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

Exactly, Kash. Nobody knows this enterprise business better than you. You know and I know that a lot of the things I just talked about are very hard to do. What makes ServiceNow unique is we do it on a common platform. This company never buoyed into by revenue game. So we kept innovating. We kept co-innovating with customers. We have design studios now in every industry with every persona, where we can build the future with our customers. And because of the simplicity, the agility and nimbleness of the platform and how quickly you could be up and running in the cloud, days instead of months and years, customers are thrilled with us. And our big thing now is just to make sure we get the brand out there, and everybody knows we're here to stay. And we do so globally on really the fastest possible pace, because there's so many problems that companies have to solve.

Got it. How has the go-to-market strategy changed amidst the pandemic? And how does virtual selling change this? How do you see the amount of deals being closed virtually versus trying to actually fly down to the customer to get deals done?

It's kind of a paradox. It's actually better. And the reason it's better is more so everybody needs a good meeting. I mean, really, if it's an enriched, intellectually stimulating discussion and you do all the preparation where you know the business cold and you have some very specific ideas about how you can improve it, you can bring that to bear by quickly building teamwork on the customer side and the ServiceNow side to get around the table and get very targeted and very specific about what can be done. That dance would normally take a good 3 to 6 months. Now you can do it in one session, and 3 to 6 days, you can get to the punch line of what's possible and how we hit the ground running. So the decision-making can be much quicker. The targeted nature of the discussion is more enriched, because you get more people at the C-suite at the table at the same time. And obviously, with the breadth and depth of our solutions, the deal sizes can become very big, because the customers have a lot of problems to solve. And it's just a question of which one we're taking down, where lowest hanging fruit goes first. And then we get the harder-to-get things probably over time. But all that planning can coalesce quickly.

I'm still blown away that there's so much diversity in your product suite and the market opportunity is potentially very sizeable. But how do you think about the market opportunity since you've got the story changing from what used to be IT Service Management and we got to ITOM and, more recently, HCM workflows, CSM workflows, custom workflows? Describe for us, if you will, how big this market opportunity is?

It's amazing, Kash. I mean -- so first of all, one of the pieces of research I read when I was thinking about coming to ServiceNow basically was a well-known firm in your industry that said, the market alone for converting paper-based processes to digital processes on a platform in the United States was $228 billion. So I basically extrapolated a little bit and said that's about $400 billion globally. So it's a really big market to rethink business-to-digital. And then when you think about IT, which is what we're known for as our core, we're only about 20% penetrated in the overall market. And we think that this market is just a sensationally large market, even within our own installed base. Now that we have taken deep machine learning and artificial intelligence to the platform, we're only 20% penetrated in most of our product sets and certainly in our core product set of ITSM Pro. So we have lots of room to grow in our core. And I believe every company has to have a great core, and you have to love your core, and we do. When I think about the employee experience and customer service management, I mean, these are our next billion dollar businesses. CSM or customer service management will come first, because we're running away with the market, and it will be closely followed by employee experience, because today's systems of record are just too difficult to use. They take too long to implement. And then once they are implemented, customers are like, hey, I got that now handled. I want to do all the innovation on the engagement layer or the system of action layer, and that's where we participate. But we're very respectful of all other companies. We're not competing with people. The only competition we have is the customers' dreams. We enter, set beautifully with all the participants. We integrate with 550 of the world's largest systems of record. They're all very good companies. We integrate with them nicely. And then all the collaboration tools such as the one we're on today, Teams with Microsoft, Zoom, et cetera, and all of this is done seamlessly into the Now Platform. So the idea is to be the platform of all the platforms, so we can make the C-suite job a little bit easier, because there's a company out there called ServiceNow that wants to work cooperatively with everybody to help the customer achieve their goals.

Got it. And we know our competitors. We welcome to join us in Goldman Sach's forecast of $1 trillion opportunity for the cloud. So that's a big number we went out with officially a couple of weeks back. Bill, I want to just get your thoughts on the different sales and marketing competency pillars that you've got to build in each of these domains. It seems like we might -- we could just build a multimillion dollar business in just one of these pillars. How do you establish sales and marketing competencies to go about multiple domains when the buyers are different and the products are different?

