Service-Now CEO Fred Luddy Sees a Clear Path to $1 Billion in Annual Revenue
Fred Luddy has been in the technology industry since 1973, but as a longtime programmer for mainframe computers and enterprise systems, he says he was still surprised by the advent of Web-based computing.
“I didn’t see this whole notion of software over the Internet, of on-demand, software-as-a-service in the cloud,” says Luddy, who now describes software-as-a-service (SaaS) “as a thing that is just steeped in common sense.”
These days Luddy views SaaS as a major evolving trend, and Service-now.com—the company he founded in November 2003—as an enormous beneficiary. “I don’t think it’s known how cloud computing will be leveraged by large organizations,” Luddy says. “But it’s top of mind with almost every large organization I’ve visited in the last 20 months.”
Luddy says he founded Service-now to meet the same business needs that were once served by Peregrine Systems, the San Diego-based enterprise software provider that imploded in a financial accounting scandal in 2002. Luddy, who was Peregrine’s chief technology officer, says he left Peregrine in 2002 and began developing the software for Service-now the following year.
Like Peregrine, Service-now’s software helps big companies and other organizations manage their far-flung IT operations, including their “help desk” functions. Instead of installing its software on a customer’s intranet, however, Service-now.com hosts the software on its own servers, enabling customers to outsource the technology and pay a flat monthly subscription fee for the service. In the last six months, Luddy says Service-now has added 75 new customers, including such major companies as McDonalds, Pepsi, and Coca-Cola. Luddy says the economic downturn also proved to be a good thing for Service-now, because companies turned to the San Diego company as they scrambled to lower their IT costs.
“We’re a company that’s been very fortunate,” Luddy says. “But I think a lot of it was Arnold Palmer luck. He used to say, ‘The more I practice, the luckier I get.’ “
So what does Service-now do?
For the past four or five decades, Luddy says the person responsible for overseeing a company’s information technology systems has had problems answering such questions as what do I own? How well is it operating? And is it doing what I intended it to?
Service-now’s software enables the chief information officers at big companies and other organizations to keep track of their assets, such as computers, software licenses, and other IT resources. At the same time, it generates the kind of information that business executives can use to understand, for example, how the cost of operating a sales force in the field compares with the cost of selling products through an online catalog.
Service-now’s Web-based services also enable IT groups to manage their operational chores, which Luddy categorizes as “incident, problem, change.” An incident means something stopped working and needs to be fixed immediately. It might be that an employee’s laptop won’t boot up. A problem means investigating how or why the laptop stopped working. And a change means what’s done to fix it, which might be as simple as a software upgrade.
“Our core business is managing those three core disciplines,” says Luddy, which is no small matter. A big organization can have 50 to 100,000 incidents per month and five to 10,000 changes per month.
The SaaS business model enables Service-now to update its software three times a year—in sharp contrast to the data center model of 10 years ago, when it typically took a software company two to three years to update its enterprise software. “Those upgrades when you buy from an enterprise vender are extremely costly, and they take a lot of time,” Luddy says. Upgrades also frequently require companies to go through retraining cycles, because so many basic features have changed. In contrast, Web-based software can be more or less continuously updated. “Ask [users] how often they notice Google updates,” Luddy says.
Service-now charges its 575 customers according to the number of users, or seats, per month, with what Luddy calls “hardcore IT users” paying $100 per seat per month. Since the collapse of capital markets in 2008, Luddy says, “Lots of organizations—especially in the financial services sector—took a hard look at what they’re doing, and came to Service-now. We didn’t just survive the recession. We thrived through it.”
Luddy, who has described himself as a programming nerd (“It’s what I want to do every morning when I wake up, and it’s what I do on weekends, and on long plane flights to Europe.”), spent nearly two years developing the software. In mid-2005, he hired five people and raised $2.5 million in an initial venture round from JMI Equity, the private equity firm with offices in San Diego and Baltimore.
Service-now’s first contract, with a San Francisco company called WageWorks, generated just $2,600 a year in revenue. Luddy has said that the buyer at WageWorks went to work at Edmunds.com, and recommended that Edmunds.com also move to Service-now’s approach. They bought in at $35,000 a year, and Luddy says the business “just started to proliferate and spider out from there.”
As Edmunds.com, Qualcomm, and the financial services firm TIAA-CREF became Service-now customers, Luddy says it became clear that the concept of low-cost, outsourced IT services was particularly appealing to the Forbes Global 2000, the largest 2,000 companies in the world. “TIAA-CREF started using us for several hundred employees, and it’s grown to several thousand in four years,” Luddy says. “We’re very proud of the fact that companies like Intel, Google, and Facebook are using Service-now.”
The company itself also has grown. Service-now’s headcount is about 275 today, with about 150 working in the San Diego headquarters, and the rest in Chicago, New York, Atlanta, London, and Frankfurt. Another 150 to 200 are consultants with partner companies like Accenture who are only working with Service-now customers.
“I honestly think the recurring revenue model is the eighth wonder of the world—every quarter it builds,” Luddy says. The company went from annual revenue of $850,000 in the first year to $13 million in 2007, when Service-now first went cash flow positive. Service-now generated $86 million in 2010.
Service-now’s strong growth means that the company, which has raised a total of just $7.5 million in venture capital, has not had to return to JMI Equity for more funding.
It also suggests that Service-now has sufficient momentum to carry the company through an IPO, which Luddy confirms is a topic the board has discussed. “We’ll certainly entertain that notion as we blow past $100 million in annual revenue, with high operating margins and EBIDA [earnings before interest, depreciation, and amortization] to report to Wall Street.” (Luddy says several companies “with two or three letters in their name” also have inquired about the prospects of acquiring Service-now.)
The company has no need for cash, Luddy says, and an IPO “would be something we do for our employees’ liquidity and our shareholders.” After that, Luddy says, “We would absolutely aspire to be the next Qualcomm in San Diego… We do aspire to become a billion-dollar [annual] revenue company over the next five years.”
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