ServiceNow, Inc. (NOW) Bernstein’s 40th Annual Strategic Decisions Conference (Transcript)

ServiceNow, Inc. (NYSE:NOW) Bernstein’s 40th Annual Strategic Decisions Conference May 29, 2024 2:30 AM ET

Company Participants

CJ Desai – President and COO

Conference Call Participants

Peter Weed – Bernstein

Peter Weed

Hello, everybody. Welcome. Thank you for joining the session on ServiceNow. Johnson & Johnson was an hour ago. So if you’re still here from that one, now we’re going to focus on technology and how we can deliver a lot of growth.

Last year, some of you may have joined a session that I had on ServiceNow on our best ideas forum. And in that, I likened ServiceNow to be the next Microsoft. And I think over this last year, they’ve done nothing but validate a lot of that pretty heady call that we had.

And we’re really honored this year to upgrade from the Best Ideas session to having CJ, the President and COO of ServiceNow here with us today, to talk about that. To talk about what the opportunity is, what the challenges are to get there.

And as I was poking them a little bit, Bill, the CEO, kind of alluded to the fact that you wanted to see the business be a $30 billion ACV business before he was out, and he’s talked about being around until the end of the decade. So it’s maybe not something you have personally signed up for, but I think it’s that type of aspiration that we see. And I think we want to explore with you about like what are the opportunities and the challenges to get there. So thank you very much for joining us today.

CJ Desai

Thank you, Peter, for inviting us.

Question-and-Answer Session

Q – Peter Weed

I think the place to start is growth, right? So a lot of the reason people love the business is that side and we shouldn’t shirk the fact that the bottom line is amazing, and you’ve been doing a lot to kind of pivot towards what you might consider to be kind of a large cap profile with stock-based compensation coming down and free cash flow is looking a lot like some of the durable large-cap winners that are out there. But I think people still look to the business for growth. And one of the biggest growth drivers for the business has been existing customers. And so a question that we always get is, how long can that persist, right?

And so you put out at your Investor Day that about 25% of your customers right now are using kind of three or more modules. But that means about 75% are using less than that. When you think about remaining 75%, what portion of them do you think could actually achieve where those are? And where are they going to go?

CJ Desai

So Peter, first of all, you had a great foresight last year on the Best Idea. So thank you for believing in ServiceNow. I and our entire management team, including Bill, we 100% believe that ServiceNow has a massive TAM, right? And massive TAM is typically a collection of the areas that we have focused in and how big is the market for those areas — always was and we have five products and these five products have these big markets and then what market share we are going to capture. So at our Financial Analyst Day three weeks ago, we said $275 billion TAM is what we are striving for based on the collection of products we have.

So I’ll start from an opportunity perspective, ServiceNow has immense opportunity. Now we have, from go-to-market, which will answer your question, from go-to-market perspective, we only have two simple segments. Segment number one is what we call commercial segment, which is below 5,000. So ideally, the median is 1,000 to 5,000 employees. That’s what we call our commercial segment.

Very fast growth segment. We do really well in our commercial segment that’s 1,000 to 5,000, and we have dedicated sales teams that cover that segment specifically. And then anything 5,000 and above, we classify that as an enterprise, including very, very large enterprise.

So ServiceNow, typically, we are very transparent company. So we have been very forthcoming with our cohort growth on how customers who became our customers, whether it is 2012, 2015, 2017, 2020, 2022, how these customers have grown?

And these customers have grown because we have continued to innovate by creating additional products for certain use cases that our customers can adopt. So one of the stats that we shared at our Investor Day, three weeks ago, was that 85% of our new business comes from existing customers. I mean just think about it. 85% of our new business comes from existing customers. That is because we now have additional products to go and sell to those customers, and we have dedicated sales teams who sell to these customers.

Now on your question about two, three, four workflows and how do I think about it? I think about it in even deeper sense because we have right now four big workflows based on the buying center. So CIO buying center, Chief Human Resources Officer buying center, buying center for Chief Customer Officer and so on. So when you look at these buying centers, within each buying center, we have multiple products. For most of the products, we have good, better, best, right?

So if you look at the permutation combination across the workflows, then you go to a number of products within each product, you have good, better, best. And then last year, on September 29, we announced our Generative AI product, which became like the fourth product where Generative AI products exist, which we call Pro Plus. That’s an additional tier.

