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

Okay. Good afternoon, everyone. I am Mark Murphy, software analyst with JPMorgan. And it is a real pleasure to be here with CJ Desai who is President and the COO of ServiceNow. First of all, CJ, it was great seeing you on stage at your own conference.

Thank you.

Last week out of Las Vegas, and thank you. I know you're a popular guy, there's a lot of demand for you. So thank you for taking the time to be here.

Of course, absolutely.

Maybe you can spend a moment just giving us a super brief introduction of yourself and in case there's anyone in the audience who is not aware of what ServiceNow does. Just a super quick brief introduction.

Of ServiceNow as well?

Yes.

Okay. I'll start with ServiceNow. ServiceNow was created in 2004 in San Diego area by Fred Luddy. And he created this as a platform company for any type of workflow automation. So any task that can be automated digitally, he wanted to do that. ITSM, which is our largest product line, was actually the first demo that was created on top of ServiceNow and became the first biggest use case to get to $1 billion in revenue. So that's how Fred started the company. After that, Frank Slootman became the CEO. Frank hired me in 2016 and said, "CJ, we need to hit $4 billion in revenue by 2020." That was Frank's call with Mike Scarpelli who was the CFO at the time. And then after Frank was John Donahoe. John stayed with us through 2019 October. And then Bill McDermott came from SAP to take ServiceNow to the next level. And Bill has been here now 3.5 years. I'm CJ Desai, and I'm responsible for products, engineering, our cloud, customer service, professional services and a few other things.

So thank you. That's a wonderful overview. Thinking back again to last week on stage, Bill McDermott was there and he said, this is the quote, "ServiceNow is the intelligent platform for digital transformation, but people still ask me what does ServiceNow do?" and that a lot of people still don't know. So for this audience, we hear the term workflow often. We hear the term orchestration layer. Amazon and Microsoft would also say, right, that they can handle some workflows. They would also say that they're a platform for digital transformation. So when you look out at this audience of non-IT professionals, how would you convey this differentiated role that ServiceNow has in the IT landscape?

Yes, absolutely. So many companies will claim that they are a platform company, that's okay. And they'll say that we also do workflow. And then the term gets used fairly generically at times, Mark, like you said. Here is how I would describe it. If we take just a simple example that an employee at your firm wants to move -- we are in Boston, so let's use as -- Boston as an example, from Boston to San Francisco. If an employee moves at a bank from Boston to San Francisco, there are so many departments that get involved in making sure that transfer happens, the mobility team from relo, is the payroll going to be different from Boston to San Francisco, is the department changing, the cost center changing, is the employee's role changing as she moves to, say, San Francisco? When you think about all of that at a corporation, these are complex workflows that need to be executed digitally for that transfer to happen. And even once the employee is transferred, the first 30 days, 60 days, 90 days in the new role, what are the to-do list, training that, that employee has to go through? These are very complex workflows that go across departments in an organization. The employee doesn't care. The employee sometimes don't even know that, that's the name of the department, that's mobility, which will help the employee with the relocation. That's just the example of an employee just moving from one city to the other. You can think now more complex scenarios in IT landscape that a payroll system is down, why did it go down? What was the root cause? How can we get it up and running? And all that storming and forming happens in ServiceNow from an incident management -- major incident management perspective. These are extremely complex workflows. And workflow is nothing but a task orchestrated in a certain sequence across systems, across clouds, across people to get work done.

Okay. So you used this term storming and forming, and I like that one. ServiceNow has been storming its way into our CIO surveys now for -- really, if you look back since 2011, right? The company was still private. ServiceNow would rank consistently near the top in our survey work on -- we would look at the spending intentions, we would look at the linkage with digital transformation, we would look at who's going to be used for cloud. How would you describe to this audience what is it that has vaulted ServiceNow into that kind of a position? And then, how have you maintained that also for quite so long?

