On the eve of ServiceNow's Knowledge 15 conference in Las Vegas this week, the firm got off to a bumpy start with a 17% slide in its share price on the back of strong first quarter numbers, but soft second quarter projections.
The company reported a first quarter net loss of $58 million on revenue of $212 million, up 52% year-on-year. Wall Street had been looking for break-even, but what spooked investors was the outlook for the next three months, with revenue expected to be between $237 million and $242 million in the second quarter and between $970 million and $1 billion for the full year.
Some of this was attributed to currency headwinds, but also to what seems to have been some self-inflicted damage, according to CEO Frank Slootman:
We were off to a slow start, because we had sort of a hyperbolic Q4, which is great. But unfortunately, we hit January, you know, a lot of business gets pulled forward and it just takes time for the sales teams to build the pipeline back up, so it then starts pushing the business all the way to the back end of March as well as past it. We had quite a bit of deal slip, but the good news is actually that literally when we turned the corner into April, that all started to close in rapid fashion.
We also had a fairly sizable sales realignment and reorg coming into the new year. That happens every year, but this particular year more than half our reps ended up with new account assignments. And what that does is it really dramatizes the effect that we already talked about, because people knew they were going to lose their accounts, so they’re closing like there’s no tomorrow, but they’re also not building the pipeline, because they don’t know what they’re gonna get.
It’s also a matter of timing being driven by the customers, he adds:
Our biggest number one competition is always the push, because these are large transactions. It always depends on whether a customer has the resources and the priority in the organization to undertake it.
That is often the driver, why a deal doesn’t happen in the quarter, when a customer just isn’t ready. We don’t lose them to competition. The deals are not going away. But it’s not atypical for us to see transactions not just move one quarter, but move two quarters and sometimes, even three quarters, because they have to be ready to engage on the overall deployment. It’s not a small commitment. These are really, really big rollouts and goal lines.
But it’s a long game to play, he concludes:
Our relationships with customers are 10, 15, 20 years, so a couple of weeks is not going to make a whole lot of difference.
For all that, there were some positives including:
- A 48% hike in billings in the first quarter to $268 million.
- The addition of 23 net new global 2000 logos to the customer list.
- Eight new deals with annual values in excess of $1 million.
- A total of 168 customers with an annualized contract value in excess of $1 million.
- A 97% renewal rate among existing customers.
- A 32% upsell rate among existing customers.
That upsell number was of some note, with Slootman arguing that the firm is broadening its functional footprint among its client base to extend service management across the enterprise, for example, to marketing, legal, and finance in the past quarter:
It’s a very important part of how we go to market is to sell it as service management than not specific to IT or HR or any other flavor. We really want our customers to embrace service management for the enterprise, and then they can decide how to allocate it to different service domains.
As our customers expand their use of ServiceNow, we see them using our solutions not just to support the business, but increasingly, to actually run the business.
Slootman cited a couple of examples to back up his point:
H&R Block Canada stood up a new application on ServiceNow during the quarter, just in time for tax season. The company used ServiceNow to support their annual field office readiness, providing the executive team with a dashboard view of the work associated with preparing 600 stores for tax season. The success of that program kicked off additional ServiceNow projects they will be pursuing over the coming year.
For many of our customers, the objective is to create an integrated service experience across all departments and enterprise functions. We helped AAA Allied Group reduce their reliance on email across eight different departments. The customer has said that any interaction with the business will go through ServiceNow. Their marketing department is using ServiceNow to manage creative service requests, taking that service out of email to provide a more efficient and structured workflow.
Going forward, ServiceNow sees customers creating their domain areas for the core functionality of the service offering. Slootman explains:
A central theme of our entire strategy is to really drive service management to an enterprise product. It’s also one of the reasons why we didn’t want to segment our business in terms of all these domains, because there are tons of other service management applications that really don’t sort of fit squarely on a functional department or function. It can just be a single service that’s being provided.
One of the things that we’ve also included is a template for customers to actually build their own customer service management applications. It’s so highly abstracted and templated that you can auto-generate most of the service management applications, because there’s just tons and tons of use cases out there, and we cannot support that all.
We’re just picking some of the big service domains out of there to prime the pump, because we know they’re sizeable and there’s a lot of opportunity there. But there are lots and lots of use cases, which is why we went through this templated automation approach to sort of help people with the tooling to do that, with really no coding skills whatsoever, to be able to stand up those kind of services where you have case management, knowledge management, requests.
As to what’s coming out of Vegas this week, Slootman highlights a research report into the “productivity frontier in large institutions and enterprises” and its impact in terms of time lost, as well a new developer IDE and a financial management application. But there’s an overriding theme, he says:
The biggest thing about ServiceNow [is that] the platform affords an opportunity to really change the way people work, away from unstructured messaging approaches, which is really email and voice and so on, getting to systems, structured data, structured workflow type of approaches.
The mega theme is always around how service management is really changing the way people work in institutions and enterprises.
An unfortunate start to the company’s big week, but not one that gives long term reason for concern in a sector that's increasingly recognized for its importance.
Derek will be reporting in from Knowledge 15 during the week. More to come as and when.