So you have good, better, best and Pro Plus. So the way we look at the opportunity coming back to $275 billion TAM is that, the reason we feel good about our projection to be $15 billion plus company by 2026, and we have done this, Peter, as you know, you’ve covered us, organically.

And that’s why more than the two, three workflow, I always look at, typically, all of our customers use ITSM or a variant of ITSM. And we have shared the stat that only 45% of ITSM customers are on the better or above package as in better and best. Now we are trying to sell them Pro Plus. So I look at mainly which additional products go with ITSM first, how do we then go to HR or Chief Customer Officer, and the opportunity is immense.

Peter Weed

It’s really interesting. You mentioned you publish every quarter, so it’s very detailed information around how your cohorts are performing, and it’s beautiful because it shows the consistency every cohort for the last dozen plus years in the data has followed the same adoption curve. But I think maybe one of the most important and kind of the impressive things is actually your oldest customers are continuing to grow almost 20% a year. How about — tell the story like how is that occurring, right? I mean, these are customers that could have adopted everything else already under the sun, what is keeping that growth rate so durable?

CJ Desai

I would say the first thing is that we are always solving for use cases that customers care about. And we create products that customers are like, okay, CJ, once I have implemented X, I’m going to absolutely implement Y, on the sequencing. So we continue to leverage our platform. We have just one platform for all of our products, right? So it’s a single code base, single architecture, and once they have a good experience with product A, then they will go and turn on product B.

That really helps us both from sales velocity perspective because we don’t go and have conversations, Oh, this is a different platform. Now you need to integrate this by creating another integration layer, buy this product to integrate these two. We don’t have this conversation. So one thing is very simple for us that when we tell our customers that, hey, every single product has been built on the same platform with the same DNA, they’re like, okay, we get it. So that has definitely helped us decrease the friction in terms of sales velocity. Number two, as we have expanded use cases with IT, we started with ITSM.

Everybody knows that, but our second biggest product after ITSM is ITOM. And ITOM went from $100-ish million business seven years ago to $1 billion plus, all organic. We figured out the public cloud wave, how do we still stay relevant on the public cloud, multi-cloud wave and so on. Then we said, okay, we have access to the CIO, CIOs like ITSM, CIOs like ITOM so we created a software asset management product, hardware asset management. So we are very systematic in terms of new product introduction for the pain points that our key buyers care about.

And that has been the driver. I mean, Peter, you know this, but in Q1, when we published our results in April, we are $2.52 billion subscription revenue, not total revenue, growing at 25%. I mean, organically, no other SaaS vendor has done that organically at this scale on a $10 billion run rate growing 25% organically. And that’s all because of this systematic new product introduction, really caring about the buyer and obsession with our customers.

Peter Weed

Maybe we turn to like some of the things that could go wrong that could trip some of this stuff up. I think, two things that often become challenges for some other organizations is what you might call digestion and the other one would be shelf ware, okay? So for the audience. When I say digestion, for instance, you’ve sold, for instance, a pro version of the product. And customers for whatever reason, they get distracted, they only partially implement this, and it kind of blocks the ability to upgrade them to plus.

How do you see that playing out? I mean we’ve certainly met some customers that need to do some of that work to get to some of the new version. How do you minimize the effect of like just digestion slowing down your growth?

CJ Desai

Yes, our very simple principle is that, once a product is sold, we want our customers to deploy it ASAP and ServiceNow relies on our extensive partner community from global system integrators to regional to even local value-added resellers who may have an implementation team. So 95% plus implementation of ServiceNow is done by our partner community, which is fantastic because then they like that they do implementation and they introduce us into new accounts or they may introduce us to a different buying center.

The reason that point is important is, when you have external parties to ServiceNow, our partner ecosystem implementing from a design and engineering perspective, our goal has been implementation in weeks and months, not in multiyears. If you look at classic ERP landscape, you hear about multiyear transformational upgrades or projects and so on. We are very focused that a customer should get to an initial value in few weeks to few months.

So the first implementation, say, typically for ITSM could be somewhere between five to eight months, first time they’re implementing it. But then on ITSM Pro, our goal is it should be few weeks, ideally three to four months. And with Pro Plus, we took that step about making sure that they get to value faster. On Pro Plus, we made it super easy for them to set up. And we have now customers going live within a week.

The large global life sciences company went live on Pro Plus in four days, okay? A large tech company went live and they are very tough demanding customer on Pro Plus also in less than a week. So with Pro Plus, we have said we want this to be dead simple to turn it on and you do not require a lot of implementation from our system integrators, if they want to help sure they can. So that’s how we have done the engineering principles when we create products. And what we find is that when customers have multiple products, there is some sequencing that is involved in it.

