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

Good morning, if you're on the West Coast, and good afternoon or good evening, if you are on the East Coast or in Europe. I think some clients have dialed in from Europe as well. Welcome to day 3 of the Bank of America Global Technology Conference. We thought this was going to be an in-person physical event, and it turned out to be virtual. But it's all good. We ended up getting very fortunate because attendance doubled. I'm sure that Gina, who's the CFO of ServiceNow, will talk about how attendance and debut as a conference, which, also in digital, went up explosively. So it's been a real fruitful experience, short of not being able to see executives up on stage and seeing them in flesh and blood. I think this is the next best thing that could have happened. We've had a good fortune of an unbelievable lineup of companies. So without much ado, I want to say -- give a warm welcome to Gina Mastantuono. If I got your last name right. I think I got maybe 50% of that correct, Gina. Did I say that right?

I think you did, Kash. Thank you. It's Mastantuono. But thank you so much. I really appreciate the invitation to be here to speak with your investors.

Wonderful. We've got about 123. Just imagine 123 clients sitting in a conference room, listening to you speak, pretty sizeable, I would say, by most measures. So Gina, let's start off with a high-level recap. What is the long-term growth strategy for ServiceNow? How would the ServiceNow grow into a $10 billion revenue company? Connect the dots for us, please.

Sure. Absolutely. Yes, no problem. So we remain very confident in our ability to achieve the $10 billion in revenue goal that we've set forth. Digital transformation right now is the defining business opportunity of the century. And with the COVID environment, we believe that, that's only going to accelerate. We talk about ServiceNow as leading this workflow revolution, right? Companies focused on digital transformation have a competitive advantage right now over their peers. Our customers are facing unprecedented challenges. And what we're hearing from CEOs and our customers are that they want business model innovation and they want to enable great experiences for their customers and employees, and ServiceNow is so well positioned to really help drive value for them. We talk about being the platform of platforms, and what we mean by that is that we can integrate with all the technology used across the enterprise to create standardized workflows that drive better employee and customer experiences. The power of the Now platform, the quick time to value, which is really important right now in this day, and our commitment to our customer success really are key to our growth. As most of our customers have experienced, right, Now has enabled 11,000 of our employees to quickly pivot to working from home, and we didn't skip a beat serving our customers. Digital transformation and the power of the platform really has helped drive that. And we've really been able to help our customers navigate through the pandemic, right? In March, we released 4 emergency response apps focused on emergency outreach, emergency self-report and emergency exposure management. And we had over 6,000 downloads across the 4 applications. It's really demonstrating the power of the platform. Two weeks ago, we announced the rollout of 4 new apps regarding safe workplace return. It's a suite of applications focused on helping companies as they really navigate returning their employees back to the workplace. It's really what all of our customers are talking about and focused on right now. And we're able to really help them think about pulsing employees whether they're ready, whether they're healthy and ready to come back to work, managing the personal protective equipment and supply inventory at each location, and really helping to enable and ensuring that they're able to quickly configure clean and socially distance workspaces for employees to safely return. And so we've really been focused on listening to our customers and trying to help them through this difficult time. With these new apps, we had over 1,000 installs from 200 of the largest enterprises, all within the first 3 days, including large enterprises, partners and government agencies. So we feel really good about the power of the platform that it's resonating with our customers right now, as we think about the $7.4 trillion digital transformation spend that we're expecting over the next 3 to 5 years. And when I think about the longer-term growth, we're really focused on a few aspects to get to that $10 billion. It's about customer expansion. As we've talked about in the past, 80% of our net new comes from existing customers who know us and have already seen the value of what we can do, and it's critical that we continue to grow these relationships and continue to add value to these customers. We talk about and think about geo expansion. 2/3 of our revenue is in the Americas, and we have a growing presence in EMEA and APJ, but there's -- it's still very early days outside of the Americas and a lot of growth opportunity. We're not fully penetrated even in the countries we are in today and certainly have expectation for growth in some countries where we haven't even entered yet. And then product expansion. We'll continue to identify new use cases, working with our NowX incubation hub, and we have a commitment to launch 1 to 2 new products per year. And so the last thing I would talk about here is about our partner ecosystem. Our partners are critical to our growth story. We continue to build deeper and stronger relationships with all of the GSIs, which helps to extend our reach and helps ensure our customers really can be successful in their implementations. So that's really how we think about the growth strategy at ServiceNow.

Got it, got it. There's some talk about how ITSM is penetrated, whatnot. Any thoughts? How much more runway is there for the core product as part of your growth strategy?

