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

Welcome, everybody, post lunch. We're going to keep things lively and interesting, and we'll keep you on your toes. I was telling Nick at the time, I know 30 minutes is not enough time for what we can cover here, but I will try to leave a minute or 2 at the end for questions. So get a good one queued up for Nick, and we'll see if we can't carve out a minute or 2 at the end here. So thanks, everybody, for joining us. For those who don't know me, I am Matt Hedberg. I cover software. I've been covering ServiceNow now for a long, long, long time. And my -- the way I think about stocks, I always try to find the next ServiceNow. I think ServiceNow has really been the blueprint for sort of excellent companies. And so I think you guys have blazed a really strong trail. So we're excited to have Nick Tzitzon here. You are -- your title on the website is Global Executive Committee member, but it basically means you're part of the executive committee.

That's right.

What does that entail? It feels like your job is super important. What do you do on a day-to-day basis?

That's a great question. First of all, Matt, thanks for having me. Thanks to you RBC. Great conference. Darren Yip who runs our Investor Relations team has been on the firm longer, does a great job. Alex is here as well. I appreciate everyone's time. Basically, all companies have a C-suite, right? And ours is a great team. We've given out a lot of C-suite titles and, literally, there are none left. So as a member of the executive committee and the person who is closest to the CEO, I willingly forfeited my rights to a C-suite title. So I help orchestrate a number of different functions, the marketing function, the corporate strategy function, the corporate development function. Lots of different teams roll up through me, but I've given them all, but a good title.

Yes. I mean -- so you always keep them guessing then, right, internally? You're like, I'm important. I'm part of the executive committee, but, yes, you ran out of C-suite titles.

It's an industry full of really ambitious people. So there's precious few things you can actually give away to keep people engaged. People want money and they want title, inflation. So...

Yes. Here we are.

I'm happy to give away whatever I can.

All right. Well, you're selfless in that sense. So maybe for those that don't know you as much, maybe a little bit of your background and sort of what you -- how you're helping bring ServiceNow to continue the journey that's been underway.

Happy to. Well, I actually started my career in the public sector a long, long time ago. But most recently, spent 8 years at SAP. Bill McDermott, obviously, was the CEO there. He and I built a very close working relationship. So when he left SAP and came to ServiceNow, it was a fairly easy decision to see the second movie with the same director, as I like to say. Bill is a constituent of one in my mind in enterprise software. I think he has mastered the art of building and leading great software businesses. It's a very lonely job to be the CEO of a software company. So he and I have a very high trust relationship. He counts on me to help him recognize all the different pieces on the chessboard, where those have to move, who needs to be in the room at the right times. When you're doing really well, I think to ServiceNow, the entire team's credit, there's a lot of different inputs, a lot of different ideas of where the business should go. And helping to distill those down to the actionable few things that we use to stimulate the next phase of growth. Those are the kinds of conversations he and I often do together.

One of the -- as I reflect on your quarter, which seems like a long time ago at this point, but obviously it was a really strong quarter, strong outlook, the execution has been just so crisp through some really challenging times. And reflecting on what Bill said, one of the things that really stood out to me is, in a post-COVID world, it's not about just taking orders. It's about really selling ROI and value-based selling. I mean to me that really seems key too. The strong execution is really a byproduct of what you guys are delivering for customers. So talk about like from your vantage point, how does that resonate with customers?

Yes. I mean, like the easiest way to proxy it is that we've been through several different phases in enterprise software and technology deployment, right? You went from on-premise to public cloud. You went from public cloud to hyperscale, cloud infrastructure. You're now in this new phase. The main headline is probably GenAI. But if you think about it, it was IoT before it was that. It was distributed ledger for a while. It was RPA for a while. So really this latest phase is fundamentally about have any of the previous phases actually helped these businesses to run better? And where are the opportunities that C-suite technology buyers are finally ready to say, "I just am not getting the outcomes I thought I was going to get, and I'm ready to try something new?" We have, I think, positioned ServiceNow very well at the absolute tip of the spear of, there is a better way, there is a new phase of enterprise technology, and we are prepared to help our customers, particularly our core buyers, lead that new wave.

