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

All right. Welcome everybody to the 5 -- I guess 5:10 Eastern session. I'm Walter Pritchard, software analyst here at Citi. Very happy to have with us ServiceNow and Gina Mastantuono, who's the CFO of the company. And a couple of her colleagues are on without the video here as well in -- on the IR side. I'm going to go through some questions that I had prepared. [Operator Instructions] So Gina, thanks for joining us this afternoon.

Thanks, Walter. I'm really excited to be here. I appreciate it.

Great. So I want to -- we started out the discussion just -- for the most part just sort of understanding this environment we're in that's pretty unprecedented. Sort of what you've seen so far from a business perspective, what have been things around the COVID selling environment that have both helped bring ServiceNow to the forefront with your customers? And what areas have you seen some challenges as it relates to closing business?

Yes. I think -- listen, at the end of the day, I think COVID is accelerating the pace of digital transformation for sure. But if I think about headwinds, we talked about in Q1 when this first happened that some companies in the most affected industries that we're in would likely be a little bit more conservative in their investments. And that's about 20% of our business. And these are industries such as transportation, oil and gas, retail, travel, for example, right? A lot of them have furloughed their workers. But in all honesty, we're actually experiencing a lot more uptick in business than we are in down sells. And so on a net expansion basis, we continue to see double-digit growth. Renewals of customers remain strong, and we actually closed 5 deals over $1 million in Q2 from verticals, including oil and gas, transportation and health care. And so we're really seeing COVID as an accelerator of digital transformation more than anything else. And I think what we've seen as well is this crisis has really made it clear that customers who are furthest along in their digital transformation are better equipped to manage the crisis and support both their customers and employees from a remote perspective. And so customers and companies that are lagging behind really see this as a burning platform, and accelerating their digital transformation really has become a necessity. And so I think that software and ServiceNow is well positioned because we are really help CEOs and C-suite executives look for solutions to their 3 priorities, which are about protecting revenue, driving business resiliency and really driving productivity. And ServiceNow is so well positioned throughout the product portfolio in all these areas. And so we are really seeing favorability as a result of COVID in the -- from an opportunity perspective. And if you think about what we've been able to do on the platform with our Safe Workplace app, we're really on the front lines of getting companies back to work and back to the office. We closed over 30 deals in Q2, and this is for a product that didn't even exist on April 1. And so what the apps have really demonstrated is the conversation and the messaging that Bill have been saying for a while about the platform of platforms. It's really demonstrated the flexibility and the quick time to value that our platform can provide. And so from our perspective, it's really resonating well with customers as they think about what they need to do in order to exit the crisis even stronger than before.

Got it. And on your end, you've been at the company less than a year joining as CFO. Can you help us understand some of things you've learned just about the business and maybe things that have surprised you both from talking to your colleagues internally as well as interactions with customers?

Yes. I mean I couldn't be more excited. So I'm 8 months in now. You're right. And I just -- I say often and I mean it from the bottom of my heart. I'm in my dream job. I just love this company. I think we have an excellent leadership team, and I talk often about the amazing finance team that I've inherited. And so from a culture perspective, the people are just incredible, so collaborative and so customer-focused. And a lot of companies say it. I've never seen a company as customer-focused as ServiceNow is. And hungry and humble is the cornerstone of how they describe themselves, and that's honestly exactly how they are. And so I love the culture. The opportunity that's in front of us, I truly believe in. And with this amazing product portfolio, I'm super confident in the path to $10 billion. And so just an amazing company, and I couldn't be happier.

And so you brought up -- I was going to ask you about the path to $10 billion. I think there had been, in the past, sort of lots of buildup and so forth around kind of different markets and so forth. At a high level, how would you encourage investors to think about that path? I could think there's sort of a product-related path in different markets. There's sort of a customer angle on that. How are you thinking about the path to $10 billion?

Absolutely. So I said it before. I'll say it again. I see enormous growth opportunity in front of us. And the opportunities from an investment perspective that I talked about often are expanding across geographies. So we're underpenetrated in EMEA and Asia Pacific, and you'll continue to see us invest in our opportunities in those regions. We recently brought Paul Smith in to lead EMEA. Paul served as a key leader within Salesforce's EMEA business and has a proven track record of triple-digit growth. So he brings a lot of experience in scaling and organization. And so that's the kind of opportunity that we see. We talked about EMEA crossing the $1 billion in revenue run rate in Q1. And so what's the path to that growth that we expect there is strong, and I think he's going to bring a great sense of leadership to that team. We talked also about going deeper in verticals. Industries are critical to the growth. And in the product launch that we talked about last on Orlando and even the Paris release, we talked about recently announcing these solutions in telco as well as in banking. We'll expand that further, and we'll continue to expand our use case into additional industries like health care, manufacturing, media and technology. And the vertical side of things is product as well as sales, right? And so how do we make sure that we're building out the use cases? How do we make sure that we're building out the product portfolio to really suit the needs of customers in those verticals. And so that's the key area for us. Third is really focused on establishing new buying centers, really elevating the conversation and the value proposition to sell to the C-suite as part of a top-down, go-to-market strategy. So that strategy has been in place for a while, but you'll continue to see us double down in that area. And then scaling the ecosystem. Partners remain critically important to us, and they play a really important role. They're critical to driving successful implementations to tailoring our products to the different industries. And when we talk about the verticals, right, they're critical in thought leadership with us and how we want to attack that space. And so we've met with our large SI partners who are really committed to doing $1 billion-plus business with us, and some of them are actually already thinking beyond that to $2 billion, which is fantastic. And so together with the partners, we're really committed on really helping our joint customers achieve the value from our product portfolio. And so those are the 4 areas. And then what Bill always tell us often and we talk about so much at ServiceNow is teamwork makes the dream work and really making sure that we have the ability to continue to attract, retain and develop world-class talent to really bring that strategy home.

