Okay, good afternoon, everyone. I am Mark Murphy, software analyst with J.P. Morgan, and it is a real pleasure to be here with CJ Desai, who is President and COO of ServiceNow. First of all, CJ, it was great seeing you on stage at your own conference-
Thank you.
... last week out at Las Vegas. Thank you. I know you're a popular guy. There's a lot of demand for you, so thank you for taking the time.
Of course. Absolutely.
Maybe you can spend a moment just giving us a super brief introduction of yourself and in case there's anyone in the audience who's not aware of, what ServiceNow does, just a super quick brief intro.
Of ServiceNow as well?
Mm-hmm.
I'll start with ServiceNow. ServiceNow was created in 2004 in San Diego area by Fred Luddy, and he created this as a platform company for any type of workflow automation. Any task that can be automated digitally, he wanted to do that. ITSM, which is our largest product line, was actually the first demo that was created on top of ServiceNow and became the first-biggest use case to get to $1 billion in revenue. That's how Fred started the company. After that, Frank Slootman became the CEO. Frank hired me in 2016 and said, "CJ, we need to hit $4 billion in revenue by 2020." That was Frank's goal with Mike Scarpelli, who was the CFO at the time. After Frank was John Donahoe.
John Donahoe stayed with us through 2019, October, and then Bill McDermott came from SAP to take ServiceNow to the next level, and Bill has been here now three and a half years. I'm CJ Desai, and I'm responsible for products engineering, our cloud customer service, professional services, and a few other things.
Thank you. That's a wonderful overview. Thinking back again to last week on stage, Bill McDermott was there and he said, "This is the quote: "ServiceNow is the intelligent platform for digital transformation, but people still ask me, 'What does ServiceNow do?'" And that a lot of people still don't know. You know, for this audience, we hear the term workflow often, we hear the term orchestration layer. Amazon and Microsoft would also say, right, that they can handle some workflows. They would also say that they're a platform for digital transformation. When you look out at this audience of non-IT professionals, how would you convey this differentiated role that ServiceNow has in the IT landscape?
Yeah, absolutely. Many companies will claim that they are a platform company. That's okay. They'll say that we also do workflow, and then the term gets used fairly generically at times, Mark, like you said. Here is how I would describe it. If we take just a simple example that an employee at your firm wants to move, we are in Boston, so let's use this Boston as an example, from Boston to San Francisco. If an employee moves at a bank from Boston to San Francisco, there are so many departments that get involved in making sure that transfer happens. The mobility team from Relo. Is the payroll gonna be different from Boston to San Francisco? Is the department changing? The cost center changing? Is the employee's role changing as she moves to, say, San Francisco?
When you think about all of that at a corporation, these are complex workflows that need to be executed digitally for that transfer to happen. Even once the employee's transferred, the first 30 days, 60 days, 90 days in the new role, what are the to-do list training that that employee has to go through? These are very complex workflows that go across departments in an organization. The employee doesn't care. The employees sometimes don't even know that that's the name of the department, that's mobility, which will help the employee with their relocation. That's just example of an employee just moving from one city to the other. You can think now more complex scenarios in IT landscape that a payroll system is down. Why did it go down? What was the root cause? How can we get it up and running?
All that storming and forming happens in ServiceNow from an incident management, major incident management perspective. These are extremely complex workflows, and workflow is nothing but a task orchestrated in a certain sequence.
Mm-hmm
across systems, across clouds, across people to get work done.
You use this term storming and forming, and I like that one. ServiceNow has been storming its way into our CIO surveys now for really, if you look back, since 2011, right? The company was still private. ServiceNow would rank consistently near the top in our survey work on... We would look at the spending intentions, we would look at the linkage with digital transformation, we would look at who's gonna be used for cloud. How would you describe to this audience what is it that has vaulted ServiceNow into that kind of a position? How have you maintained that also for quite so long?
