ServiceNow beats Q2 2023 expectations, raises guidance and says AI is a “market-making tailwind”

Cloud workflow vendor ServiceNow has had another strong quarter, with its Q2 2023 earnings beating expectations and guidance being raised for the Full Year. CEO Bill McDermott said that advancements in AI represent a “market-making tailwind” for the company, as he announced a new generative AI programme - AI Lighthouse - alongside NVIDIA and Accenture. 

ServiceNow announced its initial partnership with NVIDIA at its annual user event in Las Vegas earlier this year, where it said that its focus is going to be domain-specific LLMs [Large Language Models], built using data from the Now platform and for enterprise-grade use cases. 

AI Lighthouse expands on this and will see customers collaborating with ServiceNow, NVIDIA and Accenture, as design partners, to architect customer generative AI LLMs and applications. Speaking with analysts this week, McDermott said: 

Specifically, this involves our engineers locking arms with NVIDIA to co-develop new use cases for the enterprise. We already have the most significant pharmaceutical, financial services, manufacturing and health care companies engaged with us. Additional customers will become design partners for new AI capabilities in their specific industries. We're currently evaluating a range of customers who are candidates for this program, and the interest is continuing to surge.

These engagements share one sentiment perfectly in common: the propensity to buy is there. Even as our underlying growth is already strong as our Q2 results indicate, AI represents a market-making tailwind to ServiceNow. Intelligence is only relevant when it is delivered where work actually gets done. It's why our single architecture, single data model workflow platform has never been more relevant than it is right now.

The numbers

The key numbers from ServiceNow’s Q2 2023 earnings include: 

• Subscription revenues of $2.075 billion, representing 25% year‑over‑year growth, 25% adjusted for constant currency

• Total revenues of $2.150 billion, representing 23% year‑over‑year growth, 22.5% adjusted for constant currency

• Current remaining performance obligations of $7.20 billion, representing 25% year‑over‑year growth, 24% adjusted for constant currency

• 70 transactions over $1 million in net new ACV in Q2 2023, up 30% year‑over‑year

• ServiceNow ended Q2 with 45 customers with more than $20 million in ACV, representing 55% year‑over‑year increase

ServiceNow CFO Gina Mastantuono also said that the company would be raising its subscription revenue outlook by $95 million at the midpoint to a range of $8.58 billion to $8.6 billion, representing 24.5% to 25% year-over-year growth, or 24% on a constant currency basis. 

McDermott’s key message from the analyst call this week was that whilst ServiceNow has been growing solidly in recent years, this growth is now being “supercharged” by Generative AI. He said: 

Our platform experts, who have worked for the greatest brands and technology believe this moment is as transformative, if not even more so than the Internet or even the iPhone. But they're careful to remind me, it's all about delivering enterprise-grade, domain-specific large language models, which is the core of ServiceNow's AI strategy. These models will improve the accuracy results, leveraging a customer's enterprise data in alignment with their business rules, while maintaining the highest ethical standards for data privacy.

ServiceNow is infusing generative AI into all of our workflow offerings. We're going even further by expanding our generative AI capabilities with case summarization and text-to-code, text-to-flow and text-to-new-application-development.

Our customers are so excited for greater ROI and customer service, better employee self-service experiences and a substantial boost in developer productivity. They are ready to invest to drive these outcomes. And based on the immense value our customers will realize from our generative AI innovation, we have a clear strategy for monetization.

My take

It’s hard to deny that ServiceNow has done a solid job of capitalizing on the opportunity ahead of it, to date. The platform’s appeal is that it allows organizations to worry less about their legacy environments and create digital workflows that speed up collaboration and break down silos. Its partnership with NVIDIA is promising too, given NVIDIA’s role in the market at the moment. ServiceNow appears to be taking its time to focus on understanding what use cases will be valuable to customers across a variety of industries, when it comes to generative AI. We await the results of those to see how and if they bear fruits - but domain specific LLMs that use enterprise data is a compelling idea. 

But there’s one thing that’s certain. CEO Bill McDermott remains incredibly optimistic. He said: 

We're in the midst of a dramatic expansion of the software economy. In 2023 alone, IDC says Platform-as-a-Service spending will grow 30%, and Software-as-a-Service applications will grow 17%. 

When you correlate that to ServiceNow's platform and our workflow leadership, it's clear we live in a great neighborhood on a super nice street, and maybe we're in the best house.