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

Welcome to the Wells Fargo TMT Summit 2020. Your session will start momentarily. Please note, this session will be recorded.

Hello, everyone, and welcome to the Fourth Annual Wells Fargo TMT Summit. I'm Phil Winslow, software analyst here at the bank. Very excited to have ServiceNow and CJ Desai, Chief Product Officer, joining us for this fireside chat session. CJ, thanks for making it virtually to the conference.

Phil, thanks for inviting and really excited to be here and looking forward to this chat.

Yes. I know. It's going to be great. Now obviously, 2020 has been an interesting year to say the least, yet ServiceNow continues to take share in its core ITSM market and expand its product portfolio. Could you give us a sense of how the narrative from customers and products, in fact, has evolved over the course of this year at ServiceNow?

Yes. So I would say beginning the month of March, when lockdown started happening, we saw a very particular trend. And the particular trend was with people going remote, except the frontline workers in most of the industries. There is no more solution where ServiceNow was looked as something that will help transform the manual workflows into digital workflows. And what I mean is paper-based processes, still a lot of reliance on e-mails, walking over to someone's desk and getting something signed, all of that just disappeared. And then when you look at employees who go home, they request certain assets. They request certain things that they want to take care of in terms of password reset this, that and then have as much self-service as possible. And so we saw acceleration of many of our product lines, including, of course, our core of the core, which is ITSM and ITSM Pro, Phil, that we discussed in our Q3 earnings call, but also for our customer service product lines across enterprises, governments as well as educational institutions and HR product lines, which is our HR Service Delivery is flagship. But as you know, we created Safe Workplace apps and all that. So what I can tell you is, when we speak to customers, both Bill and the entire management team on a regular basis, and the need for digital transformation. And digital transformation is the high-level term. But when you keep that aside, it's basically automation and digital processes. And using ServiceNow for digital processes just made it very obvious, and it accelerated in many large enterprises our sales campaigns, as you have seen in the last 3 quarters.

Yes. Just to follow up on that because obviously, you mentioned a lot of different things, core ITSM, HR workflows, et cetera. One of the questions I have is, how has the platform approach been resonating with customers? And to what extent are we reaching sort of a tipping point where customers are coming to ServiceNow for the platform versus, let's say, just a specific product?

Yes. So I would say that it is a journey, and we always say that we are a platform company, which we are. We are a platform company. And as you know, Phil, every single product is built on this platform. Every product we have is built on single platform, which takes out the complexity for the customer because they don't have to worry about our HR product talking to IT product or our IT product talking to our customer service product. So that complexity is just gone from a customer standpoint. When we articulate that message that ServiceNow is a platform company and all the products are built on the platform and we integrate across systems of record across mobile conversational interfaces, most of the time our customers understand that we are a platform, and they understand what they can leverage once the platform is in there. They can just turn on these products. However, I would say, typically, we start with, Phil, as you have seen and you have followed us, we start with a particular use case or 2, and then it continues to expand over time. However, what we have seen is, as you have seen in last few quarters, that we are landing multiple products deal for new customers. So our largest deals have multiple products. You have ITSM. You have ITOM. You'll see CSM in there. You'll see HR in there. You will see our iPaaS product in there or an app engine product in there. So when customers crack it, they always crack it, but they are like, okay, I'm just focused on this one use case versus multiple use cases. The platform story is what we start with because we don't try to compete at a point solution level. We can, but biggest advantage of ServiceNow is it's a platform company.

Yes. Let's drill in a little bit. Obviously, as you just mentioned, ServiceNow has made significant strides in broadening its product portfolio and to reach just a larger and larger TAM. And you've noted success on ITOM, HR, customer service management, along with the Now Platform and app engine. From your position as Chief Product Officer, what of these do you feel best about right now and why?