Yeah. One of the things is when the company was created, and most people say it, but a very few do it, the focus on the end customer and end user for use cases was very special and continues to be special at ServiceNow. We do not sell to small enterprises, as some of you, if not all of you know. We only sell to upper end of the mid-market to large, to very large, to governments. That's our segment, where we do business. We are very focused on making sure that our customers get value out of any use case, whether it's ITSM or whether it's HR service delivery or customer service management. If you look at our renewal rates, which are best in class, the reason is we work very hard with our customers to make sure they get value out of the platform.
Even if we decide to go after certain use cases, that use case is something that they can truly see that ServiceNow... Like, I want to, Mark, give an example. When we entered the HR space, they said the same thing, "Hey, you do IT. Why HR?
Mm-hmm.
We said, "We are not system of record. We do not wanna be system of record that SAP, Oracle, Workday, and others do. That's great. We are the workflow or the system of action layer, so that when the actual work that needs to be get done for an employee that spans organizational boundary outside of HR, that's what we do." We proved that, and now it's a decent-sized business with north of 1,000 customers for us.
Decent-sized.
Yeah.
We're commonly hearing out there, when we do our field work, that once you win the hearts and the minds of central IT within these big organizations that you're targeting, that then it becomes very easy to expand outward.
Mm-hmm.
-into the other business units. You just mentioned HR, but people will mention legal, they'll mention customer support, finance, and so on. Can you shed some light on the mechanics of that? When in the trenches, how does that IT stamp of approval-
Yeah.
you know, kinda help grease the skids for ServiceNow so you can spread out across the business units?
A lot of you have been observing technology industry. Mark, I know you have done a lot of work, including the surveys you mentioned about intentional spend security being one and a few others.
Right, right.
in the past on J.P. Morgan surveys. One thing I'll tell you that over last 10-plus years, the number of times I have heard, which has not turned out to be true, that CIO is irrelevant. It is all about the developers. The spending is moving to developers. Yes, it is true that some technology spending does move to developers. Developers need to be productive. Get it. To answer your question, CIO, where we chose our first use case at scale, which is ITSM-
Mm-hmm.
beginning of the last decade and has continued to grow, that is our core buyer. We have won hearts and minds of CIO. Around 2016, 2017, CIO became aware that ServiceNow can be the ERP for IT. That's not a small term, because a CIO's job is pretty broad. Keep systems up and running, create new digital services, serve lines of businesses, whether it's HR or sales or whatever, or finance. We very much focused on CIO being the core of the core, and we were selling to the CIO, versus somebody will sell to chief revenue officer and the CIO has to run a CRM system. Somebody will sell to the CFO, let's say a financial system, that's the buyer, and the CIO has to run and operate that.
Yeah.
Versus we had actually product selling to the CIO.
Mm-hmm.
CIO, because we became the ERP for IT, and we have never lost sight of that core buyer and that core stakeholder. Once you serve the CIO saying, "Hey, we are here for you. We are not here that we are trying to sell to HR or finance like the HCM system or their CFO," that gave us permission to say, "Hey, Ms. CIO, can you introduce us to the CHRO? Again, you are gonna leverage the ServiceNow platform that you have been leveraging for HR use cases. You are gonna leverage the ServiceNow platform for customer support." That's what allowed us to gain permission to go to other buying centers.
Another element to this that has caught our attention for a long time is the fact that you do have a very integrated platform. Out there at your event last week, I was speaking with one of your very largest partner firms, and he was actually describing what you were just referencing. He said many companies have done ITSM, right? Now his term was, he said they're work flowing out, right? They're work flowing out from there across the rest of the company, right? HR, legal, finance, supply chain, security. The quote was, "It's exploding in so many areas and they're succeeding with it." I stepped back and I said, "Well, how?
you know, how can this company succeed in so many different parts of the organization?" He basically just said, "Integrated platform.
Mm-hmm.
You know, integrated platform. People want that. Can you speak to that part of the philosophy? It's kind of been guiding ServiceNow in a unique direction of integrated platform. What are the advantages that it affords you that might not be, you know, clear to people in the audience?
