 From theCUBE Studios in Palo Alto in Boston, bringing you data-driven insights from theCUBE and ETR. This is Breaking Analysis with Dave Vellante. ServiceNow is a company that investors love to love, but there's caution in the investor community right now is confusion about transitory inflation and higher interest rates looms. ServiceNow also suffers from a perfection syndrome of sorts. The company has seen that the slightest misstep can cause many freakouts from the investor community. So what it's done is it's architected a financial and communications model that allows it to beat expectations and raise its outlook on a consistent basis. Regardless, ServiceNow appears to be on track to vie for what its CEO Bill McDermott refers to as the next great enterprise software company. Wait, I thought Mark Benioff had his hands on that steering wheel. Hello everyone and welcome to this week's Wikibon Cube Insights, powered by ETR. In this Breaking Analysis, we'll dig into one of the companies we began following almost 10 years ago and provide some thoughts on ServiceNow's March to 15 billion by 2026, which we think is a highly probable achievement. In 2020, despite the contraction in IT spending, ServiceNow outperformed both the S&P 500 and the NASDAQ, but here's a view of 2021. And you can see while the stock has done well since it saw softness in May and again in early June, and it bounced off that double bottom, its performance is well below those other benchmarks. This is not a big surprise given the fact that this is a high growth stock and we all know that those names with high multiples get hurt in an inflationary environment, but still the gaps are notable. This is especially true given the performance of the company. It's not often that you see a company with $4 to $5 billion in revenue growing at a 30% clip, throwing off billions of dollars in free cash flow and increasing operating margins at 100 basis points a year and promising to do that over the next several years. In fact, I don't think we've ever seen that before. I remember years ago when the trade press was criticizing ServiceNow for its lofty valuation, despite the fact that it was losing money, then CEO Frank Slutman said to me, Dave, we could be highly profitable tomorrow if we wanted to be, but this is a marathon and we're planning to go big. So essentially Slutman was telling me that this company was going to be an ATM machine that prints money and that seems to be how it's shaping up. I happened to be at ServiceNow headquarters in 2017, literally the first day on the job for John Donahoe, the CEO will replace Slutman. I remember while I was there thinking, Donahoe was certainly capable, but why the heck I said, would the board let Frank Slutman get away? You know what, it turned out great for Slutman. He's at Snowflake, Donahoe, I always felt was a consumer guy anyway and not long for ServiceNow. And now you have this guy, new CEO Bill McDermott at the helm. And it's not a more qualified CEO for the company in my view. About two months ago, McDermott led a virtual investor day. We've had McDermott on theCUBE a couple of times back when he was CEO of SAP. And this individual is very compelling. He's got JFK-like looks and charisma, but more than that, he's passionate and convincing. And he obviously knows enterprise software. And with conviction, he laid the groundwork for how ServiceNow will get to $10 billion in revenue by 2024 on its way to 15 billion two years thereafter. And one of the big things McDermott stressed was they're going to get there without any big M&A moves. And that's important because previously the door was left open for that possibility. And now the company is assuring investors that it can get there organically, even with slower growth. So this chart implies no big M&A. And you can see Slutman handed over the reins at that year one tick on the horizontal axis. This was not a turnaround story. It was a rocket ship at the time. And look at the logos on this chart. This is a revenue view and ServiceNow is aiming to be the fastest to get to 10 billion in software industry history. ServiceNow's valuation, just to sort of shift gears here for a minute, blew by workdays years ago. Its sites are now set on SAP, which is currently valued at 170 billion. And then there's Oracle and Salesforce. They're at around 250 billion and 225 billion in valuation respectively. And these lines back to revenue show the trajectory that these companies took to get to 10 billion. And you can see how ServiceNow plans to get there with those dotted lines. And this is why I call this a collision course with Salesforce because I think Mark Benioff might say, hey, we already are the next great enterprise software company and we have no plans to give up that post, that mantle anytime soon. I want to share a clip from four years ago, something we've been saying for a long, long time. Roll the clip. As I say, their goal now is to be four billion by 2020. It feels like, when we first covered ServiceNow knowledge, we said, wow, this company reminds us a lot of the early days of Salesforce. They've got this platform, you can develop on this platform, call it Paz or whatever you want to call it. But we at the time said they're on a collision course with Salesforce. Now there's plenty of room for both of those companies in the marketplace. Salesforce obviously focused predominantly on Salesforce automation, ServiceNow really on workflow automation. But you can see those sort of two markets coming together. Now you may be thinking, isn't Salesforce's revenue like 5x that of ServiceNow? And yes, it is. But I would say a couple of things. One is that Salesforce has gotten to where it is with a lot of M&A, more than 60 acquisitions. It's some high profile ones too, like Slack and Tableau as well as MuleSoft and Heroku back in the day and many others. So we'll see how far McDermott can get before he reverts to his acquisitive self that we saw at SAP. But the second thing I'll say is, ServiceNow positions itself as the platform of platforms. And the thing is, it runs its own cloud. And when