ServiceNow, Inc. (NOW) Earnings Call Transcript & Summary

Okay, we're going to get started with our next session here. I'm Chris Merwin, I cover ServiceNow at Goldman Sachs. And very pleased to be joined by Gina Mastantuono, the new CFO of the company. Gina, thanks so much for being here, I appreciate it.

Thanks, Chris. It's a real pleasure to be here as well. And good job on the name, I know it's a mouthful at times.

Well maybe to start off, can you just tell us a bit about your background in leading large finance organizations, both at Ingram Micro and Revlon and what drew you to ServiceNow?

Sure, so super excited to be the new CFO at ServiceNow, what an incredible opportunity and a great company. My background is really in larger scale organizations. So Ingram is a $50 billion tech distribution company, supply chain, services as well as cloud services. And so the scale and complexity of that business, I think gives me a unique perspective as we look to scale ServiceNow from our $4 billion current revenue run rate to the $10 billion goal that we've put forth. And so it was really important to me, when I was thinking about next steps, to not only look at an amazing company with great growth aspirations and growth prospects, but also a company with a strong leadership team, a strong culture, but as well where I could really add significant value. And I think my skill set is really complementary to the leadership team there, and I could add a lot of value pretty quickly. So I'm really excited.

So now that we're through fiscal fourth quarter earnings, can you tell us a bit about where you're spending your time?

Sure. So first -- so I joined officially January 8. So as you can imagine the first few weeks are very focused on Q4 end results, and spending time really understanding forecasting, processing, guidance, methodology. It's quickly morphed into spending time with the leaders and understanding products, go-to-market; really, from a growth perspective, where we're going to be seeing the growth, the path to $10 billion, what does that look like as it really is coming to fruition now and where we really can see it, spending time on understanding that trajectory. How to scale that from a finance organization as well as help the organization on the go-to-market. And really, in total, scale, looking at ensuring that not only are we the fastest-growing software company, but also the best managed from a margin perspective. And how can we think about that as we're going from $4 billion to $10 billion. And so focused a lot on that. And then really on talent and development of talent, making sure that we're attracting the best, retaining the brightest and developing the future.

So in the past, we've heard ServiceNow management talk a lot about digital transformations and how that's, obviously, a driver of growth for the company. So as you've gotten out on the road, I think you just got back from Europe. Can you talk to us a bit about how digital transformation, in particular, is showing up in demand?

Yes. So first of all, I have been meeting with some customers. I've been meeting with the team, and digital transformation is a top, top of minds, right? And so what we're really seeing from the customers is they love what we can do, and they love the adjacencies that we've moved into, and they're understanding more and more how ServiceNow can help in their overall digital transformation road map and not just on IT and IT service desk. And so what I mean by that is, if you think about where the conversation about digital transformation started, a lot of it was all around customer experience, right, and customer focus, which is a complete smart way to think about digital transformation and really import it. But I think where it's morphing as people are more familiar with the customer side is really understanding not only that, but how the employee experience really helps engage the customer. If you have happy employees, you have happy customers. And so how do we think about that conversation. John, when he came on board, was really elevating the conversation at the C-suite level to much more about what ServiceNow could offer really across the portfolio. And how we can help automate workflow and workflow problems, not only on the IT side and not only in ITSM, but throughout the IT portfolio, with ITOM and ITAM. And then as we branched out into HR and customer service, really thinking about ServiceNow as the cross-enterprise platform, not just focused on the IT, but really focused on the suite of buying centers in the organization. And so the conversation is really resonating, there's no CFO, CEO who isn't really thinking about how to transform the digital side. And whether it's customer, employee, even facilities in other areas of operations, it's a huge focus. And so, the comments and the conversation is resonating and I think you see that in kind of the larger deals that we're seeing, the growth in our large deals. Our customers are really understanding that we're not just about IT anymore.

Got it. Actually on that topic, ServiceNow has, as you said, transitioned from really an IT-centric company to really multiproduct platform that you deliver to your customers. But IT is still I guess the majority of revenue, more recently you've started selling ITSM Pro and that's a higher priced skew of that core IT product. So, can you talk to us a bit about what adoption has been like for that so far? I believe the price is 50% higher than core ITSM. So what is sort of the value prop that customers are seeing with that skew?

