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

Welcome to our next session. Really happy to have Pablo Stern from ServiceNow. Pablo, maybe we start with you briefly introduce yourself, and then we can go a little bit deeper.

Yes, absolutely. First of all, thanks for having me. My name is Pablo Stern, and I'm the SVP and GM for IT Workflows at ServiceNow. And ServiceNow, we have offerings we divided into 4 workflow families. And my team is responsible for the one that is for technology delivery across the organization. And over time, that's broadened from like core IT to like cybersecurity to other tech functions. But what you can think of there is products like ITSM, ITOM, ITBM, ITAM, they go to technologists. And then we do for security and risk with our security solutions and our GRC offering. And now what we're doing as we're going into ESG as well.

Yes. Okay, perfect. And I did read up on you, Pablo, and you did start out as GM for ITOM. And that's where I get actually a lot of the questions from investors still in terms of like, "Okay. So ITOM is a very big market. How does ServiceNow fit in there versus kind of some of the other kind of classic legacy ITOM players?"

Yes. So maybe as a starting point, I think, like when I think of like our operations management suite, I think this is the -- this is what technology teams used to run their command center, right? And so if you think of that, that command center is kind of like the -- if you remember, like Star Trek Enterprise, the bridge, it's like the 24/7 cockpit that basically run all your technology services on. And ITOM really what powers that bridge and the people to work on it. And so when you think about our legacy when we started with service management, that starting point really was people will be calling into the bridge all the time, right? You've got an incident, you got an issue, you're calling in the bridge. With ITOM, what we actually help do is we actually connected to all the technology landscape, all the services that exist that are helping power and run the business. And so really, what's happened is the evolution has been because we have this one platform approach, it's enable us to bring the people, the folks that are calling into support, that have issues, have questions and the machine, the technology, the services closer together, and that actually helps us get more proactive. And so really, it was very synergistic to sort of be a follow-on to where we started with service management.

Yes. And now you're running the whole IT space, as you said, like, how do the different parts come together? Like going to back to the legacy side, they all have really nice point solutions. And everyone was really proud of their point solution. And then you guys came with more like a platform idea, but did they grow that organically as a platform? Was it like -- how did that evolve? Like that's kind of interesting to hear and understand.

Yes. I mean I really like to think of this really from the customer perspective first. And I think the common link here that really underpins everything is how technology is powering modern operations in companies that are trying to digitally transform. And these organizations really ultimately need to be world-class in technology delivery to be able to drive that innovation and to really get to the other side of the digital CASM. But there's so many ongoing shifts in technology landscape. And as you know, Raimo, like there are hundreds, if not thousands of tools in a modern enterprise that they're using trying to manage this. And that creates many process gaps, a lot of [indiscernible], too much effort spent on work that's ultimately not differentiated. And so this is really where our IT workflow portfolio comes in. And you hit on it, it's because of this platform approach, we can actually help connect the different groups that are working on technology, the product or program teams, the engineering organization, the ops or SRE team, the security team and bring those all together, and we can very do this very uniquely because, as you said, that one platform approach means that when we deliver the outcomes, not only can we deliver a best-in-breed solution for a specific use case and for persona, but we have this added benefit that it's all on common data, on common workflow, you can actually start connecting those, but historically you have to work through the silos and through the process breaks.

Yes, yes. Okay. Okay. Makes sense. And the -- I mean, you talked earlier about the foundational piece of this is ITSM. And I remember like when I did the ServiceNow IPO like a long time ago now, it was like, okay, that's just a help desk. It's like -- and then I remember [ Mike Scarpelli ] and my bankers took me to decide is like, no, no, no, you don't get it. This is a lot broader. But what's interesting is like remind me of like that journey of ITSM and why are we still growing in that space? Because it does seem kind of 10 years in, and we're still kind of growing the ITSM footprint.