So we typically — when I had just one global CIO, Peter asked me, hey, CJ, we are becoming your customer for the first time, where do I really start? And I said, you need to have a very solid foundation for your asset repository CMDB, just start with ITSM and ITOM. And that’s it. And once you’re live, we will tell you what else you can use from us.

Peter Weed

Obviously, these are great stories. But if you look at the bell curve, maybe you’re telling you just about those customers that are like the ones that were easiest to do like where is the bell curve in terms of kind of the average and the distribution of like how customers are doing those things? Because I assume it’s not everybody implementing Plus and Pro this rapidly?

CJ Desai

I mean, Pro is now 45% of installed base. So that’s quite a bit installed base. And most of the Pro — what we did with Pro is there were multiple functionalities in Pro. So for example, there were KPI and analytics functionality in Pro, then we have some machine learning capabilities in Pro that we introduced in 2018. And we also had something called Major Incident Management and a few other things in just Pro offering.

I would say when I look at HR Pro, which has a large installed base, 90-plus percent are deployed on HR Pro within six months or so. On ITSM Pro, I would say 70-plus percent have already deployed either one or two modules. So it’s pretty good. Yes, there is always some who are trying to figure out which next functionality to turn on. But Pro is not just one thing.

There are multiple things. And even if you turn on one thing, you are now live on Pro. Maybe you want all three things or five things. But typically, we look at, okay, are they now using Pro effectively so they can move to Pro Plus. So it’s not the top end of the bell curve.

Peter Weed

Yes, yes. So that’s great. I mean you basically demonstrated, you can get it installed. There’s not a huge digestion risk. What about the other side, that shelf ware issue?

And for those of you audience who don’t know this term, it’s this idea that you get things installed, but then the customers don’t use it. The employees don’t use the ITSM platform or the HR platform, and so the value isn’t received. How do you see that shaping up?

CJ Desai

So we have a great Chief Digital and Information Officer, Chris Bedi. And I think it was around 2018 or ’19 so five years ago, he developed something called Early Warning System, where he would look at because we are a cloud company so we can see what customers are using. We don’t know how they’re using it, but we can see there is a pulse on ITSM or HR or whatever.

So he — Chris and his team developed this call Early Warning System, which basically looks at our entire installed base, what products they have bought. And if they have not a pulse on that product within X number of days or X number of months, we start getting warning signal where our sales team will then go and say, hey, what’s going on, oh, I’m doing partner selection. My partner is going to start, and we figure out those details.

So we have been systematically making sure that our exposure to shelf-ware so that I don’t come here two years from now to you, Peter and say that, hey, I have a problem on optimization that people are trying to figure out optimization. So we put that early warning system. I think it went live in 2019.

Peter Weed

And since that’s been installed, when you look at that pulse, what portion of your customers kind of give you worry?

CJ Desai

Only customers, if I find — so most of our customers will sign for three years. That’s most in that segment, except U.S. government, which has to sign every year. So most of our customers signed for three years. And typically, if I don’t see any pulse because sometimes customers will buy.

So say a customer will buy a large bank, buys on June 1. It may take them four to six weeks to do a partner selection who’s going to implement it, four to six weeks, maybe eight weeks. So I’m like, okay, but we know that because we have direct sales motion, so we exactly know what process they are in. So Peter, typically, we will wait for three months before the first alert goes to the sales rep, who will typically say, no, I’m already aware, we are working it, this is where they are. So right now, as you have seen, we have consistently reported our numbers, go lives and others.

This is not something that bothers us. Our renewal rates are 98%. Our renewal rates would not be 98% if we had shelf-ware problem.

Peter Weed

And I bring this up because this is a challenge for some other large application vendors. And I think ServiceNow has taken a very targeted approach of dealing with this. One of the things that you were bringing up is the Plus SKU. And I think on everybody’s mind is always GenAI, are you going to be getting value from this? And there’s probably a couple of different dimensions. One of them is, can you get paid?

And I think you talked a couple of weeks ago about like actually getting paid. We’ve spent a bunch of time actually with vendors that work on contracts and they’re basically like they’re absolutely getting paid, that’s great. But I think there’s a concern that folks have and I even got it again this last weekend where people were like, okay, fine, they’re getting paid, but there’s fewer seats. And this is going to reduce the number of seats that are in organizations. And by the way, they’re seat-based companies so they must be getting a lot of their growth out of seats in like people hiring more people. It’s just going to be a bad thing for ServiceNow that has a lot of their revenue tied to seat-based growth.

