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

Hey. Welcome to our next session. I'm really happy to have the CFO of ServiceNow on here with us. Gina, hey, thanks for joining us today.

Thanks, Raimo. Really excited to be here.

And let's kick it off with the first questions. Like it's pretty much been a year for you at ServiceNow. Like what was -- what's standing out for you?

Oh, my goodness. I just -- I mean I couldn't be more excited to be here. This company is just extraordinary. And I'm just loving being part of this amazing leadership team, and I've been blessed with an incredibly strong finance team. And what stands out for me most, I guess, would be the people and culture, right? It's hungry and humble, and that's just an incredible culture to be a part of, and of course, the opportunity to scale this business, right, the amazing product portfolio. It's just been incredible to see how powerful this Now Platform is. And the ability to be this only cross-functional platform that can sit on top of any of the systems of record to enable workflows across the company is just incredible, right? And just being this system of action, making employees more productive and improving both the employee and customer experience across the enterprise, especially during these unprecedented times, when employee engagement is just so important and customer engagement is so important, I just couldn't be more proud to be part of this company that's having such a tremendous impact on knowledge workers around the world. And so I say all the time, I'm in my dream job and just couldn't be more excited to be here.

Yes. No, I can imagine then, and I mean, on the one hand, you've been at larger companies before, but like this -- the needs for scaling and stuff like that are like very different at ServiceNow than kind of most other companies I've ever looked at, like in terms of like what can you -- what was the stuff that you were able to bring to the table and what was the stuff where you were like, oh, my God, this is like a big surprise, I need to slow down on that, okay?

Yes. Well, Raimo, I think my experience at Ingram was really unique in that it had the scale of a $50 billion revenue technology distribution company. But Alan, our CEO at Ingram, was really smart about investing in these smaller, nascent, higher-growth businesses, such as our cloud marketplace and the platform that we use to run that marketplace, which would really be the growth drivers for the future. And so this really gave me the unique perspective of understanding large-scale businesses, but also about what's different and what's required in these hypergrowth, fast-scaling businesses. And so I think I bring a disciplined mindset of understanding what's required for scale as well with a sharper focus on efficiency to drive profitability. But at the same time, I really understand the importance of building for scale without creating a lot of the complexity and bureaucracy that will sometimes get in the way of agility and speed. And so I think that, that experience really has helped inform how I think about things at ServiceNow. And I think it gives me a way to differentiate and really add value, literally out of the gate on day 1, which was really important if you think about the fact that I started in January and 60 days later, we were pivoting to a 100% remote workforce. And so yes, it's been a unique experience for sure.

Yes. And then like I'm trying the big picture now, like a little bit the -- so Bill talked a lot about the digital transformation. And on the one hand, a lot of people talk about that, and it's a very big word. And actually pre-COVID, it was more of a buzzword. Now it seems a little bit more real. In your customer conversations, like what does it actually mean when you talk of that? Because it clearly seems to be happening, but it's -- kind of what does it actually entail?

No. I think it's a valid point that it used to be a buzzword, but now, it's really becoming real to most people. And I can tell you that digital transformation is on top of mind for every C-suite and all the customers that we're talking to because really, digitizing manual processes can really drive exponential increases in employee engagement. It can drive fierce customer loyalty, better scale and of course, better profitability. And in this environment right now, there's no C-suite who's not focused on each and every one of those areas, right? And so they're really learning that IT is no longer a supporting function, but really key to the future of business strategies, how are they going to digitize their business from a front-office perspective, from a mid- and back office, too. And I think what we're seeing is that digital transformation is accelerating as companies really are reacting to these unprecedented disruptions that we are seeing today because they're really looking to reimagine the future of the business, right? It's going to look different tomorrow than it looked yesterday. And so as Bill has mentioned in the past, ServiceNow is the strategic workflow authority, really at the epicenter of this transformation. And customers, what we're seeing and hearing is that they need us now more than ever. And they're really relying on the platform to meet their crisis management, business continuity, productivity needs as well as really looking to us to help drive this employee engagement and fierce customer loyalty as well. And if I think about some customer examples, Zoom is a great example, right? Since March, the COVID pandemic sent millions of global workers from home, and their usage peak was huge, right? And so to meet the unprecedented demand, they really looked to us to deploy our CSM business to help scale their customer service operations, really unite their front, middle and back office to help solve issues and resolve problems more quickly. And so that's just one example of how customers have been able to use -- to utilize the platform in real examples of what digital transformation means to them.

And do you have that internally as well, like where you kind of think about like ServiceNow as you scale as an organization to kind of do that? Or were you always pretty nimble because like you were in a tech company?

Well, so first and foremost, we're customer 0 on all our products, right? And so we absolutely have been very focused internally in our digital transformation, although I wouldn't call it transformation because we started out that way. But our digital evolution has been phenomenal. And literally, within 24 hours, 98% of our workforce went remote, and we didn't miss a beat. And that really was a testament to the investment that our CIO and our entire leadership team has been really focused on internally. And when we look at -- and we look at productivity measures and we look at ROI on all of our internal investments as well. And we see 10x ROI on a lot of the investments that we've made, and that's really helped us -- enable us to continue to invest for growth, but also be able to drive the margin profile that you've seen from us, which is best-in-class.

