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“We are well on our way to become the defining enterprise-software company of the 21st century,” ServiceNow Inc. CEO Bill McDermott told MarketWatch.
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While Salesforce.com Inc. continues to build itself into a powerhouse with large acquisitions and a thunderous chief executive, a quieter rival believes it will eventually be the cloud company that defines enterprise software in the 21st century.
Salesforce’s CRM, -7.65% billionaire CEO Marc Benioff is generating plenty of buzz following his company’s $27.7 billion acquisition of Slack Technologies Inc. WORK, -2.00% on Tuesday, but ServiceNow NOW, -2.16% CEO Bill McDermott is on a winning streak of his own, though he refuses to take a victory lap.
See also: Salesforce to acquire Slack in $27.7 billion deal, while results top Street estimates
In the year since he was named CEO after nearly two decades at SAP SAP, -0.44%, McDermott’s new company continues to be one of the fastest-growing major cloud vendors. Its market value has doubled to $100 billion, and it joined the S&P 500 SPX, +0.07% index. Next up: market domination?
“We are well on our way to become the defining enterprise-software company of the 21st century,” McDermott told MarketWatch. “If you look at our position in the market today, we’re the only born-in-the-cloud software company to have reached $100 billion market cap without large-scale M&A.”
In its inexorable ascent, the plucky company whose automation software used to improve productivity at businesses is leading what is calls a “workflow revolution” while drawing comparisons to its much larger San Francisco neighbor, Salesforce, in a market pegged at $26 billion. (To underscore its growing competition, ServiceNow on Tuesday named Salesforce veteran John Ball to lead its Customer Workflow business unit, which represents the company’s fastest-growing business.)
ServiceNow has taken a different approach than Salesforce, however. It is focusing on partnerships and smaller acquisitions rather than mega-purchases as Salesforce just did with Slack and, before it, Tableau Software Inc. ($15.3 billion) and MuleSoft Inc. ($6.5 billion).
The quietly confident McDermott envisions an inevitable march forward, via partnerships and savvy acquisitions, to become the premiere cloud-software company. What COVID-19 fomented in the workplace — placing even more emphasis on digital tracking of employees and business systems — has played into ServiceNow’s strengths. And the tectonic shift is accelerating: By 2025, most of the millennial generation will work from home permanently, based on research reports cited by McDermott.
Where ServiceNow stands now is at the precipice of something truly big, though it admittedly has a ways to go: Although the company’s market value is roughly the same as International Business Machines Corp. IBM, +0.58%, its expected revenue of $4.49 billion in fiscal 2020 is one-fifth that of Salesforce, one-sixth of SAP SAP, -0.44%, one-ninth of Oracle Corp. ORCL, +0.43% and one-16th of IBM, according to FactSet.
But ServiceNow is closing ground as corporations and government agencies pour billions of dollars into their digital infrastructures. So far, more than $3 trillion has been invested in digital transformation initiatives. Yet only 26% of the investments have delivered meaningful return on investment, according to market researcher IDC.
“This is fueling the workflow revolution, where ServiceNow is the missing link that can integrate systems, silos, departments and processes, all in simple, easy-to-use cross-enterprise workflows,” said McDermott, whose grandfather, Bobby McDermott, was inducted into the basketball hall of fame in 1988.
A spike in demand for “workflow automation” technology, sent into hyper-drive during the age of COVID-19, will help ServiceNow sustain 25%-plus revenue growth, Morgan Stanley analyst Keith Weiss said in a Nov. 12 note, in which he upgraded ServiceNow’s stock to overweight from neutral, and upped his price target to $652 from $559.
During its third-quarter earnings announcement on Oct. 28, ServiceNow raised its full-year guidance after disclosing it has 1,012 customers with more than $1 million in annual contract value, up 25% year-over-year. That included 41 such transactions in the third quarter, with new customers such as the U.S. Senate and New York City’s Mount Sinai Hospital. ServiceNow raised guidance for the full year on subscription-revenue range to between $4.257 billion and $4.262 billion, up 31% year-over-year in constant currency.
If ServiceNow’s market forecast proves accurate, it has a chance to make a run at cloud-software leader Salesforce.com and achieve ServiceNow’s goal of $10 billion in annual sales. (McDermott declined to give a timeline on that goal.)