Yes. No, I mean, you're spot on, Raimo. When we went public with Mike in 2012, the size of that industry was aimed at around like $1.5 billion. I can tell you right now like that industry is way bigger than our revenue alone, even though we don't publish those numbers, is much more than that number in and of itself. And really, part of, I think, what happened and one of the reasons why we've been so successful is we help redefine that market. And we went into that market with a cloud-native solution when that cognitive didn't exist. But more importantly because we have this true platform approach and because Fred Luddy really started with that as a construct, we could deliver service management helping those people get what they needed. But we were able to quickly add on capabilities, which really expanded what that notion of service management was. And if you think of it today, I mean, as a company, we're spending $1.3 billion in R&D alone, and that allows us to push really, really hard on innovation and use cases. And the typical capabilities that a customer would expect out of ITSM like managing those incidents, getting to portal, having knowledge, like we do all that stuff. And the advantage that we have is because this platform also has this ability to drive work and make it flow across the enterprise, it enables us to like start turning on use cases very quickly and helping customers in ways that in a traditional ITSM world, you wouldn't even think of. And that was just like within the core standard solution, which we're investing very heavily to continue to keep innovating across. And then as you go, what we found is over the last few years, as we've gone into the ITSM Pro, here's where we brought in the power of AI and using really the machine learning to take the mountains of information and help where customers really want that help, where we want to drive more self service, where they want to keep up with the machine, and that's really where our pro solution comes in with our virtual agent, with our predictive analytics, with our predictive intelligence, like those capabilities ultimately are add-ons, which are new to the market and an expansion, I think, ultimately, where the market's going. And then most recently, we announced our enterprise solution, which is really focused on driving optimization around 2 of the core questions that our customers keep asking us about, which is great. That service management, kind of helping you with a lot of the technology and with what you're doing from a data and AI perspective. Now help me help myself with my workforce, like, how can I get the right skills, the right time, get the right people, serving the issues at [indiscernible] and the right need. And the second big question is, there's a lot of process. And I've got so many bottlenecks in my system, where can I go and improve those because those are going to drive a lot of efficiency for me. And so in that solution, the 2 big anchor points are that workforce optimization really aimed at driving and helping teams better serve their customers and find those bottlenecks through what we call process optimization.

Yes, yes, yes. And then before I move on, like the -- I just wanted to stay on that ITSM subject for a little bit longer. Like if you get involved with client conversations, where are people in terms of the adoption? And I have to admit I was cheating a little bit in the earliest because we were -- Barclays was a big reference customer. And every time I kind of went into one of those roundtables and listened in, you were like, you're doing that little or like how people was rolling -- were rolling it out, it was completely like not how you should have used the platform. Like so where are we on that journey in terms of like all the customers on it now because it's the one that is unique in the industry, is there still more to go, et cetera. Can you talk to that a little bit?

Yes, absolutely. And I think we've talked about before that like if you take that service management market, we're about half of that market. As we look at it, like we're continuing to take share in that market. Now we're probably closer to 60% of the market. But that's only part of the story because as you said, like most of our customers are actually on our standard edition. And [indiscernible] probably been very successful for us. We're driving up to about 25% penetration right now, but we still have a long ways to go on that. We think we can get to 50% of our customer base on Pro, and we are just in the early innings on ITSM enterprise. We're just starting there. And so with that, we really believe that we can get to 25% of the market. So I think there's a tremendous amount of headroom just in the ITSM market alone based on some of these new capabilities. And frankly, I think this is a place where we're pushing the market because it's something that ultimately, our customers are asking us for from a use case and capability perspective.

And remind me Pro, what's in Pro? That's kind of a lot more automation, like just remind me.

Yes. So in Pro, that where we bring in that power of AI. We bring them in our virtual agent to basically help customers self-serve. We bring a lot of predictive intelligence in to give our customers insights into the amounts of data they have, so they can remove bottlenecks. They can get more efficient and actually leverage the power of the machine. I mean it seems like a no-brainer, like for people to -- not to adopt it.

Yes. Yes. Okay. Yes. Yes. What's in enterprise then that's sitting above Pro?

Yes, that's where that -- it's really -- we focus on this optimization use cases, which is how do you get your teams and workforce, better tailored, better trained, better on call around serving the customer. And then looking at the process, looking at the workflow and finding where there are places that are bottlenecks and highlighting them so that you can remove them. And by removing those bottlenecks, it helps you deliver a better service. It means your employees are going to be happier and ultimately helps you save money and time because you're not spending time on mundane.

Yes, yes, yes. So if I sum it like -- and I'm moving on now into security in a second, but if I summarize it, you still have more customers that they won't use you and I don't know what the heck they are using. And then you have to take the Pro and the enterprise upsell still, and that's your core ITSM product.