CJ Desai

Okay. Do you want me to address it?

Peter Weed

Yes, tackle it.

CJ Desai

Okay. So I would say our first journey, on this question, came in 2018 September when we launched ITSM Pro. The whole phenomenon on ITSM Pro was innovation that helps with productivity and so on. That was the ITSM Pro. We have now been — so 2018 September so you have 2023 September, so you have five years and two quarters.

So we have 5.5 years of data points. There are two data points that you should pay attention to. Data point number one, while 45% of installed base has migrated to Pro or enterprise SKUs, so better or best, we have gotten 25% price lift consistently. So the P has gone up. I know your question is on Q, but the P has gone up by 25%.

So that’s great because now we are getting for the same customer who is using the same product, you’re at least getting 25% more price realization based on the innovation we have put in the product. The interesting stat when we started really looking into this is that at renewal for ITSM Pro, our Q went up by 10%.

So that was counterintuitive that how can P go up by 25% and Q goes up by 10%. And the reason based on multiple customer surveys and asking them this question is that ServiceNow is basically providing services and the digital assets at a bank or at a government or at a healthcare company or a manufacturing company, the number of digital properties they have because that’s why it was called digital transformation, continues to go up when you have so many digital properties, things go down, things don’t work, things get stuck.

And so the incident volume or the volume on ITSM or volume on ITOM, continue to increase, and hence, they needed actually more people to serve their digital assets, which ServiceNow is a beneficiary of.

So to have that over five years with 25% and 10%. With Pro Plus, we have already revealed, as you know, Peter, at Financial Analyst Day, that our current price uplift, and it’s only two quarters and two months, we launched it on September 29. So in two quarters and two months, our price uplift has been 30%. Q is the same as Pro. So we have said, okay, you keep the same Pro as Q, but we have also added a number of tokens because of the usage.

So when you buy Pro Plus, you get your charge 30% uplift, that’s the price realization we are getting, again, early days. But if you use a lot of Pro Plus to become more productive, then you start paying for additional tokens. So we have now P times Q plus T, as the tier. So you get tiers, certain tokens you get with the base quantity and then you get more. So when you look at all that math, with if — customers do get value, which we believe customers are getting value with the examples I shared at the Financial Analyst Day, overall ServiceNow will still be okay between P times Q plus T.

Peter Weed

And for those of you who don’t know that the Pro SKU, which you’re talking about originally is also about essentially automation and driving efficiency, right? So if GenAI’s about that. They were already doing this for years, delivering value on it. So it’s an extension of that, that’s kind of furthering it.

CJ Desai

And that’s right gives us confidence on five years, 10% seat growth and now doing with Pro Plus.

Peter Weed

Now an interesting conversation that you and I were having at the cocktails and dinner after the Analyst Day was actually on that pricing point. Which is a lot of the business has historically been seat-based and you’ve now been kind of exploring and broadening some of the pricing that’s going on. And I think one of the questions that we were discussing was will there be kind of a pricing evolution? And how are you thinking about that to kind of maximize getting your fair share of the value that customers are receiving.

CJ Desai

And at the highest level, ServiceNow, we would have not grown to $10 billion of ARR if we don’t systematically think of how customers get value for the price they pay. So in general, our models are always evolving. So we introduced a few years ago unrestricted user license. So say rather than looking at staff in IT, seat-based, maybe it’s an employee-based meter. And there are certain customers who say, hey, we grow either by acquisition or we do this or sometimes we do divestiture in life sciences, we like that model. So we have continued to evolve the model based on the customer feedback.

A pure play consumption model is not something — we have rolled it out for our ITOM, our machine data products, but we have not done that for some of our seat-based products because it does not give customers predictability. They already know the ratio of number of IT people I need for the number of employees I have. So we are always evolving our pricing model based on feedback from customers.

Peter Weed

And obviously, you haven’t made any kind of formal announcements of this, but like what are some of the different mechanisms that might be valuable that you might be testing going forward?

CJ Desai

So I think the biggest thing that we are — because customers signed with ServiceNow typically three years contract, except U.S. federal government, we are always looking for how can we give them peace of mind on predictability. So predictability is typically done based on where the company may be going or customers may be going and so on. But it is typically some combination of usage-based pricing or either number of employees you have or the staff within IT, for example. So there is — we have also taken a lot of hybrid approaches on this. And so far, there is not a lot of pushback from customers yet.

