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

Welcome back, everybody. Again, I'm Brad Zelnick, software analyst at Credit Suisse, and welcome back to the 24th Annual Tech Conference that ordinarily would be in lovely Scottsdale. We look forward to being back there next year. But for all the reasons you're very familiar with, we are here virtually. And for this session, extremely delighted to be joined by the Chief Financial Officer of ServiceNow, Gina Mastantuono. Gina, thank you so much for joining us.

Thank you, Brad. Really happy to be here. Thanks so much for the invite.

For sure. And just for logistics, the format of this will be a fireside chat. I've got a bunch of questions that I want to ask Gina. I will also try to keep my eyes on my inbox just in case any of you have questions, and I'll try to work into the conversation.

But maybe, Gina, just to get started, you're now 1 year in the seat. Congratulations, happy anniversary. I can't think of a greater trial by fire in your first year as a public company CFO. And maybe if you've had the chance with -- if you could go back with full knowledge of what you know that's transpired in 2020 and you went back, what would you tell yourself before signing on with ServiceNow? Where have been the biggest upside surprises and perhaps downside surprises versus your original expectations?

Oh, wow, great questions. Thank you very much. I appreciate it. Yes. I'm just shy of a year. I started on January 8, but I could not have imagined this type of year, certainly as my first in the seat of ServiceNow. But what I can tell you is that -- and I say this all the time, that I'm absolutely in my dream job, and I couldn't be more excited to be in a role than as CFO of ServiceNow. We have such an incredible leadership team and a super strong finance team. And I have just been in awe of the resiliency of this company, right? I was 60 days in, and we literally, overnight, like everyone else, 24 hours went to 100% remote workforce. And so the people and the culture of this company is just absolutely incredible, and we are blessed. It really is a very hungry and humble organization. Super customer-centric and customer-focused. Everything that we think about, everything that we will talk about always starts with the customer. And that is just such an incredible place to be in. And I really think, and I say it often to the team, that we don't take this place a privilege for granted at all. And we have been doing extremely well even amidst this crazy pandemic world that we're living in. And so the reason for that is that there's this tremendous opportunity in front of us, and I felt it before I came on board. It's one of the reasons why I came. And certainly, I feel it even more so now. I think this pandemic has really accelerated the pace of digital transformation, and it's not going to slow down. I got questions today from a lot of folks here about do we think that the acceleration will slow down post pandemic when there's a vaccine in place and people get back to normal. And what I say is, well, from your lips to God's ears that we get this vaccine in place and that we get back to normal sooner, but that no, I don't see the pace of acceleration changing at all. In fact, I see it continuing to accelerate because no one wants to be flat-footed again, right? And when this happens once, no one expected it to happen once. But if you're flat-footed and it happens twice, I think that's going to be a problem. And so it's just been really incredible to see the power of this ServiceNow platform and the how product portfolio resonates so well with what's going on today, and I just couldn't be more excited to be here. And Bill and I talk often about our belief in this path to $10 billion from an organic perspective, and I think it's more true today than even a year ago when I started.

Well, there's a lot there that I want to dig into, and thank you for that perspective. But maybe just to dig a little bit deeper on the environment and what you're seeing, especially from a go-to-market and selling perspective, this has been an unusual year. Can you maybe help us unpack a bit of the dynamics around new versus existing business, the nature of the recovery or stability that we've seen since June? What have you changed as a company, if anything, around the messaging or go-to-market that's enabled ServiceNow to succeed despite what most surveys would say are challenged CIO budgets that are out there?

