ServiceNow aims to court CEOs, expand use cases beyond IT

CEO Bill McDermott said he has all he needs to expand ServiceNow into a company producing $10 billion in revenue a year.

ServiceNow is looking to move from being a strategic vendor for CIOs to be a digital transformation engine for CEOs. And CEO Bill McDermott's playbook from SAP is being put in place quickly to grow the company.

The company, which started as an IT service platform, has branched out to customer service as well as human resources. Its ecosystem of third-party developers has also expanded use cases. Now McDermott is taking ServiceNow vertical with industry specific use cases and recruiting systems integrators.

On ServiceNow's fourth quarter earnings conference call, McDermott was enthusiastic as ever. The master salesman has big plans for ServiceNow and a bet that it can ramp annual revenue. And he has a good base to work with.

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ServiceNow reported fourth quarter revenue of $951.8 million, up 33% from a year ago. Net income was $598.7 million due to a one-time tax benefit. Non-GAAP earnings were $186.9 million, or 96 cents a share. For 2019, ServiceNow reported revenue of $3.46 billion with net income of $626.7 million.

ServiceNow had 76 deals worth more than $1 million in the quarter largely due to IT service management. For 2020, ServiceNow is projecting subscription revenue of $4.22 billion to $4.24 billion, up 30% from 2019.

The plan

On a conference call with analysts, McDermott sketched out ServiceNow's expansion plan.

IT is where digital transformation begins, and we are a powerful strategic partner for CIOs all over the world. CIOs are struggling with fragmented legacy technology instead of delivering the experiences their employees and customers really need. Our IT workflows provide a single platform from planning to operations to service management. We're modernizing IT, enabling high-performing services with modern experiences. That is enabling us to not only enhance the core of how IT works. But also extend the perimeter of IT itself. We're doing this across the entire enterprise, and that's driving momentum in our vast portfolio of products, including our fast-growing HR and CSM products. Customers are realizing the strategic value of combining ServiceNow IT workflows with everything from HR, CSM, security, GRC, financial close and dev ops to deliver greater value across the entire enterprise.

Using its Now Platform, which has one architecture and data model, McDermott plans to pitch more CEOs on the digital transformation possibilities. For instance, ServiceNow is aimed to be a "system of action" to complement systems of record, explained McDermott.

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McDermott's argument is that ServiceNow can resolve problems end-to-end instead of in an ad hoc way. For CEOs, ServiceNow could be a way to drive employee engagement, customer loyalty and productivity. He cited wins at the Veterans Administration, Department of Defense, Bristol-Myers Squibb and Roche. "The opportunity to scale ServiceNow is right in front of us, and we have our sights set on achieving $10 billion in revenue and beyond," said McDermott.

The priorities for ServiceNow in 2020 go like this:

• Be an innovator for the C-Suite and market accordingly.
• Engage customers with "a world-class-go-to-market machine."
• "Force multiply ServiceNow" with partners.
• Create product experiences for people at work.
• Collaboration among ServiceNow's 10,371 employees.

"ServiceNow is hungry and humble, and we have an unwavering focus on serving our customers," said McDermott. "I'm truly fired up to lead the next phase of ServiceNow's journey."

Analysts bought in. In a research note, JMP Securities analyst Patrick Walravens said:

We continue to believe ServiceNow should thrive under the leadership of McDermott, whose career we have followed over the past 20 years, and we point to three areas where he is contributing in the near term: 1) Mr. McDermott is clearly bringing his very high level of energy to the business, and his eleven day, three-continent customer tour that kicks off this week; 2) Mr. McDermott should also help to open many CEO doors for ServiceNow, which has historically been better known by CIOs; and 3) he is focused on building partnerships with firms like Microsoft, Deloitte, and Accenture.

Will it work?

McDermott is inheriting a company that's well established, running well and just needed a bit more focus and a sales strategy. The odds are pretty good that McDermott can juice ServiceNow's growth without a lot of disruption to derail the master plan.

He said there won't be sales coverage changes at ServiceNow, and the plan really revolves around global expansion. Sixty five percent of ServiceNow's revenue was from North America in the fourth quarter.

McDermott noted:

We will go to market as we are today in the various geographies. We can expand our footprint. We clearly are going to focus on industries such as banking and telco. I referenced a few partner examples. You know we're doing very well in regulated. You can see that in the public sector in the United States. You can see that in Australia, where we're bringing in large deals. And I'm really encouraged right now with what we're doing in buying centers because to expand as an end-to-end solution provider in the enterprise, the backbone is IT, which is unique to ServiceNow because every company wants to be a tech company. Every company would ideally like to be a software company, but it all starts with that tech backbone.

And we can carry that. We've proven it to HR. We've proven it to customer service management. We can prove it with the COO. We can prove it with the risk and compliance folks, and of course, we can also now prove it with CEOs. And I'm, in particular, excited about that because the Rolodex that I have has been calling on me, asking me for new and innovative ways to help them, either take cost out with better workflow or bring in more revenue and growth because they can manage their business more effectively.