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

Thank you, everybody, for joining us. With us we have the CFO of ServiceNow, Gina Mastantuono. Gina, thank you so much for joining us today. I know it's been a busy few weeks helping to run a very large company that is doing very, very well. And you're just coming off the Analyst Day, and I'm sure that took a lot of time and energy. So again, I appreciate you joining us today.

Thanks for having me. And yes, it's been a busy couple of weeks, but I have an incredible IR team that helps put everything together. And so yes, we had a great Investor Day last week, and I'm happy to be here.

Great. So why don't we maybe kick it off there. We've had this push pull, right, where, on the one hand, we're seeing all of these cost currents in the news about what's going on in the world, whether it's a tight labor market, but then you have people concerned about a slowdown. And then around all -- within all of that, the company last week had its Analyst Day and you gave what's a really good outlook for both the intermediate term and the longer term. Just what are you seeing right now in the macro environment? And what are you hearing from customers? And why don't we start there?

Thanks, and great questions around the board. So we're seeing and hearing from customers that there continues to be a strong demand environment for our products. And ServiceNow's platform really serves as a deflationary tool for many of our customers. We think about having to drive productivity and efficiency in an inflationary environment until recession, we're really able to help our customers journey. But a potential slowdown also is not happening in isolation, right? And what you're seeing amidst a backdrop of COVID reentry into a hybrid distributed workforce, the great resignation focus on employee engagement is more relevant and more important than ever. So not only does our platform help to drive productivity and efficiency, but really serves as this incredible tool to help drive great employee engagement as well as customer engagement. So if you put all of those things together, the conversations that we're having with customers today show us confident in the ability to raise our guidance for the mid- and long term and obviously, as we came out of a strong Q1, we raised the guidance for the full year as well. Now what I will say is that things can shift very quickly. And so what you've come to know from ServiceNow is our transparency and our openness. And so we feel confident about what we're seeing today and the demand environment, but we'll always stay super close with our customers on what they're seeing as well.

And I appreciate that, and that's 1 of the things where if I look back to 2020, well lot of investors know there is a small group of companies in our coverage that never pulled their guidance, right? You communicated what you saw in real time. You adjusted accordingly, but ServiceNow is 1 of the few companies that I cover, at least that maintain guidance all the way throughout we've seen your playbook in times of uncertainty. So maybe just to follow up on -- in terms of what you're seeing, is there anything different that you're seeing from existing customers, which are a really big source of your growth in any given period versus maybe new customers that you're trying to acquire and bring into the ServiceNow family?

I mean we talked last week about the fact that 88% of our net new ACV last year came from existing customers. So our land and expand motion is going strong. That being said, our new logos are growing very well as well. We've been really focused on ensuring that we're growing the right new logos that can continue to expand with us and not just the number. And so from our perspective, it's always easier to land new with existing customers when we have such strong expansion and renewal rates, right. The customers who know and have seen the platform and the quick time to value and what we can provide from a cross enterprise perspective is why you continue to see 125% expansion rate at our scale. That being said, our new logo growth has been strong. We've been really feel good about where that where that lies and that new logos are always important to us and will remain important.

Great. And then I promise this is the last kind of macro-related question and then we'll move on. But the company on the last earnings call mentioned a couple of deals slipping in what was overall a very strong quarter. So it would have been even better, if not for that. So just should we think about that as, hey, that's going to happen in any given period, you're dealing with large enterprises or is there anything worth calling out? And how we should think about that?

No. I would say there's always deals that slip into a next quarter, like that's just the game of software and not surprising. The bulk of them in Q1 did happen to be in Europe when it was right after the Ukraine and Russian conflict started. So when I got the question, are you seeing any sort of impact? Again, in full transparency, we wanted to say there had been a couple of slipped deals, but we were able to offset that -- more than offset that with strength elsewhere. What I can say is that some of those deals have already closed in Q2. So we feel good that there's not an issue that demand is going away and deals are not happening. But some companies are putting an extra layer of approval. So things are taking a little bit longer. So far, that continues to be the trend. We don't see anything major in demand. Our pipeline remains robust. I'm as confident today in my '22 guide as I was at earnings.

That's great to hear. I heard the typing getting a little faster out there when you said that. So maybe if I pivot, we're just coming off of knowledge. Analysts were allowed to attend the user conference the next day and even at the Analyst Day, the company walked through all of the different products and the relationships with its customers. I think 1 of the key things we took away was Service has a relationship with large enterprises has really evolved over the last several years. And it seems like you guys are much more of a partner with your customers versus a vendor solving an individual problem. And so just what's your perspective on that and how that relationship has evolved with your larger customers?