Yes. And then like if I think about COVID, you mentioned some of the changes in terms of going remote, et cetera. Like what has been like the major impact for you? Like in a few years, we will all be talking, so you remember when COVID happened, this was kind of the thing that happened to us, so this is what we did. Like what do you think from the ServiceNow journey, what's the thing that stands out there?

Well, I just -- I have been unbelievably impressed with the resiliency of our people, right, to seamlessly transition to that work-from-home environment so quickly. I talked about the fact that we're lucky that we leverage our own platform, that helped allow us to pivot that so quickly to really help meet both our employee and customer needs. And we've continued to innovate through this. We haven't missed any deadline for any product innovation or product releases, which I just think is incredible. But overall, I think what we're going to see as a result of COVID, once we exit this pandemic, is really the acceleration of the pace of that digital transformation that we were talking about. It's really become clear during this crisis that the customers who are farthest along in that journey have been better equipped to manage the crisis and support employees and customers in the remote environment. And I think customers that have been lagging behind are really realizing that there's a burning platform to digitize internally. And so for us, implementations have not slowed. Practically everything we do, from implementations to training, can be done in a remote environment and don't require in-person support. And so we are operating from a place of privilege, as we know, and don't take that privilege lightly and are really focused on enabling our customers to really drive this employee engagement and customer satisfaction to the best of their abilities.

Yes. Okay. Yes, that's really interesting. And how did that play out for you? And it's still -- I'm trying to say as well like how is it still playing out in terms of when it started. And it's like, oh, my God, the world is coming to an end in middle, early March. And the numbers, you were thinking, oh, my God, how do I make my quarter, to where we are now. It seems it's as you've been a lot more resilient. Yes, numbers were impacted a little bit. But like overall, you've been executing extremely well in this environment. But just help us to understand that journey a little bit.

Yes. It's a great question. And if you can imagine, being 60 days in as the CFO of this company when COVID hit and thinking through guidance, right, we spent so much time on understanding. And there wasn't a whole lot of information at the time, right? It was literally like 4 weeks. But again, it goes back to the incredible team that we have. The -- first and foremost, our business model is really resilient and predictable, right? We have a really robust backlog. RPO exiting Q3 is $7.3 billion, right? And so we have a good sense of kind of where, near term, our numbers are going to look like. Also, we generate 80% of our new business from existing customers. And they really understand the value that we provide, and they know that we're mission-critical to their operations. And so with renewal rates at 98%, it wasn't a question of do we guide or not, it was about really how to refine that guidance. And the fact that COVID, we really see this as an acceleration of digital transformation, and our pipeline really continues to be strong and remain strong throughout, helped us to be able to guide as successfully as we've been. Our coverage ratio today is better than the same time last year, which has been helping to offset some conversion rates that were under pressure in those highly impacted industries that I had talked about back in Q1. And so, at the end of the day, we're seeing that business leaders are recognizing the need to digitize to address the new reality of this distributed workforce and remote workforce. And those that make the investments now are going to emerge stronger from the health crisis, and I think most customers are realizing that.

Yes. And talk a little bit about like, look -- and I'm sure you've heard it, like the notion from enough investors is like all of the curves will be coming out there, but you're going to make up a lot of revenue. And I just wanted to hear a little bit like that notion of like a subscription model is very mechanical, what you don't book this year, you can't kind of renew next year, et cetera. Like how do you think about that like, yes, we're coming out stronger, but like you also need to think about like, okay, well, the underlying growth this year is a little bit -- it's a little bit lower than we had. Can I just overjump next year, and then I'm back on like the old run rate? Or how do you have to think about that when you do your longer-term planning, for example?

Yes. I think that, again, we really know that we're operating from a place of privilege, where our business has been very resilient as we talked about, but you're right. The guide is lower than originally expected pre-COVID. We did take it down about 10%. I tried to be really transparent back in Q1, that the biggest impact that we would be seeing was in our customers in the highly impacted industries, which represents about 20% of our business and includes areas like transportation, hospitality, retail and energy. These customers held up well again in Q3. Renewals remain strong. And our ability to land new logos in these impacted industries has slowed a bit as expected, right? The new logos in this industries, they're going to renew because we're mission-critical. But their ability to really think long term about adding new, we knew would be hampered. And that's really where we've been seeing the biggest impact in our business versus the original guide. I think the other piece is that I think when you think about longer term, you have to realize that while billings remain robust this year and revenue remains robust, revenue is a lagging indicator. So because billings are slightly lower, you'll have that impact in 2021. But the impact that we're seeing, we absolutely believe, is temporary, and that the tailwinds behind us remain stronger. And so while it might take a little while to make up that 10% that we missed this year, it will come back.