Yes. So one of the things is, when the company was created -- and most people say it, but a very few do it, the focus on the end customer and end user for use cases was very special and continues to be special at ServiceNow. We do not sell to small enterprises as some of you, if not all of you know. We only sell to upper end of the mid-market to large, to very large, to governments. That's our segment where we do business. And we are very focused on making sure that our customers get value out of any use case, whether it's ITSM or whether it's HR service delivery or customer service management. And if you look at our renewal rates which are best in class, the reason is we work very hard with our customers to make sure they get value out of the platform. And even if we decide to go after certain use cases, that use case is something that they can truly see that ServiceNow -- like I want to, Mark, give an example, when we entered the HR space, they said the same thing, "Hey, you do IT. Why HR?" And we said, we are not system of record. We do not want to be system of record that SAP, Oracle, Workday and others do, that's great. We are the workflow or the system of action layer so that when the actual work that needs to be get done for an employee that spans organizational boundary outside of HR, that's what we do. And we proved that. And now it's a decent-sized business with north of 1,000 customers for us.

Decent sized?

Yes.

So we're commonly hearing out there when we do our field work that once you win the hearts and the minds of central IT within these big organizations that you're targeting, that then it becomes very easy to expand outward into the other business units. You just mentioned HR. But people will mention legal, they'll mention customer support, finance and so on. Can you shed some light on the mechanics of that? In the trenches, how does that IT stamp of approval kind of help grease the skids for ServiceNow so you can spread out across the business units?

So a lot of you have been observing technology industry. Mark, I know you have done a lot of work, including the service you mentioned about intentional spend, security being one and a few others in the past on JP's surveys. But one thing I'll tell you that over last 10-plus years, the number of times I have heard, which has not turned out to be true, that CIO is irrelevant. The -- it is all about the developers, the spending is moving to developers. Yes, it is true that some technology spending does move to developers. Developers need to be productive, get it. So to answer your question, CIO, where we chose our first use case at scale, which is ITSM, beginning of the last decade and has continued to grow, that is our core buyer. We have won hearts and minds of CIO. And around 2016, 2017, CIO became aware that ServiceNow can be the ERP for IT. And that's not a small term because a CIO's job is pretty broad: keep systems up and running; create new digital services; serve lines of businesses, whether it's HR or sales or whatever or finance. And we very much focused on CIO being the core of the core, and we were selling to the CIO versus somebody will sell to Chief Revenue Officer and the CIO has to run a CRM system. Somebody will sell to the CFO, let's say, a financial system, that's the buyer, and the CIO has to run and operate that versus we had actually product selling to the CIO. So CIO -- because we became the ERP for IT and we have never lost sight of that core buyer and that core stakeholder. And so once you serve the CIO saying, "Hey, we are here for you. We are not here that we are trying to sell to HR or finance like the HCM system of their CFO," that gave us permission to say, "Hey, Ms. CIO, can you introduce us to the CHRO?" And again, you are going to leverage the ServiceNow platform that you have been leveraging for HR use cases. You are going to leverage the ServiceNow platform for customer support. And that's what allowed us to gain permission to go to other buying centers.

So another element to this that has caught our attention for a long time is the fact that you do have a very integrated platform. Out there at your event last week, I was speaking with one of your very largest partner firms, and he was actually describing what you were just referencing. He said many companies have done ITSM, right? And now his term was -- he said they're workflow-ing out. They're workflow-ing out from there across the rest of the company: HR, legal, finance, supply chain security. The quote was, "It's exploding in so many areas and they're succeeding with it." And I stepped back and I said, "Well, but how? How can this company succeed in so many different parts of the organization?" And he basically just said, "Integrated platform. Integrated platform, people want that." So can you speak to that part of the philosophy? It's kind of been guiding ServiceNow in a unique direction of integrated platform. And then what are the advantages that it affords you that might not be clear to people in the audience?

Yes. So for customers, like this partner told you, it's workflow out. For us it's platform out. So you start with the platform as the core and some of the mechanics that I shared -- because a ServiceNow platform has user experience built in, machine learning built in, workflow built in, RPA built in, process mining built in. All of these are, think about, building blocks that are part of the ServiceNow platform. And now when we decide, as a company or as an engineering team, that we are going to go after a supply chain use case, what I shared is that, with one or two scrum teams, somewhere between 7 to 14 to 15 engineers, because the platform provides all core services, we can create a version 1.0 of any use case for, say, a supply chain department. And then from a customer perspective, customer says, we use you for ITSM. Are you telling me it is the same mechanics when we roll it out in supply chain, your portals, your workflows and others? We say yes. And all the user access model that you have built in, security that you have built in will just extend. So you're not installing yet another platform and you don't need to install in yet another team to scale that platform.