Yeah. For customers, like this, partner told you, it's workflow out. For us, it's platform out. You start with the platform as the core and some of the mechanics that I shared, because ServiceNow platform has User experience built in, machine learning built in, workflow built in, RPA built in, process mining built in. All of these are, think about, building blocks that are part of the ServiceNow platform. Now, when we decide as a company or as an engineering team that we are going to go after a supply chain use case, what I shared is that with one or two Scrum teams, somewhere between seven to 14 - 15 engineers, because the platform provides all core services, we can create a version 1.0 of any use case for, say, a supply chain department.
From a customer perspective, customer says, "We use you for ITSM. Are you telling me it is the same mechanics when we roll it out in supply chain, your portals, your workflows, and others?" We say, "Yes, all the user access model that you have built in, security that you have built in, will just extend. You're not installing yet another platform, and you don't need to install in yet another team to scale that platform.
You know, this platform keeps broadening. I think at the last update, CJ, we were told there are 11 organic businesses with over $200 million in revenue.
Mm-hmm.
It's becoming actually pretty diverse. If you had to pick one or two of those and say, "Do your work. Keep an eye on this, because there's nascent potential here, and this is gonna be a durable compounder," where would you tell us to look?
I would say the same thing I think I said in 2017, which was now six years ago. To start with, customer service as an area. We are ServiceNow, customer service, ServiceNow, service.
Mm-hmm.
That is a large TAM, and when you do industry-specific customer service, like a telecommunications or a financial services, we believe that the market is large enough, and this can become a massive business for ServiceNow.
Okay.
outside of IT. That's number 1. Number 2 is we just entered last year what you called out, finance and supply chain workflows.
Mm-hmm.
Again, we are not trying to be system of record, but specifically workflows for procurement department or supply chain department or a finance accounts payable department, we believe there is enough pain points that ServiceNow can solve. That's another area that has potential. It's, like, $11 billion TAM, is what we disclosed last week, but it has potential to be a very large business.
Okay. You've given us a couple areas to focus on and do the work. I do wanna ask you about HR-
Okay.
in addition to those. I recall, CJ, this was several years ago. I traveled out to the HR Tech Conference.
Mm-hmm.
It was probably in Las Vegas. It was, you know, had been a long week. I walked into the partner pavilion, I immediately saw a ServiceNow booth, right? Big booth right in the front, very crowded. I had a brief moment of thinking that I somehow went to the wrong conference.
Mm-hmm.
Right? I didn't know about it then. Last week, you know, we were kind of milling about and talking to multiple partners at your event, and several of them called out HR as their number 1 growth factor. They're saying that they're getting inbound requests on the HR side.
Mm-hmm.
Can you help us understand why is HR a logical extension for you and maybe which pieces of that are resonating?
Yeah. First of all, just at the highest level, the good news for us is we have divided our product lines in four big buckets: technology workflow, employee workflow, customer workflow, and creator workflow, right?
Mm-hmm.
Four of those workflows are growing nicely for us. We don't have this challenge, one is declining, and we need to move the R&D.
Right.
Other allocation to the other area. All four are growing nicely. All four of them. Okay? That's number 1. Number 2, HR, which pretty much in its earnest started in 2016-
Mm-hmm.
Where customers said, "Hey, for HR case management, onboarding type of challenges or offboarding challenges, ServiceNow can do this thing." What has resonated the most is an employee, in trying to make that employee productive, is something that always has been our focus and take friction away. To give a very simple example, think about a large bank, if you want to get something done with the finance department, you go to somewhere else. With legal department, you go somewhere else.
Mm-hmm.
With your facilities, you wanna go somewhere else. That, "Hey, I became a manager. I need an office." We provide a single portal for employees because employees, at the end of the day, do not care what the org structure looks like. Okay, there are four lines of businesses, and there is this HR function. They wanna go to one place to get help, and they want one place to get things done. That's what we have done with HR products.
You're mentioning the employee portal, or, I think you call it Employee Center at times.
Yeah.
You have onboarding, you have that piece, and then you have this HR agent.