Yes. I've just been incredibly impressed, Brad, with how our sales organization has stepped up to the plate and executed during these challenging times. Despite everything going on, our sales team continues to deliver. They closed 9 deals in Q3 over $1 million, and so -- and that's on top of executing in Q1 and Q2 really strongly. We talked about landing new logos being temporarily more challenging in the current environment, particularly in the more highly-impacted industries. We expected that, and that is absolutely what we've seen. But we absolutely believe it's a timing issue. These opportunities haven't moved out of the pipe, they've just moved down the pipe, and I think it's just easier when companies know the value that we provide in their existing customers to upsell as opposed to start new. I think there certainly have been, especially in the beginning of the year, IT budgets were a bit more constrained. But I do believe, based upon what we're seeing, that the acceleration of digital transformation, the investment dollars to really enhance customer experience and employee experience and drive business resiliency and productivity are really where people continue to invest and where, ultimately, we're really well positioned. I think we've been in a very privileged position to have a business model that's very resilient and predictable. Our backlog is strong. We exited Q3 with RPO of $7.3 billion. 80% of our business historically has always been generated by existing customers, and so that business model is resilient and strong, and we feel really good about it. And again, pipeline remains strong, remains good. And so we're well positioned into Q4 and as we enter '21 and beyond.

Great to hear. And maybe at the risk of being a little bit pessimistic, which on some level is what I get paid for, just to be sure, are there any areas of the business outside of the obvious impacted industries, where there might be challenges as it relates to closing business? And even Q4 to date, I mean we're 2 months in. Is there anything to note in terms of the customer conversations and how they're evolving?

The customer conversations are really, really great. Again, going back to the acceleration of digital transformation. The customers are really looking for 3 things. It's about projecting revenue. It's about business resiliency and productivity and employee engagement, and we're well positioned throughout. We talked a little bit about new logo being a bit challenged in the current environment. From a product perspective, we're seeing really strong growth in ITSM, in CSM, in HR, risk, in our platform business as well. ITOM has been a little bit slower. We've seen that kind of in Q1 and Q2 as that's a bit more of a lengthy implementation and more complex. And so we're seeing really the quick ROI, quick time to value deals a bit more -- progressing more quickly. But again, ITOM in Q3 had a good quarter as well. But those are probably the 2 areas, I would say, are slower than normal, but being offset by some real growth in some of the other areas I've talked about.

Excellent. And Gina, I want to go back to the path to $10 billion. But before I do, I want to call out some big news today. You've announced as a company that you'll be acquiring Element AI, which is great to see the continued investment. This is not the first AI company that ServiceNow is acquiring. And it's not a small company. I mean it's -- they've taken on significant amount of venture capital. Hundreds of employees from what I understand. Can you maybe just give us a sense of why AI is so important to the future of the Now platform, how this all fits together and maybe a little bit of whatever you might be able to tell us about the deal?

Sure. Absolutely. So we've been talking about investment in AI and machine learning for a while, and this is not our first foray into investment here. And so we've continued to see strong demand for our AI-powered ITSM Pro, CSM Pro and HR Service Delivery Pro product as most customers are really focused right now on automating as much as possible and allowing them to focus their time and efforts on the more complex issues. So with Element AI, we'll be able to deliver workflows that really learn more efficiently from smaller datasets. We'll be able to deliver these workflows that really enhance AI capabilities like content and language understanding and expand in new capabilities like image recognition and cognitive search. And so we're really focused on enhancing the capabilities that are going to allow employees to work smarter and faster, streamline business decisions and really unlock new levels of productivity. And so Element AI really gives us an incredibly deep bench of world-class AI scientists and practitioners. You talked about like hundreds of employees, between 100 and 200, really bringing expertise in modern AI, text and language, chat, images, search, And if you think about what that can bring and the capabilities that we can bring to the platform itself and when we add capabilities to our platform, it helps the whole product portfolio, whether it's ITX or HR or CSM. And so we couldn't be more excited to announce this acquisition and really believe it's going to help us remain on the forefront of innovation on the platform within AI and ML.

Very exciting times. And congrats on the deal.

Thank you.