I think our relationship with our customers has always been really strong, but it has certainly evolved over the past couple of years as we've been really leaning into solution selling, right, and not just selling point products, right? And it's all about the benefit that the platform can drive cross-functionally across the enterprise. And so customers are really understanding that. And we have a leg in with the IT organizations because we are and have been the trusted IT platform for IT, right? And so as IT is becoming more and more of the business, they're opening doors for us outside of IT into HR, customer service, for example. And so the understanding of what ServiceNow can deliver as a platform is becoming more and more relevant and more resonant with our customers today. So I think that's why you're seeing some of the great success that we've been having. It's why you're seeing deal sizes continue to grow. It's why the number of products in all of the new lands continue to increase because we're actually selling a platform solution and not just point products.

So when I think to the analysts last week, there is a slide there, I think it was a pyramid that showed just the evolution of $1 billion plus $5 million, $10 million and now we're talking about $20 million plus customers and the company gave some like a framework on where that goes over time, and it really seems like that's accelerating. Is -- you guys mainly deal with large customers? Is there anything that precludes a lot of your base from getting to that size over time? Or is it just a matter of time that you can grow even within the base and get more customers to that $5 million, $10 million level?

Yes. There's a ton of opportunity and many of our customers have the ability and opportunity. And if you think about the TAM for these customers, there's no reason why we can't exceed even those numbers that we put out. I think we talked about not this past week, but a year ago, just based on our current product portfolio and our current customer base, we see 5x potential opportunity as we think about the size of our customers. And so our current product portfolio and current customer base has so much runway and opportunity in front of it. So that's what -- that's part of the confidence in raising the guidance last week for the short and midterm, even amidst an uncertain macro environment.

So you mentioned the product portfolio, and so maybe I want to like unpack the different parts of it. IT, we're not call technology workflows has continued to grow faster for longer than I think anybody anticipated in. I know you're probably tired of getting the question about IT, given how much market share the company already has, but what do you think investors are maybe missing? And why has it been so much more durable than maybe -- or why do people underestimate how IT's runway has been?

It's interesting. I've learned because I wasn't around when we IPO-ed that Gartner estimated the total addressable market back when we IPO-ed at just $1 billion, right? And so clearly, we've had significant incremental addressable market grown just by virtue of our products. And so I think what you're seeing, and we talked about this not just with ITSM, but our emerging technology products within that workflow over the past 5 years have grown in excess of 50%. If you layer on top of that our core ITSM, which we've expanded into premium SKUs like ITSM Pro and enterprise, which enable incremental capabilities on the platform, you're continuing to see evolution and just increase capacity, increase innovation, that's just helping our customer journey. And so the market has always underestimated the size of that prize. What I would say from an opportunity perspective, while we're most penetrated in the U.S., there's still significant headroom in the total number of enterprise customers even within the U.S. and then take international, where I would say we're very early days in both EMEA and APJ. The opportunity even just within IT continues to be strong. And then you layer on the additional workflows, HR, customer creator. We talked last week about only 10% of our customer base have all 4 workflows. So if you think about the opportunity, not only in the core but cost platform, it shows you the size of the price.

And I think the size of the price, as you mentioned, last week, got bigger. And I want to maybe stay in the technology workflows because 2 slides that really stuck out to me were the discussion around process mining and then the ERP workflows that the company is introducing. So I'm just curious, how should we think about how much stronger that is? And where are you at today in process mining? And where is that maybe being used within the ServiceNow ecosystem?

It's early days. So process mining was rolled out, not even a year ago and as part of our enterprise SKU within IT. And so it's our premium. If you think about good, better, best, it's our best. And so process mining, workforce optimization are part of the incremental capability in the enterprise SKU. Very early days. We talked last Investor Day about potentially that becoming 20% to 25% penetration over time. But again, super early days. We'll continue to innovate and grow there, but it's an interesting space for us to be and the capabilities are great, the customers really enjoy it. But early days, early penetration.

It's going to be an ERP which Bill really sounded very excited about it, now that maybe is SAP. His days at SAP that makes him feel that way. But just how should we think about that pivot and that kind of greater focus on ERP workflows? And how does that work with the SAPs and Oracles of the world?