Yeah.
type of a workspace. Where do you think it would expand beyond that? Is there enough to be done there for a while where it's not necessarily gonna be expanded?
We are expanding on making life easier for managers to manage their employees and what are the workflows required for managers to deal with. Skills is another area that we launched last week on every job function has skills career path. Right? You need certain skills to be a manager, certain skills to be a director, certain skills to be a VP, whatever it is, or a software engineer.
Mm-hmm.
How do you do that skills mapping? How do you have the conversation with your manager in a meaningful way? That's another area of focus for us. Then because of the pandemic, what has also happened as companies have tried to figure out this hybrid workplace, where some will say, "We allow our employees," or, "We mandate our employees 2 days a week." Some will say 4 days, some will say all 5 days. It varies. How do you do facilities management, and how does employee get that experience that if I'm only coming 2 days, that means I don't have a desk that is assigned to me because.
Right. Mm-hmm.
... no corporation will assign you a desk if you're coming two days. Can I book something? Can I book a conference room? Can I look at the maps? These are other areas within employee experience standpoint that allows us to expand.
Okay. You just mentioned the pandemic.
Yeah.
When you think back on this, if you think back 1 year, at this conference, that was the time when we just started to have a few software companies that began calling out some challenges in the demand environment, right?
That's correct.
Then over the summer, ServiceNow was also relatively soon in kind of identifying the change, right? Called out macro crosswinds.
Yeah.
That was last summer.
I think Bill went on CNBC.
That was it. That's the one.
Yeah.
That's what I'm referring to. Most companies kind of recognized the environment was changing a little later, right?
Mm-hmm.
Admitted it later. How do you connect the dots on the macro environment if you kinda start with the last several quarters, and then how does business confidence feel to you right now today?
Yeah. I would say 2022 and 2023 from my perspective are very different, right? 2022, there were a lot of conversations, especially in the first half, that we saw were around supply chain and what does that do to fulfill demand when you talk to companies or corporations, potentially talent shortage-
Yeah
all of that. Second half of 2022, including this 2023, it has become all about interest rate environment.
Mm-hmm
... the cost to serve, profitability, focus, and there is not a single conversation, Mark, I have where there is not a conversation about efficiency and automation. Simply put, I'll just do this pattern matching over 100+ customers in, say, last month.
Mm-hmm.
They say we are solving for two things. We want to automate better, while at the same time our digital agenda is still on, because digital is still required, right? It's not at all cost. That's the efficiency game that we are solving for. It's the year of efficiency or year of productivity and all of that. That pivot happened once the interest rate environment changed at a global scale. From our perspective, we are pretty distributed in terms of industry, public sector to financial services to healthcare, manufacturing, telco, media and others, so we see it all.
Mm-hmm.
I would say United States of America continues to be resilient for ServiceNow. This is a very ServiceNow specific comment.
Mm-hmm.
For us, very resilient because we are workflow automation platform. We see that from a demand perspective, whether it's IT automation or HR automation or customer service automation. We are seeing also similar things in Central Europe. We are seeing UK turnaround for us this year. I feel, given what we do around digital and automation, we are still seeing demand for ServiceNow and customers take... I mean, last week we had 15,000 in attendance.
Yeah.
You have so many companies that have cut travel budget for profitability and others. We had, I would say, median number per customer, 12 to 13 folks being sent, which just tells you that they want to learn more about ServiceNow.
There was good energy there, and it was crowded.
Yeah.
It was busy. How was the pipeline generation activity?
Pipeline so far. Our sales and marketing team did a great job to make sure that, one, there are still customers who don't understand that we are the end-to-end intelligent platform for digital transformation.
Mm-hmm
... not just IT service management or IT operations management. These customers coming in and sending this many folks from line of business and IT, it just opened up and I had so many conversations over three days there where customers are like, "I didn't know you did supply chain," or...
Yeah
I didn't know you did. Oh, I didn't know you had field service management product." One, our existing pipeline that we need to nurture and mature, a lot of those customers came, now it has allowed us to also expand the conversations to say, "I didn't know this.