So there's a lot of like subtopics that I want to cover here, and you mentioned AI and that's with Now Assist, it's been really an incredible adoption curve there. Bill, his -- when he talks, it's hard to not get excited about a lot of things. I guess from your lens and being as close to Bill as you are, and you sit back at all of the S curves that sit front of ServiceNow -- just with sort of a very high-level question, what excites you most about the future of the company right now?

I think if you were to say ServiceNow has been on a journey to go from sort of the core buying center where we're most historically known, right? The IT area, and we were taking that core business and expanding around the edges of it to go to different buying centers across the enterprise. What excites me the most is if you took that core ServiceNow installed base, and you layered it on top of the expanded portfolio, we are still barely in the early days of cross-pollinating the different solutions to all the different buying centers. So we've had a lot of success just in the last few years of stimulating more platform adoption than just individual workflow adoption. And we're in the early days of that. So like even if all you did was concentrate on getting the core installed base to gradually adopt more of the perimeter solutions, you would still have a really fast-growing company for the immediate future into the foreseeable future. Then you add all the accretive elements to it, the GenAI, the workflow data fabric that we just announced, there's a lot of things on top of just the basic blocking and tackling of taking the installed base to the next level.

Well, I think your second customer just crossed through $100 million of ACV, which is no small feat. And to hear that you feel like you're still relatively early in that kind of that customer penetration, is super exciting. I want to talk about AI in one more second, but I just want to double-click on the sales motion because I think it's an important piece. We've seen a lot of Chief Revenue Officer turnovers. We've seen a lot of companies have to change how they sell in sort of this new normal that we're in now. Because from my perspective, I guess I can't illustrate how important I think it is to really sell ROI and to sell value. Talk about then when you're talking to customers, are there others that are like that? Because it really feels like you're somewhat unique in the fact that your model is effectively built for the future, whereas the other companies are rearchitecting their sales organization?

I certainly think that the ServiceNow value proposition is sort of made for the moment. But I also give immense credit, and I give credit to Paul Smith who runs our field operation. Bill has set a tone that making and beating our numbers is not a sales responsibility in our company. This is an enterprise-wide focus. So all of the different pieces that exist in the ServiceNow organizational construct, whether you're building products, whether you're marketing products, whether you're professional services offering, whether you're running ServiceNow software inside ServiceNow, the expectation is that you are market-facing, that you are customer relevant so that as our customers prepare to get into a software buying cycle, all of the resources of the company exists to make that conversation valuable for them, which I think accounts for a lot of the success we see.

Workflow Data Fabric is super exciting, but I wanted to first touch on AI and Now Assist has had some incredible growth. It feels like that business is near $100 million of ACV. Can you give us some tangible use cases of why that product has been growing as rapidly as it has? Because it really feels like around this conference, AI and GenAI has been a theme for every conversation. It feels like very few companies are at the point where they're actually monetizing it yet. And it feels like in some regards, ServiceNow is a bit of the easy button on. This is a great way to employ Generative AI early. Talk about why that's resonating?

I think, Matt, a lot of times, when there is a cutting-edge new technology, the industry almost as an over rotation makes the mistake of saying, "Oh, we can finally cure every terminal disease that was ever created." And people sit back and they go, "Yes, okay, but wait a minute, it's still pain. You have to do basic stuff." So I think that the ServiceNow strategy with Now Assist has been very straightforward. We would rather a customer show up 6 months later with an actual discernible value lever that's been pulled. So let's just say you're talking about your agents who are doing customer service. If you can peel off 25, 30 minutes of their day because the Now Assist will actually compose the resolution summary for them, and they don't have to do the work and then write a memo about doing the work, then you're actually going to create capacity in your current resourcing that you didn't have 6 months ago. That may not like shatter the front page of the Wall Street Journal, but it's going to signal to the buyer, whether that's the CIO or the Head of Customer Service and the user that you can actually get productivity boost from using ServiceNow and Now Assist. That sets us up for accelerating the cross-enterprise deployment because you have proof points where people actually point to it and say, "Hey, before, this was miserable and I hated doing it. And now the AI actually does it for me." I'd rather have 100 of those than one really sensational large story that makes it hard for other enterprises to replicate. Does that make sense?