Yes, we believe we still have tremendous amount of headroom, even within ITSM. Even though it's our largest and most penetrated product, we're seeing really nice growth from existing customers as they usually start out small and then roll out ITSM throughout their enterprise over time. There's also still considerable amount of opportunity to land new logos, even within enterprise companies in the U.S. as well as the rest of the world, where we're still really in the early days of expansion. The other thing that I like to talk about when we talk about ITSM is ITSM Pro. It's another massive opportunity, which we launched just at the end of 2018. And it's continued to gain traction, and we're still in the early innings. The Pro SKU really gives our customers AI and machine learning capabilities and has been really well received by the customers. It's become even more important in the current environment, with the IT department requiring to be supporting employees from anywhere and everywhere. Our virtual agent capabilities in this Pro SKU really enables many employee requests to be solved through the chat box and with no conversations within actual agents. And so the traction that we've seen has been strong. The time to value is really great. On average, we're seeing about a 25% price uplift on the Pro SKU. But still, less than 10% of our customer base is on that SKU, so there's still a lot of headroom and opportunity in front of us there.

10% penetration for a product that just got launched late 2019 is actually very good, isn't it?

We feel really good about it. The traction was even better than we had anticipated. And so in Q1, our largest customer, which is actually a large U.S. insurer, chose ITSM Pro because they really were focused on driving operational efficiency. They had many disparate applications for service management across their entire org, and the Virtual Agent will allow them to save, think about this, 26,000 hours per year by automating and deflecting level 1 cases. It really allows the IT support team to focus on more mission-critical work and prioritization. And so we feel really good about the traction and expect to see great results from this product.

Got it. How -- on that note, how is -- I know that the company guided conservatively for the June quarter, which is absolutely the right thing to do. Because it's a bigger quarter, generally, there's bigger deals to be done in the month of June, et cetera. I'm curious, I mean, relative to the assumptions that the company made back in late April, how is the actual environment feeling like for you guys? Has it turned out to be just about what you expected, modestly better than what you expected?

Yes. I think that we are really pleased with how the quarter has trended. We talked about, at the end of Q1, really bringing down guidance, mostly reflecting the COVID environment and the fact that 20% of our customers are in highly impacted industries. And so we remain confident in the guide that we gave for Q2 and the full year. And we're seeing nothing at this point in time that would cause us concern on that guide.

Got it, got it, got it. Okay. I wanted to talk about the workflow opportunity. When I listen to Bill talk about Workflow, I listen to -- I hear somebody talk about business applications. And the -- pardon me, if I exaggerate this stark contrast. The old ServiceNow was about selling a workflow solution to an IT department and the end user happen to be an end user like you and I, business people. But the new ServiceNow positioning seems to be selling a business application, which happens to be powered by Workflow. It's a very subtle but dramatic shift in how the company is positioning itself. Maybe I'm overdoing this, but I'm curious to get your thoughts. If you look at the world of opportunity that way, what are you going with and where are you going towards with the Workflow technology? What are the kinds of applications in white spaces are we likely to see in the future? You started off with HR and CSM, but that could be just the tip of the iceberg. What are the other things -- or maybe not so much, to put it even, those are big markets. How do -- what does ServiceNow look like as far as the product profile is concerned, when you actually make these workflow technologies into applications that actually do something that we can relate to?