it does acquisitions, it replatforms the acquiree into the now platform so that it can drive integrations more seamlessly. That's fundamentally part of its value proposition, a big part of its value proposition. And that means it's somewhat limited on the acquisitions it can make. It has to be pretty selective. Otherwise, it's got to do a heavy lift to get it into the now platform. It's the power of the model, especially if customers can get to a single CMDB, the configuration database management system, which by the way, a lot of customers never get to. They're going to skirt that. But remember, ServiceNow is like the ERP for IT. So the more you can get to a single data model, the more effective you're going to be, especially in this data era, where you got to put data at the core of the organization, something we've talked about a lot. The third thing I'll mention to ServiceNow wants to use this platform to attack what it sees as a very large tan as shown here. Now, a couple of things I want to point out. One is, when ServiceNow IPOed in 2012, a lot of the analysts said that they were way overvalued because they were in a market that was help desk and writing tickets was a $2 billion business that was in decline and BMC remedy wasn't really that big of a base to attack. In 2013, the Wikibon team took a stab at sizing the tan, a dug back into the old wiki. We had it well over $30 billion at the time and we expected the company to move deeper into IT and then beyond IT into lines of business and line of business management. You know, we felt we were being conservative. We thought the number could be as big as $100 billion but we felt like putting that number out there was too aggressive but it turns out from ServiceNow standpoint it sees these new software opportunities coming together. At ServiceNow in a way, they can double dip both in and beyond their current markets. What I mean by that is it can partner with for instance, HCM vendors and then at the same time offer employee workflows. It can partner or even purchase RPA tools from specialists like UI path or automation anywhere and it can go acquire a company which it did like Intellibot and integrate what I would consider lighter weight RPA into its platform. So it can manage workflows for best of breed and pick off functionality throughout the software stack. Now what's interesting in this chart is first the size of the tan that ServiceNow sees $175 billion but also how it's now reorganizing its business around workflows which you see in the left hand side. This was done of course to simplify the many, many, many things that you can buy from ServiceNow but there's also speculation that ServiceNow is leveraging its orchestration and service catalog capabilities which are meaningful from a revenue standpoint and using them to power these workflows because the way it was organized was both confusing and not as effective as it could be. Now it's well known that ServiceNow's ITSM business comprises the biggest piece of its revenue pie, probably a couple billion and it's adding to that with ITSM Pro and ITSM Enterprise so going deeper into the ITSM space and its ITOM business is also doing well against the likes of Datadog and Elastic and Splunk and others and its acquisition of LightStep is going to push it further into this space which is both crowded and it's morphing into observability as we've been reporting. What's unclear though is how well for instance HR and the CSM businesses are doing as sort of standalone businesses. You might remember they used to be standalone businesses with standalone GMs. They've sort of changed that up a little bit so this is potentially not only a way to simplify but also shuffle the deck chairs a bit and maybe prop up the non-IT workflows which then allows ServiceNow to show this chart which essentially says to the street see we have this huge TAM and our TAM expansion strategy is working as the overall business is growing nicely yet the mix is shifting toward customer, employee and creator workflows. See how awesome our business is and see how smart we are. So this is possibly a way to hide some of the warts and accentuate the growth. Look there's not a lot to criticize ServiceNow about but they've been pretty good at featuring what some perceive as weaknesses like for instance the way it marketed its multi-instance and turn that into an advantage as a better model. Even though the whole cloud world was going multi-tenant and within a ServiceNow you have to you got to really plan new releases which they drop every six months. Although CJ Desai, he's ServiceNow's head of products he did say at the investor meeting that event that they held last May that they do certain releases now bi-monthly and even some bi-weekly. So yeah, maybe a little bit of nitpicking here but I always like to question when such changes are made to the reporting structures to the street and if workflows are the new black so to speak I wonder will ServiceNow start pricing by workflows versus what really has been a legacy of what's your ticket volume and how many agents need access to the model and will charge you accordingly. Now I'm not a ServiceNow pricing expert and they don't make it easy to figure out their pricing so let's dig a little bit more on that and keep an eye on it. Now I want to turn to the customer survey data from ETR on ServiceNow. First here's the latest update on IT spending from ETR something that we've been tracking for quite some time. We've been consistently saying to expect this year a seven to 8% growth for 2021 IT spend off of last year's contraction. And the latest ETR survey data puts it right at 8% so we really liked that number. You know, could even be higher and push 10% this year. Now let's look at the spending profile within the ETR data set. Of the 1100 plus respondents this quarter there were 377 ServiceNow customers. And this chart shows the breakdown of net score or spending velocity among those respondents. Remember net score is a measure of that spending momentum. What it does is it takes the lime green bar which is adopting new that