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

Okay. Good afternoon, everyone. My name is Tyler Radke. I co-head the software sector here at Citi. Welcome to day 1 of the tech conference and kick off post lunch. We're excited to have ServiceNow, the CFO, Gina Mastantuono. Gina, I think this is the third or fourth year in a row that you've come. So thanks for supporting our conference. I thought it would be great. You're in New York City this week, we were just catching up. You've been on the road talking to customers a lot this quarter. I know you have a bunch of meetings this week. But it would be great to just frame for the audience, what's top of mind when you're having conversations with customers and how is that different from prior years? Like what are the priorities for 2025?

Yes. Well, first of all, thanks so much for having me. Hopefully, after lunch, you're not also tired. We'll make this interesting for you. Customer conversations are going extremely well. What I'd say is that everyone is focused on a few things: innovation, speed, ROI, right? And how can technology really help them in each of those areas. And what I would say is different today versus a year or 2 ago is it's all about pace. And it's all about speed and it's all about AI and how they can leverage technology and platforms like ServiceNow to really help move forward their AI agenda. And the great thing is that ServiceNow is right there, and I think, positioned so well and poised for this moment to really enable not only productivity gains but business model innovation because AI right now, everyone is talking about it from a productivity and cost savings perspective. The real value long term is how we're going to reshape business models and how AI is going to help companies drive top line, get better vaccines and medications to market to patients even faster. And I love the use case for pharma -- for pharmaceuticals, right? Average clinical trials take 6.6 years, right? If AI is able to help companies get medications to product to market sooner. Not only is it more top line, significantly more top line, lower cost, better margins and wow, live saved, right? So how do we really help customers not only think about cost savings, which is important, and everyone is talking about it, but how can AI really help reframe the dynamic on how businesses run going forward. So pace of change and pace of ROI is a huge area of focus for everyone that I'm talking to.

Right. And obviously, those are some pretty important examples broad-based across businesses that you're referencing. But for investors in the room, maybe just high-level frame how ServiceNow is helping those customers. Obviously, the platform has expanded dramatically since Fred Luddy founded the company. But how is sort of the vision evolved? And how are you helping them from an AI perspective?

Yes. So a couple of things. You bring up, Fred, so I can't not talk about his initial vision, which was remarkable. He was thinking about ServiceNow as a platform to help people do their work better, faster and stronger. And no one understood what the platform was 20 years ago. They're like, give me the best use case. And being in IT, his best use cases were all about helping people who we work with in the IT department, run their business and run their departments better. And so fast forward 20-plus years, those use cases have proliferated, right? And so where we started in IT, we've brought in so dramatically into HR, customer service, developer with the platform, we are now really a platform company, first and foremost. And the ability to grow exponentially, mostly organically, gives us a really unique position in that we have one data model, one architecture, broad-based. And so we have AI now built into that one platform, which enables our customers to not only go north to south and touch data wherever it resides in any system because we're integrated with that, but then to action that data more broadly across the enterprise east to west. So whether that business process touches IT, legal, finance, HR, to be able to not only action it from the start, but get it to resolution all on one platform with the AI built in, it's a unique position for us. So the strategy today of AI plus data plus workflow, really driving the orchestration of workflows, north to south, east to west, all autonomously with Agentic AI is the strategy that we're going after. And from what I'm seeing, really enables us to help our customers get to value in an Agentic AI-enabled world even faster. So that's our focus.

Right. And that's obviously a really exciting vision in terms of being this orchestration for AI, a huge, huge opportunity, hundreds of millions, if not more. But how do you think about the timing? What do you need to do from a product perspective to get there? I know historically, ServiceNow has developed a lot of great in-house functionality. You also recently did acquire Moveworks, which was one of the larger M&A deals that relative to everything you've done historically. So just help us understand what that vision looks like from an organic versus M&A perspective.

