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

All right. Hello. Good afternoon. I guess it is afternoon, everyone. I'm very excited to have my good friend. And we were actually just talking about this, I think, 20-year friends, if you can believe that. We have Bill McDermott joining us from ServiceNow, Chief Executive Officer. And Bill, this is a particularly an important date for me because you were actually my last keynote 5 years ago at Credit Suisse. I really appreciate you being the first keynote back.

Honored to be with you, Phil. Thank you very much for having me.

And so now, we're also celebrating almost another anniversary, more than 2 years now, of you being at ServiceNow and man, lots happening in these 2 years.

Been busy.

And so obviously, digital transformation being a topic of focus for executives, ServiceNow just sort of reinforcing its position as the platform of platforms to enable this. When you think back over the past 2 years, what have been the critical driving forces of success?

I think the #1 thing we try to do is maintain the culture in the company. Fred Luddy created this company in 2004. The company went public in 2012. And the company has a great heart, and Fred has a great heart. And I think that customer centricity was absolutely front and center in everything that he did. He used to talk about inventing technology that people don't know they need. But once they have it, they don't know how they will ever live without it. So it was this humility. And then the second thing is really, the first 100 days I was on the job, it was the end of 2019, I had the stroke of luck to travel the world, meet all of our biggest customers and all of our employees before the first quarter of 2020 and COVID hit. So we had a chance to build the bridge of trust. And as I said, in Winners Dream, "Trust is the Ultimate Human Currency," man.

That's it. It's true. That's one of my favorite books. I highly recommended it for everybody who hasn't read it. It's a great story about Bill's career and a lot of life lessons in there, too. But the -- when you think about also just from a product perspective, we talked about this before we got up, where when you did the IPO for ServiceNow, you had 16 products. And now, if you look at the big wheel, okay, there's -- I can't even count how many there are now. The typeface has to get smaller. When you think about just the innovation engine at ServiceNow, once again, you've been in this business a long time. How do you think about sort of the potential value creation for customers from that innovation into ServiceNow?

The innovation in ServiceNow is an unstoppable force. And we have 2 major releases a year, and they're always named alphabetically after different cities in the world. We just did Rome. We'll do San Diego in March. And they have not only been on time, but they have been on quality. And if you think about the engineering pride in ServiceNow, it is really something to behold. And there are pundits in the industry that just are mystified by how quickly we can innovate and how high the quality of the innovation is. And I think the main thing that I would just like to really remind everybody of is this is a platform company. Fred Luddy invented a platform. It started in IT. And now, we understand that the IT architecture is the business architecture. But what's happened is this platform has not only served to secure IT to service the business, run the operations and the assets, but now, you're into the employee experience and the future of work and the new version of customer relationship management and low-code apps on a platform. And it's become this enterprise juggernaut that I don't think a lot of people truly understand.

Yes. That's one of the things that we've been talking about, is that CIOs -- and not just CIOs, to your point, just the C-suite, they're standardizing on this platform, consolidating on ServiceNow, just sort of like we've seen other platforms in the past. This is the new platform of platforms.

Well, as you all know, I mean, the 20th century was an interesting one for digital technologies. And it basically took half a century to create the mess that most companies have now, separate silos, fragmented systems, lack of collaboration, disillusioned workforce because they don't know how to nor do they like using the technology that most companies provide to them. So the situation is so clear to me that there is now going to be a 21st century generation of companies, especially hyperautomation platforms, that will move up the leaderboard a lot faster than most people in this room or around the world actually think. It's happening quick.

Yes. And then -- and one of the things we talk about is that the pandemic has changed the company's strategies where no cloud is officially a no-go. And so -- and then you've also talked about how ServiceNow is becoming the control tower of digital transformation. When you think about what makes ServiceNow so mission-critical to customers and increasingly mission-critical, what is that?

