ServiceNow CEO Bill McDermott joins Yahoo Finance Live to discuss company earnings, the state of the software market, and the outlook for digital business.

Video Transcript

BRIAN SOZZI: ServiceNow topped estimates for the first quarter and expects subscription revenue growth to accelerate for the full year. Joining us now for a deeper dive on this growth is ServiceNow CEO Bill McDermott. Bill, always great to get some time with you here. What recession? Didn't see it in your numbers.

BILL MCDERMOTT: Well, it's because if you look at the world situation rising rates, inflation, and supply chain dislocations, the war in Ukraine, all these issues are real. And large enterprises that we serve, because we're the enterprise software market leader in the cloud, they need our services now more than ever to get past these choppy waters and grow their business, take care of their customers, and inspire their employees. So we're right behind that major movement in the enterprise.

And, you know, I think one of the leaders I talked to summed it up well, Brian. You know, and that's why the enterprise is so resilient right now. If we slow investment in the short-term, we'll lose ground in the midterm. And we won't be in business in the long-term. That's pretty much the state of the affair.

BRIAN SOZZI: You've been around the software industry for quite some time Bill. Have you been surprised how just the sector has done in terms of stock performance, just given, really, the strong results for the space out for the first quarter?

BILL MCDERMOTT: Well, you know, everything has adjusted on a PE ratio basis based upon the environment that we're operating in. But fortunately, the business software market leaders like ServiceNow have done extremely well compared to the relative peer group. But having said that, I think they'll all do better soon because the only deflationary fighting force left in this economy is software, because you have to do more with less. You have to create great experiences for your employees, especially to battle this tough talent war that everybody is in.

And the customer is now fully digital. Two years ago, a 1/3 of the revenues for customers was digital, now 2/3. And in another two years, it'll be nearly 90%. So you have to transition to digital. And I think the only way forward is for all technology companies to be software companies. One of the stats, Brian, that I think is really significant is, there'll be 750 million net new applications built in enterprises for enterprises. So they got to build their own software.

And the question then becomes, are there enough engineers in the world to do that? And the answer is no. So they have to do it themselves. And they're going to do it on low code platforms like ServiceNow. So if you can tie together digital transformation on the IT employee experience direct to consumer, and then the citizen developer workflow level, you can accomplish a great deal, indeed. And that's why I think ServiceNow is the ultimate defining company of this generation.

JULIE HYMAN: Hey, Bill, it's Julie here. At the same time, you know, we're seeing that companies are going to have to cut some costs, right? I look at Amazon today, and there is a good example of a company that's going to have to pull that lever, and there are certainly others. Do you think that the business spending cycle overall is going to hold up well enough next year to support the software industry?

BILL MCDERMOTT: I think it's because they do have to cut costs, Julie. They do have to do things more efficiently. They do have to do things more effectively. There's no choice but to invest. And the only place, really, to invest where you can actually streamline your operations, get more productivity out of each employee that you have, deal with this incredible great resignation that everybody is dealing with, so, you know, you have less people available for jobs that are really needed. And, you know, the gap filler for all of that is software.

So I do think there will be cuts made. I don't think it'll be in the area of digital transformation. Digital business is here to stay. This is the era for digital business. And I think market leading software companies that get that will do extremely well because customers have no place else to turn to.

BRIAN SOZZI: You know, a lot of folks, Bill, outside of technology, when you talk to other leaders across the world, what are some of their biggest concerns right now at this point in the economic cycle?

BILL MCDERMOTT: There's no boardroom right now that isn't dealing with this incredible war for talent. They're seeing turnover like they've never seen before. They now have literally, in many cases, large companies, thousands and thousands of jobs that they need to fill. They're all digital jobs because of the paradigm to digital and digital business. And then the question is, how do I recruit, hire, onboard-- really critical because people are working from everywhere-- train, and manage services from my employees so they have a seamless, gorgeous experience, and they love my company, even if they're not in the office?

And that is the biggest issue of all. It's a people issue economy right now. And the second thing is, the consumer isn't coming to you the way they used to. So you've got to go to the consumer and give them great experiences. And the 20th century software did an OK job of engaging the customer, but that's not enough. You can't just engage them. You have to tie together your mid and back office operations so you fulfill in a way that delights the customer and keeps them coming back for more on a direct to consumer level. These issues are massive.

And then the third one I would put on there is the supply chain issues. You know, many global supply chains have now formed regionally. And now they're moving locally to combat some of the difficult issues that we're seeing in the global economy. All of these changes are force multipliers for the need for digital enterprise software.