Yes. I think that we have been really a leader in workflow automation, not just with ITSM and our IT portfolio, but expanding outside of that into opportunities like CSM and HR. We talked about the fact that both of those businesses are over $200 million each in revenue back at the end of Q4. And so we've been really focused on those areas as well as continuing to drive the portfolio with an IT. If you think about CSM, for example, it's one of the largest opportunities with a TAM of over $25 billion, right? It's primarily made up though of legacy technology. And we found that many customers are struggling with delivering customer service due to inefficient legacy and homegrown solutions. ServiceNow has been focused on really helping customers quickly identify the root cause of issues with their customers and really kicking off workflow automatically to address the issue and deliver consistent service, which helps improve the customer satisfaction. We've been really trying to differentiate in 3 areas: one, being managing complex cross enterprise workflows. So if you think about it, often, solving an issue for a customer requires the customer service agent to figure out what's going on, to connect the dots, identify the problem and then coordinate with different teams to resolve it. Our CSM product automates the workflows across that organization that needs to solve the issue. For example, a large Internet service provider uses ServiceNow to orchestrate their workflow across their organization to identify and remediate issues for their customers. For example, when a customer's Internet is down, they can quickly identify which part of their IT asset is actually causing the problems and kick off the workflow to address the issue. Field service agents, for example, can be deployed then if some networking hardware or equipment is necessary to be fixed. And then the service product can also identify, on the back end, which other customers are also potentially affected and can start a workflow to proactively reach out and provide updates. So we've been really focused on the CSM product. In HR, we continue to focus on employee service delivery, providing a one-stop shop for consumer-like experiences for all employees. If you think about really what's going on in the COVID environment and ensuring that our employees are safe and healthy and ensuring that they're able to work productively and even, at times, onboard them remotely. I know ServiceNow has committed to no layoff this year, and we continue to hire, which means we're onboarding employees in a remote environment, right? HR and our HR products are able to help us do that seamlessly. A few recent wins in use cases, for example, are the U.S. Department of Health and Human Services. With the pandemic, they had to quickly move the majority of the workforce into remote. This really created a need to quickly roll out this portal to the broader HHS employees to really help enhance timely communication during this time. We also had a large U.K.-based consumer product company that had fragmented different enterprise technology landscape and siloed development. We were able to really help them automate a lot of the work and become a one-stop shop for all their employee needs. They were able to actually achieve 25% decrease in their HR case volume. So we're really focused not only on -- and we talked about ITSM Pro. So I don't want to say that we're not as focused as always on innovating within the IT portfolio as well, but we continue to refine the use cases around employee service management, customer service management. And then if you think about the platform and these apps that we were quickly able to develop, both at the start of the crisis and then now as we look to bring folks back to the workplace, it's really highlighting the power of the platform and how easily you can develop customized apps to help drive any kind of workflow issue from the mid to back office.

Can CSM and HR individually be billion-dollar businesses for ServiceNow at some point in the future?

I believe so.

Okay. That's good. How does the go-to-market strategy evolve for ServiceNow, especially as you do remote selling, remote implementation? I believe Bill was an early proponent and advocate for virtual selling, even before the COVID crisis happened, so very visionary on his part. So how do you see this taking roots within ServiceNow as we go -- work through this pandemic? And I also wanted to ask you, related to that, I think the company talked about telco and banking verticals, and you will probably end up with 10 verticals by the end of 2020, a little bit more elaboration on that as well. So really a 2-part question.

Sure, sure. So as we think about the go-to-market, Bill talks about it, I talk about it, we really have a large opportunity in front of us. And our priority is maintaining growth at scale and doing it in a disciplined way. Given the current environment, you're absolutely correct. We are seeing a switch to much more virtual selling, savings from C&E, lower cost as knowledge moved to digital, for example. We are actually having remarkable traction with selling in a remote environment. Folks are just much more available, right? They're not on planes. They're not traveling to different countries for an hour, 2-hour long meetings. And so the ability to actually connect with the customers and speak with them is just greater than ever. And so we've been really pleased with the productivity on the sales side as well as throughout the organization through this pandemic. And so we feel good about what that looks like in the future. I get the question off and on, does it mean your cost to acquisition will come down. And certainly, if you think about the future of travel and are people going to be as willing to get on planes for that 1-hour meeting, listen, travel will happen, but will it happen at the same level? I think people are getting more accustomed to this remote working environment. And so I think we will see a shift in how business is done in the future, for sure. And then I think your second part of the question was around verticalization. Well, first of all, we had our digital Knowledge for the first time this year. And I've been super impressed with how quickly the team was able to transition from the in-person event to the digital event. And the early indications are that it's been really well received. And at Knowledge '20, we announced a few new products, including the launching of our new Financial Service Operations and telecom services management industry solutions, and they're really focused on enabling automation of the middle and back office workflows in each of the verticals. The focus on Financial Services is really around securely digitizing core operational processes. With respect to telecom, it's about proactively detecting, solving and updating customers on issues, automating network and service issue resolutions and really breaking down the data silos between the customer service and the network operations. And so we're really excited about the launch of these. We've talked about the focus on verticalization, and I want to be clear that, that's just a piece of the strategy. We will obviously continue to drive from a horizontal perspective as well. And what we mean by verticalization, it's not only on the solutions from an engineering perspective, but really creating industry-specific playbooks targeting these new verticals, making sure that we have a library of information of use cases, so that our account executives can really articulately, talk to customers about how ServiceNow can help solve the problems that they have in their business. And so we will continue to invest there as well as in our horizontal side.