Peter Weed

I think a lot of the conversation we’ve had thus far is kind of on existing customers, ways that they’re going to expand and as we’ve talked about, this has been 85% of your growth. But new customers…

CJ Desai

85% of new business come…

Peter Weed

Yes. Exactly the incremental growth. But that says 15% is still coming from new customers, which is impressive given the number of customers you have. And I think one of the important things about new customers is they grow faster than existing ones. So having those customers is really important for the long term.

I think there’s always a bit of anxiety when you look at the list of amazing customer wins you have, the proportion of the Fortune 500, the proportion of the Global 2000, that maybe you’re getting saturated on new customers. How do you think about that in terms of really like where the headroom is on new customers, particularly maybe as you’re adding solutions integrators to give you more reach and these types of things.

CJ Desai

Yes. This is a fairly important and deep question, so I’m going to address it in two or three parts, okay? So first thing is we report on a number of customers who use ServiceNow based on customers’ headquarter entity not at subsidiary level. So when we say we have 8,000-plus customers, that’s a customer headquarter number, we don’t count five subsidiaries that may be using maybe a different legal entity so we count them as 5, we count them as one, if they all roll up to a parent entity. So first is we have 8,000-plus customers.

Now our ideal customer profile, which we strive for because we don’t want to add quantity if the quality is not there because if we create churn, the amount of energy we spend on getting that new customer. And if that customer is not a great customer and he’s going to churn, it was not worth it. I would rather sell to an existing good customer then get a new customer. So 8,000-plus existing customers we have today. Our profile that our sales teams are incentivized to is very simple.

We like customers with more than 1,000 employees, where our platform can be really helpful, 1,000 plus, whatever could go 100,000, could go to 1 million and $100 million in revenue. So it’s the quality of the customer that we will get as a new logo is more important than just adding quantity, okay? So that’s point number one. We saw nice growth with our new customer lens last year and there are some customers where we have been trying Peter for a long time, and there was just a resistance to move to cloud or they had something going on in their business. But we did a partnership with Azure and ServiceNow is available via Azure Marketplace.

So this one very large company, which is Fortune 100, basically said we have made a big commitment to Azure, CJ, we really want to use ServiceNow given that ServiceNow runs fully managed in Azure, we are now going with ServiceNow. That was after nine years of sales campaign. But that particular logo, by the way, when they sign, they said we’ll first only deploy this couple of products based on sequencing because we said you should not buy everything. Just buy these couple of products first, roll it out, next year buy this. They made a commitment of close to 100 million TCV, that’s the new logo, I mean it’s phenomenal.

In the first year, ACV we got from them was like 7. So they have built in this staircase on what other products they will use, and they just went live with ITSM, first pilot. So this is like a phenomenal thing that we have Azure helping us with some new logo acquisition based on customers’ commitment to Microsoft, and they’re a great partner. We also launched AWS Marketplace in January. And currently, we are in discussion with Google Cloud if there is a demand for certain Google customers to run ServiceNow within Google.

So that’s one that we are now leveraging these kind of technology partners like Amazon as well as Microsoft Azure for new logo. We created new logo territories. And again, same thing, we want quality new logos versus just quantity. Adding a quantity and a 50K ACV on a $10 billion business does not move the needle so we want great logos and I would say, Peter our big opportunities are still international. There are if we look at — we have looked at this number multiple times and I’ll give you a range because the sources are a little bit all over the place.

We are in 8,000 plus companies, based on a 100 million threshold and 1,000 employees there are probably close to 30,000 companies that split that profile. So we basically have 70 plus percent opportunity in the new logos, right? 70% that do not use any ServiceNow product, any workflow and they are in the U.K. they are in India, they are in Singapore, they are in Korea, they are in Germany, they are in Central Europe, they are in Saudi and all those places. So we are going to systematically grow more new logos internationally while we are still growing in the United States.

Peter Weed

And it might be important to talk about the hyperscaler model that you’re talking. Obviously, one of the promises and benefits of a SaaS business as you’re hosting for the customers so you’re essentially getting the value of running it for them. But when you go to a hyperscaler and you’re talking about running it in those hyperscalers, you get paid less money because now the hyperscaler is essentially running the infrastructure and you’re just getting paid a software layer on top? And how do you think of some of those trade-offs?