Got it. And so when you think about the sales and marketing organization that you need to support $10 billion in revenue, I mean -- I've covered ServiceNow since the IPO and I've seen a number of evolutions in the sales and marketing structure of the organization. How do you think about things evolving as you sort of shoot towards that $1 billion goal? What sort of layers in the organization or specialization or what have you do you need to support that sort of revenue?

Yes. I think the team under Kevin -- so Kevin's run global sales for 7 years now and is doing an incredible job. I think it's refinement along the edges that the structure that he's put in place and the coverage model with account reps and then the overlay solutions specialist has been working and will continue to work. For us, really, it's about scaling that organization as we continue to grow and making sure that we're getting the best and brightest talent in who could really help drive that throughout the organization. So we don't expect that shifting kind of coverage ratios and coverage models. It's really just as we scale up, increasing and making sure that we're able to attract and retain the best talent.

And on the verticals, I think you mentioned it's -- part of it is the sales organization to support that, and you also potentially have products in that area that might become more vertically oriented. How far along that process are you? What areas do you have, vertical specialists? And sort of what areas may be next?

Yes. We've invested really heavily so far in financial services and telco. And we are looking to expand that further, I said earlier, into health care, manufacturing, media and really working with our partners to help drive those use cases, to really help ensure that we're building the right products for our customers.

Got it. Okay. And then on the product side, how much of a vertical sort of specialization do you need -- do you think you need on the product side? Or is it mostly kind of a go-to-market and solution and partner sort of lineup?

It's more on the go-to-market side. I think the innovation that we bring in the platform doesn't need to be verticalized from an engineering perspective as much at all.

Okay. Got it. And then on the topic of sales, how are you sort of seeing the productivity of sales reps? And have you made any adjustments in the type of hiring you've done and the sort of sales processes that -- obviously, everybody is virtual, but sort of more fundamentally in terms of the sales process given the environment we're in?

Not really. So we've really focused and we said very early on in the crisis that we pledge no layoff in this environment and not only that, that we were going to continue to hire at the pace that we had planned, especially with respect to sales and marketing and R&D. We definitely slowed the pace for the G&A functions a bit, but on sales and marketing and R&D, we have not slowed the pace of hiring at all and in fact, a greater than 20% increase in hiring this year, which really sets us up well for 2021. Productivity remained strong and actually in the Americas was relatively flat year-on-year. Outside of Americas, in APJ and EMEA, the productivity was down slightly, and a lot of that was really because we didn't slow down the ramp of hiring while we brought down the revenue guide a bit as a result of COVID. And so we feel good that, that positions us really well as we come out of COVID and into 2021. And so, so far, so good.

Okay. Got it. And then on the -- I guess specifically geographically, in Asia, I know for a number of companies, Japan and some of those countries in Asia tend to be a little bit more challenging. They have their own sort of ways of operating from a business perspective. Where are you in terms of your entry into Japan? And what -- have you seen any challenges at this point? Or does that business seem to be progressing as you've seen other countries that you've entered?

Yes. Super excited about Japan. It remains a great opportunity for us, continues to do well. We closed our largest CSM deal. I forget if that was Q1 or Q2 but -- so we continue to see good traction there. Certainly, the COVID environment has had its challenges in that culture. But the opportunity remains strong, and we will continue to invest there for sure.

Okay. Got it. And then maybe diving a little bit into some of the product areas. I think there's -- CSM has been a big, I think, surprise. If I go back and look at a multiyear view in that market especially given some of the strong incumbents that are in that market, can you talk about where specifically you seem to be seeing success in customer service, understanding there's other players there that I think a lot of investors sort of try to position everybody amongst?

Yes, I mean, I think about CSM -- and obviously, we do compete with Salesforce for some of business. They're very focused on the front-end engagement, and they're a fantastic company. ServiceNow though is differentiated in our ability to manage the end-to-end process of creating a ticket, right, and then carrying us through the resolution, all-in-one system for the customer service rep. And so most companies' customer service systems are really set up only to answer questions and not necessarily to solve problems. And if we think about customers really looking to make that customer experience so much better, our platform is really built to manage these complex workflows and orchestrating the work across different parts of an organization. And because all the products are built on the same platform, the customer service agent really is able to manage the task really from start to resolution all in one place. And so if you think about where we really shine is when the customer has, one, complex workflows; and two, the product or service is dependent on a digital asset. And so customers who use us -- and they combine CSM with ITOM, for example, are able to really quickly break down the silos between IT and customer service and allow them to utilize the insights from IT to provide better, more efficient customer service. And so if you think about the Disney+ example that Bill talked about on the call and those customers having issues, 90% of the issues are going to be about something to do with the digital asset, right? There's a problem with the service. And so if they can tie that back to what's going on and be able to quickly resolve that problem, you have a win-win for everyone. So that's really where we differentiate. At the end of the day, the overall TAM is massive and growing and there's plenty of space for multiple winners here.

