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

Hi, good afternoon, everybody. Thank you for your patience. We had a bit of technical difficulties, but we are happy to have Lara Caimi from ServiceNow. She's the Chief Customer and Partner Officer. And we're very excited to have you with us today, Lara, and look forward to getting to learn more about you. So thanks for joining us.

Thanks. Thanks for having me. Excited to be here.

Great. So maybe let's just dive right in. You recently became the Chief Customer and Partner Officer about a year ago after serving as Chief Strategy Officer before at ServiceNow. To start, could you maybe speak to what your role is and what you're focused on for those that may not be as familiar with it?

Yes. Sure. I am the Chief Customer and Partner Officer, as you said. I lead the customer and partner organizations here at ServiceNow. So I have been in this role for about a year. And before that, I was the Chief Strategy Officer, as you said, which, and so I think in total, I've been at ServiceNow 4 years now. So my organization includes customer outcomes, which is our traditional professional services business and customer success business, alliances and channels business, training and certification as well as customer experience. And it's probably worth noting that when we created this role, Bill and I were actually really deliberate about this title and the role itself for a couple of reasons. First, we felt like elevating kind of a Chief Customer Officer title at the C-suite is really important as we recognize that getting our customers to success is actually foundational for us to be able to get to our kind of big goals in the company. And then secondly, because the role of partners, I think, at ServiceNow is so critical in terms of achieving what we want to do, we wanted to make sure that we elevated that specifically as well to really signal to our partners how important they are on our journey. So to your question about what I focus on, I have a couple of areas that I'm really focused on and excited about. The first is continuing to force multiply with our ecosystem. Our partners are absolutely critical to our continued growth. They play a really important role in selling in terms of elevating that into digital transformation, in bringing us into new C-suite conversations that maybe we weren't part of before. They give us, of course, global scale and scope. They drive 90% of our implementation. And so the partner is really force multiplying what we're trying to do is incredibly important. The second focus area is delivering services to ensure customers see value, again, continue hammering that notion of value. We've always known that this is important. But increasingly even, especially during COVID, our customers have seen that time to value is as important, almost as the value itself. And so we really are investing in expert services, customer success, training to ensure that we are truly delivering healthy on-time implementations, getting customers to value and making that link between what we promised in the presales process, making that come true in post-sale. And for me, the role of the services business isn't to have a services business in and of itself in a software company, right? We're here to make sure that we are investing in understanding what it takes to get our customers to success and then codifying that and scaling that through the ecosystem, right? And so making sure that we're doing that as efficiently as possible so we can continue to reinvest in getting our customers to success is a really big focus of mine. And then finally, really focusing on that end-to-end journey of customer experience is another thing that I'm focused on. I think that creating an amazing customer experience is something that enterprise software doesn't necessarily do a constant job of. When you think about great experience companies, you think of consumer companies mostly, right? So I think there's this opportunity to really lean into that and think about, how can we make sure that everybody in the company understands their role in driving a great customer experience? And for me, that's something that's frictionless, something that's valuable and something that's delightful. And so every function and every person plays a role in doing that. And to me, if we get that right, we can unleash the 16,000 employees that ServiceNow has and growing. How can we really raise the bar, challenge how we've done it before and create a new standard in the industry. So that's something I'm really excited about that I think will make a big difference.

Great. That's a super helpful lead-in, and there's a lot to unpack there. So maybe I'll start first on the partner network. As you mentioned, it's obviously quite a critical role both in terms of implementations, but also in kind of co-selling and/or referring in terms of driving new ACV. And so just I think the company each year has made some changes to the partner program. Could you maybe just help us understand maybe the big changes over the last few years and kind of what's the shape of the partner program today? And how much of your new business in any given period are they typically driving?

