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

Okay. Well, thank you, everybody. I joked when, half an hour ago, we had the CEO of Snowflake here that it was a packed room that they must have done something right in their quarter. A little more packed now, so you too must have done something well in your 3Q results, Gina.

I wonder sometimes is it if you do well or not so well. [ It was the fact ] but yes, we did well. Thank you.

Okay. Well, thank you for coming. We're really appreciative of you taking your time, and I hope you've had a good day of one on ones, meeting our clients.

Of course.

So maybe, Gina, we'll start by asking you about the quarter. First of all, congratulations on the stock passing $1,000. That's kind of fun, isn't it?

It is kind of fun, absolutely. Can't complain.

I wish UBS would hit that mark. If it did, I probably wouldn't be here a year from now. But on the quarter, maybe to start, you could comment a little bit on how the environment felt for you, Gina. The numbers were good. And I think if we all reflect on the results across the software space in the third quarter, they felt okay. No blowups. The beats were pretty good. The tones were pretty good. Does it feel like maybe things are modestly improving at all or pretty similar? What do you think?

Yes. I'd say -- from an overall macro perspective, I'd say into Q3, we've seen similar, huge remaining focus on value, right? ROI, a lot of continued scrutiny of spend, right? And so the fact that the deals are getting larger, so there's more eyeballs on it, continues to persist, which I don't necessarily think is a bad thing. I think one of the reasons why ServiceNow has done well in this environment is because we drive value, right? And so it's not years to ROI but months, and that value proposition for customers, especially in an environment where productivity, efficiency, cost savings is more important than ever, ServiceNow has always done really well there. We're all about automating the enterprise and how do we drive that productivity and efficiency. And so I wouldn't say Q3 saw a marked difference in the macro environment, but you're consistently seeing us perform well because I think our products are innovative. They are really -- our products are a function of where our customers are pulling us and always have been. So it's where our customers are leaning in, it's where our customers are looking to innovate, to digitize. And so I think that was more -- I think that's the result of -- like that's what's driving the results as opposed to a real shift in the macro.

Got it. Okay. I recall a comment that you made on the last earnings call about the fourth quarter, Gina, where you were -- this was ahead of the U.S. election where you were adding a little extra prudence as you put it, uncertain about which way it would go and therefore, how your clients would react. I know it's only been literally a couple of weeks. But any early observations on whether that uncertainty has manifested itself in good or bad things?

Well, a couple of things. So first of all, I'd say we're always kind of prudent in how we think about our build of our forecast, right? We are super focused on 360, not only what our pipeline looks like, maturity, coverage ratios and all that, which is super important but really what's happening in the macro and what's going on. You've seen me continue to be prudent on that early renewal piece because it's really very customer specific, whether they want to co-term when they're upselling and pull forward their early renewal or just wait. And so I continue to be prudent there. And then with the elections, it was uncertain, right? Now we had a great Q3 from a federal business perspective, better than expected. Our federal team continues to do extremely well. What I'd say is subsequent to the election, from a business perspective, we haven't seen a big difference. December in a Q4 is the biggest month, and so we're super early in that. What I would say though, that does feel a little bit different just in the environment, not necessarily with customers, but how they're thinking about the business environment in '25 postelection seems more optimistic, right? A lot of the IT spend reports and expectations that you're seeing coming out of IDC and Gartner, whether you believe the actual number or not because some people will say, I don't believe that number, but regardless of whether you believe the actual number, software spend is expected to be significantly higher, IT spend in general, significantly higher in '25 versus '24 and software as well. And so from that perspective, I think there's optimism in the environment. I think the understanding today versus a year ago on how GenAI is really going to revolutionize how enterprises get work done, I think is a catalyst for how people are thinking about technology and IT spend in '25 and beyond. And so I know I'm sure you're going to ask me lots of questions on GenAI. But I think that there's more optimism in economic outlook today than maybe 3 months ago. That doesn't mean that I'm seeing that so far it's way, way too early to tell.

Okay. But still, that's nice to hear. Can we stick to the theme of postelection optimism and in particular, initiatives in the federal government over the next several years to get more efficient, cut costs, automate because ostensibly, Gina, that should be good for a company like yours. So can you remind us the portion of your revenue mix that comes from federal government and how you and the leadership team in that vertical are looking at that opportunity over the next few years?