CJ Desai

Absolutely fair question. So ServiceNow for many, many years now, has world-class gross margins. So when you look at our cloud gross margins, 84%, 85%, that’s absolutely best-in-class when it comes to SaaS business because that’s where your — Peter, you mentioned free cash flow, that’s where your staircase starts because if your gross margin start with a seven handle, it goes very fast with R&D and sales and marketing costs.

So our gross margins are world-class with 84% plus depending on the year for last few years. Second thing is, so when we are running in hyperscaler like Microsoft Azure, our engineering team has done great work with both Azure and AWS to make sure that our gross margins are protected, right?

They may be a little less, but they are overall protected from a gross margin perspective, which does help with profitability because if this customer that I talked to you about signs a $100 million TCV deal, we want to make sure it’s a pretty good gross margin, not bad gross margin because just they run in Azure. So Azure and ServiceNow, great partnership. We’ve done a great job to protect our gross margin or protect the house. And when it comes to the cost, as in how much the customer will pay, Microsoft, when you transact through their marketplace has some premium on top of it, but that premium is on top of ServiceNow price list. So just today, I was talking to a large customer in Silicon Valley who wants to buy additional products from ServiceNow, including Pro Plus.

And they said CJ, we want to do it via Microsoft Marketplace. I said that’s great. Here is the price and here is the extra that Microsoft will charge you for transacting through that marketplace.

Peter Weed

Yes. I think one of the other important things to remember is, obviously, some of these customers with Microsoft…

CJ Desai

Azure — AWS…

Peter Weed

AWS and GCP, they’re buying credits, right? So they’re literally using the money they’ve already spent, they need to spend it someplace let’s spend it where they have value. So you’re essentially able to take their digital tokens to get paid with them. The other thing that you mentioned, though, was how much larger these new customers are landing. Now that could be that you’re getting rid of the remaining head customers that are huge, and it’s going to be downhill from here. How do you think about that in terms of the ability to sustain landing larger and larger versus as you start to go down that long tail of customers that maybe you wouldn’t have gone after with sales, but SIs will do it or something that are 1,000…

CJ Desai

SIs definitely help us with new logos, including some of our regional partners, in a place like, say, U.K. or something. Absolutely, they help us saying, hey, CJ, ServiceNow is a perfect platform. We’ve already done implementation of ServiceNow in these five customers. This is an ideal customer for ServiceNow.

So when I think our channels for us because we are a direct selling motion, AWS and Azure are definitely two channels, but then you have partners or SI global all the way to regional SI system that help us with new logos.

Now on your new logo question, what one of the stats that I can share with you is if you look at the cohort up to 2017 so you go to cohort a few years back from 2017 and you look at new logo from 2018 to 2020, that new logo cohort from 2018 to 2020, we just finished 2023, five months ago has gone up 30% higher on the cohort growth. So we now have more products. So even this example that I shared $100 million TCV, our customer over multiple years, is mainly just in IT. They have not even looked at our HR, our employee workflow. They have not looked at our customer workflow.

They’re definitely not looking at creator workflow. They don’t even have Pro Plus. So even though we may get some larger amazing logos where we have been trying to sell for a while. The median is still a few hundred Ks when we get a new logo. So the headroom for growth on the cohort chart, you’ll not be disappointed even five years from now.

Peter Weed

It’s interesting, you’re chatting about these other workflows. And what ServiceNow has done is they’ve taken the Service Desk concept and the automation around it, they’ve done an IT and put it to many other functions. As you go into those, you start to compete with some other established vendors. And so like when you think of, for instance, the sales and commercial workflows that you have, obviously, there’s a large established vendor there that would like to argue that they can suck up most of that value. What gives you confidence that you can go into some of these other categories, whether or not it’s HR or sales and there’s room for you and this other vendor? Or is it about taking up that other vendor?

CJ Desai

So a really good question. And it’s a very strategic question in the sense, is this battle worth fighting, is what you are trying to say, when you have an established vendor. So the same question that Peter asked, he’s asking in context of our customer workflow, okay? So customer workflow, we created product in 2016, and that was our first 1.0 product. And this story is really important because in 2016, we created this product called Customer Service Management.

Our strength is in workflow. So we said we will do mid-office, back office workflows when you try to get service for your customers, right? And we’re mainly focused on B2B space in telco, tech, even some of the government agencies and so on. And at that point in time, both my hiring manager, who hired me, which is Frank Slootman, and then it switched over to John Donahoe, who was CEO of Bain. So a very sharp strategic mind, amazing individual.