Absolutely. So we launched ITSM Pro in 2019, so it's fairly new to the market. And what I would say is while the retail price is 50% up with discounts, we're really seeing a 20% to 30% uplift in price. The traction has been better than we had anticipated, but still early days. And so the adoption rate and the runway that we have on that product is really big, even just within our current customer base, as well as landing new customers. The value prop is really meaningful, and what I mean by that is, we've added AI and machine learning capabilities to this product, such that we're really able to see significant productivity pretty quickly. What do I mean? So customers who are very centric in their service desk on phone calls, sales reps, were able to through chat, automate a lot of the lower level incidents. While that's freeing them up, the issues that a lot of our customers were having was on the call side, right, when you have high call volume, you have high call abandonment rates, it's hard to prioritize which calls to pick up first. If you have AI and ML in the system with chat, you're able to really focus on optimizing that and getting a lot of quicker resolution for the lower-level issues so the reps can really focus on the more value add and higher priority, more difficult issues that need to be resolved.

I think the last quarter, one thing that really stuck out was the success of IT overall, not just ITSM but it was a great quarter for ITOM, ITAM, IT Business Management, so can you talk a bit about some of the specific pain points that those products are addressing and why we're starting to see an inflection in demand now?

Yes, I think that people realize that ServiceNow can be more than just the ITSM. So ITOM really has been a huge value add in that it's enabling a more strategic conversation, it gives the operations team visibility to what assets they have, where they have, how it's deployed and the health of those assets. And how can we potentially even think about using AI and machine learning to predict in advance where something's going to go down -- a server's going to go down, right? And so that has been a real value add and enables us to have a much more strategic conversation with the CIO and the CIO organization. If you think about IT Asset Management, of Software Asset Management, the time to value for that product deployment is so fast and the value is huge. If you think about all of the underdeployed software assets that these companies have, if we're able to identify them pretty quickly then they can redeploy that money in a much more effective way and so we're seeing a lot of uptick on that side of things. And then especially even on the -- if you're overdeployed, right? How many software vendors are coming in and doing audits and striking penalties on top of that. So if you're able to quickly identify that, it's very quick that value. So those are areas that the new products have kind of been addressing, that have enabled the significant growth in IT still. So there's tremendous runway still, even in our core IT, with the new products as well as ITSM Pro that we're really excited about.

Great. So shifting gears to some of the non-IT products, HR and CSM I believe are both over $200 million now. I think last year, actually on this stage, we heard they're $100 million, so 100% growth year-on-year, super impressive. [ In HR ] specifically, you never -- didn't seem like initially you had any competitors, it was new work flows that you found to automate. Are you starting to see anymore copycat solutions for what you're doing or is it still pretty much a white space opportunity for that product?

Yes, we haven't seen a whole lot of competition coming in with what we can do, right? And so the value add and the workflow that we're able to define has been a really compelling story for a lot of the customers. We're not competing on the engagement letter. We don't want to be a system of record. What we want to do is when employees are interacting with the system and when employees have issues, whether it's onboarding, offboarding. As CFO of Ingram, $50 billion, we have 35,000 employees. The offboarding process, ensuring that from a soft perspective, they're getting off all of the applications that they have access to. Workflow like that would be amazing, right? And so I think that we're not really yet seeing significant competition. The other thing, as you think about the new wave of work and the new millennial employees, they don't want to get bogged down in administration work. If they can, on their mobile device, really get set up from an onboarding perspective, from a training perspective. All that we can do there is really compelling. And with the war for talent being as aggressive as it's been, really retaining and keeping your talent at this stage of the game is super important. And so the employee engagement has become a key priority for the CEO and CFO, across the board. And so we're winning effectively there because the product is so compelling.

And then for CSM, that's one area where there were some actually incumbents in that space. So in terms of why that's been so successful. What can you say about how and why you're winning in an area where there -- the competitive landscape isn't as open?

Yes. Well, I think that we're still displacing a lot of old legacy technology there. And when we are coming up against some of the more modern players, we are winning where we have -- where customers have complex workflows that they need to resolve. Where they have services that are provided on digital platforms that if there's issue resolution, the issue starts in the IT world, and we're able to help quickly identify the root cause as well as get to resolution quickly. So those are the areas and types of wins that we're seeing.

