Okay. I think we're live. Welcome back, everybody. I'm still Brad Zelnick, Deutsche Bank Software Equity Research, and for this session, truly delighted to be joined by none other than the Chief Financial Officer of ServiceNow, Ms. Gina Mastantuono. Gina, thank you so much for being here.
Thanks so much for having me, Brad. Happy to be here. Good to see everyone.
Always good to see you. It's always good to see you in Southern California.
Yes. Although super hot down here right now.
Although super hot. I do not think you need really much of an introduction, but I want to jump in. When I think of ServiceNow, I often think back to the founding of the company. I think about your founder, Fred Luddy, and the platform nature of what he built and how it has endured the test of time. Can you just help us bridge from the past into the future? Why are you so confident that ServiceNow will continue to lead in the AI era?
Well, listen, I think first and foremost, Fred is just an incredible founder, incredible human being, and he built this incredible platform, one data model, one architecture, one platform. 20 years ago, people did not know what a platform was. So funny, right? They are like, "Platform? What is a platform? Give me a use case." He was an IT guy, so he gave the most important IT use case, solving the problems of the people that he worked with every day. From there, we built out, right? Because our customers saw that this incredible platform that was amazing for IT and had great workflow capabilities was able to do the same thing across the enterprise, whether you are an HR customer. We have been customer-focused even from the beginning, and AI just makes it even more important to have a platform that drives incredible scale and workflow.
We are really excited about continuing to build out this platform that he built for us. Fred is still on our board, and he is just an incredible human and leader. In an AI world, autonomous work is more important than ever. How do we automate this work? We have billions of workflows on our platform, trillions of transactions each and every year, and now how can we help our customers automate them even more in an AI world? We have the context, we have the data, we have the rules and rails to manage it all in one platform with ServiceNow. That is why I am so excited about the future, and AI just makes ServiceNow even more applicable.
Excellent. I just learned recently that Fred is a real tennis fan, which makes me like him even more because I am as well.
He is a huge, avid tennis player and tennis fan. That is true.
Awesome. A tip of the hat to Fred. Maybe just turning to the exorbitant amounts that customers are spending on AI, headlines of enterprises blowing through token budgets. Investors have really been concerned about AI spend crowding out other spend.
Yep.
To what extent do you think this is really happening, and is this something that we should think of as a net tailwind or headwind for ServiceNow, or perhaps neither?
Yeah, listen, I think the headlines are accurate. I talk to CFOs, my peers, every single day, and all of them are talking about how do they manage their token budgets going forward. So it's real. People are spending. Listen, Anthropic and OpenAI have huge revenue numbers, so we know that folks are spending. The question I get often is: Is it taking away from your budget? And are customers spending less elsewhere as a result? And I'd say there's probably some customers that are spending less in other areas because of their token spend.
What we're seeing, though, specifically in ServiceNow more directly, is that while they might be spending more in one area, if they're really seeing value from a product, even internally, I'm spending more on tokens, but I'm still leaning in with my software providers and spending more with the ones who are building incredible AI into their products. That's what we're seeing with our customers. What I'd say is when you're able to drive real time to value quickly in this market that we find ourselves in, we're not seeing a crowding out of spend. In fact, what we're seeing is a lot of companies seeing incredible productivity as a result of the AI that they've been investing in. They're able to tap into the labor pool much more broadly and really find dollars there. ServiceNow, great example.
We're growing our top line. Q2 was 23%, so above 20%. We're keeping our headcount flat this year, and this is after absorbing M&A. How are we able to do that? Because we're seeing $500 million worth this year alone of AI efficiencies, which allows us to not increase our headcount, right, but still growing at 23%. We're seeing a lot of customers lean into a labor pool dollar budget for spend, so it's why we've been able to continue to see great growth. You continue to see, we talked about our AI business crossing $1 billion in Q2, well on its way to the 1.5 guide we gave for the full year. That's not a business that's being crowded out. That's a business that's, I think, thriving.
I don't know about you, I think you're going to blow past that 1.5, but I don't expect you're going to-
Don't guide me up. Don't guide me up.
I wouldn't do that to you.
I feel very good about our numbers.
I think-
I feel very good about our numbers
I would never do that to you, Gina.
Yep.
I have to think, Gina, this has got to be perhaps the most demanding time to be a software company CFO.
No. This year? Come on. What is going on?
You are the CFO of a leading technology company. We are in the midst of a paradigm shift here, and I would be curious to get your thoughts on how that changes the way you think about allocating capital, where the future just seems far less certain and things are evolving so quickly.