The most important thing to get under control is to understand it's the ultimate consumer that you're serving. So for example, Veteran Affairs was the largest customer that we had in the ServiceNow installed base. And we would talk very proudly about Veteran Affairs. But what I want to talk about is the brave veteran who just got back from 3 tours of duty who need on their mobile device to have an unmatched experience. So they have all their services at their fingertips. They never have to wait on the line. They can always get the service that they need most when they need it without any friction. In fact, now, they can even take out a housing loan seamlessly with a couple of clicks and done. So I really want the company to always stay centered on our customers' customer at a deep level of empathy and compassion, because if we always have that seat with us in the room, we'll never lose our focus on who we work for. In my way of thinking, the customer is the only boss that really matters. Because when you do that job right, you have an inspired company, inspired shareholder base and the rest and the ecosystem too. So that's really it. And we obviously recognize that geographically, there are cultural differences. In every industry, there are nuances about how the industries operate. Financial services is one of my favorites, of course, but so too is telecommunications, obviously, health care, public sector. And we have practices now in all of these industries, and we go to market by industry. So anytime you have critical mass in a geography, you'll organize it by industry, as an example. And there's a full value chain behind the selling motion now that includes how do we dream up the case of value with the customer? What is their dream? How do we put that in a cogent plan that's absolutely believable? And then what are the goals and metrics associated with that? And then even in the post-sale phase, how do we continue to wring value out of the platform, so our customers improve productivity, revenue per employee, margin performance and market share, whatever their goals are? And that's what I mean by partnership. It's not a transaction. It starts with the transaction, but nobody hires your software to do anything less than the job. They want you to do the job. So we've got the culture now understanding clearly that it's the job the software does. And it's the outcomes the software delivers. And it's the happiness it brings human beings who touch it, whether it's the employee or the customer that matters. And that's where our focus will remain.

Wonderful. I was planning on asking this a little bit later, but I think it's a perfect segue into the verticalization of ServiceNow just to use a very generic term. I watched, with great fascination, you execute the vertical strategy and this other technology item that you are associated with for quite some time. And here at ServiceNow, we've been talking about deepening practices with the systems integrators, whether it's Deloitte or Accenture, to develop them one of the specific projects, financial services, transaction processing, et cetera, telecommunications. Can you talk to us a little bit about, is luxury of things that you have in front of you, I think you have this vertical opportunity as well. So how are you prioritizing the vertical opportunity? And what should we be looking for from ServiceNow with respect to the vertical strategy?

Absolutely. So first of all, we have to have our own domain expertise and hiring the absolute very best people that truly understand the vertical industry business, whether they're developing the software or they're doing the presale work to demonstrate things properly, so they really understand the problem or the opportunity they're trying to capitalize on. And obviously, on the salesperson or the account coverage model, you have to really have deep domain expertise to have an intelligent conversation and then know who to bring in to help the customer. We don't want the customer having to figure us out. We want us to figure out the customer and have the problem solved. But one person has to own that relationship and coordinate that properly, so the customer never has to suffer several bus loads of people coming in and calling on them, which other companies do. We don't. And then finally, on the ecosystem, you mentioned some great brands there. We really embrace our partners, and our partners trust us. And they trust us, because it's an honest conversation. They have very big businesses with lots of practices, and I'm very aware of the business models that they have and the brands that they built those business models on. I have no quarrel with that. What we try to do is be very candid about our business, our business model, what we are trying to do. And we try to be extremely open on the geographies where we think we can do things together, in the industries where we think their expertise can differentiate for the customer to get the benefit. And then we carve out, even on a persona basis, business plans that make a lot of sense. So the partner doesn't have to struggle around saying, I invest all kinds of capital and my win rate when I work with ServiceNow is low. No. When they work with ServiceNow, their win rates are in the 90s, because we're very targeted. We go in with high-value offerings that the customer is extremely likely to want. And we also don't want our great partners having to compete against each other. We want them to be absolutely aware of everything. And that way, we can build multibillion dollar businesses together, because we're doing the right thing for the customer in the shortest cycle time possible with the greatest return for the customer. And that's what scales. The other thing I think is really important is to make sure that we work together on recruiting and bringing the next generation of young people into these companies, so they can get trained, they can get certified, and they can do great work. One thing I noticed, especially when I was in Asia in the first 100 days I was flying around the world, is that we needed to train the partners that are talking to the C-level executives from our customers. We were doing a great job on the implementers. And I think now we've broken the code on that. So everybody is in high trust. Everybody has very ambitious goals and plans. We're proud of our partners, and we just want to do really great work for the customer. And I know that's what they want to do also. So we cut out all the noise and all the cycle time, so we spend our time thinking about the customers' customer.

Got it. Are there any unique applications that we can envision financial services, telecommunication. What are these integrators building that could make firms like Goldman Sachs to get more efficiencies out of the existing narrow investment that we have?

