ServiceNow's CEO Presents at Morgan Stanley Technology, Media & Telecom Conference (Transcript)

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 |  About: ServiceNow (NOW)
by: SA Transcripts

ServiceNow Inc (NYSE:NOW)

Morgan Stanley Technology, Media & Telecom Conference Call

February 26, 2013 6:50 pm ET

Executives

Frank Slootman – President and Chief Executive Officer

Analysts

Unidentified Analyst

We’ll go ahead and get started. Thank you all for coming. I am very excited to have our next presentation from Frank Slootman, the Chief Executive Officer for ServiceNow. This is a relatively recent IPO, a company that is fundamentally in my view transforming not just the IT operations, management and organizations but also becoming a fundamental platform for the way that organizations think about to manage, deliver, IT as well as other applications and one of the most exciting growth stories that we’ve seen in a long, long time. So thank you so much for coming.

Frank Slootman

Absolutely.

Unidentified Analyst

Great to see you. So why don’t we start with a little bit of a level set on what we’ve just seen. You’re just off of a very good fourth quarter, a very good year with some of the growth rates, you just don’t typically see in enterprise software. Could you talk about what came together to drive this kind of results over the last quarter and the last year?

Frank Slootman

I have been with the company since April 2011. So it hasn’t even been three years yet. There is one thing that we nearly started to do when I arrived, it started someway management team is just massively accelerating. The LIBOR rate of resources across the company in sales, increased sales and engineering, support and cloud infrastructure, as the company looked less under invested at times, we felt and we just started we should have to go no holds barred on getting the company to scale up rapidly. The company was very much ready for it and I think we have seen the effects over the last two years that those resources have really converted to yield and we’re going to continue to do that. I mean in other words, the place that we’ve been running over the last two years, you can expect us to continue to do.

Unidentified Analyst

If you look at the thought right now, the market, one of the questions that I get asked a lot is, how big the market is? Because your growth rates are like this, and some of the markets that you are in, here the growth rates are like that. So how do you think about the size of the market and what’s enabled you grow so much faster than in the markets that you are in?

Frank Slootman

ServiceNow has had a transformational effect on the markets. So if you play legacy definitions and estimates, you’re not going to go very far. And one of the ways we tell people how you get sort of a fix on what it really is, is to look at our rate of monetization, in another words, how much revenue are we really extracting for the number of customers that we have and as of the end of December, we had little bit more than 1,500 customers and that represents in our estimation about 12% penetration, of that 12% penetration we think we’re only a third saturated.

So it’s a very early innings. We have 12 month trailing revenue. It was already $244 million. So I mean you do the fast math on the back of an envelope you’re in a market place that this well north of $12 billion. This is very similar effect that the sales forces come, on the CLN market, when it was once owned by (inaudible). It’s just the nature of the software really extended the nature of the usage. We typically got 5 to 10 times as many users on our systems than historically have been in this class of software.

Unidentified Analyst

So just to maybe help frame that discussion, so how do you think about the target customer. And so when you say, you think you’ve 12% of you customers, how do you define what’s a good customer and the focus customers who go after?

Frank Slootman

We have a very simple way of think about it. So we have identified the universe of about 12,000 enterprises that we think are relevant for our product and our channel, within those 12,000 enterprises we look to license every single IT professional. I mean, we already – Q4 IT, every single person that works in the IT functions in the IT organization is a potential licensee. Now beyond that we have the platform set as applicable to the broader enterprise employee population that sort of the derivative for downstream revenue opportunity that we have that really results from our presence in the IT space. I mean, we view ourselves as the IT cloud, sales force of the sales cloud and working at the IDHR cloud. This is the enterprise IT cloud and we’re going to be providing anything and everything set that cloud requires.

Unidentified Analyst

You mentioned in the sales force that the allegory where sales force really expanded the use Ks and got exit the soft wind non traditional sales people, how are you expanding the youth cases in the IT department?