Yes. No, that's -- I'm -- high confidence there as well. I mean to build on that, one of the reasons for the confidence is like we -- I don't know if you saw that, we just recently did some extra work on the ITSM Pro product. And to me, I got -- the more work I did, the more excited I got because it's -- it creates like a nice product cycle. If you go back to the installed base and say, look, I can save -- solve the same problem with a much better, more automated solution. Are we on the right track there? How do you feel about that?

You're absolutely on the right track. ITSM Pro is a significant growth driver for our IT business. It meaningfully increases automation and operational resiliency that really delivers meaningful productivity improvements quickly once rolled out. And so if you think about it, it's in just over 15% of our customers today. And there's no reason why 50% or more of our ITSM customers in the future would not be on Pro. It carries about a 25% on average price uplift versus our standard. So you can do the math and see like it's really a nice growth driver, in addition to seat expansion and cross-sells of other products. And so if you think about the embedded AI and machine learning capabilities with our Pro SKU, it's really resonating with our customers today as IT service requests, especially in this COVID environment, really have grown exponentially with everyone at home and working remotely and many IT organizations are looking for more and more ways to deflect these lower-tier cases by leveraging automated chatbots, for example, and streamlining the processes. And so in this environment, where you had thousands of tickets coming into IT organizations asking for things, for help with things like VPN passwords and requests for hardware, like monitors, you can imagine that the ability to have these lower-tier cases taken out of the hands of humans and fully automated is really going to help drive productivity, employee engagement and all the goodness that you would expect. So you're absolutely thinking about it in the right terms, and we definitely think it's going to be a significant growth driver for our IT business.

And it must be -- I'm sure your sales reps won't complain either because if you revisit the client with something like so fundamental to the customer's business, it's a nice upsell, cross-sell or at least, discussion of this -- starting for a discussion there.

Absolutely. And when you can really very easily show value, right, I mean, customers are going to jump all over that really quickly. So yes, the sales folks are going to be really happy with that.

Let me switch gears one more time because like we only have like 4 minutes left now. When you -- one of the concerns that when Bill joined was, okay, well, you had the old management team and they were always like kind of very driven by growth but also leverage. And then I'm sure you got it as well when you joined, it was like, okay, so what's the new philosophy of the new team, is it more growth-focused, can you deliver both. Can you talk a little bit about like your first year now? Like -- and full credit to you, you have been delivering both. So yes, well done. But like, I'm sure you got the initial chat from everyone. But like how do you see it in real life in the business as well?

Absolutely. Well, first and foremost, we're a growth company. And we want to invest in that tremendous opportunity we have in front of us. I talked earlier about the acceleration that we're seeing in digital transformation, and we're so well positioned. We want to make sure that we continue to invest to take advantage of that. With that being said, Bill and I both want to be balanced and provide profitability along the way. And there's a lot of natural leverage that exists in the business and a big opportunity for the company as we scale and become more efficient, while at the same time, maintaining a good amount of investment to support that strong rate of growth. And so for 2020, we guided now to 24.5% operating margin, which is up 300 basis points year-over-year. And much of that, we originally guided 100 basis points, right? And that's where we're comfortable with. The incremental 200 is really driven by the T&E reduction as a result of COVID and in-person events transitioning to digital. And I'll say, we absolutely expect that a good amount of those expenses will return at some point in the future. But we also think there's going to be real learnings from the current environment as we lean into the future of work. I think internal travel will be less. I do think that in-person events will return, but they will probably return in smaller scale, with digital assets surrounding it to really pump up the experience, but there's investment there on the digital side to enable that. And we absolutely expect to redeploy the savings that we will see longer term back into the business to make sure that we are really well-positioned to take advantage of that growth that we see. So reinvestment will be very focused on R&D and quota-bearing resources really to drive innovation and pipeline to fuel that tremendous organic growth engine that we have. And so you'll continue to see us have a very balanced view on growth and profitability. But the amount of profitability that you're seeing in 2020 is definitely not sustainable and is onetime in nature.

Yes. It seems a bit outsized. Yes, yes, yes. I mean that's the question we're asking everyone, was like what's the lesson you learned in terms of like sales. And you kind of talked about some of that in terms of like lead generation, how you sell, how much you have to be there, et cetera. I'm sure it's going to be an interesting discussion for you going into next year as well.

For sure. And I think it's early doors to really understand what that's going to look like because it's going to be customer-driven, right? And I think it's unclear at this point. I do think internal T&E will come down quite a bit for customer-facing. I think it's too early to tell. I can absolutely tell you that we're investing heavily in inside sales to help really drive pipeline generation because in this remote environment, we have been so successful. And so you'll see more investment in areas like that as well.

Yes. Okay. Perfect. Hey, Gina, unfortunately, my time is up. I could talk for a few hours here. And I know you have to run the company and kind of do some meetings. Thanks for joining us. I really enjoyed our conversation. And have a happy holiday season as well, yes.

Raimo, thanks so much for having me. I enjoyed the conversation. And stay safe and healthy, and have a very happy holidays as well.

Thank you. Hey, take care.

Bye-bye.

Bye-bye.