleasure meeting you and thank you for having me today thank you me all right everybody keep it right there we're going to do a quick cut to we're going to check out what's happening at Google i/o in San Francisco and they'll be back to wrap this is the cube we're right back after this