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

Hey, everybody. Keith Weiss from Morgan Stanley. I run the U.S. software equity research franchise, and super pleased to have from ServiceNow, Bill McDermott, Chairman and CEO. Thank you. Bill, thank you so much for joining us.

Thank you, Keith. .

So I would say there is no better time than right now to be talking to Bill McDermott about what's going on in the software, right? Because the investors in this room had a high level of uncertainty. They don't have a clear view of what's going to go on with software broadly. They have a lot of concerns about the viability of SaaS vendors over time. And you are, I would say, the best software salesperson that I've ever met. So nobody better to talk to us about the positioning of ServiceNow, the positioning of you as a trusted vendor of your customers and how AI is an opportunity for you versus a risk. So maybe we could start out there. And like when you think about Generative AI, you think about these innovations, what does it mean to ServiceNow in terms of your opportunity of what you can do for your end customer?

Sure. Thank you very much, Keith, and I appreciate the very kind words. I know, for example, you had Jensen today. I'd like to congratulate Ted and the Morgan Stanley team for really the conference of the century in terms of who you've had. And of course, Satya as well. And I really do think this universal agentic network that ServiceNow has formed should come out in the conversation today because that's an example of 2 great companies, 2 great partners, and we're doing amazing things. Sever years ago, we started building models with Jensen. We have done some great work to make ServiceNow the AI control tower for business reinvention. And so when you think about this universal agentic network, consider this, ServiceNow is connected to every node in the Fortune 2000. Every hyperscaler seamlessly integrates with ServiceNow. Every language model has been integrated and adopted by ServiceNow for the right industries. We can turn it on and turn it off based on industry and all the systems of record. And then you say, well, what about the data. All this stuff produces massive data, plus you have data companies that are also very good companies like Snowflake and Databricks they also all integrate. So if you think about that control plane in every major tech transformation, the money goes to control plane. So while AI thinks workflow acts and that's our unique competitive advantage that today as we're having this conversation, we have 85 billion workflows in flight in the Fortune 2000 doing almost 7 trillion transactions. So deeply embedded, deeply durable expanding platform with a deep exciting moat that continues to grow and prosper for our shareholders. So we can get into that today.

Excellent. So if I think about the ServiceNow story, over the past decade, ServiceNow has extended from being an IT solution to automating workflows on top of a lot of transactional systems. You guys have become the system of engagement and where the work is actually getting done on top of the transactional systems, but now we're in an environment where people are worried about the AI labs, not from their models, but what they're doing on top of it. They look at Cloud Cowork. They see the tool use there. They see an extension in terms of how much work it to do in the time frame. And they worry is that going to become the new service now. Is that going to be where the work gets done and this is going to push ServiceNow into the background. But I'm sure you guys have an alternative view, right, that you have probably even more of a right to play there, probably even more of a right to provide that worthful automation. So what gives you that right? What gives you the better positioning to further automate those workflows versus an AI lab or a start-up coming in fresh?

Right. Well, if you think about anthropic, you had Dario on stage, and he talked about Health Care and Life Sciences as an example of major industries where AI breakthroughs would happen. We team up with anthropic in those industries. And so if you think about a nurse, for example, on a floor today caring for a patient somewhere, the time that he or she has to spend on the medical record is equal to the time that the doctor is actually spending with the patient, which is why we took health care operations and the thinking that Claude can do, as an example, and put it into our health care operations solution where we directly integrate it into the medical record itself. So let's just assume on Floor 8, aisle 2, there's an IoT device that's down. The nurse instead of having to have somebody create a ticket and create a fiasco can write in the medical record itself, remediate the issue because we're directly integrated. So we take advantage of the thinking power, but we're doing the action in the workflow automation, no paperwork, no forms, rock and roll right out of the medical record. That's a practical example. Another thing I could have said is like there's payroll issues all the time. There's mistakes made all the time in a company. Today, any land wood model can tell you what is wrong and what you're supposed to do about it. But none of them can actually do it. And why is that? Well, the same reason, Keith, that people have had a mess in the enterprise for 6 decades, legacy systems, lack of integration, you have to take multiple trips across multiple systems and functions to actually fulfill a workflow. That is why we are the workflow company, and that is a unique competitive advantage because I'm not a feature, and I'm not stuck in one function. I'm going end-to-end across the enterprise to get work done. So we freely embrace incidentally. Anthropic is doing a fantastic job on coding. We actually use it, we are their customer, and it makes our developers more productive. But OpenAI also does very important things with multimodal and natural language, especially voice, and we have fully adopted that into the ServiceNow platform. So we're not running, we're not heightened, and we're not assuming that they're going to do what we can do because it's really hard to do what we can do. But we're embracing it. Just like if you remember, not too long ago, all the hyperscalers look out, they're going to take over the enterprise. And today, they have multibillion businesses built on the ServiceNow practice. One of the things that never gets talked about, we all know about the fratricidal relations between countries and things like data sovereignty and stuff like that. Well, just as an example, think about ServiceNow is a unique advantage in single tenancy, where I can run ServiceNow in any hyperscale cloud in any sovereign cloud in anyone's data center. So there are no limitations on ServiceNow that exist in some of the multi-tenant SaaS companies that are operating here in Silicon Valley, which is why I keep saying stop branding things SaaS because we don't live in a SaaS neighborhood. We are a very unique enterprise company.

