ServiceNow is teaming up with Nvidia and Accenture on a new program called "AI Lighthouse" that will help companies develop and adopt their generative AI initiatives. In an interview with Yahoo Finance Live, ServiceNow CEO Bill McDermott says the program will help companies build "transformative" generative AI systems. As for its impact on ServiceNow, McDermott says its unclear exactly when the company will see the financial benefit from "AI Lighthouse" but that it is building a "bull-case" for the company.
Joining us now to help us break all of this down, we've got Bill McDermott, ServiceNow CEO. Bill, always a pleasure to speak with you and get some of the insights from the quarter, perhaps as well some of the outlook. Coming off of a partnership like this with NVIDIA, how did that come to be and what are you expecting that to do in terms of delivering some future type of financial performance to the business as well?
And if you think about each of these industries, they all have something a little bit different about them. Insurance, for example, might be looking to use AI-based decision making to reinvent the underwriting process, or you could have manufacturing, where they're trying to automate the shop floor or supplier onboarding to reinvent the supply chains.
And then, you know, just think about health care and big pharma, obviously, everybody wants to give the patient a better experience. And you have to put natural language knowledge support in front of the clinicians so they can care for the patient, instead of keyboarding stuff into a computer. So all these industries are going to be completely reinvented with the power of generative AI, and ServiceNow is the first mover and enterprise software to bring a platform to market that does just that.
JULIE HYMAN: So you mentioned a couple of examples of how this would work, Bill. Hey, it's Julie. It's good to see you.
- Hi Julie.
- Hi. How quickly do you expect this to be implemented? Talk to me about what you're hearing from customers, and how soon they want this product.
- Yeah. It's a great question, Julie, because we, as you know, have had AI in the ServiceNow platform for years now. We were the first to do that in an enterprise software platform for the enterprise. So whatever the function is, whether IT, or you're taking better care of your employees, or caring for your customers, or even taking your innovative developers and giving them the opportunity to text to code, or text to a workflow, or text to new application development, we've been doing that.
And that business where we have AI-infused innovation in our platform is growing well over 50% on a year over year basis. And that is in our current results and our current forecast. The big upside, though, are these transformative gen AI use cases, where we're specifically innovating on the ServiceNow platform to do very big and transformational things. Is that going to be 2, 3, or 4 months? Will we see those results more in 2024 than 2023? That still remains to be seen.
But what I can tell you is there's 125 of the world's largest brands and multiple industries lined up to participate in this program because the CEOs and the c-suite executives want to go forward on a gen AI basis. And what's happening and why they're so excited is the enterprise data is their data. So you don't have the hallucination challenges of the open internet, and we're really working with their data to do highly transformative things. So I think it's going to happen pretty quick, and that's why we have such a bull case in mind for ServiceNow going forward.
- I mean, it is interesting, though. As you said that you didn't incorporate this into the forecast as of yet, are you worried at all-- I know we've talked to you about this before-- about the spending cycle on the part of clients? We're going into a period where, I mean, I know we've been predicting an economic slowdown for a while now that hasn't quite materialized, but what are you seeing from your perspective and why didn't you sort of bake this more into your forecast?
- Well, there's a couple of things. One if you think about the IT budgeting cycle for major corporations, they tend to do it on an annual basis. So big innovation like this is now coming in essentially the third quarter of an annual budget cycle. So I think you're going to see many more companies plan for large transformative gen AI projects to take place in 2024.
Having said that, the business case for these gen AI opportunities in terms of taking cost out, bringing productivity in, or going after growth are so significant that to me it's going to be hard for companies to refuse them, or even delay them, but that still remains to be seen. And that's why we gave a beat and raise quarter, as has become a habit here-- knock on wood-- and also a very strong guide where we up the guidance, but we didn't completely implement all of the expectations for this bull case on gen AI until it actually begins happening. And I think that's just prudent guidance.
- How do you ensure that generative AI doesn't cannibalize other parts of the business going forward too?