Yes, that's exactly -- there's definitely a lot of upside, and I think the thing I would emphasize because I spent a fair amount of time talking to customers it's really around the use cases, like we're very much customer-related in where we're going. And this is what customers are asking us for. So like it's definitely more pull and push.

Yes. Okay. Okay. Makes sense. And then a few years ago, you went into security. And I have to admit initially when I saw it, I was like now they going crazy. Like, what do you want to do into security, like start competing in security vendors and stuff like that. But now with some time and learning a little bit more, I think you're much more complementary. Can you talk a little bit about what you're doing here?

Yes. I mean, I agree. Security is definitely a broad market. I spent the better part of a decade in the security space itself. And basically, what happened, and it predates me, but we found a couple of areas where our platform could be a competitive advantage. And we focused on 2 sides of the security coin. One on the proactive side and second on reactive. Then on proactive, that came down to vulnerabilities because we could leverage our workflow and the connections that we already had to the IT organization and the system of record that we have for the systems and services to capture data about potentially of the millions of vulnerabilities that could exist in an enterprise and help teams prioritize and drive the resolution. And this is the vulnerability of response space, and we're a leader in that market. And then when you think of the reactive side, and we went to the security operations center, the stock. And we brought them very similar capabilities that you would have from a workflow perspective in terms of the service management, right? You empower teams to take incidents, security incidents in this case and drive them towards resolution. And so this market is known as a Security, Orchestration, Automation and Response market or SOAR. Again, this is another place where we're a leader in the market. And customers are responding to this. In Q3, a SecOps from an ACV growth rate perspective, led my entire IT portfolio.

Oh, well Okay. Yes, yes. Okay. And then where are you on the penetrations there? That sounds like -- I think we're much earlier there.

Yes. With a lot of -- I mean, if you think about it from an overall customer perspective, ITSM is where we have most penetration. What we see with a lot of the other solutions is customers are ultimately coming -- driving fast forward because of that -- once they lay the foundation, then it just makes sense to drive security use cases, asset use cases, others on top of it. Now what I would say is that those security markets are smaller than the overall ITSM market, but they're growing more rapidly. And we're probably in a similar position relative to like where the market is, and we're growing at or faster.

And it does feel like ITSM, ITOM, security are all kind of coming together in one motion. Is that what you see as well? And is that also when you talk with clients in terms of who you're talking to that they realize this is one?

Yes. I mean when I stepped into this role, this was one of my fundamental premises of the role. And you're absolutely right. It's reiterated and reinforced in my CIO conversations like I hear it echoed back in a lot of those one-on-one discussions. And as I mentioned in the beginning, like that the increasing digital agile world that we're in, technology teams need to collaborate more than ever, and they need to simplify it. And whether you're the product manager or the engineering manager, the ISRE lead or even a service desk agent, your technology tool chain has become your software factory. And in ServiceNow, what we're really focused is we're really focused on helping connect it seamlessly to our platform and really power that modern software factory for the new digital enterprises.

Okay. Yes, makes sense. And then shifting gear a little bit, like the -- recently, we saw the Lightstep acquisition from you. So that kind of, in theory, gets it into the ops availability space. And I don't know if you look at the agenda at the conference, there's quite a few vendors that are kind of in the space. They are all doing well. So I [indiscernible]. But like how do you -- what was the motivation there?

Great question. So I arrived at ServieNow in 2017, I've been looking at the space since then. And I'm a huge fan. Observability is incredibly complementary to our vision. We like to really simplify it. It's, first, you observe and then you act, right? And in that world, like that's what we do. We're a workflow engine. We drive action. And so for us, like when I think of that and I think about those software factories, we've done really well in driving planning, helping those operations teams and helping the service out, helping security team. And with Lightstep, we really start fortifying on the engineering side, right? Those DevOps teams that are ultimately trying to drive work and kick that work across the enterprise, and it's such a natural adjacency for us. Like if you go back to that analogy of the bridge that I was talking about, right, the command center, like you're really trying to drive that service health with ITOM and you're trying to find that bridge on the observability side, which is really making Lightstep and ServiceNow come together in an observe to act motion.

And the -- but you are in -- so you're in the space now, but you also have like kind of some very fast-growing kind of growing players in there. Like how do you see yourselves in terms of like, how do you call this term now competition frenemies? Like how does that play out for you?