Got it. And on the HCM side, I guess there's -- similarly, there's other players. I think here, your positioning is maybe there's more lines that have kind of been drawn in that market. How do you think about though the -- some of the players in the landscape? Are they potential partners? Or are those relationships more challenging because there is a potential competitive relationship over time?

Yes. I mean on the HR side, peer offerings are largely systems of record, right, not systems of action where employee services are managed, orchestrated and delivered. So we don't feel like we compete against the HCM players, but we're a layer on top of them with great integrations and partnerships. And so with Workday, for example, we don't compete with them but we rather complement them. Workday is used to drive better insights and now utilizes that data to get work done across the organization, so the system of action to help resolve an employee issue as opposed to the system of record. With our employee workflows, the employees can get help across HR, legal, finance, IT, to name a few. And we hide the complexity, right? So it feels like a consumer-grade experience, but in fact, there's really workflows driving cross-functionally through IT to get a laptop, through finance to answer a question, through HR to get them set up, right? And so we really believe that we complement. And again, great market, great opportunity and multiple players can win here because we're doing different things.

And within HR, I guess there's a few opportunities. You've got the sort of portal self-serve that -- the employee service portal. You've got kind of an onboarding process that is a pretty big process at a number of companies. Which parts of the HR market have you seen the most success as you look back on the last year or so with the traction there?

I mean it's really throughout. And if you think about what's resonating for most CEOs and C-suite executives, it's all about employee experience and employee productivity in this remote environment. And so we've seen real success with the overall employee portal onboarding. I just hired someone a couple of weeks ago, and everything is onboarding remote now but -- like I onboarded almost entirely remote except when I walked in the office. And so it's really resonating well. And if you think about all of the productivity issues that some employees can potentially be having in this work-remote environment, homeschooling kids and trying to do their day jobs, the ease in which employees can get answers to questions, get IT answers, really just deal with anything, has been really a help in the productivity side for employees.

Got it. And as sort of a follow-on with the HR area, is that the sort of leverage point that you're using to sell your sort of return-to-office set of applications? Is it really an HR relationship that you're leveraging there?

Sure. Absolutely. If you think about -- but I'll tell you it's interesting because the return to workplace in any organization, we're finding, is totally cross-functional. So you have the CFO involved, the CHRO, the COO. And so they're all focused on ensuring that when they're bringing folks back to the workplace that they're safe, that -- from a risk perspective. And so that buying center has actually been all over the place. But the one thing that is consistent is the fact that everyone is focused on bringing folks back safely and being able to get -- to make sure that they have the right products in the right place, the safety equipment to make sure that the social distancing protocols are accurate. And then you have this one beautiful dashboard where you can see everything from a CEO perspective or a COO perspective. And so we've seen great traction there. And if you think about the innovation and the sales motion that we're able to come together so quickly because those applications literally were designed, built, GA-ed and sold all within one quarter, and so just incredible. It really goes to show the power of the platform and how really quickly you're able to add value to an organization.

And then a follow-up, going back on the customer service side. There are -- there is process-related and workflow-related areas within things like sales and marketing. How do you think about the broader front-office opportunity sort of following on from what you've done in the customer service area?

Yes. I mean there's a lot of adjacent opportunities both within enterprises and within different verticals that are yet to be unlocked given the capabilities and reach of the platform. Our -- if I think about it, our CSM and HR products were built really as out-of-the-box solutions for our customers because we saw how our existing customers are actually using the platform. So similarly, you'll see us launch other products based on where our customers take us. It includes natural extensions of CSM. The buying decision-makers and selection process for field service management, for example, they often overlap with CSM. And the single platform conversation, so one platform throughout the organization as opposed to multiple ones, is really increasingly resonating with customers. So ServiceNow field service management allows customers to create work orders directly from the cases that come in, apply the work order templates to associate skills and the parts needed and really leverage dynamic scheduling to automatically assign task to the field service agents. And so that's a really natural adjacency for sure. On the marketing front, we're also building out our capabilities and reach with partners. In May, we announced a partnership with Adobe to deliver industry-first solutions, connecting data from Adobe Experience Platform to ServiceNow CSM workflow. So we'll work with partners sometimes. We'll do it ourselves sometimes. But to your point, there are adjacencies that make sense, and we will go where our customers take us.

Got it. On the -- another area that's been maybe a product that's been brewing for longer, and I sense that you're starting to see more of an uptick here, has been in the security area. Could you help us understand where you're seeing demand specifically there? And then it does seem like it strengthened in the last 6 months or so. Is that right?