Yeah. I don't think the future is that uncertain. I'm very confident in ServiceNow's ability to make this transition, and you're seeing it in our numbers, you're seeing it in our product portfolio. What I'd say is that, I think it's trying time in general in software. But the narrative, I think, is starting to shift in that the real value is in the system of action, the orchestration layer, the ServiceNow platform that has the 20 years context. It has the data, right? In an AI world, you need data, you need AI, you need the reasoning, and you need the workflow all together to be able to go end to end to not only understand what the issue is, but then understand, detect, alert, and then remediate, respond. I'm excited about what the future holds for ServiceNow, number one.
Number two, to your question specifically on capital allocation, I think it's not that complicated for us, right? We've been, first and foremost, always have been an incredible organic innovation platform company, and that has not changed. That's in our DNA from Fred, from across the board. We will always be an organic innovation center, and that doesn't change. So number one priority for capital allocation is always going to be on organic growth and organic innovation, first and foremost. You'll then see us do the tuck-in type of M&As, the talent acquisitions that we've always been doing. Listen, as we scale up, sometimes those tuck-ins are scaling up, right? That talent, especially for incredible innovation and incredible products, it's a little bit more expensive right now. It just is, right?
Third, we are very focused on shareholder value always, and so we did a $2 billion repurchase in Q1. We've got $4+ billion left in authorization, and so you'll continue to see us think about making sure that we are really focused on capital allocation top to bottom.
I'm always reminded what Bill has always said, that organic is delicious.
Delicious.
Yeah. I tend to agree. If I could take us back to Financial Analyst Day, which seems like a long time ago, but it really was only a few months ago.
Yeah.
Your targets imply both sustained growth at significant scale and substantial free cash flow margin expansion from where we are today. What are the two or three operating assumptions that matter most in achieving the base case, and what would need to develop for ServiceNow to reach the upper end of the range faster?
Yeah. So a few things. We were actually a bit conservative in our numbers because back in May, and even now, I do not think I am not going to get a whole lot of credit for being overly aggressive. There is actually an amount of decel in our core, just because of the law of large numbers. More importantly, there is incredible growth assumptions in there on our AI business and then our three other key growth vectors, so security and risk, data and analytics, and CRM.
We talked about at Financial Analyst Day that all three of those portfolios would be growing in excess of 25% over the three-year period, and that is with AI infused in everything. We also talked about AI being at 30% of our revenue by 2030. If you think about 1.5 this year on almost $16 billion, so 9.5% going to 30% over time.
AI is a huge part of how we think about growth in the business, and we are continuing to see incredible traction I talked about earlier. You said I would blow out. I said I am very confident in my numbers. As we think about infusing more and more AI into our products, that, I think, could be a hockey stick to help achieve us even faster. We talk about security and risk. You see the market right now, and the importance of security and risk, always important, even more so in the world of AI. We have done a lot on acquisitions in that space because of it. When we announced the acquisition of Armis and Veza, we got the question, why?
It goes back to our theory and our thesis always on what our customers want and where our customers are taking us. The customer said for two years, the biggest obstacle to scale deployment of AI in the enterprise was all about security, risk, and governance. We had an incredible security business that crossed $1 billion in revenue in Q3 of last year, but it was only a piece. Now the ability, other companies detect and alert. Now our ability to detect, alert, decide, and remediate all in one platform, end-to-end security journey for our customers in an AI world, it positions us incredibly well in a space that continues to grow fast and is a top priority for every board in every C-suite in every single company. 30 - 32 billion were the numbers we gave.
I feel extremely excited and confident about achieving those numbers. Remember when Bill and I started here November 2019 for Bill, and January 2020 for me, in that first investor day, we talked about hitting $15 billion by 2026. We are going to close at $15.8, and even if you take out some M&A, it is like $15.6. Pretty darn good. I think we have a really great track record of doing what we say. I think the innovation that continues to be built within this company is stellar and top-notch. We are well on our way to hitting the 2030 goals.
Awesome. I want to dig in more into some of the products, some of the market opportunities.
No, I didn't think you would go there at all.
Before I do, though, I want to just touch a bit on the migration opportunity, taking existing customers up to greater bundles and higher-end SKUs that they can take advantage of all the platform has to offer.
Yeah.
Just how should investors think about the opportunity within the base, including the pace at which customers move to Prime?
Yep
The durability of the initial uplift, and the incremental consumption opportunity once more AI use cases are deployed in production?
Yeah. I think the standardization, so what we've done with the standardization of our AI-native bundles, I think is going to be really helpful for the market. And what it allows our customers to do also, it allows them to have a different journey depending on what phase they're in, right? And so you could start off really light with some basic AI capabilities, and you can get them really fast. You don't have to jump to the hugest price uplift up there, especially if you're not ready. And even in that base package, you get the Moveworks front door. You get really nice AI capabilities that allows people to kind of feel their way in an AI world, right?