So this platform keeps broadening. I think at the last update, CJ, we were told there are 11 organic businesses with over $200 million in revenue. So it's becoming actually pretty diverse. If you had to pick one or two of those and say, do your work, keep an eye on this because there's nascent potential here and this is going to be a durable compounder, where would you tell us to look?

I would say the same thing, I think, I said in 2017, which was now 6 years ago. To start with, customer service as an area. We are ServiceNow, customer service, ServiceNow, service. That is a large TAM. And when you do industry-specific customer service like a telecommunications or a financial services, we believe that the market is large enough and this can become a massive business for ServiceNow outside of IT, so that's number one. And number two is we just entered last year what you called our finance and supply chain workflows. Again, we are not trying to be system of record. But specifically, workflows for procurement department or a supply chain department or a finance accounts payable department, we believe there is enough pain points that ServiceNow can solve. That's another area that has potential -- it's an $11 billion TAM is what we disclosed last week, but it has potential to be a very large business.

Okay, so -- well, you gave us a couple of areas to focus on and do the work. I do want to ask you about HR in addition to this. So I recall, CJ, this was several years ago, I traveled out to the HR Tech Conference. It was probably in Las Vegas. And I -- it had been a long week. I walked into the partner pavilion, and I immediately saw a ServiceNow booth. Big booth right in the front, very crowded. And the -- I had a brief moment of figuring that I somehow went to the wrong conference, right? I didn't know about it then. And last week, we were kind of milling about and talking to multiple partners at your event. And several of them called out HR as their #1 growth vector. And so -- and they're saying that they're getting inbound requests on the HR side. Could you help us understand then why is HR a logical extension for you and maybe which pieces of that are resonating?

Yes. So first of all, just at the highest level, the good news for us is we have divided our product lines in 4 big buckets: technology workflow, employee workflow, customer workflow and creator workflow, right? All four of us -- four of those workflows are growing nicely for us. So we don't have this challenge, oh, one has -- is declining, and we need to move the R&D and other allocation to the other area. All four are growing nicely, all four of them, okay? So that's number one. Number two, HR, which pretty much in its earnest, started in 2016, where customers said, hey, for HR case management, onboarding type of challenges or offboarding challenges, ServiceNow can do this thing. What has resonated the most is an employee, in trying to make that employee productive, is something that always has been our focus and take friction away. To give a very simple example, think about a large bank. And if you want to get something done for -- with the finance department, you go to somewhere else. With legal department, you go somewhere else. With your facilities, you want to go somewhere else that, hey, I became a manager, I need an office. We provide a single portal for employees -- because employees at the end of the day do not care what the org structure looks like. Okay, there are four lines of businesses, and there is this HR function. They want to go to one place to get help and they want one place to get things done. And that's what we have done with HR products.

So you're mentioning the employee portal or I think you call it employee center at times.

Yes.

You have onboarding, you have that piece and then you have this HR agent type of a work space. Where do you think it would expand beyond that? Or is there enough to be done there for a while where it's not necessarily going to be expanding?

So we are expanding on making life easier for managers to manage their employees and what are the workflows required for managers to deal with. Skills is another area that we launched last week. On every job function has skills, career path, right? You need certain skills to be a manager, certain skills to be a director, certain skills to be a VP, whatever it is, or a software engineer. How do you do that skills mapping? How do you have the conversation with your manager in a meaningful way? And that's another area of focus for us. And then because of the pandemic, what has also happened, as companies have tried to figure out this hybrid workplace where some will say, we allow our employees -- or we mandate our employees 2 days a week, some will say 4 days, some will say all 5 days, it varies. How do you do facilities management and how does employee get that experience that if I'm only coming 2 days, that means I don't have a desk that is assigned to me because no corporation will assign you a desk if you're coming 2 days. So can I book something? Can I book a conference room? Can I look at the maps? These are other areas within employee experience standpoint that allows us to expand.

Okay. So you just mentioned the pandemic. And when you think back on this -- if you think back 1 year at this conference, that was the time when we just started to have a few software companies that began calling out some challenges in the demand environment, right?

That's correct.