Well, first of all, you really want to connect with your employees, because your greatest asset is your people, and no company exists without them. And the fact is if they're not happy and they're not inspired and they're not part of the motion every day, they can pick up and go someplace else. So we need to make sure that the employee experience is truly world class. And I truly believe -- and I've got countless examples to back me up on this that the systems of record are very important. But the employee experience is based on simplicity. The ultimate form of sophistication is simplicity itself. You have to be able to get everything on the mobile on the fly that impacts your job and makes you better. And the frictionless way to work with employees also transcends right to customers. And that customer example, I can work with this brand, I can get anything I want online. And if I've got a problem, they have unique ways that they can remediate it. And I get a service that's uncommonly good. They do what they say they're going to do. Their products are delivered in the form factor I ordered it, at the price point I thought I was getting. And if I had to return something, the flawless nature of that 360-degree experience was fantastic. All of this is being done on the Now Platform. You know, Kash, a lot of people haven't realized this, but I know you do. In the last year, we bought 4 AI companies with the signature or the flagship one being Element AI from a size and scale perspective. In none of those cases did we buy revenue. In all of those cases, we obviously take all the code and recode it to the Now Platform. So we keep that platform pristine. What you're seeing us do is build all the machine learning and the AI capability into this. So whether you're in IT and you need the predictive analytics to make the right call on security, things that you're observing, things that you're tracking to make sure the business is safe and it's resilient, we've got you covered. Security operations in fourth quarter for ServiceNow, we did more in security operations in Q4 than we did the entire prior year. Employee experience. We're running the table on employee experience, because we're friendly to all the systems of record. They do something important. But we're the one that brings that layer of simplicity, exquisite user experience, an absolute delight in terms of onboarding and training and working and procuring all the services from within your own company and also remediating problems. I had one airlines company where they said, Bill, our employees wait an hour on the phone for an HR service. Can you imagine? And I said, well, did they really do it? They said, yes, because they really need the problem solved. With ServiceNow, most of that, 85% to 90%, is remediated online. The 10% that isn't is issued a work order from our workflow to the right person with the right skill set with the right tools and empowerment to solve the employees' problem. And this is really fantastic. And the same is true -- I mean look at great businesses like AT&T, 5G, multilayer platforming for customer services orientation, lots of software products and software offerings that they have for their customers. They see the power of the Now Platform at an enterprise level. Governments all over the world. Think about this idea of creator or citizen developer on the Now Platform with a low-code idea of being able to build quickly and get an idea out. Lowe's, a big retailer in the United States, 323,000 employees. They in 96 hours, when COVID hit, they had all the leave requests and all the COVID emergency response processes built on the Now Platform and rolled out to all their employees. This is empathy at mass scale, which I believe is the defining issue of this generation that the companies that you choose to work with have a brand that says, it's great, I have an unbelievable experience. And they're also purpose-led, because everyone I talk to in the company just has one thing in mind, and that is to make the world of work, work better for people. That's what we are doing.

Got it. There's been a fascinating conversation. We've got about a minute left. And I wanted to get your thoughts on M&A. Clearly, the company has been blazing the trails on organic growth rate. At what point do you think about M&A? Maybe that's not on the horizon. Just quick thoughts on that.

Yes. The most important thing is we are a company with many, many ideas, and we have yet to discover our biggest best ideas. So we're constantly in pursuit of engineering excellence, engineering pride, co-innovating with customers, design studio, application of working with customers to define the next big practices in every industry. We even have a department in engineering committed to our next practices. So that is a department that just thinks about innovation and the ideas that we've yet to conquer. So we're really focused on that. Now when we do tuck-ins on a technology or a people level that will give us part of our dreams, we've proven that, and we've been very consistent with that. Do we always look at the market dynamics and what's going on out there and what's possible? Of course. And the one gating thing that we all have in front of us is that seat in the room, the customer's seat, is going to dramatically change based on a business decision we make in that office. And I can tell you this, Kash, when we do it, if we do it, it would really be delightful to the customer. It would be a big, big idea. And it would be something that people would say, Aha, that's big, that's really something special. There's nothing on the drawing board right now. But I am telling you, we always are thoughtful and constantly pressure-testing every angle to make sure we're the defining enterprise software company of the 21st century. And on that mission, we will not rest. We are going for the gold.

Awesome. On that note, thanks, once again, for being a keynote speaker at our conference. And thanks for being such a wonderful visionary, incredibly thoughtful leader in our industry. And thanks for all the inspiration and the mentorship, and last but not least, for being such a good friend. Thank you once again, Bill.

Appreciate it, Kash. Thank you for having me. I'm really honored by your wonderful remarks, and right back at you. We have a lot of history together and a lot of really great memories. And today has been added to a long list. I'm grateful to have you.

I love your outfit. Thank you so much.

Thank you. Bless you.