He said CJ, same — exact same question that Peter asked — was asked to me in my first month at ServiceNow 2016 December, is this worth pursuing because that is already a large vendor? And my answer, having been in that field for a while was very simple. The TAM for that segment at that point in time was $20 billion plus and only one player had maybe at that point in time, 20% market share, but you still had 80% of the TAM ready to be captured via ServiceNow. So us and the team, we said we absolutely believe in this product. That is a market, yes, there is one large incumbent who has been there for a while at that point, like 10 years, but there is enough market for us to go.

That conversation was in 2016 December and in 2023, which is just seven years, and that product was doing sub-$10 million in ARR. We announced that customer workflow crossed $1 billion. Think about that in seven years, multiple orders of magnitude while competing with a large incumbent.

Peter Weed

Yes, there’s a lot of VCs that would like to have invested in that business alone. You are alluding to now going after those types of vendors, but you’re also going into other spaces like cybersecurity, observability, again, now this isn’t in these more kind of like desktop application software areas, it’s in operational categories with very large entrenched vendors. How do you see yourself succeeding there?

CJ Desai

So security, when it comes to — and I personally have some cybersecurity background, but security is absolutely a crowded space. But one of the things that ServiceNow did, we were not providing actually a cybersecurity solution. Yes, we are absolutely selling to Chief Information Security Officer or Chief Security Officer, but we are about workflows for security. So any financial services customer, any government customer, any healthcare customer, if you talk to them today, they will say one thing. Their security threats are on the rise.

The number of security incidents they have, is on the rise and how do you mitigate that remediate that and so on while making sure you keep your environment secure. There are so many workflows between the security department, IT department, the business and how that works, that’s where the ServiceNow plays. So we are not a vendor who says, hey, I have a new firewall that is really high performing or I have an endpoint security solution. We are not in that space. We are absolutely in just security incident management, there are so many vulnerabilities with digital properties, how do you manage vulnerabilities and patching via those workflows.

And then in observability, combining our ITOM AIOps, which is a north of $1 billion ARR product line, with our observability solution, giving that peace of mind on metrics, traces and logs with ITOM, is what we do. So we have very clear — I don’t want to call it swim lane, but an area that’s an AND not an OR. That, hey, I can use something from a Palo Alto Network versus ServiceNow, most people do not make those decisions. ServiceNow regardless of your security landscape, ServiceNow is this orchestration engine for your security incidents or number of vulnerabilities that you are trying to remediate.

Peter Weed

And if I think about one of my associates was at the RSA conference a couple of weeks…

CJ Desai

Same week as our conference…

Peter Weed

Yes. And a tremendous amount of focus on consolidation in cybersecurity. If that consolidation goes on, does that leave you room to continue to do these workflows, if some of these vendors are essentially becoming kind of the platform?

CJ Desai

100%. I mean most of our customers, which are very, very large for our cybersecurity, our security operations business are typically large banks or large healthcare or large government customers. They are already consolidating the tools. We provide, hey, if you report a security incident, is there a playbook that will automatically remediate that security or alert something. That’s what we do.

So whether you have two tools to do that, 75 tools to do that, 50 tools to do that, we really don’t care. That piece is a complementary to any security companies, whether they are a single platform or multiple platform, we really don’t care.

Peter Weed

And the other half of this is observability pieces of which actually fit to cyber security with SIEM and some of the stuff you’re alluding to. You started by buying Lightstep, which would have been Google’s essentially observability platform originally, and you built a whole solution around that. Again, a very crowded space. And I think you made a comment to me when we were doing — the drinks that you were like, this is not about going after microservice. This is hybrid and obviously, there are several established players there.

What is the opportunity that you think that you bring to the market as you’re doing observability relative to that kind of established set of players, some of which have been acquired recently by some others.

CJ Desai

So software developers, software engineers, when they are creating a digital product, they may buy an observability solution by swiping a credit card, a product-led growth. That’s not the space we are in. The space we are in, is a CIO who has customer-facing digital assets or very important digital assets that may be facing their partners, you still need to monitor the health of that asset.

And between our ITOM solution and observability, including the logs for that asset and things like that besides metrics and traces, that’s where we play because we have relationship with VP of operations, IT operations again, not software developers, VP of IT operations where we can say, okay, now you can monitor your digital properties, and you can do event correlation. And oh, by the way, with AI, you can do this. That’s our simple story.

