Nov 9, 2022
Holding Name: ServiceNow Inc. (NYSE: NOW)
Strategy: Flagship
Percent weighting of strategy: ~3.1%
TLDR: ServiceNow’s position in the enterprise tech stack has allowed the company to remain resilient in the face of economic uncertainty. Our thesis continues to track and Bill McDermott and the leadership team at ServiceNow continue to provide consistent outperformance.
Business overview: ServiceNow, Inc. provides enterprise cloud computing solutions that define, structure, consolidate, manage, and automate services for enterprises worldwide. The Company designs, develops, and produces prepackaged computer software, cloud services, and IT service management platform. Its product portfolio is focused on providing Information Technology, Employee and Customer workflows.
Why we own it: ServiceNow has evolved from its founding as an IT service management (“ITSM”) company to a quasi-monopoly, given it is the only SaaS platform that offers the full suite of back-to-front office workflow tools. While platform is often an overused term; it is appropriate for NOW and is a key differentiator from all of its competitors, which only provide point solutions.
NOW does not force vendor lock-in upon its customers; rather, the extremely high switching costs are a function of where NOW sits in the customer’s tech stack and the custom tools customers build to embed in their workflows. As a result, ServiceNow is a mission critical software platform that should be able to mostly withstand any potential slowdown in broader IT budgets resulting from economic uncertainty. Digital transformation projects remain a key priority according to CISO/IT surveys which should function as a tailwind for the company. In fact, incremental budget dollars may flow to ServiceNow as a productivity tool - allowing (potential) customers to scale operations with fewer full time equivalents (FTEs).
What’s the latest: ServiceNow reported earnings two weeks ago and provided a very strong print that reaffirms that our thesis is tracking. Key components, namely, cRPO (current remaining performance obligations) or the sum of deferred revenue and backlog, and subscription revenue saw constant currency strength. This in combination with fourth quarter guidance being better than previous guides represented the two most critical drivers for the stock. Number of customers paying over $10 million in annual contract value in Q3 2022 grew 60% year over year and the company has proven the ability to hire a highly capable sales team that has led to high quality sales efficiency.
Sign posts moving forward: Bill McDermott and the management team at ServiceNow have done an impressive job so far in navigating the changing market dynamics. The team has set the bar extremely high for Q4 and the team has affirmed that their selling execution is driving the high quality guidance for the coming quarter. We will monitor trends to make sure the company can live up to their guidance but the company's demonstrated success expanding within its customer base serves as the foundation for hitting their key metrics.
We will continue to monitor cRPO and subscription growth as two of the key metrics moving forward. This in combination with macro signposts regarding IT spend will impact potential growth in the near term for ServiceNow.
The content contained in this material is intended for general informational purposes only and is not meant to constitute legal, tax, accounting, solicitation of an offer, or investment advice.
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