Service-Now Analysis
Service-Now Workflow Automation Lego Tool?
Service Now is a cloud based workflow automation platform providing prepackaged solutions and customisable ‘Lego’ building blocks. With digitization, customer experience, artificial intelligence, and internet of things “themes”, enterprises are increasingly looking to robust platforms / solutions to redesign their workflows. Can Service Now, with its best in class automation platform, and 98% contract renewal rates (highest in the software vendors) capitalize on these broad industry trends, and expand use cases for its platform and become the enterprise tool of choice for workflow automation?
Product offering and Growth Strategy
Service Now was launched in 2004 by Fred Luddy with a vision to route work effectively in an enterprise. Even though Service Now built a strong base platform, the scope of that vision was limited to IT line of out of the box products – ITSM (service), ITOM (operations), ITBM (business), and ITAM (asset) – till a few years ago. However, robustness and ease of use of its platform enabled its customers to build in-house solutions for specific use cases. Starting 2016, on increasing demand from its customers, Service Now started selling out of the box solutions in the form of its ‘emerging’ products / lines – Customer Service, HR, and Security – for general customer base.
Some features of its emerging product lines:
- HR: Cross-functional workflow automation for employee on-boarding experience
- Customer Service: Workflow automation for capturing, categorizing, cross-functional routing, and aiding in root cause analysis of all inbound customer touch points
- Security Operations: Workflow automation for identifying, prioritizing, and responding to security threats faster by integrating existing security tool sets
Some applications / use cases of its emerging platforms:
- HR Employee On-boarding: This solution provides an On-boarding experience – badge, equipment, logins, vacation, training, paychecks etc. – all from single interface. What usually is a multi-day and multi department On-boarding process can turn out to be a few hours process from a single interface. This translates to a better employee experience and days saved can be put to productive use.
- Customer Experience: GE integrated health of 90 serviceable GE products (sold and serviced by different business verticals) in a single interface of Service Now. GE is able to route service requests to appropriate departments, turn customer service into a team sport, and act as a single touch-point to its customers regardless of the product line or nature of customer inquiry. If GE is able to redirect at least 10% of customer issues to self-service mode, GE would save tens of millions of dollars. Over a period of time, if GE were able to leverage AI functionality within Service Now and predict issues, savings would be even greater. This enhanced customer experience increases the probability of ‘sticky’ customer relationships
A few elements of product growth strategy:
- Maintain its robust Core platform
- Understand customer pain points, and extend use cases of its platform (akin to its emerging line of products – HR, Customer Service, Security Operations)
- Ensure ease of use of its platform
- Ensure platform has breadth and depth of integration with “system of record” providers (HCM, ERP, Security etc.,)
A few elements of revenue growth strategy:
- Work with existing customers on a Multi-product adoption journey
- Focus on penetrating new customers
- $575B (Service Now internal estimate) spent on administrative tasks
- large market opportunity: (850 out of global 2000 enterprises, 4,400 out of 28,000 enterprises – with at least 1000 employees and $500 mil annual revenue)
- Government vertical
- Nurture partner ecosystem of system integrators (Accenture, KPMG etc.,), and 3rd party developers
- Become the enterprise tool of workflow automation (engage ‘C-suite’ type Salesforce, shared account strategies with big system integrators)
Competition
Service Now faces competition from manual work flows, and legacy software vendors. For its IT line of products, Service Now competes against another Gartner leader BMC, and a lot of niche offerings including from CA, HPE, and Cherwell software. For its Customer Service Management product, Service Now has heavy competition but its approach to redefine Customer Service has already won it a lone Visionary spot in Gartner’s CSM quadrant despite offering the product only since two years, and enterprises are increasingly adapting its CSM product.
But with digitization, customer experience, artificial intelligence, and internet of things “themes”, enterprises are increasingly looking to robust platforms / solutions to redesign their workflows for a variety of use cases. Service Now will have enough “sales leads” to play to its strengths (in competitive advantage section) that Competition does not play a significant role at least for the next few years.