We look forward to learning more as information becomes available and as the process unfolds. Maybe backing it to this path to $10 billion. How would you -- if I think about it from 3 different dimensions, how would you encourage investors to think about that journey maybe first from a customer spend and wallet share angle; second, from a product offering and end market angle; and then thirdly, just from a resource and go-to-market angle? What are the key areas of investment? What sort of additional layers do you need to build into the organization? And how much of this is ServiceNow-led versus partner-led?

Great question. And so listen, I think we continue to see enormous growth opportunity in front of us. And we think that we can continue to double down in our organic bets, which will give us the elbow room to reach $10 billion and beyond. And so when we think about the growth opportunities, we think about it in a few different ways. And so I'll start with customer spend question perspective that you asked. 80%, I talked earlier about of our new is existing, customers is 20% new logos. Most deployments start relatively small and grow across the organization over time. As we demonstrate quick time to value, our customers really recognize the efficiency and the benefits of the products. And so we typically see these customers expanding over time as they expand deployments into incremental areas of the business, business units and even across geographies. And so we'll continue to see customer expansion. Expect that mix between existing and new, 80-20 might shift a bit 75-25, but it'll remain pretty consistent. Then there's product expansion that we talk about. After proving the strength of our platform across organizations, we typically really see strong attach rates in the product side. So whether they start up in ITSM, they add on CSM and HR, and we've actually been seeing a lot of new logo lands with HR and CSM as well. And so we absolutely believe that new product attach rates and new product expansions over time will add TAM for sure. And then there's additionally, from a customer perspective and product, we see the opportunity to drive additional value with our pro SKUs and enterprise SKUs. So we are thinking through like a good, better, best. We launched CSM and HR with the good, better, best SKU portfolio, but we hadn't done that yet with ITSM. And so we launched ITSM Pro a couple of years ago, and we'll continue to evolve that as well. So from a product perspective, that's kind of our thinking. When you think about geographies, we're definitely underpenetrated in EMEA and APJ, for example. We recently brought in Paul Smith to run our EMEA business, and he served as a key leader in Salesforce as and has a track record of triple-digit growth, and really has the expertise and experience in scaling an organization. So he's been making a real difference, even early days. So really excited to have him on board. And APJ, similar. There's a lot of room for growth, and we're definitely underpenetrated, and we'll continue to invest there. Verticals. We talk about investment in verticals and how we really think about ensuring that we're able to speak the language of our customers and understand the use cases that are different depending on what vertical the customer is sitting in. And so when we talk about investment there, it's not about huge overlay organizations, but it's really about building up expertise, domain knowledge expertise, building out these vertical use case playbooks for our sales teams to be able to go in and speak the language of the customer. And so really expect to invest more there. But again, it's not in these huge overlay sales org. It's really very focused industry-specific expertise. And then you asked the question about how much of it is service-led versus partner-led. Scaling the ecosystem for us is big and a really big opportunity. Partners play an incredibly important role for us. They have always and they will continue to do so. They're critical to driving successful implementations and really tailoring our product to industry verticals. Both Bill and I have met with the largest SI partners. And they come in committed to doing $1 billion biz with us, and we walk out the door and they want to double and triple it because they see the opportunity as well, which is really exciting for us. We just announced the Accenture-ServiceNow Business Group partnership. And that really brings together dedicated professionals with deep expertise in workflow and platform development, marketing sales and really across the priority of industry. So we will absolutely be doubling down on the partner ecosystem, and we'll continue to invest there. We've talked about partnerships with Deloitte as well in the financial services and banking vertical. So absolutely expected to be not only ServiceNow-led but also a real partnership ecosystem-led growth as well.

Gina, to that point, when I think about your past as well as Bill's, you both have a tremendous wealth of experience in leverage distribution models. Maybe a little bit different, but I mean this is obviously something that's going to help drive success. And we have seen a lot of these announcements with partners, Accenture; even technology partner, Zoom, IBM, Cisco, many more. How has the partner strategy evolved even since Bill and yourself joining? And what is the success criteria? And if at all, how might that be different than perhaps prior to both of your arrival at ServiceNow?