Yes. No, it's definitely the case. I will say that we're in an ecosystem, we recognize that. And we recognize that within our customers, I said there are thousands of different tools, like they'll often have 2, 3, 4 different solutions in this space. And I think that is one of the strengths of our platform and how we drive that connectivity. Now what I really love about what Ben Sigelman and the Lightstep team built is how they thought about it. They really thought about it very similar to Fred Luddy. They started with platform first and the construct of that platform, especially in the datasets. And that founding team cut their teeth on large-scale observability and what arguably is the birthplace of it at Google, and they learned many lessons along the way. And if you look at them like -- unlike other solutions that are in the space, that may have different back ends for the different layers of that observability cake, Lightstep truly is built as a platform where you have a one layer cake. And you get to eat it, too, which is kind of nice. So that concept in an increasingly distributed complex microservice world with a truly native approach, I think it's really one of the only real ways that you're going to be able to get the insights you need in these massively distributed complex applications.

Yes, yes, yes. No, I can imagine that. So you basically -- but like if a client wants it from you, you can have it because it's a very nicely scaled like Lightstep was kind of scaled up and it's kind of working. And it's kind of very well integrated into what you have. And someone wants to stay with some of the other guys that's fine, you still integrate really nicely.

Yes. Yes. And when we partner with the industry, we're going to continue to them. We're very committed to it. I mean it really -- as I said, it really starts with customer. We want to meet our customers where they are. We want to give great solutions. We want to make sure that they're natively integrated and that they give disproportionate value. But at the same time, like it is so important to us to make sure that from an ecosystem perspective, we help our customers. We help them as they're rationalizing a very complex estate.

Yes. Yes. Okay. Okay. That makes sense. Throughout the -- our conversation, you talked a lot about like automation and AI playing a greater role. Like how does that kind of fit into -- you mentioned like, obviously, it's in the Pro SKU, if I think about ITSM, but there's almost like a bigger picture story here because it does go into everything you're doing actually. And since you're automate, automation can be driven a lot more by AI. Like where is that -- so first of all, how do you weave it in and you gave us some examples already? And then I have a follow-up there.

Sure. So to me, it's very simple. I spend time in the data industry. And if you look at all the data, how it's increasing, the increase in compute, the scale of it, it's becoming increasingly hard for people to keep up with that growth. I mean, I think the simple thought exercise is just kind of map population growth to data compute technology growth, right? Like we're losing the risks, and we're losing it by a lot. And so the good news is AI is really here to help. That machine learning is where -- because machines are really good at finding those needles in those very large haystack, sifting through mountains of data, mountains of information to get those key insights, and they can then drive the automation to get things done and get it done smartly. And so we're bringing a lot of that innovation into our solution. So as we talked about in ITSM, the virtual relation, we're investing very heavily in or in ITOM, around this notion of AI ops, the industry talks about, which is taking that mountain of information that's coming into that command bridge and being able to get the insights and then drive them through our workflow engine to drive outcomes. And that's true across our entire portfolio. And thanks to, I think, really, this workflow that we have with our investments in AI, we're going to make the world work better.

Yes. And the -- where is that AI sitting for you? Because likes it's -- is it a horizontal function? And then because you guys also like in HR, you're on the services side. So is that an extra team? Or like are they kind of down in the -- with all the different departments?

Yes. So as you likely know, we've done a few acquisitions in the space over the last 4 years. But every time we've brought in technology, we've always replatformed and brought it and made it core to the platform. And so that's where it's been really good for application teams like my app teams or some of the other application teams at the company because these constructs are now embedded into our platform, which then means that we can get access to them really quickly. And the other thing is we also make them available to our customers. So if you're using our creator workflows, if you're building on the platform, you have the same constructs available. So it's native, and it gets built out as a platform service for everybody else.

Okay. Okay. Perfect. Okay. And then I started touching already on a little bit on the broadening out for ServiceNow around like HR now, customer success, customer success, et cetera, customer service. How are you kind of interacting with that groups? I mean it sounds like the underlying platform is still very [indiscernible] and then it's just a different goes that way. So is that right way to think about it? You just in parallel to you, but they all get powered by the platform?

