The Six Five team discusses the ServiceNow earnings report.
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Transcript:
Patrick Moorhead: Daniel, let’s move on to ServiceNow, that they just continue their hot streak.
Daniel Newman: Listen, we don’t always cover ServiceNow, but they’re one of the probably most interesting cases of tech is deflationary. Now that’s a bold statement here because as the economy grew, tech grew, but that’s a natural byproduct of economic expansion. But a lot of people aren’t talking about when they want to talk about TeckRack is they’re not talking about the fact that technology is the underpinnings, whether that’s semiconductors or that’s software or that’s infrastructure. If a company wants to become more efficient and more profitable with every dollar, they’re not do it any other way than investing in technology.
And one of those most important right now is going to be workflow automation. The idea that you can take a process, you can remove a lot of the excess steps out of them, out of these workflows, and get more work done and less time in a subscription basis on an OPEX versus more CAPEX, more humans, more people, more process, more paper, just makes a lot of sense.
ServiceNow, of course, sits in a position under CEO, Bill McDermott, to be in an opportunity for strength, whether it’s as the economy contracts and rates go up and growth slows potentially, or whether we continue to boom and run hot. And so this quarter, the company showed strong growth. It showed 30% subscription revenue growth. It showed an improvement in how much on their performance obligation, which is important in SaaS, by 30%. They saw their large customers grow 52%. That’s the over a million net new 52% growth.
And here’s a great thing right now for a company like ServiceNow, 99% renewal. So in a SaaS ecosystem to have almost zero attrition is just a tremendous outcome. The company’s doing, I believe they’re forecasting over $7 billion in 2022 for subscription revenue. They’ve made some really big investments this quarter hiring on and promoting from within, by the way. They promoted several of their top executives, Pat, this quarter under McDermott.
And this was kind of an interesting one that I pointed out to in my research note is we see so many companies when they knew need new blood, they go outside. They don’t promote from within. We recently pointed out, Pat, that Intel made some big moves with some exits and actually hired and promoted from within, which is impressive.
For a company like ServiceNow, McDermott back from his SAP days was always really big on culture. And so he’s bringing people up through the organization, and he really points to the fact that he wants to take his executives, train them up, develop them, and bring them up to become bigger contributors to the ServiceNow org. I like that. I think that’s important.
The other thing that the company is doing that’s probably more important than ever is they’re moving downstream from SaaS to PaaS. So everybody knows them for their workflow automation, but the Now platform, which has been rolled out, is becoming really big for the company. They’ve made some really big announcements. They’ve made some acquisitions this quarter. They announced a big partnership with EY, a big partnership with DXC. And so, I think EY came out, Pat, and said they want a billion dollar business alone with ServiceNow. Ernst and Young, one of the biggest account owning and advisory firms in the world is planning to build a billion dollar practice on ServiceNow alone.
So, overall Pat, I think there’s a lot of strength. The last thing I’ll say is they now have over 1350 million dollar customers in the organization. So as I started and I’ll finish this segment, tech in many cases will be deflationary for many people that are worried about what’s going to happen to tech. I expect if the economy actually gets much worse, tech will actually, surprisingly, do well. Not all for great reasons. This is sort of that human automation, human machine sort of world that we’re moving into, but companies like ServiceNow are building that kind of software that can really help companies be more successful in tougher economic circumstances.
Patrick Moorhead: I don’t cover ServiceNow as closely as you do, but I got to tell you, from an investment point of view, I look over the last year, it has not been a good investment. It’s down. You would’ve lost money had you put money in. Heck, IBM, if I look over the past year you would’ve made 16%. So to me, ServiceNow, doesn’t do a very good job at educating investors. They don’t understand the value proposition, and I think they need a lot of help in getting their story out. And maybe, I don’t know, maybe you and I having this discussion is part of that, but I just don’t hear a ton of folks talking about the company.
Now, I think part of that challenge is that they are a category killer right now, but trying to expand the base into what they do, right? They’re the best at IT and IT workflow. And they’re kind of moving that into kind of the CX point of view. And they’re trying to operationalize it and automate it, which I think is good. And maybe they can pull an Adobe or something like that, where they just keep kind of growing. They’re category killer in one area, and then grow.
And we see company like Five Nines in there as well, who starts off as a category killer, but then expands the definition, either makes acquisitions or goes organic. I put Zoom into that category too. Pretty much Zoom started a consumer tool, and then small business, and then enterprise, and then they get into events, and then they get into kind of contact center lite. And I wouldn’t be surprised if they get into like a CX play.
But good analysis on ServiceNow, and I think you’ve motivated me to learn a little bit about the company.
Daniel Newman: And one thing I will point out, Pat, is you did say something that’s true about the stock and the pull back. Overall though, almost every single SaaS company if you’d invested a year ago, you’d be down right now. There’s not really an example of that. Having said that, if you’d been in it for five years, this stock was at, five years ago today it was at $89. It’s at $551 today. The horizon is always the proof point, and unfortunately the last year to most tech company’s value has definitely done better. You made a great point. The last year has not been friendly. It’s just one of those things that I don’t know how much of an indictment that is on any SaaS company. Because Zoom was $550 a year ago and it’s $150 now, and I think they’re a good company too.
Patrick Moorhead: I don’t think that’s a good comparison because it’s a COVID darling. Maybe Salesforce is a better comparison. But anyways, I’m not criticizing-
Daniel Newman: I’m not arguing. I just mean it’s a tough time horizon because of how badly tech has been beaten up over the last three or four months.
Patrick Moorhead: Listen, I’m not criticizing the company. I’m really criticizing more of the company’s communications. It’s not getting its value prop out there.
Author Information
Daniel is the CEO of The Futurum Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise.
From the leading edge of AI to global technology policy, Daniel makes the connections between business, people and tech that are required for companies to benefit most from their technology investments. Daniel is a top 5 globally ranked industry analyst and his ideas are regularly cited or shared in television appearances by CNBC, Bloomberg, Wall Street Journal and hundreds of other sites around the world.
A 7x Best-Selling Author including his most recent book “Human/Machine.” Daniel is also a Forbes and MarketWatch (Dow Jones) contributor.
An MBA and Former Graduate Adjunct Faculty, Daniel is an Austin Texas transplant after 40 years in Chicago. His speaking takes him around the world each year as he shares his vision of the role technology will play in our future.