Frank Slootman

Yeah, it’s interesting because the whole notion of Service management has very close analogs in other service domains. So when I talk about other service domains, I am talking about human resources facilities and legal travel and also any other kind of infrastructure or in the business, the whole notion of incidents and problem have changed that it is extreme cadence of service exist in these other areas and that’s why people apply our software.

So if you buy that all down to what do you guys really do. I mean we built record keeping applications under their home driven work flow in its database applications and have an incredibly broad applicability area. We have just chosen to apply that in a very specific area around the ERP for IT. We stopped that was the greatest area of need. We felt the software that was incumbent and that area was really very far along and that’s useful lifecycle and therefore right for replacement.

Unidentified Analyst

One of the things that we hear when we talk to your customers is different than what we hear with talk to some other customers that people tend to use more than they have bought. But why do you think that is and what kind of opportunities that set you up for?

Frank Slootman

That’s an interesting observation. I often meet CIOs who are actually nervous about adopting software because they are not sure whether the launch will actually be a successful one and people will actually adopt the software. In our case, the IT organizations are actually avalanched and diluted by demand for the application and the reason is, this is a much more moderate walk up and use consumer style user experience, it’s something that people want to use as suppose to something that are being told to use and I think that’s very analogous to the sales force experience.

We get very strong grassroots adoption and we have to t experience as we reported to our up sell numbers that our user installation doesn’t grow by share voluntary adoption inside the environment.

Unidentified Analyst

Another question that I get a lot is, you touched a little bit on this in terms of thinking what the size of your customer is. But how many of your customers are using you for just help to asking you. And isn’t it management versus, how many of you customers are really involved into more of an IT operations management platform. Is it possible to talk about how that evolution typically works?

Frank Slootman

Yeah, it’s definitely – the core dry strain of IT if they were under four applications, it’s instant management, probable management, change management and configuration management and then if you have to sort of make a translation back to the legacy category, instant management is the closest corollary to what the old help desk used to do. But the way IT organizations view ServiceNow as, they talk to us – they talk about us as if we’re there ASAP. We are there ERP, or their system of record. All the work that IT does flows through their ServiceNow system. So we have very high adoption obviously instant management, request management, config very, very high configuration management, very high numbers, knowledge management, asset management, got into risk and compliance. So there is a whole platform of apps that together make up that sort of requirements.

Unidentified Analyst

Okay and as you think about expanding and layering in new modules you have modules that also drive your attach rates and your up-sell rates, what is in the market that makes sense for you to be in over time?

Frank Slootman

Well, we think there is a bunch, I mean, we are definitely touching infrastructure, when you think of pure service management that starts from the cloud ends in the cloud that we know are starting the customer infrastructure. So it becomes a hybrid cloud environment or both touching infrastructure, but then the processing on the information happens inside our cloud. Things like discovery, things like orchestration, thinks like event management, event management is one of those disciplines that traditionally has been associated with system management products related database and networking service and so on. But event management and incident management are very close covenants. Typically an event is raised through the Network Operation Center, the NOC, and NOC person actually have to make a determination, are we going to quit an instant which really kicks off the structured workflow process, it can get to resolution on that specific incident.

One of the things that’s least understood about where we are these days with incident management is that, most incidents do not come from people calling and complaining about something that’s not right, it comes from systems, it comes from networks, these are auto generated fully infrastructure itself and are highly, highly automated in their nature.

Unidentified Analyst

Got it. And I guess a couple of sort of questions in addition to thinking about the core market, another is the platform business which is sort of, I think that is integral to every single application that you have, but you are also starting to see more monetization in go to market separately around the platform business. How as that evolution happened or you take a sort of something that’s started as the piece of the core and are now actually taking into the market as a standalone?