Yes. So we've talked about global public sector, which federal is the biggest piece of. The global public sector is about 10% and continues to be a very strong performer for us and has been over the past several years. If you think about why that vertical has been so strong, a lot of it has been post-COVID, the need for the federal government as well as state and local as well as governments outside the U.S. to digitize and to really drive that efficiency and productivity. I think many were caught very off-guard with COVID, and the need to really digitize and drive that automation was more important than ever before. And so the federal government and many of its agencies have really standardized on ServiceNow to really be that platform for automation and digitization. And so when you have an administration coming in and talking about even more efficiency and more digitization, who are they going to trust to do that? They're going to trust the platform that they've been working with and who's driven that automation and digitization before. And so I absolutely think that it's a continued opportunity for us and remain very bullish and optimistic about the federal opportunity. And then more broadly, the other global public sector pieces that are much, much smaller and absolutely, what we've done in the U.S. federal business is replicable in state and local and then the governments outside of the U.S. And we're very small from a penetration perspective out there. So from a public sector, really excited about the opportunity that continues to present itself.

And Gina, in terms of your ability to go after that big Fed opportunity, is there any reason to be worried about the issue that popped up on your 2Q call that necessitated some leadership changes? Is that in the rearview mirror, a nonfactor when it comes to ServiceNow executing on that opportunity?

Absolutely. Yes, rearview, not an issue. We haven't seen an impact nor do we expect to see impact going forward.

Okay. Good to hear. Can I flip to AI? It seems to be the topic du jour.

I wouldn't expect anything less.

Okay. So I'll start with a very broad question, and that is you can count on one hand the number of software companies that are really monetizing AI. It's a disappointingly short list. The good thing is that you're on that list obviously.

Yes.

You and Microsoft really. It's a very -- I should say, a couple of fingers. So one obvious question, and maybe I'm teeing you up to brag a little bit, is why ServiceNow. Do you have more amazing engineers? Do you have more amazing salespeople? What is it that's enabling you to monetize your AI product while everyone else except Microsoft seems to be struggling?

Well, I think a couple of things. So I think it's both of those, but I'll start on the innovation first. So we've been investing in AI for years and years, right? One of the first acquisitions that I greenlit as CFO, and I only greenlit it, I didn't bring it to me, right, so I'm not taking credit for it here, was a company called Element AI. And that company brought in with it some of the most advanced AI scientists in the world. So we've been working on AI for so many years that, let's be clear, we were first to market with actual product that was not just a PowerPoint of what's to come but actual product in market. So obviously, if you have product in market, it's easier to sell it. So that's number one. Number two, we have an incredible go-to-market team, right? And so we were super focused on enabling our direct sales folks first. Now we're focused on enabling the channel. But I think it's a combination of both. It's about having the right product at the right time and then having a phenomenal sales organization that can drive the go to market. It's all about how do we drive value for customers. And so the focus on that fast ROI and our products, you can get to value in weeks, not years, not even months sometimes, in weeks. And so the ability to really drive that monetization, it's about product first and foremost and then on top of it having that incredibly strong go to market, which I think is really, really helpful. I also think, though, that we need to remember how technology shifts really evolve, right? The hardware comes first. The software comes second. And so software will have its moment. And yes, we've been first to market, and we gave some really, I think, great numbers in our Q3 earnings. We talked about we've only been 3 quarters in market, and we've got 44 customers paying us more than $1 million, and that includes 6 paying us more than $5 million and 2 paying us more than $10 million. And so absolutely, it's our fastest growing new product introduction in our history. We continue to see 30% plus pricing uplift realized on the Pro SKUs. And so it's resonating with our customers, and that's all about product market fit as well as really strong go to market.

Can I add one more to this list of reasons why maybe you're monetizing it more so than others?

Okay.

I'll hypothesize here.

Yes.

One thing that struck me, Gina, is that when I talk to big enterprises about where they're pointing AI, like what the use cases are, I've been struck by the number that describe pointing AI at some internal function or internal business process that they're trying to automate with AI as opposed to pointing AI externally. So it feels to me like the bulk of activity is, frankly, an internal business workflow automation. And that's what ServiceNow does. So you're just in the right end market where a lot of the activity is occurring. I think you probably would agree with that, and you essentially said so in your answers. But that's an answer that's on my mind. I take it you agree.

Yes. I think your hypothesis is exactly right. Where folks are focusing AI right now initially is all about that business process automation, that business process efficiency, cost savings. And it will more so at a certain point, too.

Yes. You'll follow that.

How do we evolve the front office and not only the front office, like the top line. And how do we use a lot of those savings that are generated from the back office, mid-office and front office on the customer service side to really help infuse kind of that business model explosion. And I think the conversations that we're having with all of our customers are 100% initially on that efficiency, productivity and cost savings.

It's shifting a little bit?

