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

Thanks, everybody, for coming. I'm Derrick Wood, Senior Analyst covering Enterprise Software at TD Cowen. Quick note, it is Extel II voting season. If you're a voter and you value our work, please, we would appreciate if you could support us. With that, we have Josh Kahn, SVP and GM of the Core Business Workflow market at ServiceNow. Thanks, Josh.

Happy to be here. Thanks for having me.

This is a good chance. I know we don't get -- there's a lot of focus on the IT side of the portfolio, a lot of focus on the customer service. Talking about core business, I think -- I do want to start on just understanding the product set a little bit more and the go-to-market, and then we'll kind of dive into more of the AI initiatives. But just walk us through your role. I think it's evolved from kind of running the Creator business. Give us a sense for what you're doing today?

Yes. And the words Core Business Workflows may be new, but the businesses that are in here, some of them are businesses you've been aware of for years with ServiceNow. So Core Business Workflows covers really what you think of as the back office. We've got HR, procurement, finance, facilities, legal and supply chain. And so if you sort of zoom out on ServiceNow, we have a business in the TX Workflows that's focused on IT and CIOs. We've got the CRM Workflows that's focused on customers and how you find them, attract them, contract with them, service them, support them. And now we have Core Business Workflows, which is about how you sort of drive the core functions that power the business. And of course, Creator is still here. That was the business that I sort of spent the first 7-plus years building that provides our platform technologies to all of our customers and partners to build things we don't build ourselves and make our products better.

Perfect. So help us understand. So in that HR service delivery, you guys have had that for a bit, source-to-pay, those products sit on top of system of records like an HR system or a procurement system. What is the value that really gets brought out by adding that workflow layer on top?

Yes. So there's a couple of pieces to this. Like if you look at each one of these departments, they all fundamentally do 3 types of work. The first is they service employee requests. Employees come to HR, they come to procurement, they ask for things that the employees need to do their job. Then the second thing they do is a ton of manual work that is going between all these systems of record. So like in an HR department, I talk to one customer that has over 35 different systems to do the business of HR. So it's not just one system of record, it's many, many, many systems. So these people in these departments spend a lot of time going, pulling data from multiple different places, swivel chairing between systems. And that's only to do the really -- the work they really want to do, which is the high-value work that, that department does. So with ServiceNow we're doing -- I'd put it in really 2 buckets of things. The first is helping them better serve employees, automate, make it easier for employees to ask for things they need. They don't have to know what department. They just go one place and they say, "Help me with this." And then for the departments themselves, we make it a lot easier for them to automate and service those employee requests. Then there's a lot of workflow that cuts across multiple different systems. And I'll give you one example of this, employee onboarding. When you think about an employee from the time that they sign an offer to the time that they actually start, it involves the HR team, the payroll team, the facilities team, the IT team. We build workflows that orchestrate that process. So we'll provide visibility to it. We can automate certain steps in it. And we can take people out of all the different swivel chair activities and give them one place to go where a lot of that work is easier to see and easier to manage and automated.

Yes. I think we know about that at TD. The complexity of a larger organization is quite a bit. So what does the competitive landscape look like for you guys at that layer?

In the case management layer, sitting across the top of these functions, there's not a ton of competition that we have. What I tend to see is companies that kind of haven't done anything horizontally. So you'll hear from a lot of the systems of record like, hey, we've got case. We've got case management. We can do HR case management. Hey, we've got onboarding. We can do HR onboarding. I'm just picking HR as one example, but you'll hear in procurement, they'll say, hey, we've got intake. But the reality is it's very siloed when they're talking about that. And so if you want to be able to have a workflow that automates all the tiny steps within your HCM, you might be able to get that from the HCM vendor. If you want a workflow that also allows someone to provision the IT access that they need to order the equipment they need from IT to get a workspace to sit in, that's a workflow that really only ServiceNow is out there providing. You can -- there are other platforms that have a core platform technology like legacy BPM platform that says, hey, we do workflow. But it's very, very heavyweight workflow, and it's for you to build on top of where we've already created a lot of this content out of the box. So that combination of the enterprise-wide capabilities as well as the out-of-the-box content is pretty unique to ServiceNow.

Great. Now you guys did resegment this kind of product bundling a little bit in the new year. Why did you do that? And then can you -- is there like an updated size of what Core Business Workflow is today, kind of the size of the growth? I don't know if you can talk about the growth, but at least the size of it.