Frank Slootman

Yeah, the platform is an interesting animal like, spent most of my life in application development, building tools. When I first started to talking to the company, the company because of its heritage really didn’t realize at that time that this actually wasn’t an application development play. So most of the business really grew virally, in other words, people were using that platform when I was selling it, when I was promoting it, without documenting it, without training forward, it’s just something that the got a life of a term.

As we get into the business, we started realizing we have to catch up with the reality where our customers are already are. We have to start licensing, investing separately, so we can actually measure and quantify in an artful way what the contribution to the business is, pricing rapidly and we really have to invest in own prioritization of these (inaudible) because the platform was originally build for ourselves and our customers discovered it and took off with it, it’s been incredibly popular because one of the things that has made ServiceNow so interesting or IT organizations it’s one of the least demanding platforms out there in terms of technical skill sets, there is no procedural language, it’s all declarative, I mean the inspiration for ServiceNow was the ideal rules of the world and yahoos where you respect it from listing, you click on boxes and check boxes and the application standards are up.

So IT people felt, hey I am really empowered here to build fully functional database to record keeping applications but I may be in involved in all kinds of technical talents, so just as leasing on friction to actually get some real meaningful applications involvement work done.

Unidentified Analyst

And how broadly adopted do you think the platform is, how many folks have built that sort of widgets if you will versus how many people will actually deal kind of production level applications?

Frank Slootman

We actually have good operational data on that because we can see that 93% of our production instances actually have custom object definition, which is probably the single best indicator of platform views. Within that, we know that 60% of custom object definition is associated with applications that are not ours, in other words these are custom developed applications that have no relationship to the set that we provide to them.

Unidentified Analyst

And just one last question on the platform; so you just gone into the market with new pricing, so I believe you have just now sort of gone into your sales organization with a sort of a go to market strategy. Can you maybe talk a little bit about what we should expect to see in terms of adoption and the impact in the market?

Frank Slootman

So one thing to sort of have an appreciation for us, we’re not leading the platform, platform is very much downstream derivative opportunity for us, we continue to be very disciplined in terms of running through the replacement cycle for the core ITSM business, because the platform opportunity really comes from our presence in the IT organization. So we really expect to start reporting on platform as a separate skew, probably late 2013 timeframe.

Today, we are already reporting revenues in the application software category that actually is derived from the platform that is just not quantifiable, because we have not added it as a separate skew. We will going forward and we think we will start to see sort of material contributions from that as we get to the later part of this year.

Unidentified Analyst

And to-date, you have seen a really nice increase in your average value per customer even without the platform business?

Frank Slootman

Right.

Unidentified Analyst

Is that been more driven by that feed expansion that we talked about earlier or is it been driven more by a module attach?

Frank Slootman

No, it really happens because of upsells. If you look at the average revenue per customer, every quarter that’s been bumping up and that’s because customers are growing. Once we sell a customer $1 of annual contract value, it just grows every single year. So I mean our growth model really have three components that we are hitting all three of them. You get spontaneous combustions. So it’s new logos obviously that’s the lifeboat of any business, it’s renewals which are super high in our business and they were 98% last quarter and then there is the percentage of upsells and upsells are just pure growth in existing license counts for existing customers and you do all three, you get an extremely urban growth business.

Unidentified Analyst

Just on the renewals piece, you have a – your software is a service model. It’s a little bit different than some completely multi tenant models. How is that been important in terms of being a differentiator into getting into large organizations and really being able to evolve as these companies grow with you?

Frank Slootman

We refer to ourselves as an enterprise cloud. I mean, there are consumer cloud, I mean there are consumer clouds, I mean Yahoo and Google and what have you that are out there, they are SMB clouds. We’ve used Salesforce and we are very much kind of started the SMB business that way.

Enterprise cloud is different. We have to have what we call a multi instant cloud, in other words we have to be able to give our large enterprise customers their own logical software instance of both the database and all the application notes and the reason is, they all operate on their own unique security compliance requirement. I cannot and by the way from a security standpoint there is just simply now way that most of our customers will agree to have their records intermingled with those of other customers, this is a norm started for conversation for our class of application. Just simply I can also tell you and we would not be sitting here having just conversation, if we had approached our business as a multi-tenant cloud.