But at the end of the day, if you have a customer that is more advanced and wants to go faster, they have the ability to upgrade to Prime pretty quickly. So what we really wanted to do was give choice to our customers, and what we are really trying to do is even folks that are the most price-conscious, to give them some AI capabilities. Because at the end of the day, AI is going to be everywhere. And customers who have no AI are really not going to be successful. So we really want to help them at least get kickstarted on their journey. We are continuing to see upwards of over 30% price uplifts in the Prime bundle, which was our plus SKU, so our most advanced of the AI, and between 20% and 30% in the other packaging, depending on how they bundle it.
And so we are really excited about what that is going to do, not only from a consumption perspective, because the more people are using AI, and the more they increase their usage, the more the flywheel of consumption will continue to kick in. So it is about driving value for customers. It is about driving enormous consumption. And so far so good.
Excellent. You are well on your way. Maybe we can pivot more into product. When we think about Control Tower, massive opportunity. I get asked this question a lot. I think I know the answer, but I want to ask it of you because I think it would be great for everybody else to hear you describe it. The question often gets asked, what is ServiceNow's right to win the AI governance layer with Control Tower? Because you have got so many other vendors out there from various positions seeming to close in on it from multiple angles, including horizontal app vendors, infrastructure, and even standalone security providers, even the AI labs themselves. Make it very clear for us.
So it goes back to this incredible platform that is ubiquitous across the enterprise, right? So whether you are using us for IT, HR, finance, legal, customer service, you name it, the platform is the same, right? And the ability now to connect to any model, any hyperscaler, any software provider, any data model, any data provider, and to be able to manage it. So we are agnostic, right? And by the way, our customers want to be able to move between. Most of the customers are not using only one, any of the things that I just named. And so the ability to connect to any data model, any software provider, any agentic AI agent, and manage it all in one place, well, that is historically what we have always been able to do. We have always been vendor-agnostic, data-agnostic.
The ability now to manage it all in one place, no matter where the information is coming from or what underlying platform you are using, it is the legacy of who ServiceNow has always been. You asked a question before about token maxing and these budgets. The AI Control Tower, by the way, when I talk to CFOs, I can manage spend across every vendor, every AI vendor, and more importantly, as importantly to managing the spend, is actually seeing the ROI. The ability there and the AI Control Tower to see it all, to manage it all, and then to, even more importantly, govern it all, right? Kill switch if something is doing something it should not do. To really be able to manage that across, I think that is unique to ServiceNow.
A lot of people can do it vertically in one place, in one stack, in one area. ServiceNow can do it across the entirety of the enterprise. When we have those conversations with customers, when we show them the product, it is an immediate, like, "Show me more, and how can I get this tomorrow?
Awesome. Gina, I want to turn next to cybersecurity. I just add this to my list of questions because cyber stocks are ripping, but I think people may not appreciate, ServiceNow has one of the largest cyber businesses literally in the industry. Can you just walk us through where it has been, how Armis changes ServiceNow's strategic position with the Chief Information Security Officer, and why combining asset intelligence with Control Tower creates a better together opportunity?
Yeah. We talked about in Q3 of last year the fact that our security and risk business had crossed $1 billion in ACV, right? So, a large business to start with. Then you add Armis and Veza on top of it. We are actually a top eight security provider in the world. I think that that is not really understood. To your second question on how do Armis and Veza really drive even, I think, more value, it is a couple things. First and foremost, I think this is a great example of M&A done brilliantly, if I say so myself, and I will. I do not do that often, but I will. First quarter of owning them, they overachieved their plan significantly. But more importantly than them just overachieving their plan, they are pulling the core, right?
Our security and risk business also overachieved, and it is not just security and risk. It is pulling our CMDB and our ITOM business as well. Why is that? It is because you have the entirety of the customer journey with security in one platform, right? Some companies detect and alert. We can now detect, alert, decision, remediate all in one place. The importance of security post-Mythos in an AI world is more important than ever before.
Now our customers have one place where they can really get the alerts, understand them, and then remediate them. We have always sat on top of other security providers, so it is not like we are going in and taking out. This is an incremental budget that we are seeing. Then you combine that with AI Control Tower and the ability to manage everything in one place. It is just a very compelling value proposition for our customers, especially today.
Awesome. You mentioned earlier data and analytics as another key opportunity.
Yeah.