So I would say, IT is still our core. And when I look at, I always start with IT because it's our core business. And when I look at IT as our core business, Phil, we still feel that there is headroom for ITSM. Various analyst firms said, oh, the market was only $2 billion, then they increased the number to $4 billion or $5 billion. And some folks will say, we are the market. Regardless of what, it doesn't matter, outside-in approach, but what we see when we speak to customers is that ITSM is still something that is required by every single enterprise in the world, as you know, that we sell mainly to enterprises, 1,000 employees and above, and most of our revenue is 5,000 employees and above. However, we see that still in some of the largest organization, ITSM is still penetrated somewhere between 20% to 30% level. So we still have room for expansion in existing installed base. And one of the biggest vector, Phil, you have seen us talk about in the last couple of years, and it has exceeded my personal expectation when we released it was ITSM Pro, which came out in late 2018. And now we have penetrated ITSM Pro in 15% of our installed base. We get about 25% uplift on the standard ITSM price. So I feel pretty good about where ITSM business is today and the room for expansion. We are in 6,000 to 7,000 customers, depending on whether you look at the headquarters versus the accounts. If you look at enterprise segment and depending on whose numbers you believe across the world, somewhere between 25,000 to 35,000 enterprises exist, which is more than 5,000 employees. So I still feel we have room for our ITSM business. We just announced a great partnership with IBM, where IBM is going to go to their installed base of IBM's IT help desk offering and flip it with ServiceNow across the globe because of our partnership. So IT is core. And Phil, one of the things that sometimes get lost when we speak about our products is that we launched IT Asset Management 3 years ago exactly. And that product is one of the fastest growing products, north of $100 million in ACV already and just growing phenomenally. IT Business Management continues to grow in high double digits. Then you have ITOM, which still continues to grow in high double digits. And then you have things such as Security Operations and Risk, which is also growing in double digits. So you have the whole core IT products from ITSM, ITOM, ITAM, ITBM, Security, Risk. That's a pretty big portfolio built on a single platform and still growing in double digits. Then your question is, next one we speak about is HR. Again, HR is employee service management. We started with HR Service Delivery. We had a system of action, but we recently launched, Phil, I don't know if you know, but we recently launched Safe Workplace apps. And actually, your organization is one of our premier customers. And then in addition, we launched Legal Service Delivery, facilities solution. So when employees are interacting with corporation, they can use our broad portfolio around employee service management and then customer service management. So these are the 3 big ones. All of them are growing nicely. And then app engine and iPaaS, we decided we didn't want to be in the any-to-any integration business. Some of our competitors do any-to-any integration business. But ServiceNow to any is an important business to us. So we created organically a product called iPaaS and IntegrationHub, and that is also growing nicely in double digits. So really fortunate that the platform story with IT buying center, HR buying center, customer service and then app engine and iPaaS are some things that I stay focused on. And we have some products growing in triple digits that started just 2 to 3 years ago. Risk, we are seeing massive traction in our risk portfolio. We started with IT risk, but now we are going after enterprise risk. And there is a lot of market to be had given the compliance reasons in health care, financial services, in government and other areas.

Great. Thank you for the depth of that answer. That's fantastic. It gives me a lot of material now to go to. I actually want to scroll back to your first comment on ITSM Pro. As you mentioned on this last earnings call, it had reached 15% penetration. What is driving that strong increase in adoption? Maybe you can help us understand the longer-term vision and potential of ITSM Pro?

Sure. So I would say, I will start with the basic. One of the things we have in ITSM Pro is just the, what we call, Performance Analytics, just analytics on mean time to resolution, what's going on with your employees, how fast, how efficient is the IT department in serving the employees, okay? So that's the one factor within ITSM Pro. And you cannot buy that a la carte anymore for the most part. That resonates with customers. So that's simple. That, okay, I need to understand my investment in ITSM and am I getting value out of ITSM Pro, so that's number one. Number two, in 2017, we bought a bunch of smaller machine learning acquisitions and made it native in our platform. So self-service capabilities where I can just be a chatbot, ask for -- I'm Phil Winslow. I'm currently in Colorado, and I need a new laptop. I mean you would think that's a simple request, but the number of things that you have to go through. If you make a request for laptop, your managers have to approve it, then you have to make sure that all the approval hierarchies are taken care of. Notifications are done. It is approved. You have inventory on stock. You ship the new laptop with the right image to Phil Winslow's home. All of those actions, automation and the front end via self-service and understanding, is Phil asking for a laptop or Phil is demanding a laptop because Phil can work better. So the self-service and machine learning capabilities that we introduced in 2018 is also driving ITSM Pro. So we have supervised machine learning, natural language understanding, those kind of features that we have built into ITSM Pro, which is driving now. And if you think about COVID, every employer, most employees are remote and they want to interact via ServiceNow, via those chatbots or via Microsoft Teams, for example, and all that behind the scene is done via ITSM Pro. So ITSM Pro, as you have seen, even in Q3, I think 16 out of top 17 ITSM deals was ITSM Pro. It's almost a no-brainer for every new customer. And for existing customer, 1/3, approximately 1/3 of our customers renew every year, right, because most of our contracts are 3 years in life cycle. We go and tell them the ITSM Pro story, and that's what is driving the growth. So 15% installed base today. And Phil, I know you'll ask me the question, what's the maximum? I would say the maximum, depending on which management book you believe in, some people will say, if you can get to 35% of your installed base on uplifting to ITSM Pro, that's a good thing. I would say 50% to 60%. My goal would be 50% to 60% with my teams and our sales teams. Our sales leader, Kevin Haverty, will tell you he wants every customer to be an ITSM Pro. But 50% to 60% adoption in the next 2 to 3 years, including every new customer signing up with ITSM Pro, where we get 25% uplift is a game changer. And as you saw, Phil, we acquired or we announced our intent to acquire Element AI yesterday, and these are amazing group of machine learning engineers who have done phenomenal work in terms of tax extraction, natural language understanding, summarization and so on. They will even enhance our ITSM Pro capabilities or potentially ITSM Enterprise. We are launching in March ITSM Enterprise, which is the third. So we have good, better and best. Right now with ITSM, we just have good and best or better, whichever you want to look at. And then in March, we will have ITSM Enterprise, which will be another uplift to ITSM Pro. Our goal with ITSM is to have those 3 buckets. And with things like Element AI, process mining capabilities and others, we will add more things on the ITSM Enterprise. Does that answer your question?

