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

Okay. Okay. So it is my pleasure to introduce Bill McDermott. I'm Madhu Namburi. I run our technology investment banking for JPMorgan. It is absolutely an honor to have Bill do our keynote from ServiceNow. I will just spend 30 seconds on Bill. As most of you guys know him very well, having spent close to 18 years at SAP, I just thought there are a couple of stats that just absolutely pop out in my view when he was CEO at SAP over a 9-year period. The stock price tripled, revenues close to tripled with an annual CAGR of 10%, which is despite their size and scale, and they went from marginal market positions to several leadership positions across portfolio. He replicated that when he joined ServiceNow. In the 6 months, when he joined, the stock, ServiceNow stock was $266, and it's trading at $366, which is over 43% despite the pandemic. So hats off. And the last thing, I will, before I pass on to Sterling is, Bill, you absolutely were at the front of the line to announce SaaS earnings, and with your level of specificity, including providing a year-end guidance, although Jamie just said on his previous call, stop doing it, okay, but it was a great leadership and stewardship on your part. So thank you for doing that. With that, let me pass it over to Sterling.

Thank you. Thanks, Madhu. And let me echo Madhu's thanks for joining us, Bill. Maybe just to get started, what was it that kind of motivated or attracted you to the spot at ServiceNow?

Well, first of all, thank you for the introduction, Madhu and Sterling. Super excited to be with you today, and I would like to, if I may, do a shout out to Jamie Dimon, a man with ultimate grit and leadership. It's sure nice to have him back at full strength. And I can't think of a better role model that's in the world of CEOs anywhere on the planet. So thanks for having me today, JPMorgan. Look, I spent, as Madhu said, nearly 10 years as CEO of SAP, their core and soul, and I saw a lot of things happening in the enterprise. It was very clear to me that this tailwind for digital transformation was at its early stages. And when I looked at ServiceNow, I met the founder of the company, Fred Luddy, who built this company the right way. He had a very clear purpose, and that was simply to make work, work better for people. And it was hungry, it was humble, and it had been well led before me. Frank Slootman was the CEO early on. He did a very good job of translating Fred's vision into execution. And then John Donahoe came on. John, who is a great friend of mine and one of the really great CEOs in the world, really took a broader vision to diversity, inclusion, belonging, brand and really broadened the horizon of what was possible at ServiceNow. So I met the Board. I saw all the underpinnings of success and then the megatrends of digital transformation. And I said, this is where I want to be. And here I am.

That makes a ton of sense. So companies have visions, and I'm kind of curious what you felt the vision for ServiceNow as you stepped into the role and how you think that -- what your impact or how you're going to shape that vision moving forward.

Yes. As I think about workflow, I think about a big, big TAM. I mean this is one of the really gigantic market opportunities of our time. And let me explain why I believe that to be the case. Today, everybody in the enterprise is looking for a consumer-grade experience. Therefore, mobile conversational tools and web-based applications are the new reality. ServiceNow uniquely does all of that well out of the box. Secondly, it took a half a century to build mass complexity in today's enterprise with systems-of-record companies, whether it be Oracle or SAP or Salesforce or Workday or Microsoft. These are wonderful companies, and they do very important things. On the transactional side, the data in those systems, very, very important. But what we need to do in the modern enterprise is get the data out of those systems so people can work interdependently in teams across those silos, and it takes a workflow. And if you design a workflow properly, you will, by definition, create a great experience. So I believe that ServiceNow started in IT, service management, asset management, operations and business management. But now we're quickly moving into employee experience, into customer service management. And then with App Engine, because this is a low-code, no-code platform, we can have customers and partners build their own innovation cycles in every industry for every persona, so literally, the limitless nature of our growth opportunity is simply stunning. So this is the workflow workhorse of the 21st century enterprise.

And I want to take the comment about App Engine. It's a perfect segue, in terms of how much of the solution actually needs to be built by ServiceNow versus providing the tools to allow the customer to take it across the finish line.