It totally. I mean it really feels like Copilot -- the way a Copilot was built -- was intended really to help some of these knowledge workers do their daily job, do them better. One of the early arguments that it feels like you guys have tamped down is that, well, if these employees, if these knowledge workers are so much more efficient, does that hurt seat count growth? Does that hurt the expansion? Talk about why you don't think that's the case.

I think there's more work to do in most of the organizations that we serve than there is time and capacity to do it. So the question, first and foremost, is if you free up time, you create business value. That business value exists not only in the time that you save, but the new work you've empowered the organization to do. So we're recognizing increasingly that people say, ServiceNow can do all kinds of things we wanted and all kinds of processes. But part of the reason that people don't actually use more technology is because they're busy doing these old things manually the way they've been doing them for 25 years. Well, flip the switch, put the AI to work to actually free up human capacity and human capacity doesn't exist as just a basic like "Oh, great, we don't need this many people anymore. We can cut costs." We'd rather reinvest that talent to do different kinds of things. So if you take a growth mindset to this, I think a lot of organizations wish they had resourcing to do things that they haven't historically had resourcing to do. We're actually giving them that capacity. So I actually see it -- I see it as accretive. I actually think it adds more ServiceNow capacity and appetite to our customer base than it does to track.

And then within the various verticals within an organization, whether customer service or HR, finance, where are you seeing some of the broadest adoption of Now Assist thus far?

I mean it's obviously a big success story in the IT side because that's the biggest segment of the installed base. I see a lot of it on the employee experience side. If you just think of the employee onboarding use case, one of my favorites. So if you onboard a new employee, historically, we've all joined employers. You get a stack of forms that you're supposed to fill out. Now at some point, they made progress, you can DocuSign or digitally sign some of them, but you still have to do every single thing piece by piece by piece. In the ServiceNow use case, you get a link to the app store to download an app and the entire experience is contained in one user interface. You add in Now Assist to this and any questions you have, any engagement that you need to help you through the process, you can do digitally with a virtual assistant with Now Assist. So you don't actually have to have human capacity to help somebody understand where do they get more information on the health benefits plan. You simply ask. The conversational interface is much more natural. People more likely to get the results they want. Deflection is higher. Productivity goes up as a result.

And then it's like a theme from the call too. It sounded like there was some incremental work to be done on pricing and packaging still within that. What could we expect from that?

I think it's great that we got Amit Zavery. He's got the exact combination of experience you would want. It's a major interest of his. He's doing a considerable deep dive on it. I've been saying, Financial Analyst Day, I would expect us to have a fair bit to say on how we're thinking about pricing strategy for the next 3 years. I wouldn't want to get too far ahead of it. Suffice it to say, there will be some experimentation, and I'm sure he'll have a lot to say.

And it feels like to me, I'm just thinking how early this is. The hallmark of 20% organic growth feels like the AI -- I mean we haven't even talked about some of the other growth drivers, but it feels like Now Assist and the broader Pro Plus upgrade cycle could last for 5, 6, 7 years from now. Let's talk about Workflow Data Fabric. I mean I think that's the one that really excites a lot of people because it feels like that's another S-curve to think about. For those that aren't as familiar with it, talk about what that is and what it means to ServiceNow and your customers?