Yes, it's a great question. So if you think about customers who have obviously invested tens and hundreds of millions of dollars in their ERP systems, the ability to add on an engagement activation layer on top of it to really help drive employee and user engagement and experience is pretty compelling in this day and age for the war for talent and where employee engagement is so important. If you then tack on what's going on in the supply chain world. So we talked about kind of procurement operations and that being the first launch. If you think about what's going on in the world with supply chain and customers and companies really need to rethink their supply chain. Add on to that the layer of ESG and climate regulations and the compelling and often aggressive targets that companies have put out there for climate, most companies, a big chunk of that is all about supply chain, right, and how are they going to effectively drive supply chain. So there's a lot of opportunity as people start to really lean on supply chain, and that's just 1 area where we really help and make a difference. And so thinking about customers getting more value out of investments that they've already made, not having to rip out and reimplement but just really help drive that incremental productivity is something that ServiceNow is known for throughout the organization. So this is like a pretty natural adjacency for us.

Helpful. Maybe switching gears and moving away from the IT side, ServiceNow has built 2 other really large businesses, right. And you've seen HR service delivery a category that didn't really exist if you like, before you guys moved into it and same thing with CSM. The company has said that you think that those could be $1 billion-plus revenue streams over time. Maybe how should we think about how do you successfully scale those and get them to where maybe ITSM is today? And what gives you the confidence in that?

Well, I think if you think about the success that we've had, we absolutely think that these are our next businesses. CSM is already at -- I talked about last week and then create workflows at 650 and employee at 5. So if you think about those businesses that didn't exist just a couple of years ago, it's more about the power of the platform, right? If you're the trusted, secure, scalable platform of the IT organization, well, doesn't it make sense to use that same platform across the enterprise as you think about HR service -- customer, service delivery. And then if you think about customers that digital assets are their business, you can tie the customer service side to -- then your customer service representative can actually solve problems within 1 system for the customer real-time quickly. It's again more of the better together story. It's more about solutions to help customers solve all of their problems. And so I think that's why you've -- success. Certainly, if you think about the market for customer service is enormous, that will probably get to $1 billion first. But employee experience and employee engagement, I don't know about you. But I mean every conversation I have with any customer is talking about that today more so than ever. So there's a lot of room for continued growth, a lot of room for continued opportunity on both sides.

It's not just customers. I mean, it actually -- it's -- I'll jump ahead to a different question out my list, but it's even the President is talking about it, right? So there was an executive order telling federal agencies that they need to modernize the experience where you're treating citizens or residents of the U.S. as basically giving them a consumer-like experience. And I know ServiceNow recently also got a higher level of certification for doing federal workloads. So maybe just -- I think that's a good pivot to what's been going on in the federal sector? What has positioned ServiceNow so well there? And how do you see that maybe over the next kind of 12 months?

Yes. So the federal space is probably the first vertical, right, that ServiceNow heavily invested in years ago. So we have a real a real strong customer value proposition for the federal business, and they know us already. That's the first part. The second part is, in all honesty, I think the government was caught a little flat-footed in COVID, right, in how to approach citizens and how to deal with it. And so I think that mandate coming through now to really digitally transform is absolutely helping to drive continued expansion in the federal market. And I think as any citizen should be, I think we're really pleased to help them along that journey and along that path. As we think about really helping our customers evolve, this is a great area for us to focus on. And yes, we did also announce we had IL-5 certification, which we're only 1 of, I think, 3 software companies to get that certification. And it means that the DoD can put sensitive information within our platform that just helps open up more addressable market for us in the federal space. So really excited that the budget was finally passed. Obviously, it takes time to trickle down through. So what it will lead to is likely, yes, another back half-weighted federal business, but we are very well positioned and working with all of our federal customers as they continue to evolve in that space.

Great. And then maybe just -- is that a different go-to-market motion than a traditional enterprise customer that you have? Or is it fairly similar?

Motion, we definitely have a dedicated federal sales team that knows the customer that builds those relationships. But the sales motion is similar for the most part. Obviously, the approval processes in the federal government are different than in a normal enterprise customer, but the sales motion itself is very similar.

Got you. And then maybe I'll broaden it out a little bit to go-to-market more generally. The company has been hiring aggressively. You guys invested through COVID in sales and marketing. Maybe just how should we think about in this type of environment, the ability to attract and retain sales and marketing talent, maybe even talent more broadly?

