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Thesis:
We love companies with great products, exceptional recurring revenue, and strong retention. ServiceNow meets all those criteria on top of having a 40% market share in the IT Service Management industry while rapidly expanding into other areas of the enterprise. ServiceNow has executed a brilliant go-to-market strategy by targeting IT departments and letting them be advocates for the Now platform in other departments.
Company Description:
ServiceNow provides software solutions to structure and automate various business processes via a SaaS delivery model. The company primarily focuses on the IT function for enterprise customers. ServiceNow began with IT service management (ITSM), expanded within the IT function, and more recently directed its workflow automation logic to functional areas beyond IT, notably customer service, HR service delivery, and security operations. ServiceNow also offers an application development platform as a service (PaaS).
Qualitative
Overview:
Sector: Technology
Industry: Software – Application
Competitors: Salesforce, IBM, Oracle, Workday
Strategy: Make the world of work, work better for people
Land and expand strategy
Best-in-class modular, flexible, and scalable SaaS solution for ITSM
The Now Platform is deployed in packaged offerings that automate workflow processes across the entire enterprise adding tremendous value
The Now Platform has one code base and one data model which allows native and custom applications to work seamlessly with each other.
Business Model: Enterprise SaaS
NOW’s SaaS offering delivers digital workflows in pre-packaged products on a single enterprise cloud platform delivered to customers through a direct salesforce.
NOW offers professional services directly and through partners to help customers deploy and utilize their products and platform.
Additional offerings include the Now Platform App Engine which allows customers to design and build workflow applications tailored to their own business.
Market: IT Service Management (ITSM) & IT Operations Management (ITOM)
ServiceNow focuses on the largest 2,000 enterprises in the world.
40% market share in the space (ITSM)
6,200+ customers including ~80% of the Fortune 500, 1,012 customers with ACV greater than $1M
The total addressable market is loosely defined as the IOTM space exceeding $150B
Moat:
High switching costs – time implementing new software, lost productivity, and operational risk.
First mover – multi-tenant SaaS solution build in a modern, flexible, and modular way.
IT First – the customer is its own advocate, IT departments cross-sell NOW software internally
Platform as a Service (PaaS) – all apps have been built organically on the NOW platform allowing for seamless integration and strong network effects.
X-Factor: IT Landing Pad
ServiceNow’s initial landing pad in an enterprise is the IT department. This provides a built-in advocate for software for other functional areas of the enterprise.
20/20 of ServiceNow’s largest deals in 2020Q3 included three or more solutions.
More than 75% of customers are multi-product purchasers, driving larger deals.
ServiceNow has a customer retention rate between 97-98%
Cash Cow: Subscription Revenue
Subscription revenue accounted for 94% of total revenue (~$3.25B FY19) while professional services made up the remainder 6% (~$2M FY19).
NOW had non-GAAP subscription gross margins of 86% in FY19 and total gross margins of 81%.
NOW had $971M in free cash flow in FY19.
Growth Opportunities:
Other departments within the enterprise in need of workflow automation.
International sales – currently sales outside of North America only account for 34% of total revenue.
PaaS only accounted for 18% of ACV in 2018 and has the ability to be a tremendous value add for enterprises.
Quantitative
Risks
ServiceNow hosts its own servers and data centers and costs associated with this operation (capacity/hardware, infrastructure, colocation, etc.) and is the primary expense of subscription revenue.
Long contracts can lead to deferred revenue and subject to variable changes like foreign currency exchange rates.
The company operates in very competitive industries and competition could limit growth.
Learn Something
Company Materials: 10-K | Investor Presentation | Investor Relations
TechTarget: ServiceNow
Investor Place: ServiceNow Stock Is a Winning Investment in a Coronavirus World
ACV: is an average annual contract value of your account subscription agreements.