The control tower for digital transformation is a really nice way to put it. Yesterday morning, the day started with a CEO in Europe who is using that control tower for all the migration services that he's looking to put into public cloud formations. At the same time, they're using the platform to run the business, and they're essentially hiding the complexity with this platform of platforms on top to solve the generational problem of integration. Why is it that only 1 in 4 projects actually deliver positive ROI? It's because there's a lack of integration in the enterprise. So we've taken a position where we're friendly to all the systems of record. And what's interesting, we've been doing the HCM scenario and the CRM scenario for a long time. But more and more, we see a giant universe in the ERP universe. Whether it is supply chain optimization, procure to pay, order to cash, these are business processes that are just logjams now in modern enterprises that want to win, and we're front and center in helping them solve those problems.

Yes. One of the things we often say is that platforms win. I got to full stop. You've circled $15 billion as a target. And obviously, that would mean some platforms win to get there. But what does the Now Platform look like when you fast-forward?

Well, I also said $15 billion-plus.

Plus. Is that with plus?

I always accentuate the plus because we have the desire to be the defining enterprise software company of the 21st century. And with that comes an amazing responsibility to keep innovating, make sure the customers are not only happy, but that Net Promoter Score is the industry benchmark driving retention, loyalty and ongoing success in the global economy across all industries and geographies. So we have like a bold ambition, and we're tireless. Like that's a really important thing to put out there. But in terms of the platform and fast-forwarding it, what does it look like, it is the enterprise platform of all enterprise platforms. Because, on one hand, it cleaned up the mess from the 21st century, but it became the system of action for the 21st century enterprise. Someone said to me yesterday, "Yes, Bill, what do you think of this inflation situation?" I think if you build your business on a Now Platform, it's the most deflationary tool you could put into the enterprise because it takes out so much complexity, cleans up all these business processes, lets things run smoothly. And I think that is really huge. The other thing is we're all in a talent war out there, your firms, our company and every other one. It's nice to have to hire the people that you absolutely have to hire, but not to waste hires because the sludge in your company is so bad that you got to throw people at the problem. And we really help on both of those dimensions.

Exactly. And one of the things you've also talked about is the technology team's desire for a fully integrated software cycle, so from planning to development, deployment, operations, service and so on. When you think about this vision or the steps I just talked through, the aspects of this life cycle, what investments are you making in sort of the shift-left strategy?

Well, a couple of things that may have not been obvious or at least clear to everybody is we picked up some of the really great AI companies in the world, including Element AI, with a Turing Award winner, which is like the Nobel Peace Prize for AI, in Montreal, Canada because it's a very sticky employee base in Montreal compared to other geographies. And we have built deep machine learning, AI operations into our platform. We've also built RPA into the platform, and we'll have a major release on that, especially in the San Diego release coming in March. We have supply chain optimization. We have ESG. We have so many on-deck solutions that are hitting the market like right now. They're not wet paint. They've been launched. And the appreciation, I think, also is the ecosystem for the platform. I'll give you an example. When I first came in, it was really hilarious. We would have these meetings in Santa Clara. The partners would come in, getting off the plane, take the bus from the airport. There's like 10 or 15 people stuffing into a conference room. And I'm like, "What's your business plan?" And it's all we think we can do easily $50 million, $100 million this year. I said, "You are just missing so many zeros, and we got to fix that." So now, we have 10 partners that are the biggest ones in the world, that have chosen ServiceNow as 1 of 5 platforms that they have as foundational platforms to their entire business strategy. We have, of the 10, 7 that have built business plans in excess of $1 billion in revenue. One of them now is going for $2 billion-plus within the next 12 months. So once you see the ecosystem effect kick in, it's pretty amazing.

Yes. Let's stick with that theme of partners. I mean obviously, throughout your career, I know partners have been a focus. So when you think about ServiceNow and the opportunity with partners, you just mentioned some of them, driving you guys to be in just deeper customer relationships. Could you walk through that, but also the channel? What role does the channel play in becoming even more productive?