Got it. Going to 10 vertical industries by the end of 2020, will you have a separate sales force that is verticalized? I mean, are you going to create product bundles? I mean is it too early to talk about how you're going to price these things? And I'm curious, I mean, is it -- how much of a net new business will the expansion into 8 new verticals will be? I mean, is this something that is not contemplated in the long-term plan or it has been contemplated, doesn't change really the growth trajectory of the company? Or maybe it does?

It's absolutely been contemplating. And when we talk about 10 verticals, what we're really talking about is creating these industry playbooks, right, so that we're able to on these -- in these verticals really enable the articulate selling on how our platform can help solve their problems, right? So how -- where we've done great work with company A in this vertical in this country, how can we really make sure that, that use case is understood by the whole organization as we go sell into other companies within that space. When we talk about products, we don't expect that we're going to have 10 different product bundles in 10 verticals by the end of 2020. It's been very focused kind of on education, sales enablement, more so than product size. Now we absolutely will continue to innovate on the solution and product side in these verticals. But it's absolutely part of the growth strategy to the $10 billion and not outside of this.

Got it. Can you talk about -- in the few minutes that we have left here, this has been a great conversation. Can you talk about how ServiceNow is becoming a platform and in developing an ecosystem. These are models that have worked very successfully for companies -- leading application software companies, like Salesforce.com and SAP. You've got a platform, then you have an ecosystem of partners and ISVs. And then you really have to work not as hard as you did before the flywheel goes out to work for you. How early are you in developing that platform flywheel ecosystem effect for ServiceNow?

Yes. I think the Partner ecosystem is incredibly important, and the partners play an incredible role for us. They're really critical to driving successful implementations, tailoring our product to different industries. And they really tell us that they see ServiceNow as the cross-platform integration engine for the modern enterprise. We have been very focused on force multiplying the Now business within the industry ecosystem. The Partner industry solutions that I just talked about with respect to telecom and to financial services, we absolutely will be working with our partners to help drive that. Accenture will continue to build telecom solutions that enable clients to run mission-critical services uninterrupted. Deloitte will provide the financial services, with unique complaints management solutions as well as timely small business association paycheck program is built on the Now platform. We will continue to work with KPMG to provide powered enterprise services management tailored for organizations across state, local and health care, right? So you're absolutely right that the Partner ecosystem will serve as a flywheel, and we're very focused in working with each and every one of them to help drive their practice as well as our business.

Gina, curious. This is a question that has come up from the chat channel. Is there overlap between ServiceNow and Workday and Salesforce.com as far as your 2 applications, the HR and the CSM product is concerned, some years from now? Is there some convergence in the functionality of how you view the product roadmap or not?

Yes. I think from a value proposition perspective, we are a platform company, first and foremost, and the benefit of that is that there's no one competitor that can provide the end-to-end functionality across IT, employee and customer, right? And so we're endeavoring to be the cross-functional platform that can sit on any top -- on top of any of the systems of record to really enable the workflow across those systems. We like to talk about ourselves as being a system of action, making employees more productive and really improving both the employee and customer experiences across the enterprise. We're not looking for the systems of record to lose for us to win. In HR, we don't compete against the HCM system, but really our focus on being the layer on top of them with great integrations with our employee workflows. Employees really can get help across HR, legal, finance and IT, right? So what we're trying to do is hide the complexity, so that the employees benefit from simplicity and get these consumer-like type of experiences at work just as they do at home. CSM, I think we talked earlier, is the most competitive market we're in, but it's a very large market, and there's plenty of room for multiple winners. And so we feel great about our platform and the real ability of our platform to help our customers drive and add value.

Wonderful. Well, this has been a productive conversation, really very articulate. Nice job, Gina. Thank you so much for spending the time with us. And as I said, we hope, at some point in the future, maybe it's 2021 or 2022, we can go back to an in-person physical setting for this conference. In the meantime, thank you, once again. Any final concluding thoughts you have on your end, please feel free to be our guest.

No. I really appreciate the invitation to be here and to speak, and I hope that I was able to really drive home the focus that ServiceNow has really on enabling and driving value for our customers. I've been so impressed since I've been here at the real focus on the customer first of ServiceNow, and we will continue to innovate and help our customers add value and drive success. So thank you so much, Kash. I really appreciate it.

Thank you so much, and please give my best regards to my very dear friend Bill McDermott as well.

Absolutely. I certainly will. Thank you all. Have a great day. Stay safe and healthy.

Thank you so much. And to all our clients, you will be connecting into the next presentation, Salesforce.com Chairman and CEO, Marc Benioff, and that will be starting in about 10 to 15 minutes. Talk to you soon. In the meantime, take care. Bye now.