It will shift. It hasn't shifted yet. But what people are really focused on is how do we experiment and move from experimentation phase to implementation phase, so we understand the value and we understand where AI can work well and where it can't so that when they're investing internally to drive business model shifts, it's all about where AI is going in the future. And customers don't want to be left behind from a how is my business model going to shift, how can AI help me not only drive productivity and efficiency but more top line growth in the future. And so experimenting now on easier, safer areas is going to allow them to really feel comfortable as we think about how AI is going to shift enterprises. And I talk about this example from -- in the pharmaceutical world, which I think is remarkable. The average clinical trial takes 6.6 years. If you can cut that by 10%, if you can cut that by 20%, that's billions of dollars in top line, much less cost, so even more money falling to the bottom line. And why those clinical trials take so long, a lot of it is all manual processes. ServiceNow platform can help on that. How do we get customer -- the patients their answers quicker so they don't drop out of the clinical trials, creating longer cycles? And so AI can help. And not only do you have more top line, more bottom line, healthier patients and lives saved is a huge benefit. And so AI is really going to change pretty dramatically how enterprises run. And we're just scratching the surface on the automation, which is why, I think, ServiceNow is really well positioned right now and for the future.

And when we translate that to numbers, Gina, you shared with the audience a minute ago the deal size metrics that you gave on the 3Q call. We can sum up those numbers. And given that you're not identifying less than $1 million deals, we can loosely get to $100 million or so. And on a $10 billion business, we're obviously talking a point of growth. But clearly, next year's growth will also be impacted by deals that you signed in the December and March quarters. So you can get to, I think, 1 or 2 points of revenue contribution next year. Is that a reasonable framework?

That's the math. That works, for sure. I think at the end of the day, what I'd like to go back to is the fact that, you're exactly right, a year out, it's meaningfully starting to contribute to growth. The core business remains really, really strong. But the innovation and the go-to-market execution that you've continued to see allow ServiceNow to be this company that, even at $11 billion in revenue, continues to have growth in excess of 20%, continues to have best-in-class margins. And you'll continue to see us focus on doing that for years to come.

And what does the AI product road map look like, Gina? So you've got the Pro Plus SKU. On the last couple of calls, you've been quite -- it seems deliberate in talking about the Now Assist product. But it seems to me there's an opportunity to add AI products. So without giving away the trade secrets, where is it all headed?

Yes. Well, we talked a lot about agentic AI on the last call, right? And so if you think about why agentic AI is going to be a really big value driver for customers, I think it's pretty compelling. If you think about the fact that you can have these agents working 24/7 behind the scenes, they don't take vacation. They're working when people are sleeping, it enables significant productivity, significant efficiencies. And the reason why the platform for ServiceNow is differentiated in that we are one platform across the enterprise. So whether you're using ServiceNow for IT, HR, for customer service, for legal, for anywhere in the organization, it's one platform. So if you have agentic AI working with your actual physical service agents, the ability to manage that all in teams, all in one place, governed in one place, secured in one place, learning in one place, the efficiency benefit, because you're not fragmented and it all talks to each other, is hugely compelling for customers. And so agentic AI, a big part of the road map. We talked about Now Assist for our service desks. We talked about also bringing it in risk and security. So there's lots of opportunities on the road map where AI is going to continue to play a really large part. We also talked about workflow data fabric, which while not specific to AI, if you think about how enterprises are going to operate in this AI-enabled world and you think about the applications sprawl that has happened over years and where ServiceNow has been so successful sitting on top of that applications sprawl and really making the complex much more simple on the application side, we can now do the same thing for data, right? So the data sprawl, data is everywhere. We have a lot of data. But how do we use that data to really help drive the business? Well, the ability to sit on top and have these 0-copy connector technologies that can connect to other data warehouses where customers are storing their data, they don't have to move the data but they can then action that data on the ServiceNow platform, really compelling. And so a lot of excitement on the ServiceNow overarching technology road map as we think about AI-infused enterprise of the future.

And when you're selling that vision to customers, Gina, are you bumping into the I'm just going to build it myself. I'm just going to DIY it. And I'm curious because Marc Benioff seems to be talking a whole lot more about the DIY trend than Bill, and I'm wondering whether you're seeing it as much as others.

Yes. So I think we don't come up against that all too much because the areas where people are DIY-ing are where their core competencies. They're not going to DIY AI in back office. That's not where they -- it's expensive. It's inefficient. If they're going to DIY, they're going to DIY in an area where there's their core competency that's going to help drive top line growth. Now they can use some of the cost savings and efficiencies that they get from implementing ServiceNow to help fund some of that DIY, but they're not going to DIY in back office, mid-office. There's just -- it's just that it doesn't pay off. And so that's what -- the conversations we're having with customers.

It's a good perspective. Okay. Thanks for that. Maybe we'll pivot away from AI because ServiceNow does more things than just AI. You do have a core business, so let's make sure we talk about that a little bit.

Great.

So on the core, I've always, I'll admit, been a little worried over the years that, at some point in time, you're going to get maxed out on IT spend.

