Transcript

The enterprise software segment faced a big test tonight after the close, when ServiceNow turned it���s results for the third quarter. Look, ever since it bottomed to $81 and change this past spring, this stock has been leading the group's comeback, climbing nearly in a straight line to over $150 today at close. Tonight, the company turned in result that was strong. All right, not perfect, but strong. Company's revenue results look good as it is booking numbers, which is what I care about, that's encouraging. On the other hand, it missed by $0.02 on the bottom line, cash flows for the quarter were considered a bit light. Guidance was similarly mixed, but we got to get to the bottom of that. Is it enough to keep the stock in rally mode? Let's go straight to the source with Bill McDermott, the Chairman and CEO of ServiceNow. Mr. McDermott, welcome back to Mad Money. Thank you, Jim. Great to be back with you. All right, so Bill there's a ton to go over here. But first I want to give you some credit. You came on the show when the stock was at $104. And you were very loud. You bought $3 million dollars of stock. You were making a statement, and the statement was, this is getting ridiculous. How did you know that it was overdone and that the whatever it was on Wall Street had disconnected from the fundamentals of ServiceNow. Jim, this is a unicorn growth company. You know, think about Fortune 500 economics with a Super Intelligence Control Tower, that's literally reinventing businesses all over the world. So I knew the exceptional super intelligent economics. Where you have a capital light, margin rich, consumption driven company, that's really providing AI value without all of the big cost items, like chips, and CapEx, and data centers. We just have a margin profile that's perfect. And a growth company operating at the rule of 57. When you add up free cash flow and margin growth, it's the only company I'm aware of that's doing that in the enterprise software world. Well, that is true. And now Armis, which you bought for 7 billion. To sum it was a head scratcher. Why is this man moving into cyber security? In retrospect, I think people now call ServiceNow because they don't know what to do. Everybody's scared, and I think that you've got the right property to be able to help. Jim, you said it right. The Super Intelligence Control Tower actually takes the right model, it hires it for the right job to solve the right problem, to unlock the real opportunities that companies have out there. So we're unlocking the value from the entire super intelligence ecosystem. From silicon to intelligence. And we're executing this on one platform. So you and I spent a lot of time with my good friend, our good friend, Jensen at NVIDIA, Think about AI governance that takes software all the way through to the silicon. And it's an industry first of its kind. So you have a long running personal AI agent at ServiceNow. It gets better with every interaction. It has runtime enforcement. So ServiceNow sets the rules and rails, NVIDIA OpenShell enforces them at runtime. So we have a kill switch, that can revoke the passport for a person, an agent, or a robot, and block the action at the point of execution, not after damage is done. And that's what everybody wants. They want a secure Super Intelligence Control Tower to run their business and drive profits for their shareholders. And that's what we're giving them. But why do some of these people in these frontier models say that there is no such thing as a kill switch? Are they just wrong? Well, they're looking at it a little bit differently. I'm looking at the enterprise software world, and I think that's why OpenAI today announced a major partnership with ServiceNow, because they all want to turn frontier intelligence into governed and enterprise execution. So if you think about the Super Intelligence Control Tower, we���re using OpenAI Voice now, ChatGPT, to simplify AI risk assessment. And we have something we call Shift Zero, where you���re stopping threats before they become incidents. And, if you think about builders out there with Codex, they're now going to run it through ServiceNow with rules and rails. And that's the same announcement we made with Google, and several other great companies today like Anthropic, AWS, Cisco, OpenAI, of course, Stripe, NVIDIA and many others. And that is what's missing, Jim. One control tower that connects your people, your agents, all your lab models, because they're all great companies. It unifies your data. It integrates with a complex infrastructure and enterprises, and it gets you to value fast. Customers want value now, and they don't want a proof of concept. They're tired of the stories, and they're tired of laying out money without getting a return. I am absolutely sure that is the case. But I also have to deal with what we see on the on the tape, so to speak. And we know the tapes wrong a lot, because it's been wrong a lot when we when we come to ServiceNow. But people are saying, listen, there are estimates out there, it missed the earnings estimates by $0.02. They're not looking at the revenue growth, which was really strong. The RPO, which is terrific. And what we look at growth and margin. They're saying no he missed by $0.02. And that's just not excusable with this high market. Well, let me offset that a little bit. First of all, the $0.02 has to do with the interest on the companies we just bought, and the companies we just bought that impacts EPS. But we now, in this quarter, and we just bought them in April, announced a 150 basis point improvement in operating margin. We have free cash flow at 36%, and we have our revenue in RPO. And everyone said you'll have shorter duration contracts and they'll be lower in value. Actually, just the opposite happened. Our RPO is growing now to $30 billion at 23%, and our sub revenues at 21%. That's operating at 57 company. 21 plus 36 is 57. And I told the markets will be 60 soon meaning operating at the rule of 60. So $0.02 is interest expense on $5 billion because we chose to allocate the capital to debt because we generate so much free cash flow. But in one snapshot, yes, EPS $1.02 was an expectation versus $1. And everybody knows in software that's the least important measurement at the time. And Jim, I got to tell you, what other company can say that they're growing the way we are with no compute constraint, no memory constraint, no data center build out constraint, just pure free cash flow, operating margin and revenue growth. What other one? Not a single one. So shareholders, I gave you my word. Back, as you said, Jim, early in the year, and the story���s only gotten a lot stronger now. Do you know, we are growing our consumption on this hockey stick of tokens I have out there, 13x year over year, 500% month over month. So as you see these revenues, just remember, I've got tokens out there on the street with ServiceNow, that we're getting these customers live faster and as they get live, and they go through their first tranche of consumption, they will renew that. And that will be a hockey stick formation that is unlike any other in the enterprise. So, I would just say this is a great quarter, Jim. All right, well, that's we're going to leave it because I think that people have to digest that and say maybe, maybe they're looking at this, I thought you explained the $0.02 very well. They should be looking at the things that you and I know what really matter, which is RPO, revenue growth, new customers, all those going your way. Bill McDermott, Chairman and CEO of ServiceNow. Bill, thank you for coming on the show. Thanks a lot, Jim. I appreciate it.�� Mad Money is back after the break.