That's perfect. I mean, that's exactly what we were kind of thinking, too, where it's like, I call it the ability that since you are sort of a platform, I think it took a lot of investors and me to realize you are a platform, but the ability to apply sort of advance artificial intelligence and ML, too, that mission-critical platform that you pointed, your system of action, we just think that's a sort of, to your point, I think you called it a no-brainer, yes. So it certainly does seem that way to us. So I wanted to stick on the theme of ITSM before we jump around in maybe some other areas of other product. But one of the things that we've been talking about is sort of one of the outcomes of COVID-19 is, one, I guess, an acceleration of the shift of infrastructure and the platform layers to the cloud, but really to a multi-cloud environment, not just a hybrid or a single cloud. And then second would be just an acceleration of modernization of legacy on-premise applications. How do you think about ServiceNow's position to capitalize on these 2 sort of megatrends versus some other ITSM vendors?

Yes. So I would say that when it comes to human workflows, for every IT department at the largest banks, health care, government agencies and so on, we are still a gold standard on the features and functions we have in ITSM product. It's many, many years of engineering. It is still one of the largest engineering team on ITSM, including the platform capabilities. So we feel pretty good that even if your workload is migrating from on-prem or your private cloud to public cloud, you still need to have the entire, for human workflows, ITSM will close the loop. So I feel pretty good about ITSM in that sense as the workloads shift to public cloud in certain industries. Now the other thing that always works really well between ITSM and ITOM is that those 2 together take care of your human workflows and all the things related to machine data. So with ITOM, you get visibility into your real estate, whether it's on-prem, whether it's your private cloud or whether it's your public cloud. Then what is the health of your infrastructure and then you can do cloud management across cost and other things. We are not into the, what I would say, infrastructure as a code and all those new fancy terms and new markets around that. That's okay. But still on the basics, where are my assets, what applications runs on these assets, whether it's public cloud or private cloud, and how do humans and machines work with each other so that IT is always up and running and there is no outage. That's what we are focused on between ITSM and ITOM.

Got it. One last question on ITSM before we jump around. This is a question I get a lot, so I'm going to ask it to you so you're responsible. Is Atlassian encroaching on ServiceNow's core ITSM market? How would you respond to that question?

So I get asked this question, Phil, multiple times by our investors. And they created a product that they call it Service Desk. They talk about service management grade. I'm sure they saw a market opportunity. What I find is that we are focused on enterprise, Phil, as you know. And in enterprise selling motion, leveraging our platform, we rarely see them in enterprise or large enterprise. So does that mean that we don't see them at all? Yes, we see them here and there on a departmental or somebody is using something with their Service Desk offering. But where we are focused on from a selling perspective, international perspective, leveraging our platform, all the innovation around our Pro offering, our mobile. We released mobile offering for ITSM agents and how we are truly one platform with ITSM, ITOM, multiple products working well together. So again, where I started with, our goal is never to compete on a point solution basis. If we are competing on a point solution basis, we are not having the right conversation with our customers. We consider our customers very strategic. So my answer is, I'm sure they are trying to figure out where they can expand and move up or everything bottoms-up, this, that so on. But we are focused on enterprise. We start with our platform and our innovation in our service management offering. We have Pro, ITSM Enterprise as well as our mobile offerings is just something that really resonates with our customers.

