When ServiceNow soon hits the $10 billion mark in annual revenue — a feat few enterprise software makers have notched — the accomplishment will come with a red flag. Growth has slowed for some software makers after reaching that milestone, a potential hurdle for ServiceNow stock.
But Chairman and Chief Executive Bill McDermott isn't one to take his foot off the gas pedal.
How will ServiceNow continue thriving?
"Try to keep innovating," he told Investor's Business Daily. McDermott took over as ServiceNow's CEO in late 2019, the year the software maker recorded $952 million in sales.
Fourth quarter and full-year 2024 earnings for ServiceNow stock are due on Jan. 29. ServiceNow has forecast over $10.65 billion in 2024 revenue.
Like most software makers, Santa Clara, Calif.-based ServiceNow is racing to integrate artificial intelligence into its products. Monetizing AI-driven products will be key to ServiceNow's future growth.
ServiceNow Stock: AI Control Tower
For corporate customers, McDermott expects ServiceNow to be the "control tower for AI business transformation."
"You've got to remember, AI doesn't do you any good if you don't have an integrated solution," McDermott said. "If one system doesn't talk to another system, it doesn't matter if it has an AI agent. So what we do is we integrate with everybody. Our AI agents are actually acting as the control tower for transformation, because they integrate with all the other agents. That's real AI."
Having struggled to generate new revenue from conversational "copilots," software companies are now turning to autonomous, goal-driven AI "agents" that complete tasks on their own.
In his tenure as CEO, McDermott has scaled up ServiceNow's workforce to over 26,000 employees from 6,900. Amid the rise of "generative AI," ServiceNow has stepped up hiring of both salespeople and research and development engineers.
But ServiceNow's revenue and headcount growth since 2019 have not come from acquisitions, a strategy pursued by Salesforce, for example. Prior to joining ServiceNow, McDermott served as CEO of Germany-based SAP, where he did make big acquisitions.
ServiceNow Stock: Big Acquisitions?
"Investors were initially concerned he was going to pivot NOW from an organic grower to acquisitive grower given the playbook he had ran at SAP for the previous 10 years," said TD Cowen analyst Derrick Wood. "But he very much stayed the course in continuing to drive best-in-class organic growth alongside a consistent margin expansion framework. He's been able to strike the perfect balance of growth and margins and smart use of capital that software companies get highly rewarded for."
ServiceNow stock has climbed about 345% since McDermott took over as CEO in late November 2019. In 2024, NOW stock climbed 50%.
ServiceNow is among AI stocks to watch.
Will McDermott stick with making smallish, tuck-in acquisitions?
"One of the things I've learned is the best innovators do not want to consolidate the past. They want to innovate the future," he said.
"With these little baby tuck-ins we've had — we never did it for revenue, because there wasn't any. We mainly did it for human capital or it had something that the customer would benefit from. And, we never detracted from the great single platform, single architecture experience. So that's very, very important."
Acquisitions included Element AI in 2020, Hitch Works in 2022 and G2K in 2023.
McDermott added: "Right now, we have no plans for M&A of size and scale on the agenda. Would it ever happen? Is it possible that it could happen? Anything's possible, but it wouldn't impose its will on what we've created, which is an unbreakable trust with our customers. So it has to be highly complementary. But again, there's nothing on the drawing board. We're going full speed ahead on the organic innovation story."
ServiceNow Stock: Federal Business
McDermott has taken ServiceNow from its roots in information technology services management into new departments such as human resources, finance, legal and procurement. The company calls itself the workflow automation market leader in digital transformation.
Also, McDermott targeted industries such as financial services, telecom and health care as well as the federal government.
McDermott says federal agencies have been handicapped by legacy customized software that needs to be replaced. With the federal business humming, McDermott said he's not worried about President-elect Donald Trump's government-cost cutting initiative co-led by Elon Musk.
"We're all in on DOGE, and we're looking forward to helping the new administration take cost out, improve efficiency, and get operations to work like a clock. My feeling is every government entity should run like a best run company and we have to start thinking that way."
By ServiceNow's count, McDermott met with over 500 CEOs in 2024, with about 20% in Santa Clara and 80% on the road. In 2023, sales outside of North America reached $3.27 billion, up 176% from 2019.