And in terms of brand new products, financial close is one of those. Can you talk about what functionality that product offers today? And then over time, I think there's a plan to offer full account reconciliations, such that it would compete more directly with, say, a BlackLine. So just what can you say about the product road map for a financial close?

Sure. So financial close is a great product, but we're just scratching the surface at the moment. So it really is enabling workflow throughout the financial close process, exactly what it says. And so what do I mean by that? So if there's any bottlenecks in the process and being a CFO, I can geek out over this for a long time, but I won't. It's really cool to be able to know, A, where you are in the process, what the bottlenecks are. And if you think about -- when I think about how useful that could have been in my role at Ingram, huge global $50 billion company, where we saw the bottlenecks and how we can help resolve that quickly is a real value add. That being said, the road map for this product and where we want to take it, we will continue to evolve that. And as I think about use cases from the CFO perspective, we will look to broaden that throughout the office of the CFO. And so more to come on that, certainly in the future.

Good stuff. So in terms of international, obviously, ServiceNow has done a great job penetrating the G2K in the U.S. and certainly, internationally as well, there seems to be even more runway there in areas like Asia Pac. So can you talk about the plan to continue to grow the business overseas? What you're doing with partners in some of those regions, new leadership, things like that?

Yes, the opportunity is just enormous, right? And so we talked about this continued white space, even in the U.S., where we are more penetrated. But certainly, internationally, with IT, including ITSM as well as CSM and HR. And so what we're focused on there is certainly on increasing the coverage model, thinking about territories that it potentially makes sense to go into where we're not currently. As well as thinking about the partner ecosystem, which is super important to us. And how can we think about accelerating the go-to-market scale through the partners. It's something that Bill was really successful with at SAP. And we certainly have started down that path and believe that we have a lot to accelerate. EMEA is probably more penetrated than APJ right now, but a ton of continued white space in both, and we're very focused on expanding our coverage model, both in our direct sales side as well as through the partner ecosystem.

Okay. So as new CFO, I want to ask you about guidance. I think over the years, ServiceNow has executed incredibly well. And I think the investor community has come to expect a pretty steady cadence of beats and raises. So what can you say about your philosophy as it relates to guidance? And any differences from maybe what we've seen before?

Well, listen, my predecessor and the team have done a phenomenal job. So I don't see a need to come in and shake the boat and rock the boat just for the sake of it. And so my philosophy, obviously, the first few weeks that I was at ServiceNow, I spent a lot of time with the team in understanding their forecasting process, the guidance methodology, to really make sure that I was comfortable with the guide for 2020, right? That's my guide, even though I might have only been here for a few weeks. And so what I'll tell you is that I have been, and I've said this on the call, I am extremely fortunate to have inherited a super strong finance team that I'm really proud of. And they have a very robust process in place around forecasting as well as how they think about guidance. And so I didn't feel any need to change the methodology. We worked -- I peeled the onion, as you would imagine, pretty deep to understand it. But the recommendation that they came to me with, I didn't feel the need to take an overly conservative approach or an overly aggressive approach. I really was very comfortable with where they thought we should be. And I continue to feel really good about the guide for 2020, both Q1 and the full year. And I don't anticipate changing the methodology significantly at all.

Got it. So in terms of financial metrics, I think, in the last few quarters, it seemed like management was also trying to move us away a little bit from billings, which have some idiosyncrasies about them and instead really focus us in on RPO. So can you talk about some of the reasons for that? And should we still be looking at your adjusted subscription billings as a good leading indicator? Or is it really more RPO that we should look at?

I think they're both important metrics to look at. I think that billings is a metric that's been around longer. And that from a forecasting perspective, we've built a lot of rigor in there. RPO is such a new metric that, I think it's important that investors, analysts as well as my own team, really make sure that they understand the puts and takes because it's not the proxy for bookings, right? And so if you're thinking about trying to get there, I just want to make sure that people really understand what's in and what's out, and how that can be interpreted. Coming into the role new, I was really not comfortable about that changing at this point in time. I want to make sure that if we're going to guide on something new that we have as robust a process as we have for billings before we were to switch. And so we're going to spend more time on that over the coming year. And we'll see. I think it's a very strong metric, and I think you should absolutely look at RPO. Whether or not we decide to change our guide, time will tell there.