Yes. I mean, partners, as you said, are like incredibly important to our business model and how we go to market with customers. They, again, drive 90% of our implementations. And frankly, they play a role in co-selling over nearly all of our sales, frankly, a partner touches in one way or another. They help tailor our products to different industries. They're thought partners with us. They invest in digital transformation, the conversations that we wouldn't normally be invited to on our own. And what I've seen since I've been here and really have seen accelerate in the last year is that they are really based on the success of ServiceNow and the success of their own practices, they are leaning into ServiceNow differentially than they have in the past. So I would say, historically, we may be used to be in one of the best among their kind of Tier 2 partnerships, right, that was sort of in that like fast-growing interesting enterprise software. And we've been elevated in the past probably 18 months or so into really the Tier 1 partnerships, right? And so that's like the top 5 in all of the big SIs. And that's with Salesforce, Oracle, SAP, Microsoft. That's the sort of tier that we're being placed in and it's because of the growth that they're seeing in their own practices and the expansiveness that they understand where the platform can go. And so as a result, we're getting outsized investment from those firms. And we're really, I see the sort of flywheel of that force multiplier really happening. Accenture is our biggest partnership, our biggest partner. And they've announced what they call the ServiceNow Accenture Business Group. That's how they classify and codify their biggest partners. And it's a real example of like of a lean in that's very much top-down. It then gets the momentum that sort of feeds the excitement into each of their different ways that they go to market, which is often per vertical. And as we continue to invest in verticals, et cetera, you see more and more excitement about what ServiceNow can do. And so that's the flywheel that I think has kind of gotten to the right place, kind of movement and momentum. And I really do think it's different than what we've seen in the past. And I think that's just going to continue to accelerate.

So I'm going to jump ahead. I was going to ask a different question. But since you brought up being elevated into kind of an elite space where the other companies that you mentioned, they drive a big portion of companies' IT spend a lot of times, right, the amount of dollars per customer. And I think for ServiceNow, there's still a real opportunity there. Relative to those companies, it's still a smaller amount of the IT software budget of a typical enterprise. And so should we see maybe partners elevating your presence inside of their own practice as maybe a leading indicator that you're being pulled up and being viewed more strategically by enterprises? It's not just solving for ITSM or solving for a specific problem, but really more of a partner that they grow with?

Yes. Yes. I think it's really a reflection of the original founding vision of ServiceNow actually coming to life, right? Like Fred Luddy created a platform company from the very beginning that was meant to sort of automate work for the average everyday person, right? And it turned out that, that notion of low code, no code, whatever, 17 years ago whenever we were founded like was almost like too early, before its time. And so we started to build applications and started with ITSM, which was a smart one to start with because there was a bunch of legacy competitors, et cetera. And from there, customers actually started, were the ones that expanded us into other areas because they understood the power of the platform, like the notion of a singular platform, a single codebase, a set of integrations that can be reused and being able to apply that very simple logic of workflow, right? There's a request. We route it. We automate it. We give it context. And then we resolve it in some way has so many different applications across the enterprise. So they started to use it for HR and customer and security and other areas, right? And that really, to me, what's happened in the last couple of years is really the maturing of that and the realization of that multiplying in the ecosystem. I think our partners see it. I think our customers see it. And you certainly see it in our expansiveness and in our expansion, right, outside of IT and into these kind of really big, many use cases across completely other areas of the enterprise. And so I think that's right. I think it is a leading indicator of the success of where ServiceNow can go because digital transformation is a huge amount of money, right? Every company needs to transform itself in some way. And this notion of this automation layer, kind of the service management layer on top of -- and workflows being on top of many of those elements of transformation, I think it's really quite meaningful. And the fact that our capabilities kind of create some better together opportunities really, I think, reinforces that platform vision. So as an example, you marry ITSM and ITOM and you're sort of, you're putting operations and machine data together with like service management and kind of human data, right? People and systems together, that's powerful. I think CSM is another really great example, right? Customers use CSM and ITOM together because that's a really unique differentiator. You have customer service and you have the workloads associated with that. But when you can tie that to asset relevance, right, and understand what's really going on, you can get to root cause and you can drive sort of understanding and remediation that you can't just do with a normal customer service application. And that may unlock a ton of use cases that are super, super interesting. And so I really think that. And then, of course, the fact that we've introduced a number of applications that features around our platform, low code, no code, making it easier to customize and extend the apps and build your own apps. I think that also helps extend the usage of the platform in a meaningful way. So all those things together, I think, reinforce really what I think ServiceNow was born to do, what the founding vision was, which really is to be that kind of platform of platforms, that platform to drive real automation and using workflows across the enterprise.

