ServiceNow: Azure Deal Key To Winning Global Customers

‘I can’t stress enough, it’s not just the U.S. federal government. We’re doing business with governments around the world and that’s a key part of that Azure strategy, a number of those governments around the world have data sovereignty requirements. We don’t have data centers. That’s the other thing that we’re going to leverage out of Azure,’ ServiceNow Chief Financial Officer Michael Scarpelli says.

ServiceNow CEO John Donahoe told investors that while the company’s recently announced partnership with Microsoft Azure should help it win deals with U.S. federal partners, another benefit is that it will attract customers in Europe as well.

“We’ve been having some of the European governments saying, ‘We want to do business with you but you got to have global data sovereignty’ or ‘you are going to have to comply with local data regulations’ and that’s where the Azure partnership, potentially future partnerships like that, will help us accelerate our ability to serve that part of the European business,” Donahoe said.

Outgoing ServiceNow CFO Michael Scarpelli said a “key part” of the Azure strategy is built around meeting the data sovereignty requirements of those “governments around the world” that ServiceNow is in business with.

“I can’t stress enough, it’s not just the U.S. federal government,” he said. “We’re doing business with governments around the world and that’s a key part of that Azure strategy, a number of those governments around the world have data sovereignty requirements. We don’t have data centers. That’s the other thing that we’re going to leverage out of Azure.”

The comments were made during the company’s second quarter earnings call Wednesday. ServiceNow grew quarterly revenues 32-percent year over year to $833.9 million. The company stumbled on net income, with a loss of $11.1 million or 6-cents earnings per share. Investors sent ServiceNow stock lower Thursday by $11.40 or 3.86 percent in afternoon trading to $285.73.

Donahoe said in the second quarter, the company closed 39 deals with annual contract values greater than $1 million. He said that brings the total number of customers with annual, million-plus deals to 766, a growth of 33-percent year over year in that category. He said the renewal rate for ServiceNow customers is 98-percent.

The company also landed large deals in financial services, technology, as well as automotive. In 17 of the top 20 deals this quarter, customers bought three or more of the company’s software products.

The Azure deal was a focus for analysts who wanted to know why ServiceNow chose to partner with Microsoft. Donahoe said they are increasingly called on by U.S. Government clients, but since many of those customers have rigorous security requirements, the deal was a quick way for ServiceNow to win that business without having to build out new capabilities.

“Microsoft has the absolute highest security clearance IL-6. And so, we just determined that it would have made sense instead of us building that data center capacity for that market -- as well as for few other federal government markets -- that we take advantage of Azure,” he said. “So we’re taking that into their capability and then that’s led to a broader conversation around how we can work together and combined our go-to-market efforts.”

Donahoe said the two companies have “very complementary” product lines and ServiceNow has more than 20 integrations with Microsoft products.

“We’re coming together to try to make it easier for customers and easier for our go-to-market teams to support each other both in the federal market, but also, we think over time in the general marketplace,” Donahoe said. “So, we’re excited about the partnership.”

During the quarter, the company “successfully onboarded” 700 net new employees, a record for the firm -- with most of the new hires going to R&D and sales and marketing.

“So, we had a very much of focused push on sales and marketing,” Scarpelli said to assist in pipeline generation.

“As we’re getting into bigger and bigger accounts, we need to split territories and reallocate accounts to reps, so we can adequately cover those big accounts and that’s been part of our strategy for a while.,” he said.

But there is one notable departure, Donahoe said.

The company is searching for a replacement for Scarpelli, who had previously announced he was leaving ServiceNow. Scarpelli – who joined the company in 2011 and helped it grow from $100 million in annual revenue to nearly $4 billion today – will have his last day in August.

Donahoe said they are searching for a replacement now and would announce the new one “as quickly as possible.” Donahoe – the former CEO of eBay -- was asked to describe what he would like to see in the new CFO.

“Mike is a great CFO, because he is very transparent,” Donahoe said. “In my prior life, (Intel CEO and former eBay CFO) Bob Swan was a great CFO, because he was very transparent and shared data in a very consistent way. I always consider that table stakes for a modern CFO.”

Donahoe, who in May told CRN he is relentlessly focused on the customer experience, told investors the other important quality to find is someone who works with customers, and can work with their senior team to coach and mentor them to help accelerate decision making.

“Mike has made many ServiceNow friends over the years, and we will definitely miss him,” Donahoe said. “Personally, I am deeply appreciative for Mike’s partnership over the past two and a half years. He’s been instrumental in our continued success and has helped set the stage for a next phase of growth. We have an active search underway for Mike successor. And Mike’s size 16 feet means his successor has big shoes to fill, literally and figuratively.”