Yes. So Core Business Workflows today is over $1.1 billion. In Q1, the net new ACV was growing at over 40% year-over-year. So it's a large business, and it's growing really well. And with that, there's a tremendous amount of upside because what we've been doing historically is going to market in each of these different departments, department by department. So we'd go to the HR department and sell to the Chief People Officer the ability to help HR. And then we would go to the procurement department and sell the ability to help with procurement. But when you bring these all together, it elevates the story and it becomes a C-suite story. What I hear from customers today is there's really 2 burning priorities that every one of them has. Number one is cost reduction, like immediate cost reduction. And that's a function of uncertainty on tariffs and macroeconomic -- concerns about macroeconomic erosion. So they're saying, look, I've got to find a way to get cost out of my business immediately. And the second is everybody is really excited about Agentic AI and oftentimes feels, I know that's part of the answer here. I need to get AI agents into my business. And we've been able to bring that message to them across the entire back office. And so we can talk about hard dollar savings in every function in the back office. We can talk about doing it with AI agents. And so now where we used to sell department by department, we have the tailwind of being able to have that conversation in the C-suite at the C-level. And then our customers kind of help us pick where they want to start. So some customers start in procurement. Some customers start in facilities. But because it's all on one platform with one data model and one set of workflows and automation, they can start in one place but have that entire vision.

And then you could, I'm sure, sell the vision of agents in procurement talking to agents and IT talking to agents and HR and then the power of that whole platform gets better.

Yes. One great -- I'll give you a great example use case of that, that a lot of people can probably relate to. When you walk into a conference room and something doesn't work, right? We have a workplace product and we have IT products, as you know. So when a conference room display monitor goes down and someone files that the monitor has gone down, the agents can talk to each other and say, "Hey, let's take this conference room offline. Let's rebook every meeting that was in this conference room in a similar sized conference room in a similar location with similar facilities or similar amenities." So that you can -- instead of having days or weeks where everyone walks in and kind of realizes they can't have the meeting they plan to have there, because the IT agent is able to talk to the workplace agent, you can actually automate a lot of the productivity in the business.

Wow. That's powerful. So who is the -- who are you targeting as the buyer, if you're targeting more C-suite? Is it IT? Is it line of business? Is it both?

Yes. So one of the people who really cares a lot about this is the CFO. And the CFO cares a lot about it because even if you're not just talking about finance, you're talking about cost profiles and maintaining margins or how you can redirect investments from one business to another. So a lot of companies are starting to move to something called Global Business Services where they bring these functions together as a shared service. And that is often a function that the CFO is either directing or overseeing. So CFO is a big priority. But then you get to all of the other departmental leads. The Chief People Officer tends to really care. A lot of companies will have a strategic initiative around improving employee experience, simplifying how employees get things done. And that's strategic, but it's not always the best business case. And that's where I think the partnership between the CFO and the Chief People Officer comes together in this because the business cases come when you help the departments better serve, but the employee experience and simplification comes when that's in a single layer.

So that's a good lead into -- I was going to ask about like the efforts in finance and supply chain, which I think, Bill -- you guys announced 2 or 3 years ago. How has that initiative gone? Obviously, CFO is going to be important on the finance side. We haven't really talked on the ERP finance side as much. But what's the -- how is that opportunity shaking out?

Yes. We found that -- that kind of goes back to the Creator roots that started this is with Creator Workflows, our customers build things that we don't build ourselves. So several years ago, we saw customers building a lot of applications in finance departments around ERP in the supply chain department. And that's when we decided to build products there. And so we started with procurement, focusing on indirect procurement, but we have a supplier life cycle module that a lot of our customers are using to manage their direct procurement suppliers, onboarding those suppliers, offboarding those suppliers, handling complex workflows like parts changes. One of our customers builds heavy equipment with a long life span. And when one of their suppliers says, "Hey, I want to change a part." There's a very complicated multi-departmental workflow. So those -- that supplier module starts getting used in supply chain to manage the suppliers. As we go forward, I think there's a big opportunity for us to continue building out workflows in and around the supply chain because there's so many underlying systems there. Some of them are in the ERP, but there's a lot of point solutions that make up the overall supply chain technology landscape. And that's really where ServiceNow excels is providing a workflow and an engagement layer on top of any kind of infrastructure you have.

Okay. In terms of the go-to-market side of things, I mean can you compare and contrast? I mean maybe it's similar, but direct sales, partner-led SI involvement, how does it look in the back office business workflow business versus the IT or customer side?