So if you're familiar with the core ServiceNow workflow proposition, which is effectively like you want to build a new workflow or a new process automation, it's going to pull different processes and different data points from all these other different systems that you run. And part of the value of ServiceNow and Workflow is that you can create a consistent consumer grade UX over a mess of different systems, so that the user who's actually benefiting from that process doesn't have to swivel chair from one system to another system, to another system. Well, the same thing is true in data. Over the years, as data creation has skyrocketed, I mean, every year, businesses, organizations in the public sector are creating infinitely more data than they did in the combination of the years before. So the necessity of a growing market in data management is real. The question is, when you get all that data, let's say, you put it into a data lake or other kind of a data repository, what are you going to do with it? So the answer is almost always people want to build some sort of new experience, new process, new workflow on top. So today what's happening is customers are saying, "Okay, I'm going to put all my data over to here. Sometimes it's with a Snowflake or a Databricks, sometimes it's with a hyperscaler, sometimes it's in an old-fashioned database." Then they're looking for a process automation solutions separately. What, if you could effectively combine that motion. You can make it easier for organizations to say, take data from any source and then fuse that data into a process using the best process automation platform in the market. That's Workflow Data Fabric. So it's going to take, I think, the same sort of empathetic approach we've taken in the short term. If a company is running a Snowflake instance, if they're invested in Databricks, if they're invested in Microsoft Azure, it's not ServiceNow's position to go out and say, "Hey, turn all that stuff off, you don't need them, come with us." It's our position to say, "Hey, let's make it easier for you to take the data wherever you have it and bring it into a workflow." And because of the Workflow Data Fabric connectors that we have built into the platform, together with the Integration Hub, it just makes the whole thing more seamless. Now, Matt, what you'll get over time -- sorry, long answer, it's a bit of an emerging space. What you'll get over time is that conversations that today are happening in parts of the enterprise where there's like data management specialists, right? Those conversations have been about how do you get the data, how do you store the data, how do you cleanse the data. And then when it's time to actually do something with it, the conversations get confused. If you can get ServiceNow penetrated into those conversations at that level on a data management layer and marry that together with the existing ServiceNow workflow strategy and AI strategy, then you can start to see how a piece of the spend where we're not participating today becomes part of the ServiceNow story in the years out. So I think it's a potentially huge opportunity and it's now up to the early deployments to prove out the thesis, but I think it's big.

Well, it's a control tower for data at that point. What would you envision as like -- what's a deployment going to look like for a customer? Could you get a little bit more idea of like what some of these early wins could look like?

Yes. I mean I think about front office, right? I mean the biggest addressable market in software remains customer experience. So if you're trying to create some sort of a new process around the customer experience, let's say, you're going to try to offer something to a cross-section of employees who are serving customers, you can't just get data from a single source to do that. It's not just in your CRM system, as an example. Some of it is, and that's an important set of data, but there's data that has been pulled out of a CRM system over time that's stored in your data lake. There's data in your ERP transactional system that's on your fulfillment engine. How can you standardize all of those different data inputs to create a new process that's intelligent, that can benefit from AI, and that gives that same sort of consistent experience engaging with that data? Today that offering does not exist in the marketplace with ServiceNow. But the vision and the strategy is to create it. And again, I think for a front-office use case where we know the data sources are spread out everywhere across the enterprise, if you can make it simple and create a single experience where they all come together, that's what people are looking for.

And then how could that be synergistic to the rest of the platform? Because it feels like it's -- it could even lead to some upside kind of the traditional ServiceNow platform?

I mean if you think about the cross-platform adoption today, most of it -- not all of it, but most of it starts in IT. The IT buyer builds conviction on how to do something like shared services or global business services. It goes out to HR, it goes out to procurement, it goes out to finance. The more the Workflow Data Fabric strategy starts to hit the ground, you'll start more actively in other parts of the enterprise and actually start to work in. So right now, what we're doing is working from the core out, then what you'll have in the future with this is the core out and the perimeter in at the same time. So if you can envision a cross-enterprise strategy is sort of an end-state goal of ServiceNow where all these different buyers are using the platform, you'll get there a heck of a lot faster if you can go in, out, in, out, in at the same time.

And like ISVs, people that are building on the Now Platform, to me it feels like that could be another opportunity to see some -- just some innovation from ISVs on the platform?

There's so many new use cases in the AI context. So every person in every part of every organization woke up one morning and somebody above them on an org chart said, what are you doing with AI? And it's like the number of point solutions that now exist that are trying to be relevant, many of those point solutions are actually starting to say, "Gosh, my viability as a business is to actually integrate and associate more closely with a platform that's benefiting from platform consolidation." So we're having a lot of inbound coming from smaller ISVs who were saying, "Hey, we've got some interesting IP to solve this particular business challenge. We actually think it's better for our business to do that on your platform. Can we make magic together?"

And then what about like -- how do you -- how should we think about pricing for data workflow?

I mean that's part of the Amit discussion that we talked about.

Okay. Stay tuned on that.