Peter Weed

The one competitive area that we haven’t touched on is everybody is worried about your core. IT service management. It’s such a huge business.

CJ Desai

Since 2011, yes.

Peter Weed

Yes, forever, right. And there’s always other vendors people point to. We don’t have to bring them up here, but how do you think of your swim lane versus them? And when we hear about them getting big wins, perhaps in your space, why or why shouldn’t we see that as a signal of strength or weakness in the market?

CJ Desai

So first of all, I’ll start ITSM continues. So it was, I think, just before ServiceNow went public in 2012. One of the industry analysts said that the TAM for this entire product like the TAM, not ServiceNow’s market share, is only $1 billion plus, okay? And we exceeded $1 billion on that product line in 2016. So just to put that in perspective, this question that Peter asked and it’s a fair question has been asked all my seven years at ServiceNow, and prior to that was asked to Frank Slootman every single time, including when we went public in 2012, that your TAM seems to be limited.

The other point solutions are going after this space, obviously because they see what ServiceNow is doing. Our story with ITSM is very simple. We are a platform company, and we are for the enterprise. Some of the service management solutions are for small teams. They are not for what you brought up initially, Fortune 500 or Global 2000.

You are not going to do an end-to-end IT service management for a large Fortune 50 financial services company or a healthcare company using this point solution that have been targeted specific to teams. And teams is not where we play. We play at the enterprise level. And that’s why this business has grown significantly. Our ITSM business continues to grow still in double digits after all this years.

Peter Weed

It wouldn’t be me if I didn’t bring up and go back to the channel and the solutions integrators and how critical this is. And I may be unique and focusing on this so much, but a lot of what reminds me of Microsoft goes back to ’91, ’92, where the ecosystem is what really crowned them again, right? And the solutions integrators realized they could create a huge business around this. And when they’ve got the tool and their toolbox, that’s all they do, right? And right now, you are still mostly getting leverage from the solutions integrators on implementation, the amount of opportunity they drive as incremental sales is relatively modest.

CJ Desai

Yes. Correct.

Peter Weed

How do you see that evolving over time? Because I think that’s the one kind of remaining piece for the story around Microsoft to fall into place, where their business was not driven by them, it was driven by the ecosystem. How does that play out? And how can we see that kind of deliver Bill’s hope of $30 billion plus by 2030?

CJ Desai

Yes. So I’ll just make it really simple that there are areas within our enterprise workflow that ServiceNow will always have a product, okay? So we came up with this very simple framework that this is a no-fly zone. This is open skies, and this is turbulent. So a global system integrator comes and says, CJ, we build this amazing application on top of ServiceNow.

And we did this for this one large global bank say in the U.K. This is a great solution built on ServiceNow. Should we productize it as in two of us together? And then should we take it to the market together but every single global bank in the world, top 100 banks? That is where the opportunity is, right, that now some of the system integrators have created very specific solution for a specific industry on top of our platform.

We are still in very early innings, but that will now allowed us to have additional growth opportunities besides our standard workflows, products, good, better, best, Pro Plus. Now when these guys create this kind of product and then they put their marketing and sales muscle on it will create the Microsoft level opportunity. So we are in early innings. There are a couple of examples where we have seen some success, and we’ll continue to build on it.

Peter Weed

How rapid do you think that, that could start to ramp up proportionately? Is it something that will be three years away because they still have to build out so much of the capabilities in their organization? Or is this something that we can start to see it eating away as soon as next year?

CJ Desai

I would say two to three years because you can build an MVP, a viable product, very fast on ServiceNow, that’s true. But to really create a deep vertical solution, it just takes time because you learn about that industry and so on. So there are certain industries where we say it’s open skies. Hey, we asked them, when we meet with some of this global or Indian system integrators, we say, we would love for you to build a product here because my team as in ServiceNow R&D teams don’t have the bandwidth. We see the opportunity, but you should do that.

So for those open skies kind of products, it will take two, three years to scale it. They have already started building in a couple of examples that I can give you in banking and healthcare, but it will take a little while.

Peter Weed

CJ, I really appreciate you taking the time today. I know we burned through this, and we could probably talk forever, and we didn’t even get the audience questions, and I’m sure all of you have smarter questions than me. But I really appreciate you taking the time today and then hopefully, some of you got an appreciation for some of the things that we’ve really enjoyed learning about ServiceNow ourselves.

CJ Desai

Thank you. Thank you, Peter. Thank you.

Peter Weed

Thank you.