- Wonderful-- wonderful point. So Brad, here's how that one works. We have pro pricing built into our platform for all the existing AI cases we already have. You have to have the Pro version of the ServiceNow platform, and the generative AI transformational results and solutions will be something we're calling Pro Plus, and they will be additive to the pricing methodology for ServiceNow because, again, the benefit that the customer will get is so big and the benefit that ServiceNow will get is a fraction of the value that we add to the customer relationship.
But it is an uplift in the pricing structure of the company, and that is why the flywheel for innovation at ServiceNow is so important to us because the customer gets the big benefit, we get a fraction of it. But obviously, that helps our company continue to be the defining enterprise software company of the 21st century.
- Bill, looking at some of the customer data from the quarter, customers with more than $1 million in annual contract value up 18%, although that is a bit of a slowdown. Going forward with a lot of the expansion and abilities of some of these products you're talking about, do you expect your growth to come from a higher number of customers or existing customers spending more with ServiceNow?
- We're getting a lot of net new logos, Julie, where companies that were not initiated on the ServiceNow brand have heard about ServiceNow. And they haven't heard anything but good things about ServiceNow because all of our customers love us. And that's very unique. You don't hear that very often about enterprise software companies. If you look at our top 20 deals in the quarter, 19 of those top 20 deals had 5 or more products in the bill of materials that the customer signed up for.
We had 9 customers sign up for 10 or more products. And our deals that are greater than $20 million in average or annual contract value are up 55% on a year over year basis. So what you're seeing is an insatiable appetite for the ServiceNow platform for new customers, and then the existing customers we have, we have the highest retention rate in the enterprise software industry at 99%-plus. And we have a very aggressive customer base that generally grows 25%, 30% on a year over year basis by expanding their use of the ServiceNow platform.
And what you see with ServiceNow is an intelligent platform for end-to-end digital transformation across the entire enterprise. We reinvent IT. We give you a better employee experience. We take care of your customer and how you service your customer in the front, mid, and back office. And ultimately, we galvanize the innovation-- your engineers and innovators are able to deliver for your customers. And that really is the perfect recipe for a growth company in software.
- Bill, just lastly here, you perhaps for our viewers, a gauge of how confident businesses and their CEOs, their leaders, and even kind of their kind of cost structures are right now is to know how long some of these deals are being netted for because when businesses are confident, they're coming to you like-- they're coming to ServiceNow and saying, hey, we're comfortable in having an extended term deal. Are you seeing any moderation in the length or the extent of deals that you're seeing come through right now?
- And if anything, our customers want to do bigger deals over longer periods of time because they really want to be locked and loaded on the roadmap of ServiceNow. So they get a peek behind the curtain on where we're taking the innovation cycle so they can plan for it. And I think that's a super, super encouraging sign. I was the guy that said, there's no chance in 2023 that IT budgets would be cut. That's a fact.
I'm also the guy that's saying the IT strategy has become the business strategy. And I do expect a large tailwind of investment going into the generative AI area, and I'm unaware of a single CEO that I have met that hasn't said full speed ahead on gen AI, and I expect my full management team based on their position in the company to adopt use cases that are AI-driven that can take cost out improve productivity, or get me to a higher rate of growth.
Every C-level executive is on this one, which is why I personally believe this is an iPhone moment for enterprise software. And if you have first mover advantage like we do with gen AI and you have amazing partners like we do in the case of NVIDIA and Accenture and many more.
I'm just super proud of the NVIDIA partnership with Jensen because not only is he a great friend, but he's running really one of the greatest companies of all time, thanks to his personal domain, expertise, and leadership and it's just an encouraging sign to see somebody like that lean all in with ServiceNow in the belief that we have the platform to solve this generation's biggest opportunities and biggest challenges. And that's what we're going after. We really think we can lift the world GDP by $7 trillion over the next 10 years. And ServiceNow, NVIDIA, Accenture, and others will have a big hand in doing that.
- Yeah. And Jensen has also talked about this being an iPhone moment. So you guys are on the same page in more ways than one. Bill McDermott, good to see you. ServiceNow CEO, appreciate it.
- Thank you, Julie and Brad.
- Take care.