And maybe speaking of enterprises, maybe switching gears to the customer side of the story. The company's success in large enterprise has been great. I think it's well documented. There's still a lot of room to go. And I think sometimes people forget that just given how much success the company has had already. But when you think about maybe whether it's the G2K or just generally the larger end of the spectrum, the company's been great in North America and EMEA. How do you think about maybe continuing to expand both here and in other geos into larger customers where you're not already, where you don't have a presence or have a relatively smaller presence?

Yes. I mean, I think there's, as mature as we are, as much as we've become kind of the standard for ITSM, I think there is a huge amount of expansion opportunity ahead of us. So if you just think about what our penetration is today. We have 7,000 enterprise customers. And there are tens of thousands of other enterprise customers with more than 1,000 employees for us to go after, which is kind of our sweet spot, right? And so there's huge kind of logo expansion. But in addition to that, 80% of our growth in the future is actually going to come from customers who are already customers today. And we've seen that kind of play out in the data consistently, right? If you look back the last 5 years, you've seen our average net new ACV for a new customer increase by 70%. And the number of new products that new customers are purchasing has also increased 30% in that time. So there's a kind of double multiplier on the growth opportunity, right, that you see in terms of, yes, there's actually a lot of white space in terms of logos to penetrate. And of course, we're most mature in the U.S. And so there's even more opportunity in places like EMEA and APJ, where maybe digital transformation is 3 to 5 years behind some of the more mature, in certain countries, right, some of the more mature markets, but also where we just haven't been around as long. And so there's huge opportunity there and also just the expansiveness of what the platform can do, I think, offers a lot of kind of white space. So there is significant opportunity ahead on a bunch of dimensions.

Great. Some of the recent kind of partner and customer conversations we've had talk about some pricing changes in terms of bundling. And I think Bill has alluded to it on the earnings calls as well. How should we think about the strategy behind that? And how are they, how are the pricing changes? Maybe what were they? And how do they create value for your customers?

Yes. I mean, look, we've invested a lot in customer listening. And we definitely hear the feedback on pricing. And we've really gone deep to kind of listen to that and understand what they're really saying and making sure that we have a strategy that addresses it. And so I think in 2019, we actually build that as a specialized pricing strategy function to kind of really rethink this and think differently. And we're, I think, in the middle of a multiyear journey here, right? One is, we're trying to simplify our buying, in general, for our customers. We're trying to make it easier to expand. We're trying to make the deals faster and improve deal velocity, continue to be easy to do business with. And we want our pricing models to scale because we know that changes in pricing create friction for our customers when it comes to renewal time. And so the more we can build something that's enduring and consistent, the easier it's going to be as our customers grow with us. And so we've done a bunch of things to kind of align to those priorities. We focused on portfolio simplification. And so we're trying to sell more suites and solutions that are aligned to customer outcomes as opposed to point products. We found that we had way too many licensing meters. So every single small product or subproduct is measuring a different meter, which, of course, is really complicated when it comes to predicting use and also compliance. And so we went from kind of 20, over 20 meters, I think, to 4. And that, I think, is a really big and important improvement. And we've thought about kind of good, better, best pricing tiers to simplify. So we, as you know, with our Pro products, we've kind of fenced innovation around certain categories there in enterprises, which are really platform capabilities that we can apply to particular products. And that created some simplicity as well as some consistency for how we talk about packaging to our customers. The other thing that's really important to note that I think is, that is important to the enterprise is we've created something called the Now Buying Program. And that really allows for kind of enterprise-wide service delivery. So when you enter into an ELA, it simplifies the buying. You have more usage flexibility. You have a little bit of protection on your investment. And I think it better aligns back to value for customers. And so that's been an important change that, I think, allows customers frankly to expand faster and also locks out some of the competition a little bit, which is great. And then we've been more like tactical things that are actually really important, sales discount guidance, making sure we're not leaving money on the table while also allowing velocity for the sellers to make sure they get quotes out easily, but they're not sort of underquoting, et cetera. So I feel like we are doing what we can to align to those principles. But at the end of the day, we are a premium offering and it's all about selling value, right, and making sure that we're consistent in how we talk about that. And then that we're actually delivering it on the back end, which is where my organization is working really, really hard to partner with the deal to make sure we stay true to that.