Yes. A lot of our customers have big SIs that are helping them with large-scale transformations in these spaces. So if you look at anyone doing a big employee engagement transformation or finance transformation, there's typically large systems integrators in there doing the strategy. What they're looking for is a technology that they can use to bring that strategy to life. And so we have a big direct sales organization in these customers. We have specialist organizations for each of the technologies and core business workflows. But we also have incredibly strong partnerships with the big SIs, and oftentimes, some of the smaller boutique SIs like in the -- in HR and finance, you'll find the biggest players in consulting are in there helping with strategy and transformation. When you go to workplace or facilities or real estate, there's a lot of smaller boutique players that really specialize in that. And so our partnership landscape kind of runs the gamut and it depends on sort of what problems our customers are trying to solve.

Got it. And I mean, is a lot of this cross-selling into the core base? Do you land on brand-new customers starting here? How do we think about the opportunity just within the base and the whole market?

Yes. So that -- in Core Business Workflows, the majority of the land tends to be with HR because simplifying the employee experience and better serving employees is often the main driver for starting with ServiceNow. What that gives our customers is a single place their employees start going to get the things they need from HR. And very quickly, they start saying, "Hey, procurement would like to plug into that. Legal help would like to plug into that." So all these sort of back-office functions then plug into this employee portal technology set. They build their -- they move their knowledge bases there, they move their catalogs there. They start serving employees there with case management. So oftentimes, that start with HR, go across with serving employees. But then they start next building their cross-departmental workflows. The underlying systems, they say, "Hey, I know in HR, you have onboarding. In procurement, we have a process that takes a purchase request, somebody's request to buy something into a purchase order, which is the actual order itself, approvals and other validation. Can we automate that?" And so you start seeing these departments do more and more orchestration.

Yes. Great. And then you announced at Knowledge the Core Business Suite, which I think is more of the commercial mid-market. What was the motivation behind that and what's the target down market?

Yes. So a lot of smaller companies, and these really aren't that small. It's not like a mid-market play. This is commercial, so up to about 5,000 employees. A lot of those companies service their employees with shared mailboxes. Actually, believe it or not, some of the largest enterprises in the world still serve their employees out of shared mailboxes. We had one HR customer that had 200 different shared mailboxes just to answer HR inquiries. But Core Business Suite is aimed at helping those smaller companies very quickly service their employees across the entire spectrum of employee requests. And we've put together the case management capabilities from each of our different product offerings. And we're making it easier to deploy and bringing greater consistency to how employees experience that and how the people and those departments experience that.

Great. Let's move on to AI. The obviously shiny new area of growth. Now you guys announced Now Assist in the fall of '23. Here we are 1.5 years later. I mean walk us through the journey on what the reception has been and the traction has been with that Pro Plus, Now Assist offering?

Yes. It's been exciting. It's been -- we've been on a multi-year journey, over a 10-year journey on AI itself. That really started before generative AI with building things like machine learning, natural language understanding and other use cases that bring AI into our workflows. With Now Assist, we're really starting to use generative AI and there's 2 -- if you sort of summarize it, there's 2 main things that we're using generative AI for. The first is understanding someone's intent. When they say, "I want, I need," what are they really asking for? And then the second is language generation, creating new things. So we use that to help the people who are -- the employees be able to go in and very simply ask for something and find the right thing in the right place and also summarize information for them. There's nothing worse when you're asking what a policy is than getting a response that's 10-page policy documents and having to figure it out. So we're able to understand their intent and then summarize that for them. And then for the people doing the work, we're able to make it easier for them to bring new people into a resolution by summarizing what's happened in a case, generate new knowledge-based articles to prevent future inquiries, allow employees to self-serve. So that's gone really well. We've seen huge adoption with Now Assist, both on that sort of employee layer as well as the people doing the work or what we call fulfiller layer. Now we're focused on Agentic AI. And Agentic AI is kind of the next level evolution of this where you really start to have independent reasoning within the AI framework. So our AI agents now are able to take that original intake and sort of autonomously figure out what needs to be done. So rather than kind of mapping things if it's this kind of request, you need to solve it here, you can just give it a problem and it will have a bunch of agents that it calls on. So you might have agents that say, I'm the procurement purchase order creation agent. I'm the HR time off management agent. And so when an intake comes in, the reasoning engine says, "Oh, I think this person is asking about time off. What resources do I have to solve that problem for them?" And it starts to direct to those agents. And so we announced at Knowledge a couple of weeks ago, we have an orchestration engine. We have an AI studio where our customers can build their own AI agents to complement the ones we have and an AI control tower to be able to monitor how these agents are running and make sure that people are getting the outcomes that they expect over time.