Got it. So the model providers, you have partnerships with Anthropic. You have a partnerships with OpenAI. It becomes an engine that helps to power the broader platform of ServiceNow. So it's a competition. They're going to try to get into our lines, but you have some deep moats. You have these deep customer relationships, you have the data, you understand the customer problems. And you've already brought solutions to the market. So let's switch gears and talk a little bit about -- no assist. I believe that went generally available in November 2024. So a little bit past the year down the road with this product cycle, what are you hearing back from customers? What are they liking the solution? What's getting taken off? Or what are the initial use cases that are really starting to gain traction?

Would now assist.

Yes.

Yes. What's fascinating about now assist, obviously, it's grown sensationally nearly 3,000 customers now. The big idea is to radically simplify the way work is done. And if you think about agents, we have created the control tower for business reinvention. So what they like about it is this. Not only can they solve big problems, but they can adopt these agents. The workforce of the future is going to be a combination of human and agents and thinking machines with ServiceNow. You don't have to worry about the seat-based pricing model concerns. I covered that in the earnings call. Our seats are up 25% year-over-year in terms of active users. But let's say that changes over time. And I expect that it will. The good news is the hybrid pricing model has already kicked in because our customers are telling us, we want you to manage your agents. We want you to manage the thinking machines and we want you to manage the agents of other people's solutions so I can have 1 control plane for all the agents. So the human, the nonhuman identities and the machines all managed in this control plane, huge. Another thing that they really, really like is what we did with Moveworks because now you have an a front door to the whole autonomous platform. So if you think about the workforce of the future, it's like you go into 1 agentic front door, you don't have to swivel chair in and out of, on average, 33 different applications a day. And now all of the work can be tripped into all these systems that exist in the enterprise completely autonomously. So we've actually created new roles on a product that we announced on February 26, not wet paint, where you have AI specialists. So now I have an IT specialist. I have a systems administrator. I have a security operations agent. These agents are complementing the humans in the flow of this work in running their business processes. So if you look at Honeywell as an example, they have IoT devices, hard infrastructure, manufacturing controllers now, they can manage their IT estate, but they're also very concerned about their OT estate. So think about IoT, think about manufacturing, things about controls, think about everything going through 1 control tower that kicks off all of these autonomous flows in the way work is done and execute it to completion. We all watch the Super Bowl and maybe most of us did. There's a company that's pretty good at the bedding process and anybody that wants to do an individual bet on almost anything. But just think about having a solution that's mass customized based on the type of better that you have. All this is done on ServiceNow. All this is done with agents. And already, these companies not only subscribe to the ServiceNow service, but they've reloaded the assists. And in some cases, they're on their eighth pack of reloads. So you're seeing the hybrid pricing model kick in because the business case is associated with these workflows and meeting the customer where they're at are so profitable. So those are among the use cases. And I could give you countless names of customers, but I'll give you 1 since you had Jensen here. We have a $2 billion pipeline right now in CRM. And one of the big things that we did last year is focused on CPQ, configure, price and quote. Because customers today, they want to be able to sell something fulfill on the order they sold and then service the account to have the net present value of loyalty kick in for life. On our platform, they're able to do that on one single platform. And I believe the customer relationship management has moved to customer resolution management. Everybody can say, "Hi, by what I've got. The question then becomes how do you give them what they bargain for and service them upsell them, cross-sell and keep them loyal for life. I think that's why we have $2 billion now on pipe.

Outstanding. One of my theories right, when I'm thinking about ServiceNow is there's an expanded capability. There's great new things that we can do with these large language models, but it's an evolution of a theme, like you guys have always been about automating those processes and bringing more productivity to your customers. And it wasn't too long ago that you announced the Pro SKU. And the Pro SKU was an IT-led SKU, right? It was about improving automation is improving productivity. Is that a good analog? Like if we think about it in terms of value proposition, but also a time frame of adoption. We saw the Pro SKU got adopted really quickly within the user base. Should we expect something similar with now assist because it is an evolution of that same theme.

