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

Yes. First of all, this is a terrific thing. If you think about the compute power that is taking place in the world economy today, it's inspiring. If you think about the lab companies and the massive intelligence they're creating, it's inspiring, but it's also very costly. And it will be very costly to continue the pace of keeping that knowledge revolution going. What's so exciting about being ServiceNow is we could take advantage of all that compute, of all that intelligence and then we put all of that to work in our AI platform for the enterprise without the cost associated with diving deeply into compute or deeply into the lab model where they have to spend billions and billions to create this knowledge. We just get to benefit from all of it. So while others have made marketing moves announcing those exciting partnerships, and they are exciting. We've already been doing that for months and months now with complete integration into all the lab models. And so the cool part about ServiceNow is we will hire the right model for the right job and will enable the customer to manage the economics of their token usage by using the right platform for the right use case. And so now you're into the token economics game. And so we understand that game very well, and we're partnering with all of these wonderful companies. And I think they're all tremendously exciting. And the best is, if you're a ServiceNow customer, you get to take advantage of all of it. You have total choice. So we didn't need a marketing event to actually pull that off. We did it at a deep engineering level, and we did it months and months ago.

Let me ask you now about your early example on the airline cutting costs because they were able to cut out their call center. One of the questions we get from investors is, look, when you start adding up all of this CapEx and all of the frontier model spend, you can't just save cost. You also have to expand the pie. There has to be some GDP derivative implication. There has to be more revenue that also comes out of the pool. I'd love to hear your thoughts for ServiceNow customers, I know you talk a lot about the labor argument, the cost argument at Knowledge. What about the revenue expansion?

No, it's absolutely. I mean the revenue opportunity is massive. If you think about companies literally taking advantage of 20 L1 jobs now that are fully agentified at ServiceNow and you just think about CRM growing on a doubling basis on a year-over-year level. I mean these are, like, huge kinds of numbers. That's because customers now are trying to connect all the things that a customer can do in any channel. They want to meet the customer where they're at. They want to fulfill whatever the customer requirement is and the configuration that they want and they ultimately want to serve the customer on a net present value to create the loyalty effect for life. We can actually do that. We're also arbitraging labor in the growth of company or the aspiration of company, where now with AI, instead of having like triple the workforce to have a services model to deliver a decent margin, they can do it with 5x less people, but still actually grow revenues that go into markets they weren't even participating in before because of AI. And so I think the GDP effect of AI, AI done well is enormous. And I do think this rising tide will lift all boats. I see our own business model. People made a big deal out of, "Oh, seat-based AI, is it going away?" And now everyone is finding out that not only did it not go away, but it's actually increased. But on top of that, if you take that seat, we predict that, that has a 4.5x increase in terms of the revenue of the original seat on the date the contract was signed throughout the fulfillment of the contract because the AI effect and the use cases across the enterprise and the flow of work to reinvent business processes are so powerful and so growth inducing and so margin accretive that companies are going to run to this model. And as they do so, they will increase their growth, they will increase their margins. And obviously, they will do all this in a highly secure manner. And that's what it's all about, executional excellence.

We're a big believer that when software companies drive value for customers, they're then able to capture a piece of that value by monetization. Tell us a little bit about how you pick the price point for some of these new AI products. You've already talked about how more than 50% of net new revenue is now coming not from seat-based contracts. So tell us a little bit about how when you have these conversations with customers about value, how do you decide how much of that value to then take in price?