Yes. So I mean, when Now Assist first came out, that was really more of like the AI assistant, virtual agents, summarization, things like that, not full automation of AI agents. It was more AI assistance. Are you guys now -- is all the product now out to support true Agentic AI autonomous capabilities or where are we in that availability journey?

The platform support is 100% there. We have hundreds of agents that we've built. But I think the continued evolution of this is more and more agents. And so in each of these businesses, there's tons of opportunities to create agents to help end users do the things they're trying to do. So that journey is in the very early innings. Our agentic platform, it is solid. It's there. It's ready. And we'll continue to evolve it. And there's probably -- I haven't seen anything that -- any technology that evolved faster than this space is evolving. But I would say, yes, it's real, it's creating value, it's ready for prime time. And now for us, it's kind of a mad dash to create more and more agents to create more value for people. One of the interesting things about the architecture we've chosen for our Agentic AI is all of the workflows, the integrations, the playbooks, every bit of automation that exists in our platform today is actually a tool that our agents can use. So I'll get a little bit technical. And if I go too far, you can stop me. But when you create a new agent, you basically -- that agent describes what it does. It says, like I said, I'm the PTO management agent, paid time off management agent. There's going to be a bunch of workflows associated with integrating with SuccessFactors or Workday or other systems to get PTO data and schedule PTO. We've already built all of those. So all we have to do is plug those into this agent that describes itself and all of a sudden, you have agents that are able to autonomously resolve issues. So our ability to create agents that drive outcomes for customers is really unparalleled because of what we're already building on top of with our ServiceNow installed base and our ServiceNow products.

And remind us what models you guys use underneath. I think you guys have trained your own small language models. Do you also use some of the frontier labs?

We absolutely do. So we built our own small language models. And part of the reason for that -- there's multiple reasons for that. One is there -- we don't need everything that's in a large language model to be able to power the domain of use cases that we have. So it brings the cost of running those models down when you can't ask questions about your kids' homework, then your -- you can save a lot of money in powering them. The other reason is it allows us to run it in our security perimeter. And so for some of our customers that have higher security requirements, that's a real value to them and they really want to make sure that the data that they're sending to any kind of LLM or SLM or whatever is staying in a place that they know and trust, and they already know and trust ServiceNow. However, there's a lot of customers that want to use the public models and the third-party models. And so we support that as well. In some cases, we do have use cases that also benefit from a truly large language model. And so there's a handful of use cases where we're sort of pushing the frontier of innovation by using some of those models in our R&D efforts and our innovation efforts.

And talk to -- I mean Workflow Data Fabric, RaptorDB are 2 new underlying core technologies. How does that help you unlock more value in the GenAI space?

Yes. This is a really important part of what differentiates us in the AI space because everybody is talking about AI. A lot of the systems of record are going to say, hey, we're going to be -- we have all the data, right? We're the HCM. We have all the employee data. We're going to build agents on top. That's all you need. But the reality is, when you look at one of these companies that has 35 or 60 different systems for employee data, it's not all in the HCM. A lot of it is going to be in other data sources and other systems. And so what our Workflow Data Fabric does is it lets you access all of that data from within ServiceNow. You don't have to move it into ServiceNow. We have a technology called Zero Copy within this where we can leave the data in place, but our agents can benefit from that. So when you get a ServiceNow AI agent, it's going to be pulling data from many, many, many different sources, to reason and come up with the best answer and the best action. A lot of the underlying point systems will just have the data they have. So Workload Data Fabric builds on top of something that we had in Creator Workflows called IntegrationHub and Automation Engine. So it's not all brand-new technology but we've extended that with some of these new capabilities that are really going to add a lot of value for agentic use cases.

Yes. And are you -- the ability to get and access unstructured data seems like what people are trying to solve to power -- provide better power into the agents and their reasoning capabilities. Do you guys have that? Where are you on that journey for unstructured data?