Yes, it's a great question. So we increased -- so during COVID, we continued to hire salespeople and fingers on keyboards, engineers. I think in 2020, we hired 26% new. Last year, it was 29%. Q1 was 28%, even in this tight tech environment. I think that's a testament to the incredible culture that ServiceNow has. We will continue to drive that same thing, right. We will continue to really lean in. I talked about earlier this year, the expectations that headcount would increase in the mid-20s. Right now, we're continuing on that trend. From a macro perspective, if you do see us pulling back anywhere would probably be on back office, if need be. But right now, no plans at this point.

Understood. And I think 1 of the big things for ServiceNow is go to motion that's really helped is as you've grown as a business, it's gotten more complex. You have different pricing models for different products. It's not just seat based. Maybe help us understand how, whether it's Buy With Now or some of the other programs you put in place that have helped reduce some of that friction or maybe easier for your large customers to add new products and to grow with you?

Great question. So we put in place a pricing kind of team back in 2019 to really help address some of the friction that we were seeing as we were growing and scaling and moving out of just point product solutions. I think we've had real success, and it's about simplifying the buying process. It's about helping them get to value quicker. It's about bundling solutions, right, to really help drive value and that has helped us. The Now Buying program as well, we implemented back in 2019. And we've seen real success. ACV With those customers is much higher than our normal dollar plus customers. And we actually see a 14-point increase in NPS and customers have been bought through the Now Buying program. So again, we'll focus -- hopefully, what you're hearing is a real focus and continued focus on the customer, really helping them get to outcomes and solutions faster, really helping them drive a more frictionless process in managing that renewal or that buying cycle.

Great. And maybe just -- I think we have time for a couple of more questions. One of the most frequent asked questions is around competition, and I think less on core ITSM, given how dominant ServiceNow is there. But just as you've expanded the product portfolio, I think you're touching other areas, which maybe make you competitors with vendors that you didn't traditionally compete with. So just how should we think about ServiceNow in terms of partnering with a lot of technology companies? And how is the competitive environment changed over time as your product portfolio has expanded?

I mean as you would imagine, the competitive landscape has changed as we've brought in our product portfolio outside of IT. What I would say is that we differentiate ourselves in that we're the only end-to-end platform that can really help drive some of action and engagement across the enterprise, whether you're dealing with IT, whether you're dealing with HR, customer service, legal, procurement across the board. And so while we certainly have seen a different competitive landscape, we continue to do extremely well because of that differentiation that we have from the platform perspective.

Great. I'm going to ask a question that everybody is legally required that I ask this next question, you know what it's going to be M&A. So the pace of tuck-ins is slow, but you guys have always been smart about it. You've rewritten them back into the code base and I think been opportunistic. We get asked a lot of times, whether it was Bill addressing it at the Analyst Day last week or in other conversations? Just how is the company thinking about M&A? And maybe just what's the overall philosophy? And has it changed at all given what's going on in the broader market with multiples?

So first and foremost, from a capital allocation perspective, we're investing behind growth. We always have and always will. When it comes to the particular conversation around M&A, you'll continue to see us do the smaller tuck-in talent type of acquisitions that we replatform on our platform to really help drive that strong customer value. The bar for any larger type of acquisitions is just very high and it would need to be super relevant and add a ton of value from a customer perspective as well as a shareholder perspective. So Bill and I have said from the get-go that we wouldn't be doing our jobs if we weren't looking and seeing the landscape, but our strategy has not changed, and we don't currently have any plan anything hugely transformational at this time.

Great. Maybe just 1 last question. I think everybody appreciates ServiceNow's balance in investing for growth, but you guys have great margins. You also addressed it last week at the Analyst Day. Just help us understand how we should think about maintaining that strategy? And I know you just revised the guidance, but how should we think about maintaining that even if, let's say, there's a slowdown? Or if there's any changes, just how do you maintain that balance on growth and profitability?

I mean I think you can see from our history that balance of growth and profitability has been a real focus for the company even before Bill and I explained and will continue to be. It's something that we feel is really important. We're very disciplined on how we think about investments. But at the same time, as I talked about earlier, the opportunity -- we're not opportunity constrained. So being smart about how we're investing, we will continue to do that. So I raised the guide slightly to 27% by 2024. I won't talk after that because it's just too far out, but you would expect that you'd continue to see a similar discipline in our approach and a similar balance in our approach in both top and bottom line.

Great. I know you really wanted me to ask you about CRPO, but that's all the time we have for everybody. So thank you, Gina, so much for joining. Thank you so much for joining us. We really appreciate you coming here.

Thank you so much. Thanks, everyone. Bye.

Thank you.