It’s perhaps an understatement to say there has been a flood of ServiceNow news this week, or even in the past two days. To add in some reactions from our leadership team to these big ecosystem announcements, I am tagging into this rendition of the ServiceNow rundown. (Don’t worry, Sarah will be back next month! )
As a reminder, the Rundown is our monthly series where we compile the top news in the world of ServiceNow. And boy, do we have a lot to get into…
Donahoe’s Watch has Ended, And McDermott’s is about to Begin
The biggest news of the week came at 2 pm EST Tuesday when ServiceNow announced that CEO John Donahoe was stepping down to join Nike. Donahoe will stay on through a transition period and finish out his term on ServiceNow’s Board of Directors.
This announcement was met with near-universal shock (and even a bit of upfront dismay) among observers, as Donahoe was a larger-than-life, inspirational leader both inside and outside ServiceNow. As a leading partner of ServiceNow since before his tenure, we can tell you he certainly played a critical role in maturing ServiceNow’s market vision and go to market strategy in service of putting the company on the path to $10 billion in revenue.
His replacement, Bill McDermott, is another major enterprise tech executive, having spent his last 17 years building up the powerhouse that is SAP to the fourth largest enterprise software vendor in the world.
McDermott will be bringing this global experience and scale to the high-growth ServiceNow, leaving SAP with a market cap of just about $140 billion. After the initial surprise, reactions from industry observers warmed to the news, citing the incoming CEO’s exceptional level of experience in maturing an enterprise platform.
“It’s hard to imagine how ServiceNow could have done better… The transition actually should be essentially seamless and lacking melodrama. ServiceNow gets an experienced captain that can build the boat into a bigger one and take the customers on the ride-along.” Charles King, Pund-IT Inc. Analyst
In a letter to ServiceNow partners, David Parsons, ServiceNow’s Sr. Vice President of Global Alliances and Channels echoed this energy,
“While we are saddened to see John move on to what is an amazing opportunity with one of the world’s top consumer brands, his move ushers in tremendous opportunity as we continue to aspire to build a great, enduring company. For those of you who have tracked Bill’s career, he brings to ServiceNow extensive global leadership experience growing large enterprise software businesses at scale… He is looked upon as an inspirational leader, a passionate advocate for customers, and a strong believer in the power of a vibrant global partner ecosystem.”
Speaking to CNBC on Wednesday morning, incoming McDermott shared his vision for the company under his helm:
“There’s so much going on in digital transformation, and ServiceNow is at the center of it all. I see us at the dawn of a new era of software. Many leading executives don’t know just how pristine the ServiceNow platform is, and just how extensible it is to solve IT issues, Customer Issues, Human Capital Management issues, etc. because it was built from day one on a fully-integrated holistic platform that drives real productivity in the enterprise.”
On last night’s Q3 earnings call the spirit of collaboration between Donahoe and McDermott was palpable, and McDermott’s energy and perspective on Now’s market opportunity is a good signal of things to come. In terms of his future with ServiceNow, the new CEO asserted, “I am 100 percent in. We are going to set the standard and become the most admired software company in the world.”
One thing’s for sure, this move is a major inflection point on ServiceNow’s corporate journey to maturity – and, if they had started putting their eyes on what it would take to get to $10 or $50 billion in the last few years, I’d be willing to bet that outlook starts to increase.
The Market Responds
It’s been nearly two decades since I was a financial analyst, but there are some adages that remain true no matter what the year. One big one: Markets are not huge fans of “surprise.” They are definitely not a big fan of surprise when they’re looking at one of the “best performing” stocks of the year (at the outset of the week, NOW was showing 28 percent year over year growth).
Donahoe’s departure is especially shocking because of his short tenure as CEO. He had, in fact, only been CEO since 2017 when he replaced then ServiceNow CEO and Chairman, Frank Slootman. Despite that relatively brief timeline, ServiceNow shares rose 161 percent under his watch, and the company took a major step toward maturity and platform expansion.
The market’s initial reaction was mixed. As Dave Vellante, chief analyst at research firm Wikibon, indicated, investors and insiders might worry that McDermott’s arrival could create negative disruption to a company and culture still absorbing the impact of losing their last CEO just two and a half years ago.
So, it’s not surprising that the immediate Wall Street response to the few hours after the announcement did not break in ServiceNow’s favor. Late day trading saw the overall price drop 15 percent. However, I would not read this drop as a vote of no-confidence for McDermott, but a general market dislike for surprise announcements.
The strong earnings report and spirit of collaboration were evident on Wednesday night’s earnings call. In a likely effort to allay disruption fears, McDermott spent considerable air time last night praising ServiceNow leadership and Sales strategy (more on that in the Q3 earnings section).
Long-term, expect to see the ecosystem embrace McDermott’s style and paradigm for what he called on CNBC “the dawn of a new era of software” with ServiceNow in the center. Indeed, early trading this morning shows the NOW ticker having covered most of its early week losses. (Smart timing on the week’s announcements by the ServiceNow corporate communications team, for sure!)
And then… ServiceNow Announces Strong Q3 Earnings
On the heels of their leadership change, ServiceNow also announced their preliminary third-quarter results on Wednesday, sharing a Q3 that handily beat analyst estimates. The tone on the call was upbeat and congratulatory from analysts and the two CEOs alike.
Going into the call, ServiceNow had a tall order. Not only did they need to address the prior day’s executive changes, but they also faced some concerns by analysts that ServiceNow’s “blistering” growth was slowing – specifically in light of a slight shortfall in subscription revenue growth in Q2 2019.
Not to worry, NOW was armed to report strong positive outcomes as they continue to focus on customer success and an expanded footprint to 75% of the Fortune 500 as clients.
Kicking off the call, departing CEO Donahoe was both positive and optimistic on ServiceNow’s future, sharing “I believe deeply in ServiceNow and our opportunity – we have clear cloud tail win and beautiful clean strategic platform. Customers are leaning into partner with us, and I see us very well positioned to become a $10 billion company.”
Some of the key earnings takeaways included:
- 835 million in subscription revenues, representing a 35% y/y growth
- 864 million in subscription billings, representing 29% y/y growth
- 2 billion expected in subscription revenue for 2019 (36% y/y growth)
- 740 billion expected in subscription billions for 2019 (32% -33% y/y growth)
- 99% renewal rate
- 18 of the top 20 new deals for ServiceNow in Q3 included customers buying 3 or more products on their platform.
ServiceNow’s riotous success is sometimes also their Achilles heel. The firm’s rapid 30+% growth rate has included a history of earnings that didn’t just beat earnings but blew them out – meaning that occasionally (like in Q2) just beating their expectations comes off as a disappointment to analysts expecting the moon.
The good news for ServiceNow in Q3? The moon was delivered. While EMEA markets cooled a bit, larger deals and Federal performance picked up the slack in the analysts’ eyes. According to this morning’s press reaction, the strong earnings and PR blitz was a rousing success.
To McDermott, we say “welcome to the team!” We are looking forward to hearing more about your C-suite approach and platform synergies and growing the ecosystem with value plays from superior partners at every level.
Other News You Might Want to Bookmark
With all the top-level news, there are still plenty of relevant items we didn’t cover. If you’re like me, you’re still seven articles deep into your ServiceNow alerts, but here are a few more articles to bookmark and catch up on this weekend!