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

Perfect. Thank you. Welcome to our first big fireside keynote. Gina, great to have you here.

Great to be here. Thank you so much.

I was like -- I saw your LinkedIn post, and I kind of -- I had to hit the gym, so I really feel bad. But...

Stamina, we need stamina...

Yes. I know, I know, in these times, so yes. If you think about it, I wanted to start big picture. The beginning of the year was very volatile for everyone, spot market, probably kind of vendors as well. How do you -- how did the situation evolve for you this year? What are you seeing?

Yes. I got this question earlier from one of our investors. And if you actually go back to this same conference last year in December right here, we talked about the environment feeling a little bit better, right, like a little bit of uncertainty behind us. And then Q1 came, and it was a little bit different pretty quickly. The great thing, I think, is that our business, especially if you exclude the Fed piece, was extremely resilient and demand was strong and growth was really good. Obviously, with DODGE, we definitely had some headwinds for Fed, but we're really excited about the fact that Q3, which is the biggest Fed quarter out there, we had incredible growth at 30%, biggest Fed quarter ever. And so I'd say this time now going into 2026, well, I think that the conversations with customers, and if you look at any IT spending reports into '26, it looks healthy and looks good. But I would just say that I'm just so excited and pleased with the performance and the execution that our team has had quarter after quarter even despite some pretty uncertain times this year.

And what are you seeing on the customer side in terms of their kind of behavior or kind of thinking about maneuvering these volatile times like what's the customer -- what are the customer conversations like?

Yes. First and foremost, no surprise. It's all about AI. I figured that's like two minutes into the conversation where I -- AI, right? So conversations are broad, and they are really focused on how AI is going to help drive growth, productivity and efficiency across the board. And so the conversations we're having with customers is all about how they're quickly moving from experimentation phase into full-scale deployment. I think there was a lot of experimentation, especially on build, and there's a lot of focus now on software providers that are the trusted partners of the IT organization and really the ability to -- if you think about what ServiceNow is able to provide with our AI control tower, the ability to manage, govern, secure all assets, including agentic AI assets, all in one place, whether they're building their own, they're using third parties to build and manage that holistically because the conversations about AI are obviously everyone is having them. But in the enterprise, especially, the focus in the C-suite is all how to do this in a secure governed way because at the end of the day, AI is only as strong as the governance around it in the enterprise. It's just so very important.

Yes, yes. Okay. Perfect. Yes. And I wanted to get back to AI a little bit later, but just finishing up, sorry, on one point in terms of what we're seeing, like federal this year. You mentioned DODGE a little bit. Then we had the shutdown. Thankfully, for you guys, that was after the end of the quarter. But like on the one hand, obviously, it created kind of volatility. But on the other hand, if the government goes and wants to be more efficient, et cetera, that should play into your playbook. So how is that federal thinking evolved for you this year?

Absolutely. So certainly, short-term headwinds just because things were slow, right, and things were slowing down. But as you saw coming into Q3, once things opened up, our growth continues to be extremely strong. And the reason for that is exactly what you're saying, Raimo, the administration's focus on transparency, accountability and cost savings is exactly where the ServiceNow platform has helped government agencies transform in the past. And so the ability for us to go more broadly and deeper into the public sector in federal space, especially, the opportunity is enormous. The agreement we reached with GSA back in Q3 also opens doors much more broadly. And so from a mid- and long-term opportunity perspective, our federal business is, I think, one of our key drivers for continued incremental growth. And even more broadly, what we've been able to do with public sector and federal government, we can do much more broadly help public sector around the world. So everything we've done, we can replicate for public agencies outside the U.S. as well as state and local, which for us has also been pretty strong throughout the year. So to your point, we're so well positioned to help federal agencies. And a lot of the work that we're doing there is displacing very old homegrown systems that really need to be modernized and automated. And so we play and the platform plays so well into exactly what these government agencies are trying to do with their technology stack.

Is there also an argument that AI -- like with AI coming, you can't do AI with these very, very old systems. So it's kind of more of a driver that you can kind of realize shoot like kind of maybe that 30-year-old system finally needs to be replaced.

That's exactly right. We're not going to get the AI productivity on old systems like that. And actually, we saw in Feb specifically a lot of very fast POVs turn into deals like within weeks. And so AI is definitely, I think, going to be a catalyst for even more opportunity in the federal space as it is more broadly in the private sector as well.

Yes. Talking about private sector, are you kind of eating your own dog food? Like how is AI within ServiceNow?'s

I like to say we're drinking our own champagne.

Oh, sorry, yes, yes.

Our platform is like champagne and not dog food. But yes, so we absolutely -- we call it now on Now. It's a huge part of how we think about the platform internally. We're customer zero for almost every single product we launch. We've talked about now on Now and our own AI productivity, driving $350 million worth of productivity efficiencies. Now a bulk of that, we reinvested back into the business into innovation, but about $100 million annualized, we flow through to the bottom line this year alone because we were able to reduce our headcount growth plans. So we don't have to do big mass layoffs, but we are able to really think strategically about our headcount bets going forward. And so we were able to actually drive $100 million to the bottom line this year, and those AI efficiencies keep growing. And so we will continue to drink our own champagne and deploy our platform broadly across the enterprise. And we're seeing it all over the place. Think about autonomous IT. So 90% of our IT requests are fulfilled self-service. Customer service, significant improvements, plus CSAT going up all at the same time. HR, employee self-service going up significantly as a result. And so expectations for the ability to leverage AI continually within helps us with our ability to accrete margins. We were able to raise our margins for this year pretty significantly on the free cash flow side as well. And so there's inherent leverage in our platform to start because we are one platform, one unified architecture. And then AI just really enables even more leverage. And so the question always is how much we're going to redeploy back into the business to drive future growth. That's always, first and foremost, our priority. But we also have the ability to be bullish and sustainably grow our margins while at the same time, really driving best-in-class top line growth.