Partnering to the top
ServiceNow’s path to market dominance has been pock-marked with tech partnerships and savvy acquisitions.
In July, Microsoft Corp. MSFT, -0.84% expanded its relationship with ServiceNow; shortly thereafter, Accenture ACN, -1.56% and IBM created new business units in partnership with ServiceNow to pursue various slices of the digital revolution.
This has led some analysts to speculate that partnerships with Salesforce, SAP and Oracle could follow.
ServiceNow Chief Financial Officer Gina Mastantuono told MarketWatch that overwhelming demand on the help desk has prompted more IT teams to look for ways to “deflect lower-tier cases, leveraging chat bots and predictive intelligence to help take the burden off the agents. This is the future of work.”
At the same time, ServiceNow has parlayed acquisitions, such as those of AI startups Passage AI and Loom Systems, into supplementing and growing its technology. (On Nov. 30, ServiceNow said it had reached an agreement to acquire Element AI, a company that uses artificial intelligence to analyze text, language, chat, images and other types of queries, for an undisclosed amount.)
In March, ServiceNow announced a new computing platform, Orlando, that added artificial intelligence and machine learning that lets the MGM Macau casino resort, for example, use a virtual agent to automate and handle repetitive requests.
“The use of virtual agents will provide employees with 24/7 support experiences when human staff is unavailable,” David Schubmehl, research director for IDC’s cognitive/artificial intelligent systems and content analytics, told MarketWatch.
“Bill has identified and jumped on the importance of AI acquisitions, which is clearly a major emerging trend in M&A,” former Cisco Systems Inc. CSCO, +0.50% CEO John Chambers told MarketWatch. “He’s a very smart CEO.”
And then there are ServiceNow’s meat-and-potatoes offerings, which are being gobbled up by companies addressing an expanding workforce that is rooted at home.
“ServiceNow has enabled us to unite our front , middle and back office teams, increasing productivity during this time period when speed and simplicity matter most to our customers,” Sunil Madan, chief information officer at Zoom Video Communications Inc. ZM, +2.37%, told MarketWatch. “The latest innovations in the Now Platform are helping us maintain business continuity through workflows that anticipate and remediate disruptions.”
What started as Glidesoft…
The latest chapter in the 16-year history of ServiceNow (original company name: Glidesoft Inc.) almost didn’t happen.
Before the company went public in 2012, it was nearly sold to VMware VMW, +0.49% for $1.5 billion. Company founder Fred Luddy, who is now chairman, and the board of directors were tempted, but venture-capital firm Sequoia Capital argued that accepting the deal would be like giving the company away. Then-CEO Frank Slootman was eventually succeeded by former eBay Inc. EBAY, +1.54% CEO John Donahoe in February 2017, who took the company to $3.46 billion in fiscal 2019 sales.
In a game of CEO musical chairs last year, Donahoe went to Nike Inc. NKE, +0.01% and McDermott joined from SAP, setting up the company for a cycle of “exponential growth,” analyst Newman said.
Read more: Nike, ServiceNow and SAP CEOs play a game of musical chairs
At first glance, the move by McDermott — who rapidly moved up SAP’s executive ranks and had become something of an institution at the company — was surprising. But a look underneath the hood at ServiceNow made the choice obvious: Its potential growth is on a far steeper trajectory than SAP’s. “It’s the difference between being part of a startup vs. a blue-chip company that is risk-averse,” Newman said.
For his part, McDermott deflected any comparison of ServiceNow and SAP. “Both are great companies,” he diplomatically said.
National TV commercials
The company’s “Let’s workflow it” brand campaign kicked off Nov. 24 in the U.S. with a national TV spot and social-media blitz. In it, Santa, the “Chief Holiday Officer,” needs to deliver joy to millions of children around the world in less than 24 hours.
Santa and his helpers learn that workflows — digital processes that route work through an enterprise — have the potential to “impact bigger and broader change, to make hard-working elf employees more productive, and to delight deserving kids around the world,” according to ServiceNow.
Santa, and a whole lot of businesses, are buying into McDermott’s vision.