Yes. It plays a big role. I mean I would say that we have really exponentially broadened our thinking on partnerships in general, whether it's the hyperscalers, great friends like Microsoft, where we've integrated ServiceNow into Microsoft Dynamics and Teams and cloud PC. Reaching 275 million Team users and having them have a seamless experience on the Now Platform is good for Microsoft, is good for ServiceNow, but it's great for the customers. If you look at Bessemer 100 Trust, Bessemer Trust 100, you would look at companies like Stripe at the top and you would look at Celonis #5, and we have partnerships going with these companies because they're leaning into ServiceNow because they know we're a winner. So if you take Celonis as an example, a company I used to work for, we basically built a very good partnership with them and they were outstanding. So now, they came over here, they said, "Why would I want to build an action platform when you already got one of those?" I can do the x-ray on what's broken in the business processes and immediately move that to action on the Now Platform. And that's a total win-win, especially for the customer. I called on a major airline, and the CEO said to me, "Bill, you are absolutely right. I just want to learn and know where things are broken. But I don't want somebody to tell me they're broken and bring in hundreds of consultants. I want to fix it quick." And that's where this comes in. So whether it's the SIs in America or India or faraway places, or it is technology partnerships that matter, we're really leaning into them, driving integration into the Now Platform because we know that's in the customer's interest. And when we become the standard for workflow automation in the enterprise, and that becomes the de facto platform, that's got to be good for our shareholders, too.

Exactly. I mean the way I thought about it, particularly the Celonis partnership, I describe it as like the top of the funnel. It's like what processes can be digitized, where are my holes, where are my blind spots, and then give me a road map for ServiceNow to digitize them. And then I'm very interested about the San Diego release, then automate those digitized workflows. Is that the life cycle you're thinking through?

Exactly. Absolutely. That's the life cycle there. But we're doing so many things, Phil, like really, so many things I would tell you that you can't get out of just an earnings call. Think about the fashion industry, think about fashion-tainment and how you can merge fashion and give consumers a front-row seat at a show in Milan while they sit at their personal device and say, "Man, I can envision myself in that outfit," of such as a gorgeous navy-blue tuxedo. And then, at the same time, they're getting entertained and then they're building ecosystems of young innovators that want simplified processes so they can jump on the platform, too. And then they want to take products to market in a buy-now concept, and we're driving that. Think about the sports and entertainment industry. Think about the idea of being the metaverse of the sports and entertainment universe. Like we have visions to do this for our amazing customers, and they're all in. These are things that you might not think of when you think of ServiceNow, but it's happening.

Yes. Yes. To your point, it all started with the platform.

It all started with the platform. I had one unbelievable meeting 2 weeks ago in New York City. The gentleman runs a conglomerate of restaurants. And just think about this. We talked about engagement in CRM for the last-quarter century, absolutely an important thing. It is important to engage. It's important to have a nice experience. But it's even more important to clean up the operations and the back office. So when the customer does engage, they have a flawless experience from end to end. So think about a world that we've gone to, which is direct to consumer in almost every industry. But think about creating a greater consumer experience in someone's living room, when they used to sit at your restaurant, and you have to figure that out, especially when you're having a hard time even hiring people to show up.

Yes. Exactly.

We're in the midst of solving these incredible problems with the Now Platform. And when I talk to the CEOs, and this is an amazing thing, the CEO meetings are fantastic because they go about 10 minutes deep and the CEO says, "Bill, would you mind if I brought in the IT team and the technical team and the operations team?" "No, actually, you're the most important thing on my calendar today. Please bring them in." And then we bring them in and they say, "I had no idea you could do this." I had one bank last week, and this CEO -- it was an incredible meeting. Part of a giant global conglomerate brings in her digital leader, and they're thinking about how do I literally rethink my high net-worth client relationships. I had a dinner the night before. "I'm trying to get past my own system so I can connect right with them. I have an engagement but then they tell me once I'm engaged, I don't really have anything to offer them." Again, the messy middle in the back office is something we're really clearing up. But for any of you that are worried about us not being friendly to all the systems of record out there that can't do those things, don't worry because we're happy to team up with them and make them look good too because in the end, it's really all about delivering for the customer.