Got it. Now we often refer to the ServiceNow as the crease company in that you found very lucrative niches that are not necessarily addressed by traditional system of record vendors, and then ServiceNow really executes cleanly within these niches while also playing well with others. I mean, obviously, HR Service Delivery is sort of a very good example here. What does that opportunity look like from the Chief Product Officer's seat from here, i.e., enter a market and compete with existing vendors such as maybe customer service management or find a crease such as HR Service Delivery and really kind of create that crease and execute within that.

Yes. I would say, you bring up a good point. When you look at HR Service Delivery, and some of our largest of the largest customers use that product. You're 100% correct. It is more around system of action enterprise-wide. Hey, I'm using whoever for system of record, some product for system of record for HR. I'm using something for recruiting. I'm using something for benefits. I'm using something for legal or whatever. How do you tie together -- Phil, we have talked about this in the past, something as simple as onboarding, offboarding. When you look at onboarding and offboarding, that touches, in a typical environment, 30 to 40 systems. We just hired today and onboarded John Ball, who is going to run our CSM product line and really excited that he started today. But when I went through his onboarding exercise over the last couple of weeks, you look at all the things that need to come together between IT, HR, facilities, security, legal, all the things he had to sign, that is truly a system of action, and we really shine on enterprise-wide system of action. And if you look at our HRSD, I think last time we looked at it, it's still penetrated in 15% of our installed base. So we still have massive room for HRSD to become a $1 billion business in the medium term so. And as I said, we added Safe Workplace apps this year, which was super fast, every 2 weeks, work with customers like Wells Fargo and others and figure out how we can innovate on a very fast cycle, but we added legal service delivery that's getting a really good traction. We added facilities. And people are like, okay, CJ, COVID, what do you mean by you're doing facilities? Actually, facilities is the second biggest cost after people. And when you think about post-COVID world, where you are going to work, how you're going to work, are you utilizing your facilities or not, actually becomes a pretty big issue. So facilities, space management, how do customers create workflow around that is another area that I think on employee service management or HR-related actions where we have developed these very specific use cases that customers are excited about.

Yes. Frankly, I always have used facilities management as sort of as a potential and sort of like an obvious workflow. When people ask me, what's the next crease, and so I'm glad you said it. So it's not just me spitballing. So thank you for that, CJ. This whole fireside chat was worth it just for that. But I want to drill down into some other areas. You mentioned ITOM before. And obviously, you've had a lot of success there signing a record number of ITOM deals. I think you mentioned this last quarter. Can you talk about some of that dynamics that have made ServiceNow so successful in this space? What's really resonating with customers relative to competing solutions?

Yes. I would say the one thing that truly differentiates us when you think about our IT real estate is CMDB, right, our configuration management database. And when I look at CMDB and when you really speak to customers, what they will tell you is, I just want to, first of all, a simple ability to discover my assets, when this asset is typically server, storage, networking types of assets. And I want all those assets to be visible to me. And that, you would think, should be done in today's world easily, but it's not because your underlying infrastructure changes a lot. The hardware refresh life cycles are typically 3 years. And then you have people going from physical, to virtual, to container world, to the serverless world, whatever the case might be. There is a lot of complexity in infrastructure of our customers. So can I just get visibility into that infrastructure. That's where we really shine with our Discovery product. And once you have that visibility of all those assets that goes into CMDB, your mean time to resolve, you looking at which applications are running on those assets, are you having an outage? I mean outages are still happening, right? They happen. Public cloud outages are usually a Wall Street Journal headline. But if you look at a typical health care agency or consumer product good company or a bank or something, outages still happen on multiple systems. So ITOM really working close with ITSM is truly a fundamental thing for service operations for every IT department. And that's just on that basic. Event Management is a product that has done really well within ITOM suite. So we have Discovery, Event Management and Cloud Management. These are the 3 areas within ITOM. And I would say, Discovery and Event Management has seen a lot of traction. We are still very Switzerland. We work with every security vendor or we work with every other software vendor in this space around even desktop inventory, and that has helped ITOM not only grow, but get 7-figure deals in some of our largest accounts.

Got it. In the last 5 minutes here, I want to hit on a couple of topics. But before we do, I'm going to do one last question on ITOM. ITOM is obviously a very broad market. And how do you think about which segments ServiceNow wants to be called a player in, in ITOM versus segments where you actually want to partner with others? In particular, the question I often get is about observability in that segment.