Yes. That's a great question, Sterling, because the customer, in many cases, does the innovation themselves. I'll give you an example. We're all in the midst of this COVID-19 crisis, really a tragedy for so many people. And for organizations, they're under tremendous pressure because they have to keep their folks safe, they have to quarantine them when it's necessary, and then they have to bring them back into the workforce whenever they can. The state of Washington was one of the states impacted by COVID first. So they built their own application to handle all of their workforce needs on the Now Platform. And one of the early learnings as well is when the federal government is going to fund state emergencies, you can't do that with e-mails and Excel spreadsheets and database entries or Google Docs. You literally have to have a professional platform approach because the federal government will expect that. So Washington state invented all this on the Now Platform. And we said, "Wow, why don't we open-source that and make it available to all states, whether it's the United States or countries around the world?" And that's what we did. And then we built 3 applications ourselves as a company in 3 days and launched it internationally in 1 week and made it available for free for companies all over the world. So this idea of rapid prototyping, bringing new innovation to market superfast with great return on investment in short cycles, let's say, weeks, perhaps a couple of months as opposed to years is what today's marketplace is looking for and only ServiceNow delivers it just the way we do.

When I think about a workflow platform, it kind of reminds me when I was getting my MBA, the joke was, once you have an MBA, it's like having a hammer and everything looks like a nail. And when you've got a workflow platform, it could solve a lot of different items. How do you prioritize the things to focus on?

Well, the most important thing is we have to remain a company that's hungry and humble and on the customer side. So we need to go wherever the customer wants us and wherever they need us the most. Today, employee experience is a huge part of the customer dynamic and we are in the midst of now a return-to-work scenario. I always remind people that the people that have been working from home have been working even harder than they used to when they were in an office. So this is about returning to work or working from anywhere and doing so productively, again, a massive opportunity every CEO is focused on. Another massive opportunity is customer service management. Take for example companies that used to have physical events to drive revenue. Okay. Let's think about theme parks as one example. Let's think about a company that had to take a business that was so dependent on human traffic going through their parks that if that was shut down, literally, you would be out of business. Well, companies today are finding new ways to stream and to meet their customers online because they're not going to meet them in a movie theater and they're not going to meet them in a theme park. So if you think about servicing that with virtual agents on the Internet, so people can have a great experience, sign up for service and then maintain that service at an excellent level of quality with 55 million, 60 million users, this is a whole new paradigm, go one step further. Take a health care company that might have 50 million or 100 million health care cases open at any one given time and how you're operationally managing those cases to make sure you track and trace and take good care of your clients. Or you could have someone who's in the field service business where they have to manage incidents somewhere physically, but they want to do that as minimal as possible. So you use machine learning and AI to predictively maintain and avoid having to go out to manage incidents, but when you do, you want to do it with the right person, with the right tool set and skills, at the right place at the right time, so you maximize your margins and customer satisfaction. So employee experience, customer service management, 2 massive growth opportunities for workflow.

When you move into these new areas, investors think about what it means for your competitive dynamics. So if we take the idea of customer support, the first company that immediately comes to mind is Salesforce.com. When you're thinking about moving into these different segments, how much of it is doing something that's not quite covered by the existing vendors in that space versus, yes, going ahead and going head on and taking on that competitive challenge?

Absolutely. Well, first of all, we don't need anybody to lose for us to win. That's a unique paradigm of ServiceNow's market position. So since you mentioned Salesforce as an example, they focus primarily on the engagement layer of CRM. So they know the customers, they can upsell them, they can cross-sell them, they can marry that with marketing campaigns, and it's very designed around the idea of generating revenue. The white space, however, is in the mid-office. Order management, how do I manage orders when I have legal and finance and operations involved? How do I deal with engineering and all the IT operations that go into satisfying the customer in mid-office operations? That's not what they do. We do that. If you think about field service, nobody does field service quite like ServiceNow. One example is Xerox. Xerox is trying to reinvent their business model and maximize their margins on field service protocols. So again, this whole idea of AI and predictive maintenance and maximizing customer satisfaction and margin with field service is something that we do and we do it better than the rest. So we have no quarrel with any of the systems-of-record. And if the customer wants us to cooperate, we're certainly very open to doing that. In fact, if you look at it from a human capital management perspective, we have no issue working with all of the vendors that have a system of record and really leaning in and helping them do good things for the customer as well. For example, when I met with Health and Human Services, they had like 74 different human capital management systems for like 74,000 people, probably 73 would have been enough. But our quarrel wasn't with those systems of record. We just wanted to make the data work for the customer. So we bring the data into one portal that manages all the knowledge, manages all the cases, gives the onboarding experience and the employee experience all the attention and care it deserves. Think about work-from-home. Accenture has like 500,000 employees. On a dime, they had to have everyone working from home. How are you going to get them their phones and their computers and their networking gear? And how are you going to set that up in a highly productive way? That's not what the system-of-record provider does. That's what we do. So was that competitive to the system of record? Not at all. It's white space that currently is being filled by workflow. And what I really believe is this configuration management database and our ability to configure it to any case is just unreal because whatever business model we want to innovate or change, we can do so on the Now Platform.