Within the company, McDermott preaches making ServiceNow the "defining enterprise software company of the 21st century." McDermott's to-do list seemingly never shrinks. So he gets by on five hours of sleep daily.
How McDermott Leads
"What he really brought to the table when joining was expertise in scaling large organizations, an extensive rolodex of CEO relationships, and his ability to cultivate a culture of ultrahigh salesmanship and sales performance," said Wood. "And he's done this while staying true to the vision of founder Fred Luddy – building a single platform that can scale across an entire organization and automate workflows for any kind of business process."
Luddy founded ServiceNow in 2004.
Further, ServiceNow has over 8,000 customers. More than 55 bring in annual contract value of over $20 million. Part of McDermott's strategy has been working closely with IT systems integrators, such as Accenture and Deloitte.
Known mainly as a "back-office" software maker, ServiceNow recently has pushed into "front office" software (customer service management, field service management and supply chain management).
While analysts focus on the big AI opportunity, front-office software also could sustain ServiceNow's revenue growth. Analysts model 22% revenue growth in 2024 to $10.98 billion and over 20% growth in both 2025 and 2026.
ServiceNow has forecast $15 billion in subscription revenue for 2026. On ServiceNow's Q3 earnings call, McDermott told analysts the company could hit $30 billion in annual sales down the road.
ServiceNow Stock: Front Office Push
McDermott is upbeat on the front office software opportunity. "We are all about customer service management and we see a huge inflection point," he said.
"We're seeing an enormous hockey stick (growth) in customer service. The market is fed up with systems that don't integrate with a lot of technology out there."
He continues to build a strong management team.
In November, McDermott brought in Amit Zavery as president and chief operating officer. He had been general manager of Alphabet's Google Cloud computing business.
Meanwhile, AI is top of mind for investors these days.
In generative AI, analysts expect ServiceNow to compete with Salesforce and others that can leverage large installed customer bases.
"The key takeaway from our customer conversations is that there is room for multiple large platform players to win in the realm of AI Agents — large platforms that are already core systems for enterprises that can deliver productivity enhancing agents within the flow of work are well positioned for success," said Evercore ISI analyst Kirk Materne in a report.
So far, ServiceNow has included AI tools in higher-priced premium product bundles. ServiceNow has yet to release pricing and packaging for its newest "Agentic AI" platform expected to be generally available in early 2025.
At Deutsche Bank, analyst Brad Zelnick estimates that ServiceNow had $100 million in "NOW Assist" annual contract value exiting the September quarter. He estimates that Now Assist "co-pilot" annual contract value will hit $250 million by the end of 2025.
In terms of AI monetization, ServiceNow expects a hybrid business model to emerge, with customers for both subscription-based and consumption-based services. Consumption models change customers based on their usage of AI tools, perhaps from a cloud computing vendor.
"I think that there will be a combination between seats and consumption-based offers where companies will do both," McDermott said. "They'll have addressable seats, they'll have the digital agents, and they'll have their use cases. So you'll want to take out all of the soul crushing work, and you'll want to do that by industry with very specific use cases.
AI Strategy Ramps Up
Key to ServiceNow's strategy is leveraging AI models built from industry-specific data sets or proprietary company data. In 2024, ServiceNow released RaptorDB, a database designed for AI analytics along with AI enhanced workflow automation tools.
ServiceNow has integrated its AI tools with data management offerings from Databricks and Snowflake as well as software giant Microsoft. It's also partnering with generative AI startups, such as OpenAI and Anthropic.
McDermott says he does not expect companies to downsize their workforces if AI improves productivity. That's important because ServiceNow, like many software makers, sells subscription services on a "per-seat," or per-employee basis.
"I predict that you're going to see headcount hold steady and grow as companies grow," he said. "Companies have to grow. And AI is the catalyst behind growth being back on the agenda. You're going to see companies not having to cut head count, because revenues will start to grow as they think about new ways of doing things, new ways of building products. So I don't believe you're going to see these AI agents replacing people as much as you're going to see them improving the efficiency, the productivity and the growth curves of these companies. That's my feeling."
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on artificial intelligence, cybersecurity and cloud computing.