Not something that I was thinking to ask you about, but since you mentioned it—
Yeah
Why don't you share for us why that's so exciting and how it's going to drive the next few years?
Well, I think if you think about what's really required in an AI world, it's a few things, right? It's data, it's AI and the reasoning and the intelligence. It's the workflow to actually drive action on that data and intelligence. Then it's the governance and security wrapped all around it. So if we're really trying to provide the full value to our customers, data is a clear piece. We've got the AI, we've got the workflow for sure, and the security. Data is increasingly important, and we've talked about Workflow Data Fabric. We've talked about data action and the ability to connect to your company's data, and again, agnostic of platform. We've got the connectors that enable this very seamlessly, and the ability to use that data no matter where it is in an organization.
This, I think when you connect data to everything else, it not only ends up being a productivity-delivering machine, AI, but I think that's how you inflect top line as well. Like, what's the data in the market telling you? How do you think about things? And getting at the speed of machine and then actioning it throughout your organization immediately, it's a top-line and an efficiency play. So we're really excited about our data and analytics. It's growing extremely well. Yeah, the ability for our customers to connect to any data no matter where it is is a huge selling point and something that they're very focused on right now.
Got it. I'm going to pull on one other thread that you touched on earlier, which is CRM, and I mean, there was another small company last night that coincidentally reported and put up-
Yeah
exciting results. Let's make it about ServiceNow.
Yeah.
Can you just bring us up to speed? I know you guys acquired Logik.ai.
Yeah.
I think that's a year ago or so now.
Yeah, a little over a year. Yep.
Which we always knew to be the best in its category in the market. Where are we in the journey, and what can we expect ahead?
Yeah. Listen, I think at the end of the day, hopefully the narrative is shifting, right? ServiceNow had really strong results. Other software companies also having strong results. The narrative is shifting, right? The value is not in the intelligence. It is important. The reasoning is important in an AI world, but the context and the domain expertise that software providers have is more relevant than ever in an AI world. That is number one. CRM specifically, and that acquisition of Logik.ai that we did a year ago, CPQ, phenomenal AI first technology. If you think about ServiceNow's history in really helping our customers manage the most complex workflows, CPQ is arguably the most complex workflow in the whole CRM stack.
The ability to have such incredible products then connected to not only the CPQ process, but the sales and order management and servicing, you have one stop shop on one platform where you can quote, you can fulfill, and you can service all in one place. What CPQ did for us was make us even more relevant in the front office conversations.
We talked about the fact that our CRM business in totality crossed $2 billion and continues to perform extremely well. So we remain extremely excited about that product portfolio, the resonance. I actually had a conversation just last week with a CFO of a great company that is looking at closing our CRM deal in the next day or so. The ability to really quote, sell, fulfill, and service all on one platform with modern architecture is a definite compelling conversation that we are having with customers every day.
Thank you for that. I think all investors are really hungry to see AI come to life and really get their heads around tangible use cases.
Yeah.
What are some of your early adopter lighthouse Now Assist customers doing with AI today, and what steps did they take in the early days that have enabled that success?
Yeah. I think that the lighthouse customers that started early with us, they're in Prime position, right? They've cleaned their data, they have simplified their stack, and they're really leaning in on, for example, our L1 specialists. We have the city of Raleigh that leaned in heavily. They implemented our L1 specialist with no back end engineering, big workload having to do. They're seeing 98% accuracy, and they're able to autonomous 65% of the requests, zero touch, 65%. This is in a 10-15-week time frame, so really fast. This is one use case. Now they're looking at going much more broadly across the platform, which is really exciting.
We have another customer that we did a 10-12-week pilot with a few of our FDEs, and we were able to very quickly, in 12 weeks, drive over $5 million of efficiency benefits with one use case with our L1 specialists. A lot of the companies, they're starting pretty small at complex but less risky use cases to get the proof points, and now they're going much more broadly. It's extremely exciting. Right now we're seeing EmployeeWorks, which is our Moveworks product portfolio, combined with our historical employee service portfolio. We are building out now efficiency experts and productivity experts for legal, for finance, for HR, for customer service that really helps any person within that domain function drive incredible productivity. The use cases are endless, and it's really exciting to see.
What you are seeing from a customer base is that even those customers that were slower to lean into the AI moment are very quickly wanting to understand what they can do and how fast they can drive really incredible value. There is definitely a shift happening that it is not just the top 100 customers, but even the ones that historically were slower to adopt AI are really leaning in very fast. I think the next few years are a really exciting time for software.
The future is bright. I agree with you.
The future is bright.