So should we be paying attention or looking for announced, I guess, either new partnerships or enhanced partnerships where we see ServiceNow pre-integration on the technology side with the Salesforce or someone else depending on the area so that you've got out-of-the-box functionality for the customers for these areas?

Yes, absolutely. And I think that is essential. Today, what's interesting is we have published more than 500 integrations on the Now Platform. So all the mega brands that you have referenced today, we actually have an open API philosophy, all of them come out of the box, integrated into ServiceNow. Can we even make it easier? Can we start combining some of these solutions for the customer out-of-the-box? Why not? I would certainly be open to that. I believe that the health of the ecosystem is one of the driving forces behind what we want to do. When I came in to ServiceNow, I wanted to make sure we elevated our level of contact at the C level. So we want to complement the CIO, mission-critical, but we also want to work with CEOs and COOs and all the heads of sales and field service and so on, so we can bring these end-to-end workflows to an enterprise. To the extent we partner and team up with others, we're totally open to it, and we're doing it. With the ecosystem, we intend to force multiply the ecosystem. Any big partner that you can think of that's an SI today is cooking up a $1 billion-plus plan with ServiceNow. And I've met with all of them, all the CEOs and chairmans and their whole teams. Before this whole thing came down with COVID, they came to Santa Clara and now we spend lots of time on Zoom calls together. But we're very excited about the ecosystem, and they are very excited about ServiceNow. And one thing I really want to make clear. One of the reasons they're excited is a lot of these systems-of-records are very good companies, but they're not going to be growth companies the way they once were. And it's entirely clear that workflow and redesigning work and rethinking how work is done is a massive TAM, and ServiceNow is in the pole position of digital transformation. And the tailwind behind ServiceNow is well known, and the more visible the company becomes, the more people are investing and moving assets towards ServiceNow to capture the growth opportunity.

With all of the white space that, that represents, how do you prioritize or what is the priority when you look at, whether it be customer support or human capital management or the different areas that you've talked about, is there a rank order that you look at? And does that also lead to a rank order in terms of resource allocation?

Yes, absolutely. So first of all, I don't know of any company that doesn't stay great because they remembered to keep the main thing the main thing. So when you think about our core business, ITSM, ITOM, ITAM, IT Business Management, we just introduced a new product in March, and a part of the whole COVID crisis, called Orlando, with deep machine learning and AI. The upsell and the opportunity for our customers to innovate their businesses on that is dramatic. And that has 90% left to go in terms of the upsell and the revenue growth on that platform. Secondly, on employee experience, as I mentioned, this business is in the hundreds of millions now, but it's growing at nearly triple digits. So we're seeing a multibillion opportunity there. Customer service management, as you know, is a $25 billion TAM, and we're seeing a multi-hundred-million business well on its way to billions. And I know that we can do that. And then I really believe one of the big breakthroughs of this COVID crisis has been the Now Platform because people are now realizing to have a cross-platform and integration engine in the midst of cleaning up the mess in enterprises that took 50 years to make or to innovate net new applications on the fly is mission-critical. One example that stuck with me was Lowe's. They have 323,000 people. They wanted to put up a control tower app for the whole COVID crisis. We worked with Lowe's over 96 hours. 96 hours. And they rolled it out to every single employee. So this App Engine, this low-code, no-code platform is really taking off. I had one CEO who said to me, "Bill, I want to get a good score on Glassdoor. How do I do a reward system and a recognition system for my people and how do I make it simple?" I'm like no problem. Get a business analyst. We will give you one of ours. And in 3 days, they had a reward system that was up and running. This is what CEOs want to hear today. Get me there quick. Give me a fast ROI cycle. I know digital transformation is a big deal. As a matter of fact, if you just look, Sterling, at the Fortune poll that just took place. They surveyed a bunch of CEOs. And they said, "Look, where are you post COVID on digital transformation?" And out of 100, guess what, 6% said, "Oh, probably I'll slow it down." That means 94% said, "I'm continuing to go." And 63% said, "I'm going to actually accelerate digital transformation." So the move to digitization of these enterprises is in its infancy. We're in the early stages, and we're in the pole position to capitalize on huge market share gains by hitting it right now.