Well, let's just look at ServiceNow because this -- as a matter of public record, we tell the story publicly. Our value accretion with our Level 1 agents is $1 billion. And it's about 2.5 million hours of work that have been taken off of the backs of people that were doing jobs that were somewhat soul crushing and now those excellent people can be retooled and reskilled and do things that are far more productive in service to the customer, whether they're writing code, they're focusing on presale, they're participating in the selling process of the post-sale go-live process or the adoption and the token utilization process. Now we got people doing more important work. And 90% of the cases, as I said, are being resolved by AI. If you take a company like Robinhood, as an example, which everyone has heard of, they're now using our ITSM product, and it's all autonomous. And 70% of the cases that they used to manage with humans are now being managed by agents, and they're getting a huge ROI on that. If you take a company like Rossmann, they have 5,200 drug stores across Germany. They used to resolve customer cases in 5 to 9 minutes. Now it's being done in 5 seconds. And so the implication is the customer is happier. They have more time to shop, more money to spend and more loyalty to that brand. If you take these companies, 3M, taking a portal approach to managing the whole customer relationship instead of having 26 legacy point solutions, consolidate everything on one portal approach to running the business in a smarter way. You could also say this for Starbucks with thousands of locations across the United States as one example, 4,000 at least now converting to ServiceNow customer service management. And I could talk about Zoom, and I could talk about so many different instances where there's large corporations now fundamentally rethinking how they run their company. And that varies by industry, but they're all exceptionally exciting. I had one company who was in the insurance industry and basically gave me a full day on a Friday afternoon to rethink the business processes of like 17,000 agents and how you can put them to work in a holistic manner that's fully integrated into the core company with the sole intent of really meeting that customer where they are and keeping them for life and also making the agent's life so much easier, all by leveraging workflow automation and AI. So this is, like, such an exciting time. The other thing that's really underreported is data. There's lots of sources of data. We were the only company that fully integrated into all 3 hyperscalers and into those data sources, not to mention the great lab companies, but now all the data companies with the right connectors, we can make a 0 copy of any data source in any enterprise from the systems of record to the various data stores to the hyperscalers without ever moving a piece of the data, 0 copy and continuous operations at AI speed. So all of these things come together in a super innovative AI package from the AI Control Tower from ServiceNow.

Let's stay on AI Control Tower because I think sometimes investors hear a system of action, and they think that it's as easy as plugging in APIs. Now you're talking about being one of the -- you talked about the full integration that you have with hyperscalers, frontier models, et cetera. What is the difference between fully integrated when ServiceNow says it versus perhaps when your competition talks about API connectivity?

If you think about an agentic front door, everybody has to come into an aggentic front door. The good thing is about ServiceNow, if you want to come to a headless front door, that's up to you. But we provide you the agentic front door. And so now you can come into your corporation into one clean pane of glass instead of swivel chairing in and out of 17 different application experiences a day burning up 1/3 of your productivity. So that's a choice. Make the choice, we give you choice. But if you come into the agentic front door, either as an employee or a customer, you have an unbelievable simple experience. You simply have an autonomous experience where you're asking the system a question. The system will go source any data relevant to the question that you asked and give you the necessary answer so you can go about your business just like you would using one of these great thinking machines on the weekend. The best part now is you're also activating not just the people, but the AI agents. And the cool thing about ServiceNow is it doesn't have to be a ServiceNow agent. We will work with all of the agents of all of the corporations that companies utilize in the enterprise. So now the AI of the AIs kicks in. And that could also be a robot. You got to treat them the same way as you treat a human or you treat an agent. And we also, as I said, integrate with all the labs. So we now have that in the Control Tower completely worked out. But now you have to integrate with data. And so I've already given you the action layer. Now I'm going to get into the workflow data fabric layer where we can connect into any data source, which could have been a Snowflake or a Databricks or a hyperscaler or completely your own rendition of what a data store is. And of course, the systems of record that you spent the last 6 decades investing in, we got you. And then where Armis really comes in was on the operating technology side. So think about all the assets of a corporation. One of the reasons our public sector business is doing so fabulously, and it's a much bigger setup this year than it was last year is because we know all the operating technology in any environment. So we already know and we can go into any agency and basically show them how little visibility they have into their assets, and that's probably not a good thing. And so we can immediately remediate that with our operating technology from Armis. So any of the assets, IT, IoT, OT, all on one common platform. And if you think about major banks, they care a lot about critical infrastructure, networks, devices, the people that roam in and out of the buildings and all that, and it's now being managed by Armis. So we got you on the identity side. We've got you on the agentic front door as you come into the enterprise, which is huge. And we've got you on all the fabric contained in the data of your corporation and of course, the operating technology. And all of this is done in a highly secure way. And I repeat, we are the only company in the world that has integrated risk management, security operations, identity management and operating technology on one common platform. And Gabriela asked me a question earlier about ITSM. That was always the fabric and the moat where you have the configuration management database and you have the context engine for all the people, places and things, and that fabric has been built over 20-plus years, 100 billion workflows, 8 trillion transactions. And so now you're talking about enterprise scale, and that's why we made the bold move into extending more broadly into security because that's what our customers wanted from us.

Let me ask you a little bit about the R&D organization.