says 11% of that 377 customers are adopting ServiceNow for the first time. It takes that lime green and it adds the forest green bar that's growth and spending of 6% or more this half relative to the first half that's 43% of the customers that have been surveyed here. And then it subtracts out the reds which is that pinkish is spending less that's 3% small number spending less. And then the bright red is we're leaving the platform that's a minuscule 1% of the respondents and you can see the rest in that gray area is flat spending which is ignored. And so what this does is it calculates out you take the greens minus the reds it calculates out to a net score of 50% for ServiceNow which is well above that magic 40% elevated mark that we'd like to see. It's rare for a company of this size except for the hyperscalers. You see AWS and Microsoft and Google are up that high. Oh, there's another great enterprise software company at the 45% net score level. Guess who that is, salesforce.com. But anyway, it's rare to see that large of a company have that much spending momentum in the ETR surveys. Now let's take a look at the time series data for ServiceNow. This chart shows the net score granularity over time. So you can see the bars, the time series the blue line is net score and you can see that it was dragged down during last year's lockdown. And even though ServiceNow did pretty well last year and it's now spiking back to pre COVID levels which is a very positive sign for the company. That red call out that ETR makes it shows market share that's an indicator of pervasiveness in the data set. I'm not overly concerned there of that downturn. I don't think it's a meaningful indicator because ServiceNow revenue is skewed towards some big spender accounts. And this is an account unit indicator if you will, not spending level metric. And okay, and here's another reason why I'm not concerned about ServiceNow's so-called market share number in the ETR data set as ETR defines it. This is an XY view chart that we'd like to show here. It's got net score in the vertical axis and market share in the horizontal plane. This is focused in an enterprise software. So remember that 40% red line is the magic level. Anything above that is really indicative of momentum. Oh, look, there's Salesforce and ServiceNow on that little collision course that I talked about. Now CEO McDermott would say, as by the way, would his predecessors, look, we're a platform of platforms and we partner with other companies. We'll meet at the customer level. And sure, we'll integrate functions where we think it can add value to customers, but we also understand we have to work with the vendors that our customers are using. So it's all good. Plenty of room for growth for all of us, which by the way is true, but I will say this, anyone who's ever been in the enterprise software industry knows that enterprise software execs and their sales people believe that every dollar spent on software should go to them. And if it's a good market with momentum and growth, they believe they can either organically write software to deliver customer function and value or they can acquire to fill gaps. So while what McDermott would say is true, the likes of Oracle, Microsoft, SAP, Salesforce, Infor, et cetera, they all want as big of a budget piece as possible in the enterprise software space. That's just the way it is. Now we're going to close with some anecdotal comments from ETR Insights, formerly called Venn, which is a round table discussion with CXOs. You can read these summaries when we post on Wikibon and SiliconANGLE, but let me summarize. This first comment comes from an assistant VP in retail who says, service now is a key part of their digital transformation. They moved off of BMC Remedy two years ago for the global ticketing system. And this person is saying that while the platform is extremely powerful, you got to buy into specific modules to just get one feature that you want. You may not need a lot of the other features. So it starts to get expensive. The other thing this individual is saying is initially it's a very services heavy project. And so I'll tell you, when you look at the service now ecosystem, the big SIs, the big names, they have big appetites. They love to eat at the trough, as I sometimes say. And they want big clients with big budgets. So if you're not one of those top 500 or 700 customers, the big name SIs, they might not be for you. They're not going to pay attention to you. They're going after the big prizes. So what I would suggest is you call up someone like Jason Wojon of third era. He's the CEO over there. And he's got a lot of experience in this space or some more specialized service now consultancy like them because you're going to get better value for the money and you're going to get short-term ROI faster with long-term sustainable ROI as a measurable objective. And I think this last comment sums it up nice. I'm going to skip over the second one and go just jump to the third one. This basically says the platform is integrated. It's like a mesh. It's not a bunch of stovepipes and cul-de-sacs. Yes, it's expensive, but people love it. And like the iPhone, it just works. And their feature pace is accelerating. So pretty strong testimonials. But I want to keep an eye on price transparency and any possible backlash there and how the ecosystem evolves. It's something that we called out early on. It's an indicator and service now needs to continue to invest in that partner network, especially as it builds out its vertical industry practices and expands internationally. Okay, we'll leave it there for now. Remember, I publish each week on wikibon.com and siliconango.com. These episodes, they're all available as podcasts. All you got to do is search for Breaking Analysis Podcast. You can always connect with me on Twitter at dvolonteer. Email me at david.volonte at siliconango.com. Appreciate the comments on LinkedIn. And don't forget to check out etr.plus for all the survey data. This is Dave Vellante for theCUBE Insights, powered by ETR. Be well and we'll see you next time.