Okay. You felt pretty good about that?
Very good about that.
Okay.
Yeah.
Now you do a lot of business in the financial services vertical. We learned while we were out there some of the banks sent 30 people, 60 people to that event. You know that's a big commitment. We're constantly getting questions from investors about whether this regional banking crisis-
Mm-hmm
... could cause any issues. You know, maybe you have some deal deferrals. Even if it's not from the regional banks, right? Even if it's from other banks. What are you seeing so far?
Our Q1 numbers, when you see, when we reported them in April, we were not impacted while the crisis or however you want to say it, the phenomena that was happening in the regional banks in Q1. When I look at the pipeline for this year and out years, right? We look at 4, 5, 6 quarters out. There are certain product lines we have besides our core of the core, which is ITSM and ITOM, is still demand for our risk solution in banks specifically. We will have a chief risk officer level conversation, or we have digital risk level conversation. Our security products are resonating well with both large and mid-size banks. Between banks and the insurance companies and others, we are also seeing demand for mid-office, back-office workflows. Again, banks, all of you understand, they're tough customers.
You have to prove out the use case, you have to show the value...
Mm-hmm
... before they make a purchase. The cycles with all the banks have always been long.
Yeah.
They understand ServiceNow really well now in allowing us to expand in other areas besides just IT.
There were, you know, there was good energy out there. Obviously it's not a perfect environment. Obviously, the typical software company has been... Growth has been slowing, right, across the entire industry, and nobody's been immune to it. There were people out there were partners out there last week who would recognize that, but then they would also say... They would at least hypothesize that ServiceNow could be a bit recession resistant. They didn't say recession-proof. We would say, "Well, why?" They would say, "Because companies are... They're consolidating legacy point products, right, onto a modern platform, and their feeling is that they do continue to do that even during a slowdown." Is there an element of truth to that? Is there an element of truth to being a little bit recession resistant?
Yeah. Listen, 2022 was the first year where the word R came out, right?
Mm-hmm.
Was 2022. That, hey, there are parts of economy that may be slowing down despite the labor market being super resilient. ServiceNow did pretty well.
Yeah.
We did pretty well. If you look at our proxy statements, the demand was there, and we executed on that demand. It exceeded, even when we reported our Q4 and fiscal 2022 numbers, it exceeded what was happening compared to the other SaaS companies.
Right.
Which is what I can compare us against, with close to 29% subscription revenue growth in 2022. Now when we look at 2023, we had a strong Q1. We reaffirmed our guidance, we won't do that unless we feel that we are, given what we do, still in the strike zone of the purchases that companies are trying to make.
Yeah. Okay. Well said. Well said. CJ, in the time that's remaining, let's switch gears a little bit and go into the topic, that's on everyone's mind, which is generative AI.
Mm-hmm.
Right. You spent quite a bit of time at the Analyst Day talking about ServiceNow's vision. Well, I'll tell you what actually stood out to me.
Okay.
When you were on stage, in front of the main session, the loudest response from the audience, and it was by far, it was when you were showing this demo of, I guess I would call it text to code, but basically someone goes in and someone types in, right, "Create a workflow for notifying, like, certain teams if I have.
Yeah
... if there's a level one incident," right?
Yeah.
The system basically spits out the code, right?
Mm-hmm.
it understands what you're asking, and it spits out the code. it's in the proprietary, ServiceNow...
Format. Yep.
... scripting language, right? You know, people kind of went crazy, and then you can hit Copy, it goes on a clipboard, and you can drop it...
Yeah
... right into the app, and then it's live. I mean, I assume you noticed that response.
Oh, 100%.
Yeah. I mean, how much of a productivity boost do you think you can provide to the typical, you know, the admin or a ServiceNow platform owner?
I'll go to the first principles, okay? This is super important for all of you to understand. In 2016, when we ended the year, we were $1.3 billion in subscription revenue. Last quarter, we hit $8 billion run rate, and we'll be $8 billion by end of this year.