With that digital transformation, would enabling the automation of more work processes, i.e., more applications, brings with it the idea that you need to monitor those applications? And you already have some deep partnerships with the New Relics, the Datadogs, the Dynatraces, the PagerDutys, et cetera. But in a number of my investor conversations, they want to understand how deep do you move ServiceNow into that monitoring space to do more and more of that yourselves?

Well, right now, our strategy is organic growth, so when you look at the profile of our company, the growth trajectory, the margin profile of the company and the outstanding excellence in engineering. Unlike many other companies, we're the first company ever in the history of software, certainly in the history of the cloud, that hit a $70 billion market cap without ever doing a large M&A move. Think about that. Only one. It's ServiceNow. So it's obvious that the pride in engineering is paying off. So I look at all those very good brands that you mentioned as good partners. And I think they do something very important. Some cases, we'll do what they do. Other cases, we'll team up with them to do what the customer needs us to do. But you always got to remember, you can move ServiceNow in many different directions. Of course, there's a developer network out there. There's this observation layer of technology. And at the same time, we're working now across the C-level of companies moving up the stack and across the application spectrum in the areas I mentioned earlier. So where we go with the company is going to be highly dependent on where our customers need us to go, where we're excellent in engineering and the time cycle it will take us to capture large addressable markets. Right now, we're in execution mode. There's plenty of runway geographically. There's plenty of runway across industries. In fact, our Knowledge event, which is going on right now through the beginning of June, we were all worried because now we're not doing live events. We were going to have 25,000 in Orlando. How is this going to play out using video. We have more than 65,000, 65,000 registered attendees. They're staying on the content line much longer than they would have in the live event. So we're seeing that our messages are coming through loud and clear. So if you think about our content and the demand for it, it's huge. So when I think about industry, I think about persona, I think about geography and I think about online digital and the way this company is thriving, I just look at those opportunities as organic growth that we've only scratched the surface on.

COVID is so top of mind. Let's switch over to it. ServiceNow, you announced -- probably one of the first tech companies to actually commit to no layoffs in 2020. What was kind of the discussion between yourself and the Board to move in that direction?

Well, candidly, that particular discussion didn't take place with the Board. I'll tell you how it went down. We were going to do a blue sky strategy session with the management team of ServiceNow. And it was an on-site, off-site. I'm tired of these off-sites when you go pay for hotels. We do it at our own facility. We're paying for that. And we were going into a 3-day blue sky thinking session. And I came in on a Monday, and we started off the session, and I said, "Look, there's really no point in talking about blue skies because if we don't get through COVID, there's no blue sky. And the world needs us to lead." And we had made a determination over those couple of days that we could actually launch the COVID applications, which we launched. We could take certain situations and open-source it so we would be a COVID leader. We gave everything away for free. We didn't want to be tone deaf as to what was going on in the marketplace. And at the same time, we said, why are we going to be slowed down by this? We're actually more relevant. We have more strategic authority at this moment in time than we've ever had before because the world needs us so much more. So we literally made the decision in that meeting to do a few things. One, we're not going to slow down. We're not going to give up. We're actually going to accelerate the pace because that's what our customers need us to do. Two, we're going to bring the ecosystem in. We don't care who gets the credit as long as the customer wins with their customer. Three, we're going to treat people with great dignity and respect. I'll give you an example. We actually hired 1,500 people in the heart of the COVID crisis. 1,500 people. At the same time, we made a decision. If you're a vendor of ServiceNow, even if you're a temporary vendor, we're not going to furlough you, we're not going to lay you off. You're going to work from home, do what you can do, but we're going to pay you in full everything that you always got from ServiceNow because we're going to need you, and the loyalty effect that we can create in these circumstances will be a force multiplier for this growth engine called ServiceNow. And that was our brand promise. By the time we got in front of the Board, our pipelines were already accelerating, our results were behaving perfectly, and our team was inspired to do great work. And it all came together with an all-hands, where we had 11,200 women and men on a Zoom call just like this, and we got all of our colleagues to say, it's going to be hard, but we're going to get it done and we're going to win. And that's the way we roll. We have this passion to win and not to accept excuses. That's pretty unique, and this culture really behaves well when it comes to challenges. And that's one of the reasons I love it so much.