Understood. And yes, maybe that dovetails into more of a near-term question. We're pretty late in the third quarter and you're talking to customers and partners probably every day when you're not spending time at a conference like this. And so what are you seeing in terms of customer dynamics in terms of customer activity, especially as the world was kind of opening at an uneven shape or uneven trajectory? So just how are you seeing in terms of customer dynamics and how should we think about that in relation to maybe the pipeline and demand trends?

Yes. I think in general, the sort of topic of digital transformation continue to, sorry, I think my audio just, can you hear me? Can you hear me okay? Okay. Sorry, guys. I think Samad froze, but I'm here. So I'm going to try to answer his question. So yes, where I was going with that was, obviously, the imperative, I think, of digital transformation continues to be really strong among our customers. And the fact that, as I said earlier, people are really understanding the power of the platform and what that can do in terms of driving a better customer experience, driving a better employee experience, driving more efficiencies in what they're trying to do is all playing out in a really powerful way. I would say, interestingly, if you like pivot that to kind of what sectors given the sort of differential opening up of COVID, what are we seeing. We, as you all know, invested really strongly in our vertical capabilities. And so we've been leaning into because we, fundamentally, we believe that speaking the language of the customer and helping to make sure that we are driving digital transformation in a language that matters to them is really, really important. And so we've invested a lot in becoming more vertically relevant, and that includes building specific vertical products. And so we've leaned into starting with banking and financial services as well as telco. And now we're investing in manufacturing and health care. And so we've seen some really, really strong growth in those areas, those verticals, in particular, where we've invested in some of those additional capabilities. I think government and education actually has also seen really robust demand as institutions have invested in better experiences for their people and also prepared to return to very broad in-person environment. And then those highly impacted industries by COVID, retail, hospitality, transportation, logistics, et cetera. We saw actually signs of recovery with strong net new ACV growth over the past quarter. But with Delta out there and just the unknowns about the ebbs and flows of what this virus is going to look like, it's too early to say kind of what's going to happen long term. But even though demand may be down in their businesses, they do need to accommodate some of these new demands for their employees, et cetera. So we were pleased to see good growth coming out of those areas as well.

Well, Lara, I appreciate you putting up with my technical difficulties on the back end of this. I'm not quite sure what happened. But maybe I'll end with one last question, if you'll indulge me. Just I know you commented on near-term trends, and I missed a little bit of your answer, but just as I think about what, the third quarter is typically seasonally strong with federal clients as well. And I don't know, if you already touched on your answer, we could skip it. But I did want to ask about that, especially with us being in a fiscal year-end for a different administration just maybe how we should think about federal traction in the third quarter this year as well.

Yes. I think Q1, as you guys know, was relatively quiet for U.S. side, but I don't think that was unexpected given the administration change. They had to approve the budget. And then obviously, the changes in leadership, people are waiting to see what the priorities are. In Q2, we did see some good strong demand. We landed 7 deals over $1 million in ACV. And as you mentioned, the federal business is seasonal with the Q3 being the quarterback, the sort of Super Bowl quarter for Fed. And so we are optimistic. We continue to be optimistic about the federal market. We think it's a huge opportunity for us. We've invested in, in the past, and we're really seeing those returns. I think you see the need for digital transformation and that these agencies have real mandates around needing to modernize, right? And so rethinking how do we do things, et cetera, digitally is a big theme that we hear in the federal government. And I think some of the big trends that you're hearing kind of in the new administration are really aligned to opportunities that ServiceNow can solve, whether that's resiliency, ensuring business continuity, whether it's a pandemic, terrorism, outages. Cybersecurity is a huge priority. Vaccine management, of course, has been incredibly important, such an incredible social mandate that we've been so glad that we've been able to accommodate that and help many governments around the world, help create good, safe environments for their citizens. And so all of us continue to be really optimistic about Fed, and we'll obviously see how the quarter turns out.

Great. Well, I know we're over. We'll leave it there. I appreciate you joining us. We've learned that we still haven't solved even with the return to offices. I wasn't anticipating anybody seeing my very messy office. But thank you so much for your time. I really appreciate it. And great to get a different perspective with somebody different at ServiceNow. I really appreciate the time, Lara, and thank you again for joining us.

Thanks, Samad.