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

Yes. First, I don't think so you should think of us as a SaaS company. We are an AI platform company, right? As we talk about the product we're building, it's a platform which allows you to really run your business effectively. And it works across multiple systems. So we're not one system provider, we are a system of action. We're really doing the ability to understand what users are trying to do and complete the task. And it can happen -- the task completion happens across multiple different entities underneath the covers. We are really at the forefront at a business process level, working end-to-end across an enterprise. Second thing, I think, is that we have already incorporated AI technologies in our platform. So we are not really -- more AI usage goes up, more revenue we make. We are able to really monetize today as we do with Now Assist, but beyond that, because the adoption is in conjunction with users and AI systems. So our platform is really, really built towards the idea of taking any kind of business process, automating them, but also understanding how all the other systems work together and abstracting it out for you. So customers might change a lot of these underlying applications in the future, and some of them are very verticalized, right? They have very full vertical stacks. We work horizontally across them. And we are the abstraction layer across all of them today. And we have built a lot of IP on top of large language models and other things like that. So it's not like the large language model is driving any of the stuff directly, it's just like another part of our technology stack. But the IP we have built around the context aware workflows -- see, a lot of times people think that you can have a large language model and understand a business process. A lot of business processes are not documented. Even the standard operating -- the SOPs out there are usually not up to date, and they change frequently. A lot of the context is in human brain inside an enterprise. It's not like the consumer world, as you know. So what we've been able to do is bridge the gap between humans working inside a company and a business process which is automated. And how do you bring those 2 things together? That's why we have the concept of human on the loop working across the business process, cutting across various different systems and automating them and making sure the context is brought in when you're making decisions. So the stack we've built is much more foolproof in that regards. It changes how businesses run and giving them the liberty to make changes in the system underneath the covers while really keeping the business running and humming using ServiceNow. And that has been very well adopted. If you look at our growth, I mean, we're still growing at the rate much higher than any other companies out there, more than Rule of 50 and consistently delivering.

And evidently not seeing any signs of seat compression.

No, not at all. I mean if you look at our licensing today, I don't see any kind of discussion around seat compression. And also the combination of -- even if user count might go down, if for some reason, companies reduce the number of headcount, our usage -- that will have to be replaced with AI agents. And agentic workflows will become the monetization part of it. And today, that's what we're doing already, right? Even though we have our seats continuing to grow, we're seeing the growth in the AI agents. Even if the other thing goes down, we still see the usage on the AI agents part of it. So we are pretty much well covered. And I think I would love to bet on seeing AI growth continue to happen because that will increase even more where we are, right? Our seats are -- employees are still using our software. They are licensing that way, plus their license is in conjunction with AI agents today, and the combination is where we see the revenue growth.

Amit, you made mention of the large language models, and you are an ex Google executive. So let me ask you a question that might force you to anticipate their behavior, but I'll ask you anyway. So I think a lot of investors are grappling with the question of how Google, OpenAI, Anthropic will scale into the revenue targets and the extent to which that might overlap with incumbent software companies like ServiceNow. Not to oversimplify, but it seems like there's a couple of routes. They can attempt to themselves launch agents that effectively step on the toes of incumbents and be direct competitors, in other words, like productize their models at the apps layer, or they can stick to a different path and go down the API route where they partner with companies like ServiceNow to motivate you to build on their models. How would you anticipate the model companies behaving because they do have a choice right now.

You're right. I mean, when I was at Google and of course, I worked with a lot of these large language frontier model companies today. Now we are very good partners of theirs, right? One of the things they lack, and I know when I was at Google, we struggled with the understanding the enterprise application business processes just because that's not the DNA. And it's not like they're not smart people, it's just -- it takes a different understanding of how you operate a business inside an enterprise and different policies and business processes required associated with that. So what I anticipate, and this is already happening today, with large language models, their really ability to give you answers. And that's really where they're very strong at is to be able to discern information out of different documents and give you a succinct way to get information. But they're not action platforms. And building an action platform takes years and years of work. Be able to do fulfillment, when somebody is asking for information, that's great, but then asking the information to do something with it. This is where ServiceNow shines. And that's why Google partners with us, Anthropic partners with us, OpenAI partners with us because they want that ability. Once you give the information, and we use them to kind of summarize things, 100%. That's a great capability. But when you have to start doing actioning, none of them will be able to do it. And that's a reality. If you look at any customer base today, there's no actioning framework provided by them. They will provide AI agents to give you that information. And that AI agent will interact with AI agents, which have been built by ServiceNow to really do the heavy lifting. And that's where the IP and the value comes in. So as I said, we have built on top of large language model. We use it in agentic flows as orchestration, reasoning technology underneath the covers, but it's like 5% of the technology. 95% is built by us because of the work we do, heavy lifting we do in the context part of it, the understanding part of what it means to do something and how do you do and interact with various systems. And these systems are not like you just say, I want to go and do something there. You have to understand details behind it. You have to understand the context behind it. You have to integrate with the details, the schema, the data models. They're not going away. Those things -- nobody is replacing all of these things and suddenly just running a business without any technology. Large language models are not going to run the business. They're going to help you with some information gathering. So the actioning framework and the technology we've built is really where we shine, and that's why customers are still buying this technology because they've realized without this thing, they're not being able to finish the work. Getting the information is great, but if you don't do the task, it doesn't really do much.