Right.
Right? You think about 8x growth in seven years, that's a very fast license subscription growth. That's great because of the use cases, this, that, so on. Our ecosystem has not kept up with it. Meaning trained ServiceNow professional. Every large customer I speak to, they say, "We cannot find people who understand ServiceNow and how to code in ServiceNow." When we showed that demo that you write in natural language something, and it spits out ServiceNow code, that was a domain-specific LLM-
Mm-hmm
... that we created in ServiceNow by feeding ServiceNow proprietary code that we know how to write, because we wanted an accurate code to show 15,000 live audience, because anybody can take picture. If that code is faulty, which was a regex for email address, number of incidents, and this and that's a game over. You don't want that demo. We did a live demo. Really nice applause and people were cheering and there was like a gasp and all of that.
Yeah
is because every customer is dealing with not having enough ServiceNow professionals, and this just creates more developers on ServiceNow, creates their learning curve faster, and ability to modify rules in ServiceNow. That's it. This allows our ecosystem to expand. Our partners, you mentioned, Mark, have a massive backlog to implement many of our product lines that our customers have purchased, and this allows them to scale faster.
Mm-hmm.
We will be able to monetize that via providing offerings, on the productivity enhancements that they will get.
you're using... You mentioned the domain-specific LLMs. The thought process was, for me, was you have OpenAI, that's the general purpose-
Yeah
LLM. The value add is gonna be the domain-specific.
Mm-hmm.
At first, I heard it as, that you're using Hugging Face for that.
Yeah
... a private company. I think later on, I started to realize it seems like that's also gonna include NVIDIA.
That's correct.
NVIDIA as well.
I could not, on Financial Analyst Day, disclose NVIDIA because Jensen came on Wednesday.
Oh, okay.
He wanted the press announcement to go after we have announced it for NVIDIA shareholders as well.
I see.
We are working with NVIDIA team on IT Service Management specific LLM. Jensen was very proud. His team showed me that morning the results we are getting with open source LLM that NVIDIA is helping us fine-tune. General purpose LLM with 175 billion parameters, whatever the numbers are, it'll continue to increase. That's interesting, it's general purpose. What our customers want is, "Hey, CJ, I'm a large telco. I use you for these 5 products. How can I enhance my productivity, and can you please take care of it using GenAI?" Because that's what...
For ServiceNow specific use cases, they don't want to build a GenAI model, they want us to build the GenAI model, which is why I call it domain-specific, and NVIDIA and Hugging Face are our partners to be able to do that, where we don't require 175 billion parameters, and we can still compute efficiently.
Let me, let me finish on observability. At a super high level, why is observability gonna be, end up being a good fit for ServiceNow? I mean, you have incumbents out there. We had Datadog here yesterday. You have other incumbents. They're pretty modern, right? They've been working on metrics tracing,
Logs
... monitoring logs.
Yeah.
They've been working on it for a long, long time. Why is it a good fit for you?
Here is what I would say. At the highest level, our customers said, "You have a right to play here," because things that come out of observability platform, that this particular application's performance is slow or something changed where this application went down, eventually makes a call to IT service management, where you have all incident repositories. Our customers said, "You should play in this field." Only when our customers say, "You should play in this field," we play in that field. Our platform was designed for human workflows, digital workflows, not machine data, hence we did the Lightstep acquisition. Lightstep used to do tracing really well, then they added metrics, and now, late summer, we are gonna add logs. We will have a full cloud observability solution that integrates with ITSM and ITOM. That is our differentiation.
Given there are multiple solutions out there are, as you know, you talk to any bank or any manufacturing company or any government, they'll say, "We have 5 of them." That's totally fine. We are focused on observability at scale, at a cheaper cost, that integrates really well with the backbone of IT, which is ERP for IT, which is ServiceNow.
Okay. Wonderful message to end on. CJ, I can't thank you enough for hopping on a plane and flying across the country...
Of course.
to be here with us.
Absolutely. Thank you.
Thank you very much.
Thank you.