Yes. Now speaking about providing value for the customer, one of the things we talked about at the very beginning was the innovation engine at ServiceNow. This is a question I get because we were even talking about it before this. It's about long runway of durable growth, organic innovation, augmented by inorganic tuck-ins, too. But the question I get is like can ServiceNow keep that innovation engine going. Like is there enough runway? How do you think about that? Or how would you respond to that?

The answer is we have limitless potential. I've been in the enterprise software industry for a little over 20 years. When we, actually, we first met, Phil, there's nothing like ServiceNow. And I knew that, by the way, coming in. I met John Donahoe when he first became CEO, and I wanted to strike up a partnership with John with my former company because I knew that weapon, that Now Platform, was necessary to integrate complex business processes. And I knew having ServiceNow as a really important friend would be good, and that struck up an amazing relationship with John. And I think you could figure out the rest of the story. But what's amazing is, as I think about the future of ServiceNow, we have something we call NowX, which is a pipeline of all the future innovations that we're driving at. We have no shortage of opportunity. The only thing we got to figure out is what is the biggest market opportunities and what do we do first because we have engineers that can build great software and they can do it at a record clip. And that's because that platform is so amazing, and the people are also so amazing and they're incredibly well-led. So I just take my hat off to the engineering team. I'm so proud of them. I don't see any shortage of that. But also, the go-to-market team is incredible, too. And the way they work together so closely is pretty impressive. And I've seen a few of them over the years. This one is super special.

Actually, maybe a good -- talking about the synergies, go-to-market and the development team, there's another question I get a lot, is that, okay, ServiceNow, to your point, a target-rich environment of processes that need to be automated, digitized, et cetera. They're manual right now. How do you sort of determine what to lean into?

Well, listen, I believe that our strategy is based upon several iterative conversations that we have with market-leading companies in various industries and geographies. So our strategy is led by where the customer needs to go. But our game plan is not to take them where they see the future today, but to take them where they might see the future in 3 to 5 years. So about 9 months ago, you might remember me pound the table that we will deliver ESG in a box to the market. Even our own engineers, like what, are you kidding me? I'm like, no, we have to do this because every CEO you talk to, every CFO, every Chief Sustainability Officer, they're trying to run diverse inclusive cultures. They want to do the right thing. They're trying to make sure their hiring practices are proper, that their supply chains are compliant with labor laws and they're building great supplier networks in running their business. They're absolutely determined to make sure that they're net zero and so forth. But there was no one system that could bring it all together in a coherent way, except ServiceNow. So think about islands of automation everywhere that need to be tied together, and our value proposition is not to replace them all but in fact, to make them work.

Yes. Yes. Exactly. It's funny. I would say, I think about just even core HR systems, since I've been back at credit Suisse, I interact with ServiceNow more than -- for HR processes more than I do the core HR system.

Of course. Well, I'll give you an example. Customer after customer, this is what they tell you. I got to recruit people. I got to hire them. I got to onboard them, which is easily the most messed-up process in most companies, which is why the loyalty equation is broken with people before they even join. And then you have to educate people, especially since you're going to have to hire a lot of young people into the workforce and get them amped up real quick so they can start delivering. So a segment of one training curriculum, you have to manage the cases of employees, right? It goes from finance, to legal, to the manager. All of this is a workflow challenge. But what is different about us? It is a consumer-grade UX. When you look at the application, you're like, it could be Google, it could be Facebook, it could be something that's considered gorgeous in the open market in terms of the user experience. And on that dimension, I really believe that our design team and our leader in design is world-class. And we spend a lot of time on design. And most companies, especially enterprise companies, don't. So I think this combination of the user experience, creating things that people really love to use, is really differentiating us, both at the employee experience and the customer experience level.

