McDermott said that ServiceNow is on its way to becoming the central hub through which customers access the data and the software tools that AI agents need to automate work. “We are the one that drives the hyperscalers, the language models, the data lakes, the systems of record, and now the security profile of companies,” McDermott said. “All of this is happening on the ServiceNow platform.”
ServiceNow has been on an acquisition spree to bolster its AI and security capabilities so it can deliver on McDermott’s vision. In December, it announced plans to acquire cybersecurity firm Armis for $7.75 billion—its largest deal ever—and identity security company Veza. In March, it announced a $2.85 billion deal for Moveworks, an AI-powered employee experience platform, which closed in December.
Those acquisitions have caused some Wall Street analysts to wonder if ServiceNow was attempting to buy revenue growth. But McDermott pointed out that the latest quarterly results show that ServiceNow can grow at more than 20% year over year organically. He said that each of the acquisitions was about gaining specific product capabilities and talent around both AI and cybersecurity: Armis provides technology to monitor IT operations in real time; Veza manages identity for humans and machines; and Moveworks handles the employee experience.
As evidence that ServiceNow is in a different league than its competitors, McDermott pointed to what he calls ServiceNow’s “Rule of 55-plus” performance. The “Rule of 40” is a rule-of-thumb benchmark in SaaS software that says a healthy company’s revenue growth rate plus its profit margin or free cash flow margin should total at least 40%. ServiceNow’s combination of 21% revenue growth and 35% free cash flow margin puts it well above that threshold. “There is no company in the enterprise software industry that is operating at the Rule of 55—that’s only ServiceNow,” he said. The company’s Q1 guidance implies a score of 57.
His pitch is that ServiceNow should no longer be valued alongside those peers. “We’re consolidating the feature companies—you know, they have a feature or a tool—and we’re consolidating the function companies onto ServiceNow,” he said. “I’m talking by the hundreds of applications.”
Along with its earnings, ServiceNow announced an expanded partnership with AI company Anthropic. The partnership will see Anthropic’s Claude AI model become the default model powering ServiceNow’s Build Agent for enterprise app development. The partnership follows the announcement last week of a close collaboration with OpenAI that will also see that company’s models integrated into ServiceNow’s products.
“Next-gen AI models will work in harmony with the most important enterprise software,” McDermott said. He said Anthropic CEO Dario Amodei sees “the meaningful difference between giving enterprises access to an AI model and building that model into workflows where real decisions are made by businesses all over the world.” He also drew a distinction between large language models, which he characterized as “indeterministic,” and ServiceNow’s ability to also use its own workflow automation tools to deliver “deterministic outcomes.” “Enterprises have to have deterministic outcomes for governance, for security, for auditability, and obviously for smooth operations that don’t hallucinate,” he said.