Yes, stay tuned on it. I would say the industry tends to oversimplify things, like consumption, which is the new and vogue thing, isn't necessarily something that all customers want because there's a degree of unpredictability in consumption. So we're trying to weigh all the inputs from across our installed base and for the prospects. Chances are we'll see optionality in how we think of it moving forward, but more to come.

It feels like ultimately what you guys are building is both the seat-based model with consumption elements. And that really -- that hybrid approach to pricing feels like where the rest of the industry needs to go as well?

Your words, not mine, but I'll take them.

This has gone really, really fast. I'm going to ask you one more and then we'll see if there's a question from the group. I have to ask an election question.

Oh, Please.

It feels like ServiceNow obviously is a big -- the U.S. government and pub-sec is a huge customer of ServiceNow. And it feels like in the spirit of DOGE, it feels like ServiceNow could perhaps even be even more of an efficiency gain for a lot of pub-sec workload. Any thoughts on kind of what under the new administration might mean from that sector?

Yes. I mean I think it's a positive. I think if you look at the story, we've been telling in pub-sec for the last 5 years anyway. It is about simplification. It is about reducing reliance on legacy tech and about reducing reliance on home-grown tech that's been built inside the government. When I think about what I hear Elon Musk and Vivek Ramaswamy talking about, it's those same exact themes. So if you were to take a snapshot of -- it's just U.S. Fed, as an example. The U.S. Fed IT spend, you would see massive line items for legacy tech and homegrown tech. And so anybody who comes to the table and says they're part of a new solution that offsets and reduces some of the reliance on those older things is going to be in a good position with the new administration. I think any of us in this room who would make predictions based on what's going to happen would be fools to do so. But from what I see of what their initial focus has been, I think it aligns really well with what we've been doing.

Excellent. We're going to pause here for a second. Is there a question out there for Nick? Yes, Noah.

I always liked [ Bull Durham ], when he called himself a player to be named later. That's not a bad title, if you want.

I'll take it. I'll take it.

I'm curious, as you think about connectors and real time for workflow, what more you have to do? I don't know if you want to be in vector databases or other databases. I don't know if you want to be more in streaming or if you want be in third-party streaming. How do you think about the evolution of real-time data and workers and workflows and how you brought it? You brought it not just horizontally, but vertically as well?

It's a great question, Noah. What we tend to see is that in a lot of use cases that are not native to those kinds of business models, they are Step B on full alphabet strategy. So I think there's sufficient opportunity for us just in some of those use cases. The pure out-of-the-box, digitally native data business models, there's a play for ServiceNow there, but I won't lie, I don't think that's our primary angle right now. Now obviously, bringing in a guy from Google Cloud, who has not only a background in public cloud infrastructure, but who has a data management background from Oracle, I would say one of the most accretive aspects, let's say, of having him in job is that the data management strategy that we've already articulated is going to go to the next level just because that's the domain expertise he brings. So what's interesting to me about Amit and what Google Cloud was doing, they were much more focused on those niche cloud-native, data-native businesses as part of their growth strategy in the public cloud infrastructure. I expect he'll have a strong point of view to bring exactly what you're asking about. So it's a little bit of a dodge. I do think it's an interesting question. I think stay tuned would be the easiest way to think about that, but thank you.

Any other ones?

No more politics question? Because those are the most threatening to the current title I have.

If there is one, raise your hand. I guess, your journey in observability, there's been a couple of acquisitions there. I'm kind of curious, from your perspective, you haven't been with ServiceNow for that long. How would you grade the performance in observability? And is there more opportunity for you guys to be even more impactful there?

It's funny. Whenever I get a, how would you grade it question, I have to think about what Bill would say. Bill would say A+. So I'd just say A+ because I want to be consistent with the boss. I mean, look, I think -- look, we flirted with it a lot. I think our customer base looks at ServiceNow, first and foremost, as a solve for rationalizing all the different investments they make all over the map. That's true of the apps layer. That's true in some sense of the device layer, the platform layer. I think we've got a decision point to make on observability, which is to say, are we going to play a neutral role like we do currently with app integration, where we're not necessarily going to rush out into the market and say you should rip out vendors, A, B, C, B, E, F, G and H because they're in spaces you could do on ServiceNow. Our answer in the apps layer has been more, "We know you're going to have those things for a while. So let's just figure out a way to make those things work better together, so that your users get a better experience." I could see that being our angle in observability, or at least our lead angle in observability for the future. There's an opportunity there. People will spend money to make that happen. But again, I'm always careful when you have a brand-new product leader to be very deferential, like it may be that it's part of Amit's onboarding. He sizes that we want to go much more aggressively with the technology we already have. That's another wait and see.