It certainly didn't seem like you saw much in the way of negative impacts from COVID on your March quarter results and especially with your large deal experience. Do you think it's -- is that really just because of what ServiceNow is bringing to market? Or is it a description of kind of what the environment for software spending in general looks like?

I believe that we're in the midst of a new economic force. And I believe this new economic force is a true culture move towards service orientation. I believe that customers are buying cultures. I believe that they're buying hungry and humble people that have great intentions and their intentions are really focused on making that customer a winner. And having said that, I also, at the same time, know that the tailwind of digital is behind us. And I know that what ServiceNow does is very unique. I tell the people at ServiceNow, the Grateful Dead once said, "We're the only ones that do what we do the way we do it." And that is really the truth with ServiceNow. So I'm jealously guarding this culture. I want every single customer to be satisfied and in love with our platform, the technology and the experience. And I want our folks never to feel like they're in a big company, even though we're big and we're going to get a lot bigger, I want to keep that startup headset. And we want to hire people into this company. I tell them 9s and 10s, but what I really mean is people that have a heart, people that want to win, and whatever they don't understand or they don't know, they have a great desire to learn, a great intellectual curiosity. And at the same time, we look at their track record and their background. Have they been winners? Have they always been a winner? Look at what they've done in their life, not where they came from, not how much money they have in their pocket, but are they a winner. And we really put a lot of stock in that. We have an ADI principle at a minimum for every person that we hire in the company. And I traveled all around the world. I'm in 4 continents a day with Zoom, but I traveled all over the world. I met every single employee live. I met our top 300 customers live. And it was incredible. And I tried to find one that didn't love the product. I tried to find one. Tell me something I don't know, tell me somebody that's not happy, you can't find them. You could call all day. What they want, do more for me, ServiceNow, give me more. And that's what we're going to give them.

So in light of the environment, along those lines, we're seeing a lot of vendors talking about customers asking for flexibility, payment terms, contract terms, et cetera. What are you bringing to your customer on that front? And what does ServiceNow get in return?

Yes. There's a couple of things you have to remember, right? So one, attribute of our installed base is that we're primarily covering, let's say, the Fortune 1000, with our concentration in the Fortune 500. 80% of our customers are not in the most affected industries, such as airline, hotel, restaurants, retail. So the 20% that are struggling with difficult times, there's a few interesting facts. One, not one of them has canceled ServiceNow. So far, not one has sold down even as they furloughed employees and done layoffs. And all of them know that it's a keep-the-lights-on platform. So it's mission-critical to the cause of their entity. And there's been no debate. Now some of them have said, "Hey, can you help me out with payment terms? Can you give me a cash flow break?" And we're leaning in. I think it would be foolish not to be seen as a company with a heart. But in many of those cases, what do we get in return? Longer-term contracts, perhaps even upsell and cross-sell opportunities that are staged, commensurate with when they expect the COVID crisis to wear off and growth to start setting back in. So if we can have a longer tail of successful, happy customers that are actually buying more from us, we're strong enough to deal with the cash flow implications of helping somebody out on payment terms. That's basically where it's been.

All right. With that, I think we're up against our time. On behalf of JPMorgan, Madhu and myself, Bill, thank you so much for joining us. Stay safe and stay healthy.

It was a great honor to be with you. Thank you, Sterling. Thank you, Madhu. My best to JPMorgan, Jamie Dimon and all of the clients that you have. I hope you enjoyed the conversation. I appreciate it.

Thank you.

Thanks.