From a compliance stand point pharmaceutical companies are completely different from any other company, so they have to have their own set of procedures. Retail companies, they have to be locked down over the Christmas holiday. So everybody has their own sort of issues, we cannot provide that in our cloud, we simply do not have the caliber of infrastructure that they require from us.

Unidentified Analyst

If I could turn to the competitive landscape, you obviously have had very nice win rates, is there anything that you’ve seen maybe remediate, maybe some other reactions in the marketplace from a pricing or a go to market perspective that has changed those win rates?

Frank Slootman

No not at all. If anything our win rates are increasingly disciplined, because there is this over-writing sensation and awareness in what we have done in the marketplace CIO Talk, they talk, plenty of awareness of what we’ve done after as grown is actually making it easier for us, I mean we said this on the call before, but I am number one competition if do nothing right there is just our type of systems are 10 to 15 year decisions. Right that’s good news when you are in, but there is a lot more friction to these existing systems. Now sometimes, it just takes time. An organization may not be ready to tackle the project. They want to kick the can down, they’re up for another six months, 12 months, 18 months, but the reality is they are all going to go. This software is getting older every single day. The question is when are they going to go and obviously up to sales organization to make that sooner rather than later.

Unidentified Analyst

And when we do our customer calls, you can hear a number of different reasons that people will move to your platform. A lot of it is functional, but you also have a value proposition that can be a lot more cost effective than operating some of the older systems and maintaining a lot of older systems. How do you think about the selling process? Is it more ROI driven or is it more functionally driven?

Frank Slootman

It’s not ROI driven. In other words, these kind of systems are not optional, it’s not like [CIO] it’s going to look at this category of software and go like, let me decide if I am going to have one of those. You’re going to have to have one of those. So the question is which one are you going to have, are you operating with spreadsheets or you’re going to operating with the legacy software or you are going to go on a modern contemporary platform for doing this sort of thing. And the same is when you are acquiring an ERP system for your finance organization. You start looking at the alternatives and what feature you need the best. So that’s where I think from a legacy competition standpoint, the hardest thing for legacy products is that they are just too hard to use for the current generation of people that have to use these products. I mean these products have been out there for 10, 15, 20 years, and by today’s standards they’re just playing off.

Unidentified Analyst

I am going to ask two more questions on distribution, then we’ll turn it over to audience for any final questions that you all might have? So I’ll ask you one of the – I am sure, I’ll be the first one to ask today about your distribution and the rapid expansion there, but are you at the point where you are starting actually to get territories a little bit more narrow and a little bit more duplication in the sales process, because you have grown so fast or you’re still very much at a putting one guy in a new market, then another person in a new market and it’s really still an open field in terms of building yourself capacity.

Frank Slootman

We’re doing both, right. We’re supplementing territories in the existing markets and that’s really where we expect to get the productivity quicker, but we’re also opening up brand new markets where we haven’t been. So and we are most to Latin America and Mexico and Brazil, big targets for us for moving into Southern Europe, Spain, and Italy and they wonder why Spain and Italy those economies are not exactly on fire.

The reality is we look very carefully where the global 2000 are located and that’s really where we concentrate our sales efforts and those are important, are also setting up shopping in South East Asia now where we haven’t been historic leader, but again there is a enormous amount of global 2000 presence in obviously Japan, South Korea, Singapore, Hong Kong, so we are pursuing all those markets. Those markets are longer to lead the productivity, but it’s well balanced with the existing markets. We still have a huge amount of opportunities for really increasing the service density of our sales organization.

Unidentified Analyst

When you are expanding that fast obviously you expect productivity to go down and to lay more focus into the organizations, but if you look at the folks that have been there for a year, how is your same store sales productivity there for your selling organization?