Service Now’s competitive advantage
- Single core platform
- Depth and Breadth of integrations with various ‘system of record’ software vendors enabling cross-functional workflow automation
- “Ease of use” of implementing out of box solutions (98% subscription renewals)
- Ease of developing customizable solutions for specific use cases
Management pedigree
John Donahue – Current CEO, served as CEO of eBay for 12 years after Meg Whitman, and served as CEO of Bain for 20 years. It was a deliberate move an year ago on the part of Service Now’s prior management to bring someone of John’s caliber and business consulting experience to march Service Now to a different growth trajectory. Business Process consulting experience of John is very crucial when branding and selling Service Now as an enterprise tool that can help several functions (not just IT).
Key Financial Highlights
Earnings ($mil):
| 2013 | 2014 | 2015 | 2016 | 2017 | |
| Revenue | 425 | 683 | 1005 | 1391 | 1933 |
| Gross Profit | 269 | 434 | 676 | 992 | 1433 |
| SG&A | 257 | 437 | 625 | 1129 | 1157 |
| Operating Income | -66 | -152 | -166 | -423 | -101 |
| Net Income | -74 | -179 | -198 | -452 | -149 |
| EPS | -0.54 | -1.23 | -1.27 | -2.75 | -0.87 |
Primary operating cost driver:
- Increased Sales and marketing expense since 2016; Indicative of company’s push to penetrate into larger customers, and be enterprise tool of choice for workflow automation (expected to be high for foreseeable future)
Balance Sheet ($mil):
| 2013 | 2014 | 2015 | 2016 | 2017 | |
| Cash, Cash equivalents & Short term instruments | 635 | 669 | 801 | 899 | 1779 |
| Short-term debt | 543 | ||||
| Long term debt | 508 | 630 | |||
| Additional paid-in capital | 574 | 799 | 1141 | 1405 | 1731 |
| Retained earnings | -179 | -359 | -557 | -997 | -1147 |
| Total shareholder equity | 394 | 429 | 567 | 387 | 584 |
Cash Flows ($mil):
| 2013 | 2014 | 2015 | 2016 | 2017 | |
| Operating | 82 | 139 | 315 | 160 | 643 |
| Investing | -403 | -317 | -232 | -108 | -884 |
| Financing | 569 | 71 | 83 | -56 | 539 |
| Free Cash Flow | 26 | 85 | 226 | 36 | 486 |
Customer profiles:
| 2013 | 2014 | 2015 | 2016 | 2017 | Comments | |
| Revenue ($mil) | 425 | 683 | 1005 | 1391 | 1933 | |
| % share of Revenue from IT products | 95% | 92% | 88% | 78% | 66% | |
| % share of Revenue from Emerging products | 2% | 3% | 4% | 12% | 23% | Service Now is expanding use cases of its platform |
| % share of Revenue from Platform Add-on & others | 3% | 5% | 8% | 9% | 11% | |
| # of customers with >$5 mil+ annual revenue | 2 | 3 | 9 | 22 | 47 | Expanding relationships with large customers |
| # of customers with $1-$5 mil annual revenue | 89 | 158 | 224 | 327 | 454 | Expanding relationships with large customers |
| Customer mix >$1mil annual revenue G2K | 77% | 76% | 74% | 68% | 63% | |
| Customer mix >$1mil annual revenue Non-G2K | 23% | 24% | 26% | 32% | 37% | Large customer opportunities outside G2K |
Valuation:
| Mktcap (July 18 2018) $mil | Sales (FY 2018) $mil | Sales (FY 2018 A/E) | Mktcap / Sales (FY 2018) | |
| Zscaler | 4960 | 185 | E | 26.8 |
| Veeva | 11934 | 685 | A | 17.4 |
| New Relic | 6280 | 355 | A | 17.7 |
| Service Now | 34213 | 2400 | E | 14.3 |
| Okta | 6028 | 260 | A | 23.2 |
| Workday | 28650 | 2140 | A | 13.4 |
| Dropbox | 12556 | 1400 | E | 9.0 |
| Salesforce | 109348 | 10480 | A | 10.4 |
| Box | 3779 | 506 | A | 7.5 |
Risks of Investment:
Short to Medium term:
- Biggest risk is Execution. Service Now has the platform. It has industry tailwinds. Service Now needs to just execute.
- Another risk is Competition. They could extend their playbook by providing easy to use, extendable building blocks to aid in better workflow automation, better integration with system of record software vendors. .
Long term:
Some new company and new technology could make Service Now irrelevant in the next business cycle akin to internet, and cloud.