Yes. So if you look at from a customer perspective, what they're trying to do is they're really trying to unify their employee experience, their customer experiences, and ServiceNow can do that because we are truly one platform. And as I think about it from my lens, a couple of things are happening here. One is IT and technologists are really the stewards of the digital revolution, right? They're the technology whisper for the organization, whether that be the HR team, the customer support team, finance or others. And so the platform that they pick, the platform that they love gives us one of the largest internal champions at a company. And I think that's a really strong starting point. But really, when it comes to that customer experience perspective, because we natively integrate those workloads, we can really integrate the use cases that they want for an employee for a customer in a way that no other platform can do it. And so when employee needs something, if it's right, they can get it quickly with no -- natively without any overhead or any strong need from an integration perspective. Or when a customer support agent has somebody come in, call in with a problem for a service that they have, we can provide the agent with health information about those services also on natively across that platform. And so I think those ultimately help from a use case perspective, deliver value that is differentiated.

Yes. Okay. Perfect. It makes sense. Last couple of minutes, I just want to spend on more like topical subject of like pandemic and the implications. Like what are you seeing in terms of like how the pandemic has impacted your space and the classic ITSM space as well, like this whole notion of digital transformation, is that something that got accelerated for you guys as we kind of discover it or accounting any of it?

Yes. So first, the pandemic has been incredibly hard for folks around the globe. And it's been true for many of our employees and families. We're also like, I never really lose sight of that fact. If you think about it from a customer perspective, as we look at metrics, we're seeing more traffic engagement than ever before. And partly, I think what's happening is the pandemic showed companies that they need to truly be digital. And that for ServiceNow has been a strong tailwind. And as an example, like if you look at like IT service requests, we're seeing exponential growth in those during this time. And you can see that across the rest of the portfolio as well.

Yes. And so -- okay. So the -- so -- well, because we have more remote, basically, people have more issues in a way, more issues in a way, which means the systems need to be very powerful to be able to deliver that. And that's kind of what's driving in like more demand. Is that a good summary?

There's -- I think that is part of it, but I will also say that like another big piece is the fact that like more is moving to vigilant. I think while the push to remote and the increase in the perimeter created a compelling event. I don't think it was like a surge event. I think actually it was a fortune function and to say, hey, look, we need to change the processes in the way that we work. I don't think that the desire is, hey, let's go back to the [indiscernible] in a post pandemic world.

Yes, yes, yes. And then how did it play out -- the pandemic played out for you and your -- on your product organization in terms of like priorities? You mentioned earlier that customers kind of give you a lot of feedback on where you should go. How did that impact you? And then was there like a slight change in direction potentially? Or like was it just kind of like just give it to me faster?

Yes. I mean I will say that from a focus perspective, on the strategy side as well as like listening to our customers and driving like, there really has not been a change there. What we have seen, though, is like if you look at like what happened during the pandemic, like we saw a lot of things from an engineering metric perspective increase, right? Variety of factors like because people have less commute, better focus, they were not -- they had fewer on work conflicts, like we saw some of those things. But now as folks have started getting back together, seeing each other in person, like what we're also seeing is the value of that in-person time, the collaboration, that innovation really is critical. And so this -- there will be a future of work in a new way of working, but we see that both of these will come together, and we need to foster that innovation, but enable people to work in the way that they want to work. And so I think that's one of the places that we're seeing a lot. Like we are able to spend a lot of time with customers, which is good because in conversations like this, we're still focusing on that. But I will say like I do look forward to a time where I'm able to fly again and get back in front of customers and break the bread with them.

Yes, yes. And then last question for me on this one is like, what do you see in terms of like as you keep expanding the organization like -- and we're in a tight labor market, like is that something that impacts your -- because ServiceNow has such a good reputation, good growth, et cetera, it's less of an issue?

Yes. I mean as you know like, we have a very high bar as we look at at the talent market and bringing folks in. The good news is, if I speak anecdotally, like when we open RECS, like there's a tremendous amount of demand. I think outside in, you look at the company, and that's been a huge tailwind for us from an engineering perspective. But I would also say like, we definitely see like market spending, we do look at the fact that now as the world expands and like the footprint of where people live and work for work also expands, that also ends up creating a tailwind.

Yes, yes, yes. I think our time is up. So Pablo, it was great talking to you. It was a great interesting conversation we had here. Sounds really exciting. Thanks for joining us here. That's really nice. Thank you.

Thank you, Raimo. And thanks, everybody.

Happy holidays. Thank you.

Bye.