Okay. And then I guess -- you guys have been so disciplined from an M&A perspective, capital allocation, generally speaking. Do you think with kind of a new product leader and all these growth initiatives, do you see any change? I know Bill is always kind of saying, M&As could be a part of it, larger M&A. And as a company as big as you guys are now, obviously, it could be a bigger deal. How do you kind of think about capital deployment from an M&A perspective?

It's amazing that every single outside input we get is about how to use it. There's no shortage of opinions. I would say at the highest level, Matt, there's no change that I've discerned in our broader M&A philosophy. We have, I think, one of the greatest performing organic product management and engineering capabilities in enterprise software. We rely on the general management of those different product areas to say, "Hey, here's our organic road map. If we could do a tuck-in here, there and there, it will accelerate our organic road map, and we see there's more growth in the business if we could speed that up." That remains focus #1. We're obviously -- you would expect any management team in publicly traded software to be opportunistic. We're mindful of what's going on in the market. But at the highest level, there's no change in how we look at it.

Yes. Yes. Well, you guys are sort of the blueprint of a single code base and so many have tried to emulate and some have failed, obviously. Maybe to wrap up, we've got 2 minutes left. What I've loved about ServiceNow over the years is it just seems like a series of S curves that kind of have sort of led to this organic growth profile at scale that we really haven't seen from many. There's a lot -- it's probably like picking your favorite child in terms of trying to pick one of the things you're most excited for, certainly Now Assist or what you're doing with data. From your perspective, from your seat and kind of hearing Bill and hearing customers, you'd say like, I'd pay attention to this and watch this, what would that thing be?

So I'll give you a slightly higher-level answer than that. If you think about the 5-year trajectory of the company, right? 5 years ago, the primary monetization was in fairly narrow point solutions by workflow, and the primary go-to-market motion was land and expand. Over these past 5 years, through the pandemic, through disruptions in the macro, the company has effectively been evolving to land more platform use cases and to land larger transactional deals instead of land and expand. So through all of this, the company has really learned how to execute at scale. Now the growth engines can be fully turned on. So I think just in terms of execution, which you talked about at the beginning, if you want to watch something, we've gone through the teenage years of the sort of evolution of the business. The business is now ready to be grown up, and I see big opportunity to expand geographically. I see big opportunity to get more serious about industry verticals. I think the partner ecosystem where we have lots of legacy practice areas that were only IT. Now we're looking at SIs globally who are seeing it as an enterprise play. So I think all of those levers that we've been pulling are going to start to actually really come on at full speed, which is really exciting.

So the answer is kind of all the above.

Yes, I am not going to pick favorite child, it's the easiest way to say.

Yes. Yes. Well, it certainly feels like any single one of those would be a significant driver, but...

Yes, and the last thing because Bill told me to say this.

Oh, one last thing.

No, no, but he's right. He's right. It's actually -- sometimes you don't argue with the boss. When the wave on GenAI really started to hit, it was clear that AI was just going to be the proxy, right? It's going to be the proxy for -- it's a change moment. You're either changing to be more relevant or you're not. So we have taken an AI strategy that goes horizontal, east to west and vertical north to south. We've made AI the centerpiece of the brand story, like literally, this is an AI company at the very top of the wave, surfing the wave. And I think that also portends well for accelerating a lot of the other things that we've talked about.

Yes. That certainly seems evident to us externally. Well, thanks from all of us. Darren, thanks for coming, and best of luck. And we're looking forward to Analyst Day. It sounds like we've got some stuff to think about now.

I should tell everybody what I said they would do now. So -- but thank you. All right. I appreciate the conversation. Thank you very much.

I appreciate the time.

Thank you.