It is. And Keith, you're absolutely right. I think it's important that we acknowledge that we continue to have the necessary pricing power to create shareholder value on the Pro SKU of now assist. So that's a 30% uplift. We've held that price line and it continues to grow, and there's plenty of room for that to grow. We have also this hybrid pricing model where we give you a very healthy dose of assist because we want you to be happy. We want you to adopt it. We want you to use it and derive the value from it. That's the whole point. But once you have exhausted the initial SKU from Pros that includes a very generous portion of these assist, then we reload them and now assist packs. Since May of last year, that is up 55x, and we're only getting started. But we're managing this very, very carefully, very, very closely because it's really now moving to an adoption game because the quicker the customer adopts the more assist they use, the more value they derive and obviously, the more profit we generate for shareholders. But there's other things to that people are not catching on to. So you have your seat, but there'll never be as many humans as there are agents. So now you have your seats. However, that evolves is fine, but now the agents step in. Now there's agent specialists where we allocate them based on highly specific domain within the workflow and other people's agents, too. So if Salesforce agents or Workday agents or SAP agents or Oracle agents are in the loop we can put them and integrate them into the flow of work of that business process. Now think about the foundational elements of governance, compliance auditability, being able to roll something back and look at the full form of the transaction, every company needs that. So that model is going great, but we also have assets. So we can price by asset. We also have devices we can price into the devices. We also now, especially as we complete the M&A cycle with Armis stepping into operating technology. So this is also going to deal with shadow IT, IoT, networks and devices, infrastructure managing things like SLAs and being able to bring that into the licensing models, there are so many new developments. And may I Keith just comment on something that I think you might notice, last year, we made the move to acquire Moveworks, it took 9 months. It was like within 72 hours, we had Veza and Armis announced at the same time. And so I figured the shareholders must be like, "Hey, what's going on over at ServiceNow. I know that we're growing organically did something change? And I said in the earnings call, no, obviously, because we didn't have them in the number, and we still grew and gave a great guide. But the best part of it all is we didn't buy things that were yesterday's news to chunk in a growth number. We bought the future of agentic business and combining that with the ServiceNow platform has not even shown up in the numbers yet. And so we closed Veza 2 days ago. We have Moveworks now. It's doing phenomenal. And we obviously have a great, great company in Armis in front of us, which I think obviously could be the Instagram of ServiceNow. So we did it for a agentic business. We did it to make sure we remain a growth company for the next decade, not for the next quarter. So I think that is something for the shareholders to get excited about. And I'll tell you not only should you know that we're going for the growth and the acceleration, the continued acceleration of the growth, but also the free cash flow margin and the expansion of that. Because we use our own agents, and we use our own platform with now on now, we are taking huge head count cost out of the company and driving that through the productivity of agents ourselves. And I'm tough on this because I tell the company you have to drink your champagne if you want to sell more of it in the marketplace, and that is a highly accepted principle in ServiceNow. So that is going to deliver more and more shareholder value goodness for everyone in this room.

Got it. One of the most surprising things on the most recent conference call was that comment about seat growth. You guys talked about 25% seat growth. When investors are really deathly afraid about seat growth. Can you talk to us about where that comes from? Is that an expansion of the types of customers that -- and the type of employees that ServiceNow is covering and the workflows that you're automating, where does it come from?

Yes, I think it's really important. One thing I want to say in a complementary nature to other companies that have a system of record, I actually think, in many ways, if you have a great system of record, it actually -- AI is actually making your intrinsic value higher because it's very important, the data that's in those systems is very important. . And those companies are not unimportant companies. But what is quite unique about us is we've been the system of record for IT for 20 years. And what's super cool about that is if you think about the people, the places and the things of every corporation in the Fortune 2000, we are "the ERP of IT. " And in an AI world, that's actually even more important because now you springboard that into the employee experience into the customer experience, into the innovator experience and you're doing that on an end-to-end platform. So now we've moved the control plane end-to-end across multiple industries, multiple geographies, multiple sub industry verticals and in an expanded ecosystem that's buying into this idea of the universal agentic network. So we are doing more things for more functions in more places than ever before. And that's where you see in the active user growth of 25%. Frankly, I think we've only just gotten started. And that's not even including some of the business model innovations that I can bring into the pricing aspects that we talked about earlier. So if I had to take one worry off the shoulders of the shareholders of ServiceNow, it would be -- don't worry about the sea counts. There's going to be many millions more of agents than there are human beings. And we're at the control plane, the AI control tower for business reinvention. And this is the plan that they're going to come through to run a genetic business. We're going to make it happen. So that's what you should be thinking.