One more model question for you. Just because you and ServiceNow have a -- because you're taking a platform approach, you have an interesting perspective. I'm sure you're, to some extent, model agnostic, whatever the customer wants and where the workload is best suited on which model. But are you seeing any interesting changes in terms of model preferences from your customer base or even from your engineering team?

Yes. I think it's -- this technology is -- the large language models are changing, and they are, in a way, trying to figure out where they want to focus on. So every release kind of changes. So as you said, we are model agnostic, and we extract it out that customers really -- we give them a choice that they choose to, but they're happy with our choices in many cases because as I said, it's really not a differentiator in 99% of the use cases. So customers don't care what is underneath the covers as long as we give you the outcome, right? But we do test. We have a lot of large -- we have a large research team and other -- we build some -- our own models to really make sure we understand what the technology can do for you. And based on price, performance, some of the multimodality we require and some of them overtake someone in 1 month, next month, you see another one. So it's a great work they do. But end of the day, we will keep up with it and use it as we see, just like we used to do with -- as you remember, with different operating system and different chipsets. That's the technology. It's really foundational, but not really a differentiator.

Okay. Another product question, not really related to AI, but that's around your core ITSM heritage, where I think there's always been a lingering worry that, that business will hit some measure of TAM saturation. But I can tell you as one of the analysts I've been amazed over the years that, that hasn't happened yet. So talk a little bit about that core and what's driving continued growth despite the fact that it's at scale?

No, it's ITSM, and I've been here at ServiceNow for a year plus, it's so impressive, the technology and the product which we have built at ServiceNow, right? And it does change how IT businesses -- IT departments operate. So the foundation is so strong, as I said, the foundation with CMDB and the things we have built around it to make it very easy for companies to really operate in a very efficient manner. And we are, I mean, still 40% penetrated even though we've been growing very well because there's a huge amount of headroom available to keep on growing. And you look at the technologies around it, right? So ITSM is a core. But when you add things like ITAM, which is asset management, observability management, ITOM, and then you add portfolio management, the capabilities can keep on expanding very quickly. And customers start with one and they easily see the value of adding other things. Now we're adding things around CISO, which is very connected to IT. So that security business is built around that as well. So what we're doing with integrated risk management or security incident response, and now what we do with the identity governance, it's a very easy upsell for us because customers value the basic foundation and they see the ability to kind of very quickly do other things, which they will take months and years to do in somewhere else. And it's very cost effective and IT groups are used to this, the technology and the interface and the capability. And it's the same platform. So the modules we add, the way that we build our platform today, this workflow, the new workflows we're adding is on the same platform. Today, a customer can build their own workflow on our platform if they want to do custom while we provide a packaged one. And very quickly, they get going without having to redo everything from scratch. So ITSM business, the tech workflow business is still a huge, huge opportunity, and we keep on investing. One of the big focus for next year as well is going to make sure that our technology workflows are getting the innovation required. We're bringing a lot of the idea of autonomous IT, where you have 0 ticketing, 0 incident, automatically -- everything being self-served. So you don't really require a lot of heavy lift when an issue happens or anybody requiring any help. So the autonomous IT thing is really resonating with every customer I speak to in this area today.

Got it. We have time for a couple more. Switching maybe to the industry verticals. Right or wrong, one of the focus areas has been your U.S. federal government exposure. There's been, needless to say, a lot going on this year. Can you give us an update here we are in early December, how that exposure has turned out, how the deal activity is tracked given that there's been a number of headwinds of late?

No, we've been very prudent with our guidance because of that. So we've been clear that we have to be aware of what's going on in the government. But fortunately enough and the execution we've had with our team, which is very impressive, last quarter, we -- our ACV grew 30% year-over-year in the federal business, right? So it's showing that we have a lot of demand from the federal government because they want to automate, they want to become more efficient. And they see a lot of value of ServiceNow products, making them more efficient as they think about the next-generation way of operating, right? So we are very bullish about how that is progressing. Our team continue to remain focused. We have a very good business opportunity there, and we've been successfully delivering against that.

Okay. Let me close with a fun question. If you don't mind for a minute to take off your ServiceNow hat and put your old Google hat back on. You left about a year ago. You must have done something right because 2025 was a recovery year for Google. But everybody in the audience has been following their story quite carefully over the last 6 months. What have they -- as the next Googler, Amit, what have they done right to get their mojo back?

Yes, that's an interesting question. So Google is an amazing company. I mean I loved my 6 years over there, very innovative and very clearly engineering driven. There were definitely -- when we were working through some headwinds and market changes, the technology is always there. The product was great. I think sometimes you just have to get a lot of the different things working together. So I think Google has figured out how different groups come together to build an integrated offering versus the federated model Google used to operate at, right? So I'm very excited about what Google has been able to deliver with Gemini. We are very bullish with Gemini, we use some of the technology, but also our partnership with Google Cloud as well. So a great team, great people, great product, a lot of innovation and a great partner of ours. So I definitely want to see them continue to succeed and work together with us. But in general, I think it's all -- I always believe you have to be product and technology led. And that's what excites me about ServiceNow as well, right? We are product and technology led. And as long as you focus on the right capabilities and differentiation, and I think Google has done that irrespective of what was happening in the industry, and deliver great product, which customers love to use, you always win. And that's our goal and my job here as ServiceNow, it's customer first and making sure we deliver the best product.

Well, from one success story to another. Amit, thanks very much. Thank you, Darren, as well, and happy holidays as they come up.

Thank you for having me. Thank you, everyone. Happy holidays.