Yes. Well, our strategy from an M&A perspective hasn't changed. So we haven't grown top line revenue through acquisitions. So we don't have a whole lot of tech debt. We've been very focused on build, buy versus partner, where we've done a ton of organic investment and organic innovation, which allows us to have this one pristine model. When we invest R&D, the leverage that we get because all of the capabilities that we're building go across platform and cross products is fantastic. The ability then to where we add on these tuck-in acquisitions of capabilities for incredible talent and build that into the platform. That strategy hasn't shifted. It hasn't changed. Where you'll continue to see us focus is all around that strategy, AI plus data workflow. And Moveworks, while certainly our most expensive acquisition, which hasn't closed yet. But is no different from a strategy perspective. So if you think about their beautiful front-end requester search engine, combining that with our back-end fulfiller, it's end-to-end, again, end-to-end AI plus data plus workflow, driving a seamless experience for our customers across the board. And so our strategy hasn't shifted. You'll continue to see us be disciplined with M&A in the future as we have in the past.

Okay. So still kind of tuck-in smaller form M&A is what...

I never say never, but that's certainly the strategy is more tuck-ins more. How do we think about delivering the best capabilities as quickly as possible? How do we get them to market and to our customers in our customer's hands as quickly as possible so they can get the ROI as fast.

Right, right. So I think it was last year where you sort of set the goal of $1 billion analysis, basically AI. [ Just in ]. Last year, you gave us the initial disclosure of kind of the analysis ACV, which was super exciting. So $1 billion is certainly a big number for next year. At the same time, we've seen some pretty prolific growth from a lot of AI start-ups out there, the cursors, obviously, OpenAIs, Anthropics of the world, some of these vibe coding platforms rapidly scaling to $1 billion without a lot of distribution. So how should we just think about like the conservatism of that $1 billion? Because in some ways, you could say you have a great customer base, you've got the distribution advantage. And clearly, there's massive demand signals for these businesses. So how do you just kind of think about that in the context of some of these private AI companies?

Yes. Well, I think -- so I think you have to bifurcate a little bit the consumer side and enterprise side. So you talked about Anthropic and OpenAI, incredible companies. But consumer focus, right? And so you always see the pace of adoption in consumer and these big tech trends much, much faster than the enterprise. And the reason for that is because the enterprise is complex, right? We have to manage governance, security, risk for any technology platform in a very different way in the enterprise. And so it's why you haven't seen a whole lot of consumer companies do extremely well in the enterprise. It's also why you haven't seen a ton of companies that have been focused on SMB come up to the enterprise because the complexity is vastly different. The scale is vastly different. And with that complexity means that adoption is going to be a bit slower, right? You've got to make sure that you're checking all the boxes. It's why the platforms like ServiceNow are so well positioned because we're the trusted platform for the enterprise, especially in the IT department. So imagine now having to operationalize an Agentic workforce, but manage them and govern them and make sure that they're secure, make sure they're doing what they're supposed to be doing. You have to manage an agentic workforce, much like you have to manage a human workforce. And so with our AI control tower, we're able to not only manage a genetic workforce in the ServiceNow platform, but we can help companies manage their internal agentic workforce, other platforms that they're building agentic workforces on and manage that holistically all in one place, securely governed and managed, it's a game changer. And definitely a competitive differentiation. But make no mistake, it's definitely going to be a slower adoption rate than a lot of these consumer companies because it's so much more vastly complex and because these -- the business logic and these business processes are so complex that they need to really take their time and get it right. It's why ServiceNow is well positioned and the first to even put out a monetization number like $1 billion in the areas that we play in.

Right. But you still feel very strong about that $1 billion?

I feel it's very strong and have great conviction on that $1 billion target.

Even with Moveworks not closed yet?

Even with Moveworks not closed yet.

Yes. Got it. Got it. And then as we think about the consumption element of the analysis and ServiceNow's AI revenue because obviously, that's different than signing the subscription and committed contracts. How are you seeing that consumption ramp up now that you've had a lot of exciting product innovation and product launches such as the recent knowledge conference.