Gina, in terms of other opportunities, if I reflect back on the past, many years ago, I think even predating your journey at ServiceNow, we were so focused on counting Global 2000 customers and what the penetration was. Your track record and presence in the largest of enterprises and the largest of governments, everybody is very familiar with. More recently, if we listen to Bill, I think Bill was quoted as saying that now is the time to address the Fortune 500,000. What does that mean? Why is this now the moment to maybe look a little bit further down market and address that opportunity?
Yeah, I think a couple things. First, we talked about our legacy and where we have come from, right? We have been very customer centric. We are an incredible culture. If you talk to anyone who has ever even worked at ServiceNow or walked down the halls of knowledge, the culture of ServiceNow is pretty amazing. Part of that culture has been customer first, customer obsession. Our customers have always been the Fortune 500, like the enterprise and commercial plus. Our products were built for that, right, at the end of the day. There was so much opportunity to expand horizontally into HR, into customer service, into finance and supply chain, that we were really focused there on serving our customer base across the enterprise.
Well, today, we are at an inflection point. As we think about trying to serve other customers in other markets, it has just felt like the right time, right? The ability to build a product that is much more suited for the small and medium businesses is easier than ever. With ServiceNow's context and history and understanding of the workflow, and understanding of how companies get work done, we are in prime position to do just that. You will be hearing pretty soon about an incredible product that we are coming out with to serve that customer base that we are extremely excited about.
Awesome. Very, very cool. Another opportunity, I want to make sure I do not get over my skis. As we think about U.S. Federal, am I too aggressive to think that there is an inflection point where agencies are standardizing on ServiceNow, viewing AI as a core way to modernize and capture cost savings?
You are not. That is exactly what is happening. There is such a great opportunity because so much of the agencies have so much opportunity to modernize, and you have seen us. Our success in that area is because our platform and our product portfolio is so well-suited for them. Add AI into it, and the ability to drive even more incredible efficiencies and labor productivity, it is right in the sweet spot.
We are very excited. We talked in Q2 about overachieving the plan in Q2. We are set up for a very successful back half. Pipeline looks good. More broadly, the longer-term opportunity in Fed is enormous. Even more broadly, public sector, right? What we have done in Fed is absolutely replicable across every other government across the world, as well as within state and local in the U.S. You will continue to see us push in that space, and you will continue to see that vertical be a pretty significant growth vector for us.
This is the time of year, at least here in the U.S., so-
It is true.
Looking forward to great things ahead. We are just about out of time for this session, but Gina Mastantuono, what have not we maybe talked about that investors might still be under-appreciating about ServiceNow today?
Yeah. I would say a couple things. I mentioned it earlier, but I think it is really interesting, and it was part of our thesis, our acquisition thesis for sure, but the fact that the acquisitions that we have been doing, not only being very successful, very early days as we have acquired them, but they are pulling the core more broadly across the board. I think that was underappreciated, and it still is. We are trying to talk about it because as people keep saying, "Oh, is the core starting to decel?" We are actually building incredible AI innovation into our core. Then we are doing, I think, really smart acquisitions that build out the product portfolio that pull the core with it. That, I think, is probably a little bit underappreciated.
The second thing I would say is that we have six unicorn business that will be bigger than $1 billion, all built within ServiceNow, right? I think that is a little bit underappreciated. We talked a little bit about the security and risk being part of it. But we have six businesses that we have basically organically built from scratch that are over $1 billion. I think that is testament to the DNA I talked about earlier, about the organic innovation, that that will always be who ServiceNow is. Lastly, I would say I talk about Now on Now quite often, right? I like to say we drink our own champagne, and we do. We are customer zero from every single product we put forth.
Our own platform, and Now on Now internally has enabled us and is driving $500 million of efficiency savings this year alone, which enables us to grow our top line and drive incredible efficiencies and keep headcount flat even though we are acquiring some companies this year. That efficiency is only going to continue to expand. So when we talked about the targets we put out for FAD, it was not just $30 billion and $32 billion. We said we would be a rule of 60. That is because we are seeing real accretion on the bottom line because of the efficiencies of our own AI products that we are using internally. We are the best reference for any customer conversation, which is why when I talk to customers, what finance teams get to talk to customers?
My finance teams love that because it is another area of growth for them because they can show how even within finance, we are able to use the ServiceNow platform to drive incredible productivity. Our HR teams, they talk to customers all the time about the incredible products that we use internally and the value creation that we continue to see. That is just going to continue to expand, and I think it is one of the reasons why ServiceNow remains extremely relevant in an AI age, and I think a leader in the space.
That is amazing. Gina, it is always great to see you.
Likewise.
This was fantastic.
Thank you.
Really appreciate you being here.
Thanks so much. Thanks, everyone.