So currently, we have taken, Phil, the approach of being a Switzerland. We did partnership with AppDynamics many, many years ago, and we have a lot of joint customers with AppDynamics on APM, right, which is part of observability. Splunk is also somebody that we partner with. And our customers use ITOM with Splunk many, many times. And similarly, we have partnership with Dynatrace. We are releasing or we may have just released a connector for New Relic and similarly for Datadog. So far, we have taken this approach of making sure that we work with the ecosystem really well. Now some, I get asked the same question that you just asked even by some of our customers. Hey, would you enter that space, whether it's infra monitoring or application performance monitoring or log management and so on? The answer is maybe. I don't know for sure because right now we like this equilibrium we have with all the vendors out there. And that has worked out really well that we become this horizontal pane that works with on APM, New Relic, Dynatrace and AppD on observability, specifically on infra monitoring with somebody like Datadog, great friends, great partners, and we continue on that trajectory. So that actually makes it easy for our customers saying, hey, should I invest in ServiceNow from observability standpoint? And we say, you have a massive real estate. You have multiple observability vendors in your real estate. And ServiceNow will continue to work with all of them, which just gives a peace of mind whether you look at our customers like Adobe or some of the large banks.

Got it. That makes sense. Well, we've touched on ITSM, ITOM, HR, but I don't want to let you go without talking about customer service management, CSM. Obviously, you've had a lot of success there. And in fact, in Q3, you highlighted that it had grown sequentially quarter-to-quarter every quarter this year. Within sort of that backdrop, why don't you just double-click on CSM? Sort of what is ServiceNow's strategy within the CSM market? And similarly, a very broad market to my last question on ITOM, and what do you think really differentiates ServiceNow in the space?

So I would first start with a very simple thing that when you think about customer service, customer service is a team sport. Yes, you can take a case, say, your Comcast router is malfunctioning. It's one thing to just take that case, but the number of teams or number of departments behind the scene that have to come together across digital workflows to serve that customer or sometimes be proactive with that customer is where ServiceNow shines. So you have seen, we use examples like Zoom. Even in the state, local market, Phil, we announce things such as State of Tennessee who uses our customer service management, so across federal, state and local and then, of course, educational institutions, prospective students. And then, of course, in B2B spaces like telco and others, our product has really shined. And the reason it has shined is because we provide everything from front office to the back office and things like ITOM, right? You look at digital services, and we have used this example at our Knowledge Conference with Disney+. Disney+ has grown to 75 million-plus subscribers. And when you look at Disney+, that is currently all of their customer service requests. If you have somebody who uses Disney+ at home, you can see our portal. Yes, you can see our portal. You can do a chat. All of that is ServiceNow. And then what can we do on the behind the scene IT workflows and customer workflows coming together. So we shine when a service is a digital service. We shine in B2B. And when you have to really think about serving a customer from the front office to the back office, including field service management, that's our competitive differentiation.

Yes. I have 2 young daughters, so I'm definitely a Disney+ subscriber, in addition to being a Star Wars fan myself. But the last question for you, we only got a minute left here. But CJ, let's say, we're sitting up onstage, hopefully, back in person in Las Vegas for the conference in 5 years, what do you think you could look back on and say, hey, look, this technology or this trend was more transformative or happened faster than I thought back in 2020?

Yes. I would say my core thesis, Phil, is that IT has become the business. People call IT, it was always seen as, hey, this is something where people keep your services up and running. But now technology is the business. If technology is the business, ServiceNow, given that our core was IT, is in a really good position today. And we will have to ensure, from our perspective, to innovate on our IT portfolio and make sure that we give peace of mind to CIO, Chief Technology Officer, Chief Digital Officer, whatever the roles might be at our customer's environment. And then you start with customers and work backwards towards technology. So that's an area that I feel that we need to innovate all the way from end-to-end, from customers to technology and similarly for employees. And those 3 vectors allow us to really capture the market. The TAM is large. I'm very optimistic. I'm seeing organic products. Even this Safe Workplace apps that we created within a few weeks, we now have, Phil, 100 paying customers. And that's the fastest revenue lift we got on that this year for a product that didn't exist. So our platform allows us to build great applications. People use it even in an app engine context. And I'm very optimistic about our product growth vectors and delivering value for our customers.

Awesome. Well, CJ, 30 minutes went fast. We could, frankly, have kept going for another 30 minutes. But we're going to get you over to your next set of one-on-ones, thank you for your time, super insightful as always. Also, a special shout-out to Lisa Banks and Darren for coming to the conference. So thank you for your time and look forward to talking again soon.

Yes. And thank you for being our customer. Thank you for inviting me. Thank you.