Yes. Yes. So great question. So just for everyone's complication, we have a hybrid pricing model with our AI products in that it's a subscription to start and you get a finite amount of token, so a finite amount of capacity as you're building out the agentic workforce and agentic use cases. Then once you consume all of that, you need to buy more assist packs where the consumption element really kicks in from a monetization perspective. We just launched in May, so it's still early days. And so we've talked about the fact that real material monetization won't kick in until back in to '26, '27. If you're thinking about our guide in 2026 is $15 billion and beyond. That being said, we're seeing month-over-month conversion and consumption increases exponential, right, even better than we had planned and expected. So what I'd say is that early days, but really having a ton of customers lean into how our AI product is going to help them redefine their business processes. And the more they build out, the quicker they'll use up those tokens and the quicker they'll need to add consumption on top.

Right, right. And for the -- it's great to hear that it's going better than planned. Like what are some of the biggest use cases where it's taking off that's kind of driving that upside?

Yes, I get that question a lot. I would say it's pretty much across the board. Our biggest use cases are all around our service desk. I think ITSM, HRSD and customer service. And that's all about how do we get folks answers to their questions and answers to their issues and resolving their issues faster with less touch than ever before. And so we're seeing -- it's really been broad-based. So there's not one area that's been enormous and other areas that have been lagging. What I'd say is because we are so strong in IT, that those use cases are probably more visible because we're in more product sets and customers with those products. But those sales and the consumption has really been across the board. We have an incredible company in England that is over 1 million assists already as they're building more Agentic AI into the platform. And that use case is all around employees and getting employees answers to their questions without anyone having to talk to someone and they just drive much more productivity. That's one example. But it's across the board in IT and customer service as well as in our developer. So our creator, AI generating code, 50% or more is being put into production at first half without any changes needed. So there's real productivity and real gains associated with what's happening.

Yes. And one of the concerns we hear from investors just on the SaaS industry in general, but particularly in support is just the risk of seats declining. And I know that's something in the past you all haven't seen, but is there any changes to that? Or when do you kind of anticipate there could be some declines in seats?

Yes. So this question ebbs and flows. We get it, and then we put it to rest and then it comes back. Here's the thing. If labor costs are going down because of AI, the willingness to pay more for AI goes up. So it actually opens up a whole other TAM from a labor pool perspective, right? And so expectations are that people are willing to pay for technology that's going to help enable everything that we're talking about. And so if labor comes down and technology goes up, I bet you, Tyler, that your IT department is 85% -- 80% to 85% labor and 15% to 20% technology. If you're able to tackle just a piece of that 80% to 85%, but your technology costs go up a little bit, I think that's a winning profile for ServiceNow and for Citi.

Right. And probably 95%, keeping the lights on, right, in terms of the maintenance budget. And Gina, I did want to touch on federal because there was some interesting news this morning with the GSA announcement. And obviously, this is a big quarter. For federal, it's no surprise. Federal has been a challenge for a lot of software companies this year. But I thought you could just kind of frame for the audience the incrementality, if that's the word, of the announcement this morning. Was this something you were sort of expecting as it relates to the third quarter? Or was this maybe a positive surprise?

Yes. So first off, I'll just say, I've been so extremely proud of our federal business and our federal team. They are so connected with their customers. They're one of the best teams in the business. And to be honest, even throughout the uncertainty that we had in the first half, we've been right on plan and they've been right on expectations because they are so close with that customer. Very exciting news announced today with the GSA agreement to help them get more of our AI products into their agencies to really help that enablement and help that adoption. And all -- and this is all around how do we really ensure licensing, complexity goes away. So it actually opens the aperture for a, some incremental agencies where we haven't been talking to. But on top of that, one of the that we had been seeing is just a slower pace of getting things done in the first half of the year. And this absolutely should help with really pace and just simplifying the whole process of getting deals done and getting -- and get the licensing in place. And so very excited. What I'd say is it's obviously been something we've been working on. It didn't just get signed overnight. So from an incrementality perspective, we were expecting it, but it absolutely should help really open more doors. And as we think about moving into 2026, hopefully, that headwind that we've seen turns into a really strong tailwinds.

I got you. So more of a 2026 catalyst, obviously, nice to see, especially relatively early in September as you're getting some.