I know you have been worried, Karl.

Yes. That every company seems to already use ServiceNow and yet you keep growing the core. So I'm sure part of it is that there's a Pro SKU mix that's helping out, but like we're not seeing the end of that runway in terms of penetration. So do you mind commenting on that?

Yes. It's interesting. When we went public, right, Gartner talked about the TAM for ITSM being $1 billion. The TAM is much higher than $1 billion right now. And at best guess, the analysts' estimate we're at 50% penetrated. But there's so much still legacy homegrown that we continue to displace and replace still, which is incredible. And then at the end of the day, we've brought in outside of ITSM. So ITOM, part of our core, it's only 20% penetrated in our customer base.

And it's still growing 20%, 25%.

It's still growing well. And so I think part of our success has been really continuing to innovate outside just core ITSM. But that platform -- and I talk about this all the time, Fred Luddy, brilliant human being who I love to pieces, he had this vision of a platform. But when he was trying to sell it years and years ago, no one understood what the platform was. They were like, well, what's the use case. So he was in IT, so he specifically talked about IT use cases. But the use cases are broad regardless of IT, right? And so we have brought in that product portfolio where customers were pulling us, where customers wanted us to go. And so our core now, even within IT, we have ITOM. We have security. We have risk that continue to do extremely well. To your point, we've also upsold with the premium SKUs with incremental capabilities like AI and machine learning and now GenAI. And so the core business remains really strong. We've brought in outside of IT into HR and customer service, in Creator. And so while AI and GenAI is 90% of what we talk about because it's hugely revolutionary to where enterprises are going, our core continues to do extremely well. It has to because you talk about the numbers for GenAI. Yes, it's 1 point or 2 of growth. Well, we're growing a lot faster than 1 point or 2.

Got it. Let's talk about one other thing you mentioned on the last earnings call that I thought was intriguing. You made a comment that 2025 is a larger renewal year for ServiceNow. And I'm wondering how do we interpret that? Could that have any change on the quarterly cadence of your cRPO number? Is it actually an underappreciated positive because, upon renewal, you've got just a larger upsell opportunity? Can you talk about that, what you meant to just say?

Yes, yes. So it's both. So it came out in a question around cRPO, right? And I often try to get investors to think about the big picture. I know you're building models, and cRPO is important because it's the forward-looking indicator of what you think revenue will be for the next 12 months, whereas revenue is kind of a lagging indicator. But there are things in there that impact the quarterly number in any particular minute that have no bearing on what revenue is going to look like going forward, right? And so what I try to bring folks back to, especially today and this past year is you have a guide for '24. You have a guide for '26 revenue, so you have an implied guide for '25. And so there will be seasonal things that impact cRPO like an unusually large renewal cohort in 2025 because as that renewal cohort starts to come down Q1, Q2, Q3, you'll see some seasonality in that cRPO, which is not indicative of what next -- the year after revenue is going to be. So that comment was in question to cRPO, is there anything in the business in '25 that could impact the seasonality. But to your point, renewal is a huge time where we upsell and grow the book of business. And so at the same time, it's -- if you're really thinking longer term, which I hope all of you are, that is, I think, a bigger opportunity, right, for top line for '26, right? Because the renewal will happen, and Q4 being the biggest quarter, you will see Q1, Q2, Q3, a little trough and -- before it pulls back up. But the opportunity when those customers are renewing for the upsell is certainly, I think, an area that is not as appreciated.

Okay. That's helpful. And then maybe the last one for me is you made a big hire last quarter, hiring Amit from Google Cloud, who was an extraordinarily successful executive. What is he doing at ServiceNow? What's been his priorities over the last couple of months since he arrived? And what are his big priorities into 2025?

Yes. So we are so excited for Amit to be with us. Really, really pleased with the runway already. Like he made impact on day 1, which is fantastic. He's an engineer's engineer. He understands enterprise technology. He understands data, AI and where the enterprise is going and so obviously has been spending a ton of time with his incredible team really understanding road maps, pipeline, where we're focused as we're looking at 2025 and beyond. He's super focused more on mid and long term, obviously, also the short term. But the great thing about Amit is that from a culture perspective, he's been a really great fit, and that was super important to Bill, me and the entire exec team as you bring someone in from a culture perspective. He's seen it. He's done it, and he's got that hungry and humble attitude that is just pervasive in our culture that fits really, really well. And so really excited to have him onboard. He's super collaborative, super smart and just from a technology perspective is second to none. So it's been great so far and really, really excited to have him.

Okay. Well, congrats on the success you've been having, all the best for the holidays and next year. And Darren, Gina, thanks for attending our event today. Appreciate it.

Thank you so much, Karl. Thank you.