Yes. We're well down that path. It's really important for a lot of those kind of employee service use cases to be able to access all the different data sources around the Internet. I think there was sort of -- there's been spaces where sort of the stand-alone enterprise search space and there, people think of this employee service space, I really believe those are going to be coming together very much into a single place where employees go, whether they're looking for some information out in the enterprise or they have a request for someone. And that's what we're innovating towards and focusing on is that consolidated place where employees get everything they want, whether it's unstructured data that's somewhere out there in their enterprise or a knowledge-based article or a policy or a request. We're also -- there's also a huge amount of value, and specifically in the space I focus on with Core Business Workflows, contracts are incredibly important to a number of different functions. And today, they're largely unstructured data that exists as a PDF in a repository somewhere. And if you look at what happens on the sourcing side and understanding what's in those contracts, a lot of companies are missing opportunities to save money, enforce supplier penalties, renegotiate contracts because they haven't extracted the data from those contracts. So we've got metadata extraction from contracts that we turn into structured data to trigger workflows, whether it's on the post-signature side like procurement and supplier management or on the presale side like our CRM and our sales operations management product.

Okay. You mentioned enterprise search. I know the deal is not closed, but Moveworks, I mean what does that add to the portfolio and your capabilities?

Yes. So Moveworks and ServiceNow. We're -- we've entered into the agreement and we've got a lot of hurdles to go. But I think the combination of the 2 technologies is very additive. So one of the things that we have that Moveworks doesn't have is the case management capabilities and the portal, where we've innovated in some areas of chat, conversational and other areas, Moveworks has done some complementary innovation. So we're going to bring those 2 sets of technology together, and it's going to allow us to provide the best-in-class experience for employees to get anything they need. And when they can't self-serve on it, it's going to give us the ability to capture the need and resolve that as quickly as possible and as cheap as possible on behalf of these departments.

Okay. We have a few minutes left. Any questions in the audience? Yes.

[indiscernible]

Yes. So one part is meeting the user where they are. So for example, companies that are big Slack or Teams users, we provide our capabilities plugged into those technologies. We have ways to send alerts to Teams or to Slack or wherever they are. But we also have a really important technology called the employee center, which is the place that over 1/3 of our customers are already having tons of their employees go every day to start using that as their kind of starting point and destination. We're evolving that into more of a bidirectional employee hub where more of those notifications will occur. There is more value pushed to them as well as their ability to pull it from them. And so I think our focus is on those 2 things. One is meet them where they are and not necessarily say, hey, you can only get to ServiceNow through our pane of glass, but also continue to evolve what's already a really well adopted and important sort of ServiceNow pane of glass into something that's the next evolution of that.

[indiscernible]

Yes. So what I'll first say is I'm not the best person at ServiceNow to talk to you about CRM because -- I have a peer, John Ball, who runs that business. John is probably one of the deepest experts I know in customer service and CRM. And so I would defer the question to John. But what I would tell you is our platform is one platform, one data model, one architecture. And we use that to service Technology Workflows, CRM Workflows and Core Business Workflows. And when you look at where the systems of record have fallen down, it's their inability to provide workflow and their kind of siloed nature. And so when you look at how you can apply this engagement layer and this workflow layer on top of those processes, it creates something that's unique in the market that is something a lot of those customers are really looking for and asking for. But to go deep on that, I would definitely defer to John.

[indiscernible]

Yes. So we use Workday at ServiceNow. We are complementary to Workday. What we do is find ways to create value on top of and around Workday. So I'll give you one example is if you really want an end-to-end employee onboarding, offboarding experience, you're going to need Workday and a whole lot of other systems, including systems that don't belong to the HR department. And so we'll provide workflow that will pull data from Workday, push data to Workday, but also a lot of other systems. So we'll -- I look at us as very complementary. And our goal is to find a business case that creates customer value on top of and around them so that it makes sense for the customers and it makes sense for us. And it makes Workday even more important in that enterprise.

I know we're at time, but I did want to get one last question in on the target for $1 billion in ARR by the end of next year, definitely sounds like Core Business Workflows is going to be a big driver of that as is other parts of the portfolio. But I did want to ask about how you see the evolution of pricing and new consumption elements and how you feel about bringing consumption pricing into the model?

Yes. I think consumption pricing, the evolution towards consumption pricing is great. When these AI agents create value because they're getting used, customers are going to be willing to pay for that value. And so we have a hybrid model where we have a user and a consumption base. And so as that model shifts from the history which is more user based to a future which evolves towards consumption based, we're going to be perfectly positioned to move in that direction. So if our customers are finding that they're able to have AI agents that do the work of human agents, they'll be paying us for the usage of those AI agents, and we'll be able to navigate that transition into an agentic AI future pretty well.

Great way to end it. Okay. Thanks, Josh.

All right. Thank you. Thanks a lot.

Thank you.