ServiceNow, Inc. (NOW) Q3 2023 Earnings Call Oct. 25, 2023

Here is a summary of the NOW earnings call.

Bill McDermott - Chairman and Chief Executive Officer

Subscription Revenue:
ServiceNow delivered impressive Q3 results, with subscription revenue growing by 24.5% in constant currency, surpassing guidance by over one percentage point.

cRPO Growth:
Committed Remaining Performance Obligation (cRPO) showed strong growth of 24%, exceeding guidance by 2.5 percentage points.

Operating Margin:
Operating margin reached 30%, surpassing guidance by more than 2.5 percentage points.

Large Deals:
ServiceNow achieved a notable increase in large deals, with 83 deals greater than $1 million in net new Annual Contract Value (ACV), representing a 20% YoY increase.

Customer Acquisition:
The company's focus on acquiring the right new customers continued to deliver results, with large new logo growth accelerating for the third consecutive quarter.

Workflow Businesses:
All of ServiceNow's workflow businesses were part of 14 or more of the top 20 deals, including ITSM, ITOM, ITAM, security and risk, customer, employee, and creator workflows.

Industry Performance:
Q3 marked the best US Federal quarter in ServiceNow's history, with NNACV up over 75% YoY.
US Federal agencies are standardizing on the ServiceNow platform with a core set of end-to-end solutions.

AI and GenAI Investment:
ServiceNow emphasized its investments in AI, particularly GenAI, which is expected to be a significant growth driver.
The company released generative AI-powered Now Assist for every workflow, distinguishing itself from competitors.

Customer Wins:
ServiceNow signed deals with prominent organizations such as a US government agency, real estate leader CBRE, NVIDIA, Teleperformance, FedEx, one of the world's largest automakers, Philips, Mars, Bank of California, Cleveland Clinic, the US Department of Defense, Fujitsu, Asahi Mutual Insurance, and the State of California, among others.

Partner Ecosystem Growth:
ServiceNow aspires to increase the percentage of net new revenue sourced by partners in the coming years.
Notable partnerships, like the one with Deloitte, are integrating generative AI capabilities into their services.

Verticalization and Industry Expansion:
The company is expanding its product development roadmap to include use cases in telecommunications, financial services, retail, and the public sector.
ServiceNow sees opportunities for workflow innovation across various industries and value chains.

Workforce Training Initiative:
ServiceNow's RiseUp with ServiceNow initiative aims to provide training and skills development opportunities, including partnerships like FutureSkills Prime, a digital skilling initiative in India.

Company Culture and Employee Engagement:
Employee engagement scores increased across the board, and the company maintained a commitment to thoughtful, careful expansion rather than layoffs.
ServiceNow's retention rates are already considered best-in-class.

Strategic Vision:
ServiceNow aims to be the defining enterprise software company of the 21st century, focusing on customer value and creating shareholder value.
The company is building for long-term, sustainable growth.

Market Outlook:
ServiceNow believes that AI and GenAI will play a crucial role in the future of enterprise software, with significant spending expected in this area.
The company sees a generational movement in AI adoption, not just a hype cycle.

Q4 Focus:
ServiceNow is focused on delivering a strong Q4, increasing full-year guidance on both the top line and the bottom line.
The company is optimistic about its growth prospects and plans for a fast start in 2024.

ServiceNow's commitment to customer value, employee engagement, and strategic investments in AI positions it as a unique and highly differentiated company in the enterprise software industry, rewriting benchmarks to be best-in-class in the SaaS sector.

Gina Mastantuono - Chief Financial Officer

ServiceNow Q3 Financial Metrics Summary

Subscription Revenue Growth:
In Q3, ServiceNow achieved remarkable subscription revenue growth of $2.216 billion, representing a 24.5% year-over-year increase in constant currency.
This exceeded the high end of their guidance by over 100 basis points, showcasing impressive organic growth at scale.

Committed Remaining Performance Obligation (cRPO):
The company reported an ending cRPO of approximately $14.4 billion, reflecting a 23.5% year-over-year constant currency growth.
Current RPO was approximately $7.43 billion, representing 24% year-over-year constant currency growth and surpassing guidance by 250 basis points.

Strong Industry Performance:
ServiceNow highlighted significant growth in various industries.
The US Federal sector had its best net new ACV quarter ever, growing over 75% YoY.
Transportation and logistics grew over 100%, education over 75%, and manufacturing and CMC also saw robust growth.

Workflow Achievements:
Creator Workflows achieved a monumental milestone by crossing $1 billion in Annual Contract Value (ACV) in Q3.
Employee Pro SKU experienced over 100% growth in net new ACV year-over-year.

Customer Expansion:
Retention rates remained exceptional with a renewal rate of 98% in Q3, emphasizing the essential role of the Now Platform in customers' operations.
ServiceNow witnessed solid customer cohort expansion, with 1,789 customers contributing over $1 million in ACV, and a 58% YoY growth in those contributing over $20 million.

Large Deals and Workflow Adoption:
ServiceNow successfully closed 83 deals greater than $1 million in net new ACV in Q3, with four deals exceeding $10 million.
Notably, 18 of the top 20 net new ACV deals included eight or more products, demonstrating strong workflow adoption.

Profitability and Cash Flow:
Non-GAAP operating margin reached 30%, surpassing guidance by over 250 basis points, driven by disciplined spending and top-line performance.
The free cash flow margin increased to 9%, up 300 basis points YoY.

Financial Strength:
The company ended the quarter with a robust balance sheet, including $7 billion in cash and investments.
ServiceNow initiated a share repurchase program, demonstrating financial stability and responsible capital management.

2023 Guidance:
ServiceNow raised its full-year outlook due to the strength of Q3, increasing the subscription revenues outlook by $48 million at the midpoint.
The new range is $8.635 billion to $8.640 billion, representing 25% YoY growth or 25% on a constant-currency basis.

Operating Margin and Metrics:
The full-year operating margin target was raised to 27%, with expectations of subscription gross margin at 84%, free cash flow margin at 30%, and GAAP-diluted weighted average outstanding shares of 206 million.

Q4 Guidance:
For Q4, ServiceNow expects subscription revenues between $2.320 billion and $2.325 billion, representing 24.5% to 25% YoY growth or 23% to 23.5% on a constant currency basis.

Federal Contracts Impact:
The strength of the federal business has led to a higher mix of 12-month contracts, creating a one-point headwind to Q4 cRPO growth.
ServiceNow expects these contracts to renew in 2024 with a 99% renewal rate.

Overall Performance:
The company concluded by attributing its exceptional performance to a culture focused on customer success, highlighting the need for businesses to consolidate vendors and standardize on a strategic platform like ServiceNow for digital transformation.
The introduction of the Vancouver release and GenAI capabilities further expand the possibilities for productivity improvement, employee satisfaction, cost reduction, and organizational agility.

Q&A followed.

Anne Chapman

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