Sure.

There is a view that ServiceNow's been established incumbent for a long time. Therefore, to take new technologies and make them backwards compatible, you run into an issue of technical debt. And at the same time, you're acquiring these companies, they have to be beautifully integrated. That's not easy. How did you -- and maybe Moveworks is a great case study here. How did you look at your organization as a whole and say, we've got to be able to move really quickly here and not let any -- use the technical debt. And I don't even know if that's how it works, but not let that hold you back and transform the tech stack such that you can actually move quickly.

Right. Well, it's really interesting. I've been here 7 years now. I don't know where that went, but it was quick. I can promise you that. One of the first moves that we made in the company was a company called Element AI who had a Turing award-winning founder, and they were in Montreal, Canada. And we did that, like, in the first 120 days when I became CEO of ServiceNow. So we immediately had a vision, immediately had a vision for where AI was going to go. And we were building models with Jensen and NVIDIA right from the start. And so it's just one of the real beautiful partnerships, a really sustainable one and one that we're super proud of. We have really great engineering. And anything, whether it was Moveworks or it was Veza or it was Armis, we are immediately focused on integration. So the calling card of d ServiceNow and how we got big fast was really recognizing that the enterprise is a thorny complex place. And the #1 reason why digital transformation failed to deliver a positive ROI for 85% of the companies in the global economy was because integration held it all back, which is why everybody was operating in silos doing point solutions. And we knew that for the platform to transform companies, it had to integrate beautifully into all these other systems. So in the flow of work, you could fundamentally change how companies ran without actually ripping and replacing the infrastructure that they spent billions on and years implementing and years customizing. So that was our solve for that. And so when we took on Moveworks, and it was really interesting. We acquired Moveworks in April of 2025. The deal didn't close until December. And we wanted the AI Control Tower. We are a company that's destined by our strategy and our vision. And we had the AI Control Tower vision. And so Veza was a very important part of that, and so was Armis and so was Moveworks. But you all dealt with a 72-hour period where we closed Moveworks and then Veza and Armis were announced and you're like, "What, what's happening? I thought they were an organic growth company." We are. But we had to have the AI Control Tower to give you the organic growth and print cash for many years to come. And so now everyone is like, genius move, Veza, Armis, all these companies are unbelievable. All the customers love it. All the people that work for us love it. The investors now love it. So I think what's happening is they're seeing the power of integration on an enterprise scale platform that serves multiple industries that satisfies multiple personas in every corporation we serve, and we actually deliver extraordinary ROI. And so our business cases are dynamite. And I think that's the real critical difference that we can do it, that we integrate well and that we do what we say we're going to do and we give you a great return on your invested capital. And that's what customers want, but they also want it in a secure way.

We're at a moment in time where enterprises have a lot of choice. And there are a number of new entrants in the space. There's a lot of confusion. You may even have different factions within a customer on the right way to do things. And ServiceNow comes in with a pitch like AI Control Tower, and you have the case studies like FedEx, for example, of what true transformation on ServiceNow looks like. How do you get more customers to commit? How do you get them over the hurdle of, "Hey, we want to experiment for a while. Everything is changing so quickly. Let's just see how things go." What does that conversation on conversion look like? How can you enable more of your salespeople to cross the chasm, so to speak?

Yes. First of all, you're right. I mean there's just a lot of confusion out there. There's a lot of FUD out there. It's silly season with vibe coding and the point solutions and the claims that are not based in fact. And so we, like everyone else that has a scalable substantive company has to be ready to handle that. And what you find is the higher you go in corporations, the easier the people are to talk to because they just want to win. And so if you have a winning formula and you have a C-suite relationship, and we definitely have that across the world and a Rolodex that I think would pretty much compare with anybody's. That's really the basis of understanding. You have to really deal with executives that are trying to transform their company. And then ultimately, what we did is we not only invested in engineering, but we also invested in forward deployed engineers where we actually go to the customer site, we actually implement with the customer and deploy the software and get them live at a record clip. And especially now in CRM, we're particularly interested in that discovery to adoption to ultimately tokenization process to create the value chain for the customer. So you got to be in it to win it.

I think that's a perfect place to leave it, in it to win it. Hey, please thank me -- please join me in thanking Bill McDermott.

Thank you very much. Appreciate you. Thank you, Gabriela.