Buried within ServiceNow's upbeat Q1 2024 earnings call lies a clue, a subtle hint that may have escaped the attention of even the most seasoned Wall Street analysts. While the headlines focused on strong revenue growth, expanding margins, and the seemingly unstoppable momentum of the Now platform, a different story is unfolding. A story of quiet, focused innovation, a strategy that positions ServiceNow not just to ride the generative AI wave, but to redefine the very landscape of enterprise software.

The clue? ServiceNow's persistent emphasis on small, domain-specific LLMs (Large Language Models). While competitors rush to embrace the most massive, generalized AI models, ServiceNow is betting on a different approach: tailored AI solutions designed for specific customer workflows.

This might seem counterintuitive. Aren't bigger AI models always better? Not necessarily. As CJ Desai, ServiceNow's President and COO, explained during the earnings call, the company's AI strategy is driven by three key factors: accuracy, efficiency, and performance.

By focusing on use-case-specific LLMs, ServiceNow achieves a higher level of accuracy in its AI outputs. These smaller models are trained on data sets tailored to the specific tasks they're designed to perform, resulting in more precise and relevant results for customers. For example, an LLM designed to automate document generation in clinical trials would be trained on a data set of relevant medical and legal documents, ensuring outputs are accurate and compliant with industry regulations.

Beyond accuracy, efficiency is paramount. Smaller LLMs require significantly less computational power to operate, translating into lower operating costs for ServiceNow and ultimately, more attractive pricing for customers. This efficiency is reflected in the company's projected subscription gross margin of 84.5% for 2024, a strong indicator that ServiceNow is confident in its ability to deliver AI solutions at scale without sacrificing profitability.

Finally, there's the question of performance. Smaller models deliver faster response times and a smoother user experience, crucial factors in driving adoption and user satisfaction. As Desai noted during the call, customers are "turning on Pro Plus and working with us saying, 'Here's where I'm seeing the improvement, here's how I should think about it.'" This eagerness to deploy and experiment with ServiceNow's AI solutions speaks volumes about their ease of use and tangible impact on productivity.

"The evidence of this strategic advantage is already emerging. Pro Plus, ServiceNow's suite of AI-powered products, is seeing faster adoption than any other product family launch in the company's history, surpassing even the impressive uptake of its original Pro SKUs."

Here's a hypothesis backed by data: If ServiceNow can continue to deliver on its promise of accurate, efficient, and high-performing AI solutions, the company could capture a disproportionate share of the rapidly expanding enterprise AI market. Gartner predicts that nearly $3 trillion will be spent on AI between 2023 and 2027. ServiceNow, with its strategic focus on "small" AI, is uniquely positioned to seize this opportunity and propel itself to even greater heights.

Growth in Deal Sizes

The following chart illustrates the growth in the number of deals of different sizes closed by ServiceNow, highlighting the company's success in securing larger contracts.

The company's success isn't just about technology. It's about building a culture that fosters innovation and customer obsession. ServiceNow consistently ranks among the best places to work, attracting top talent and fostering a collaborative environment that drives results. Over 1 million people applied to work at ServiceNow in 2023 – a testament to the company's strong culture and reputation.

This focus on culture and innovation is paying off. ServiceNow is rapidly becoming the "go-to" platform for CEOs looking to transform their businesses with AI. From financial services institutions to global manufacturing giants, businesses are recognizing the power of ServiceNow's approach.

Wall Street, focused on the immediate impact of AI on revenue, may be missing the bigger picture. ServiceNow's commitment to "small" AI is a strategic masterstroke, setting the stage for sustained, profitable growth in the AI-powered future. The company isn't just building another software product; it's building a platform for a new era of business.

"Fun Fact: ServiceNow's founder, Fred Luddy, initially built the platform to automate his own IT tasks. He later realized the potential of his creation to revolutionize how businesses operate."