Maybe just to dig into that a little bit further because it is a big concern for shareholders. When you're sitting down with the CIO and you're talking about what ServiceNow is going to do for the organization, how important is that C count metric versus talking about the broader value? And if it's not going to be seats, are there other ways or certain how to get paid or fundamentally, is the customer going to pay you for the productivity gains? Are they going to pay you for the value that you add, regardless of whether it's adding or tracking?

It's a great question. So first of all, the sad thing is a side show. That's just something that people somehow got worried about. I'm sure somebody put the fud in somebody's mind and they wrote articles about it. It's a side show. What you have to do in enterprise software to be successful, is you have to know the customer, and you have to understand what they're trying to accomplish. And everything is tied to a business case. So what I'm explaining to you is you have seats, you have hybrid pricing based on the assist packages, which is a hybrid pricing model. It's already in the market. They're already renewing the assist packs, and that's a completely new way of generating net new revenue. I gave you other things also like assets like devices, like infrastructure, these are all components of net new ACV opportunities in the pricing model of ServiceNow, and it is happening. The other thing that's quite interesting, and I ran across this in December of last year, I met the CEO and Chair of one of the biggest SI firms in the world and we were working together on a common customer. It happened to be a CRM-related matter and the business case was $682 million. And our take on that was de minimis compared to the $682 million. So I basically say to the customer and to the SI, I'll tell you what the heck with the licensing model just give me a piece of the action. What do you want to give me? I want to give me half. No, I don't want to give you half. Give me 20%. I'll probably get a lot. In other words, they talk themselves into, no, no, I want the seats because that's predictable, and I know where I stand. I'm good with the assists. And by the way, the SI said, the business case is so good, we're underwriting it. So what I think is a net new possibility that's not even commercialized yet, but I believe we're going to do it is literally saying to the biggest, most important companies in the world we are the AI platform for business transformation. We will take care our view. We will put business cases together with AI that generate unique economic value. give me a piece of the action, and I'll even underwrite it and guarantee it for you. That is something with big companies that haven't even hit the street yet. But for your imagination, if that doesn't burn you with some pool ideas that get rid of the silly seat conversation, then probably nothing will. So this is what's happening in the real world. Hybrid pricing is where it's at. The agents are going to be priced in. They'll be agent specialists, networks, devices, infrastructure assets. It's all going to be part of the Agentic revolution and the upside for a company like ours that touches every function of a corporation and every buying center of a corporation, it has not even been scratching the surface yet. That's how much is in front of us. And I tell people all the time, and we just had the conversation with on Backstage. Look, $200 billion is where it should be now. We'll go for $1 trillion, and we're building business models to do that. And so I warmly welcome language models, hyperscalers, systems of record, Anybody that wants to be part of this universal agentic network come to the party because we're going.

Got it. I'm going to feed that to my associate, $200 billion market cap is the base case, bull case, $1 trillion.

$1 trillion is the number to focus on. That's why -- so I signed up to 2030. That's steady. And by the way, I bet the whole comp plan on the stock. So -- and bought some, too. So I'm shoulder to shoulder with you, and it's all going to come true. Don't worry about it. .

That's it. The other side of the hybrid side of the equation is the consumption ramp. And you talked about on the most recent earnings call, a hockey stick of consumption into the second half of this year. So two questions on that. Like one, what are you seeing in usage patterns because there's got to be usage that's kind of going to drive that hockey stick. And from the investors' perspective, like how should we sort of set our expectations in terms of the ability to really start moving the needle for subscription revenues or revenues overall for ServiceNow as that consumption starts ramping up?