Frank Slootman

Yeah, it’s interesting. Obviously, we’d like to scale what sales productivity staying relatively constant we’re not driving it down, because even driving that down too hard structure make us feel uncomfortable. We look at attrition rates very carefully like as attrition gets to be too you high we get to the threshold if you will or you just not productive in adding incremental resources.

The sweet spot in terms of productivity in terms of our rep stores is between 12 and 24 months, that’s when people really are hitting their strikes. Our model assume as they hit productivity at nine months, but we can just tell from historical data that this three point is after one year people really are the most productive of the entire sales organization, that is long lead time, it’s long raps and it will get started.

Unidentified Analyst

And as you think about your barriers to growth over the next two to three years, is capacity really your biggest constraint at this point?

Frank Slootman

Yeah, I think it is. I mean our ability to effectively scale our service resource not to sales people, exclusive consultants, professional services, it’s a spot infrastructure, it’s a cloud which is a huge thing of obviously for a SaaS company. So there is an enormous amount of drag of resources behind just being able to sell new transaction.

Unidentified Analyst

Terrific. With that we’ve got time for one, maybe two questions in the audience. Any questions? Here in the front.

Question-and-Answer Session

Unidentified Analyst

Some of your competition has also announced cloud offerings, BMC specially in alliance with Salesforce.com. Just some comments on fair offering versus orders and (inaudible) rates against share offerings related to the cloud?

Frank Slootman

It was one of the surprises to me when I first became a quanta with ServiceNow as that we really didn’t have any sort of pure play contemporary seem vintage type of competition. There were companies that were very similar to us. You look at any other cloud category, where it is marketing rates, how you see like handful of company sort of duking it out. This category has been very, very sparse in terms of pure play competition and then the competition really is of the legacy sort, that’s where we can get most of the pushbacks and BMC has had a joint venture with Salesforce, that really has been focused at the SMB marketplace, that really does not intersect with our market focus all that much.

We are very large enterprise focused. I mentioned the top 12,000 enterprises and within that global 2000, so what might be that some of the people that are trying to emerge, we simply don’t see because they’re sitting much lower in the marketplace.

Unidentified Analyst

Time for one last question.

Unidentified Analyst

I have one on to the geographic mix. You talked about some of the investments you are making in sales in emerging markets. The U.S. is obviously been 70% plus percent of your business. If we were to think through the next two to three years, how are you expecting international to U.S. mix to shift?

Frank Slootman

Well, it needs to shift because we’re going to double the hiring plan for sales and marketing this year and we said that during the call. After that we will go into international markets. So we’re going to very forcibly drive higher contributions from those areas. The hard portion has been, that our North American organization has been very good. So as they become more productive, they will give the international regions run for their money, but we’re investing very hard on that outside of North America, just proportionately so.

Unidentified Analyst

And I guess the key point I want to drive home is there is a number of other SaaS companies will say that there are limitations to international expansion. So salesforce for example in really only in eight countries, salesforce.com, your model is different however with the enterprise cloud that you talked about whether isn’t really, you haven’t seen any limitations in some of these markets that others may not be able to get into?

Frank Slootman

Well, I mean we can get into France and service French customers from our parent datacenters in the Amsterdam and London, so there is actually no reason for us not to pursue that opportunity same for the rest of Southern Europe side, I really assume no reason, I mean IT is IT, IT I mean from country to country exactly the same sort of issues from one market to the next. so where we – things just give is positives when we have local (inaudible) requirement, data solving issues, tax issues, that for our business are complicated.

Brazil is such a market we know that we have to move into Brazil at some point relatively soon in terms of its own datacenter infrastructure but that’s also going to be a competitive advantage for us because nobody else has that in that marketplace.

Unidentified Analyst

All right. With that we’re out of time. Thank you so much and thank you all.

Frank Slootman

All right.

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