Yes. Got it. Well, we've only got 5 minutes left. So I've got a bunch more questions. But I forgot to pause for a moment to see if there are any from the audience. Just raise your hand. Otherwise, Bill and I will just keep cranking away. Any from the audience? Well, let's say we must be doing a good job.

You are doing a great job.

Well, let's step back and talk about observability and application monitoring because, obviously, this is a question I get a lot from investors because, obviously, you have the launch of the Lightstep Incident Response this fall, and that really opens the door, like I said, application monitoring, observability. What are the challenges that customers are experiencing in this market? And what is really ServiceNow's vision here?

Well, we think that we have a uniquely differentiated architecture, and that's why we chose to team up with Ben and his team at Lightstep. So if you think about people, process, technology and observing things, from the way developers operate, to the way system engineers observe, to the way executives look at the checkout counter in retail. We have one sheet of glass that you're looking at the whole business process. And any change, anything that offers an insight, a deviation from what is expected, is immediately put out there and its purpose, to the purpose of the role that the individual is in. When you look at other technologies, they are all dealing with different screens and different user experiences. And they're logging into different monitoring capabilities. It doesn't mean their system is not good. It is good. It just means it's not as simple as this one. And then when you can connect that to the action layer of ServiceNow and literally see something, grab an insight and then turn it immediately into an action, that's what Ben said was the differentiator because that's the thing, also like Celonis. These great innovative companies, they see something, "Oh, my goodness, if I only had that," and then the global channel and so forth. And the brands that they're winning, it's unbelievable. Well, we can't get into so many -- so much of that today because I know you've got to get permission before you can start using all that stuff. But it's a stunning team. So proud of Ben and his team, and they're just doing a great job.

All right. So you said you want to make ServiceNow a definitive software company in the 21st century. Obviously, you've given that '26 target, 15-plus, 15-plus. But there's always, there's the long-term path and then there's the way there. As CEO, what is top of mind for you over the next 12, 18 months here, where it's like we got to knock these things down?

Right. First and foremost, never lose the humility and the hunger that was in the culture before I got here. And that's what attracted me to ServiceNow. That's why I love ServiceNow. So keep the culture really turned on and remain humble and hungry, humble in service to the customer and hungry in service to the innovation that they need and never stop pushing. And one example of that was the emergency response, return to work safely and vaccine management. We did it on a shoestring budget in record time, and now, it's a global sensation. I want ServiceNow to be the standard platform for 21st century innovative enterprises running end-to-end business processes on an action layer that truly does capture the imagination of every executive. They say, "I now have a control tower for digital transformation. I can clean up the mess. I can make my people and my customers happy. I can have my innovators build new applications in record time." There will be 500 million new applications built in the next couple of years. Millions of them will be done on the Now Platform. And that is a vector of growth. So with great retention, best in the industry, super happy customers, happy place to work, I mean, everybody rates their companies on the Internet. You don't have to take my word for it. Just see what the people are saying at ServiceNow. That's why it's harder to get into ServiceNow than Stanford University. On a per capita basis, we're bringing in less than 1%. We hired 7,000 people in the heart of COVID, and we get the best people in the business. You know why? Because they're smart. They know what, when or when they see it. So I want to give you the best company in the business. And we won't compromise. We won't take shortcuts. We're determined to win. And I mean win every day, every week, every month, every quarter, every year. And that's because the people deserve it. They're capable of it. The huge market that they're serving requires us to be that company. And it's so much fun, Phil.

Awesome, really. Cool. Thank you, my friend. It was an honor doing the keynote with you. I appreciate you coming back and be my first one back.

Thank you. Thank you for having me. I appreciate it so much.

There's nobody better, my friend. I appreciate it.

Thank you all. Thank you. Appreciate it.

My pleasure. Thanks, everybody.