And because you're probably involved in this -- on the projects, like -- to me, it sounds like a multiyear journey because if I think about like Barclays, when we are using AI, it's like, yes, there's something, and it's like, "Oh, yes, this is actually working." But you think like bigger picture, this is not just a one-off and one-off margin improvement. This looks like multiyear, correct?

Oh, this is definitely multiyear. This is an AI journey, and we are in very, very early innings. We talked about the fact that our AI revenue surpassed $0.5 billion this year alone, well on our way to $1 billion next year, which was the target that we put out back in May. But this is very early innings. And talking with our customers, including Barclays, it is a multiyear journey. And we're just getting started. The innovation that continues to be fueled internally, I think, is just phenomenal. And it's all about how we're able to help our customers, really drive significant incremental value, both on growth as well as productivity and efficiency gains.

And then what do you see in terms of customer adoption? Because like -- and you started out with the Pro Plus SKU. So if I'm a customer, I could say, well, I bought Pro Plus, I have AI, but that's on paper. That's not really adoption. Like what are you seeing there in terms of customer behavior?

Yes. So implementations are going faster. Deployments are going faster. We've seen 55x increase in consumption from May till now, which is faster than we anticipated. And so we're seeing really strong traction. And what that means is that customers are deploying, and they are building more and more agents on the platform. And so the consumption trends that we've seen over the past several months continue to be strong. And so the more customers are using and deploying, the more value they're getting, the more they'll continue to deploy. And so it's a virtuous circle that we're really excited about.

And how do you think about that consumption showing up as consumption? Because like -- I guess if I'm like a customer at Pro Plus, I get token, I get consumption initially and then use more, then I need to come back to prove that point that SaaS is alive and kicking for the whole industry. People want to see consumption growth. Like where are we on that journey?

Yes. So as I said, we've seen consumption growing 55x from May till now. So we're doing extremely well on that consumption journey. But yes, you're right, we have a hybrid model from a monetization perspective. And so that initial subscription, consistently, we're seeing 30% pricing uplift. And we've talked about that for a while. We're consistently seeing that. So with that initial subscription, obviously, we're giving them a decent amount of consumption. I've talked about the fact that given the initial consumption allocations, we wouldn't expect to see the incremental consumption kicking in until back half '26 into '27. What I'd say is that 55x is stronger and faster than we initially anticipated. But our base guide back in May that we talked about for 2026 was $15 billion in revenue for '26. And so for the consumption to start to materially impact that number, that won't happen until back half '26 into '27. But that hockey stick and what that looks like in the future as AI becomes more ubiquitous and more agentic workflows are built, and think about it, we have trillions of workflows built today on the ServiceNow platform, trillions. You identify all of that, that compute and that capacity need really is exponential and can be a really strong hockey stick as you think about growth '27 and beyond. So we're excited. We're keeping a strong eye on that, and it looks very, very healthy.

And then two questions -- two quick questions around that. If you think about it, if we talk to customers, a lot of them start small. And they were like, okay, well, like let's not go crazy on the use case in itself because I'm nervous that it starts to hallucinate and things like that. Do you see that? And how quickly are they kind of moving on from that? And second quick question was like on the use cases. Does it kind of mirror what you see internally in terms of what people are using it for?

Yes. So we're absolutely seeing it mirror internally. You would imagine our core is IT, right? And that's our core. So IT service desk is a huge area of where customers are focused. And we secure all the assets, right? Our CMDB has visibility to all the IT assets. And now you layer on AI, it's just a huge value add for customers. So you'll continue to see it there. Customer service continues to be a pretty remarkable area for us. And HR actually was a bit surprising. But if you think about probably not so surprising because it's a safe place to start internally with employees versus externally with customers. And we're seeing those use cases really across the board, across the product portfolio. And then you add in AI control tower, which we talked about briefly, and the real need for customers as they're deploying AI more broadly to think about governing and securing it, that AI control tower. And the ability, by the way, to connect and monitor the agents irrespective of what platform it's built on, I think, is a very compelling value-add customers love this. And we actually surpassed our full year expectations in one quarter. So we're really seeing some strong traction there, very exciting times. To your question on small deployments getting bigger, we're absolutely seeing that. We're seeing folks really leaning in and understanding that the real value is when you go more broad as opposed to starting small.

Just to save you a question for the earnings calls for the next few quarters, we have that slide where you look about the ITSM versus CRM versus HR versus platform? Conceptually, because you have such a big base on ITSM, if I do more agentic, could we have a scenario that, that kind of segment kind of actually grows faster because there's just so much upsell, cross-sell that you can do there. And so as we get the slides, it's not like, oh my God, like something is wrong with CRM or HR, it's like ITSM has such a big upsell opportunity. Like how do you think about that?