Yes, for sure. I think it's real good question because the assist packs just started kicking in now, Q4 and now since May, they're up 55c in terms of the consumption. But that is progressive through this year. May was when things started to really take off. So I think in the second half of the year, you're going to have a real hockey stick in terms of the assist packs kicking in at scale. When managing the process beautifully, you'd be very proud if you saw behind the scenes, how the company is doing it. There's a tremendous obsession with customers at ServiceNow. You'd expect that from me. I get it, but I'm not 29,000 people. I got 29,000 people that are obsessed with that too. And tremendous adoption skills in the company. forward-deployed engineers in the company. And they're all about getting the customer to adopt use and derive value from. The software sale is the easy part. That's the part where companies really have to get with us shoulder to shoulder to win the game. And so I think in the back end of the year, you'll see a lot of the assists really kick into the hockey stick formation. The other thing I think you're going to see is we're just now beginning with Moveworks, Veza and soon Armis. Moveworks is with us now. Veza closed 2 days ago. This is the identity management platform of this generation, is nothing as good as it Otherwise, we wouldn't have done the deal. We only buy the best. And then Armis, I believe, is instagram. And so you're already penetrated in the Fortune 100, 40% penetrated without a sales force. So we have one of those, and we know what to do with them. So all of these things, I think, will form hockey sticks on top of an already fast-growing ServiceNow. Other thing that's happening, Keith, is customers, I first came here, I don't know if you remember this, but I said with a platform of platforms, nobody has to lose for us to win. And I stand by that still. I mean, I have no quarrel with any of these companies, including the systems of record because their win rates would go up. If they adopted ServiceNow, it would be good for them. But they won't because they feel very threatened by us, but they shouldn't because it would help them if they really teamed up because that's what the customer wants. The customer is going to get with what they want either way. But where I was going with this conversation is we're at a very unique inflection point now where we're 1 company that's coming at the customer with 1 highly integrated platform that's going to be able to seamlessly manage all of your agents connect all of your data in 1 real-time fabric where the work is happening inside of the workflow, the transactions are real time, whether you move it into ServiceNow or at 0 copy. And now you're going to be able to combine your IT and OT landscape seamlessly on 1 platform. And that doesn't mean that the security companies that are out there today aren't good companies, they are we integrate with all of them. And today, our security business is heading for $1.5 billion. We haven't even worked at it. But what they want is they want 1 vision of their security estate. Now we're not only giving them that, but we're actually giving them the control plane of the operating technology and the information technology that connects with all of their security. And you know why that's really big, and I think this is going to be the big deal is because today, if you look at the world economy, U.S. is #1, China is #2, and the security, fraud is number three. It's a $1 trillion market a month. So if you think that, that's a problem, you're right. And so in the enterprise, we're going to be able to control that plane and give that visibility and the real-time workflow action necessary to do what you have to do to stomp out that problem. Companies that work with us already know we're good at it. But you add IT and OT and you're going to be of something extremely special. And all the licensing models advance with these new business interests in the agentic world, which are far bigger than the enterprise. And if you say, well, everyone is going to tell me to buy their agents. Yes. but they're going to tell you to buy their agents either as a feature because we can do 1 feature that ServiceNow does maybe you should buy my agents or a function where someone says, "Yes, but I'm the specialist in HR or CRM, all that might be true. But there's only 1 company that traverses across all of those interests on 1 common platform. That is what makes everything simple. And from my money, the ultimate art form of leading a company is making it simple and simple is really hard.

Okay. One last topic I want to double click on is the M&A strategy. And I remember when you came on Board as CEO at ServiceNow, you understood the investor Angst around M&A and said, "Listen, we don't need to do M&A to grow this company. There is a lot of organic opportunity. What changed? Like was it the assets that you saw? Is it the level of maturity of ServiceNow? What changed that M&A has become a bigger part of the strategy over the last 18 months versus like the first 4 years?

We want to be the best. We want to be the fastest-growing and best enterprise software company in the world. And AI moved the goalpost. And AI is changing the world. Agentic enterprises are the ones that will survive. The other ones won't. And our ambition is to be that a genetic market leader. And the assets that we bought, we could have built it, but it would have taken us too much time. AI is moving too fast. So to have the Agentic front door to our autonomous platform was necessary to have identity management at a human, nonhuman and thinking machine level was necessary. We bought the Agentic market leader. And with Armis, we absolutely bought the OT market leader in the world and such potential. So we bought into a TAM idea that is now a $600 billion TAM. The TAM idea that I walked into in 2019 was still a great TAM. It was $90 billion. But $600 billion is better than $90 billion, if you want to build a $1 trillion company as simple as that. And so everything we did is about innovation and progressing the customer's agenda. So ultimately, our shareholders can look at this now a symbol and say, "I'm proud to own that. That guy cares about my money. That man understands what's going on in the enterprise, and he wants to win. And I got 29,000 people around me they feel the same way. So that's where it's at. You're not going to get surprised by us. We don't need to buy the losers. There will be plenty of them. We're just going for growth.

Outstanding. Super exciting story at ServiceNow right now. Thank you for coming in.

Thank you for having me, Keith.

Appreciate you.

Thanks, everybody.

Thank you very much.