ServiceNow beats Q4 expectations - ‘organic growth machine is in full flight’

As the COVID-19 pandemic becomes the ‘Vaccine Economy', investors have been more cautious on enterprise software stocks as the huge drive in demand seen over the past year or two slows down somewhat (as would be expected). However, workflow vendor ServiceNow is still bullish in its growth opportunity, as CEO Bill McDermott told analysts this week that the company's "organic growth machine is in full flight". 

ServiceNow beat the high end of its Q4 guidance this week, with revenues reaching $1.523 billion, up 30% year-over-year. 

McDermott's confidence was palpable upon announcing the results, where he said: 

The reality on our numbers is we did not see any evidence of unusual demand pull-forward into our business for 2021. It happened in an extremely linear and coherent fashion, which was really a thing of beauty to watch from an execution perspective.

And as I look at the pipelines, they're ever increasing, and they're doing that across the platform, the employee experience, the customer experience, the creator experience. 

And all of this now is really making ServiceNow one of those real standard platforms for well-run companies in the 21st century. And I think that includes a very short list of others. We're one of them.

Chief Financial Officer Gina Mastantuono said that in 2021 ServiceNow added more incremental subscription revenues than it reported in 2016 - meaning that the company added the equivalent of a whole 2016 ServiceNow to its top line. 

ServiceNow's full year revenues were up 28% year-over-year to $5.573 billion and the company now holds $5 billion in cash. 

Diving into the detail

diginomica recently spoke with CEO Bill McDermott about ServiceNow's strategy in 2022 and beyond, which we suggest marks a ‘new era' for the company. The ServiceNow platform continues to expand its reach beyond its ITSM roots, with the company's workflow approach tying business functions together in what it calls a ‘digital control center'. 

Commenting on the results this week, McDermott said: 

ServiceNow is uniquely positioned. We're growing like a fast-moving start-up with the profitability of a global market leader. We're on a clear growth trajectory to $15 billion plus by 2026. 

While rising interest rates challenge others, ServiceNow's business model is built to flourish in any economic environment. We are not opportunity constrained as our customers' need for digital transformation is ever expanding. Our organic growth machine is in full flight, and our pipeline is stronger than ever. Our 99% renewal rate is one of several lead indicators for sustained performance moving forward.

There are structural challenges facing every industry in every geographic region. The great resignation, supply chain disruption, inflation, to name a few. These underscore a point we have made consistently, the technology strategy has become the business strategy.

A CEO I spoke to last week said it perfectly. "I have a long list of strategic priorities. Technology isn't one of them, it runs through all of them." ServiceNow's Q4 results clearly validate the structural incline of this digital economy. As enterprises build, deploy, monitor and service technology, our IT workflow business is at the core. 

Commenting on potential merger and acquisition opportunities in 2022, McDermott said that ServiceNow is continuing to focus on organic growth. Whilst the company does occasionally engage in small-scale strategic acquisitions, McDermott said that he is very wary of using ServiceNow's engineering capability to focus on integration, rather than developing the platform for the future. 

In Q4, ServiceNow also closed 135 deals worth over $1 million, which was 50% year-over-year. ITSM was in 16 of its top 20 Q4 deals, with 19 deals over $1 million;IT operations management was in 18 of its top 20, with 21 deals over $1 million; HR service delivery was in 11 of its top 20 deals, with 24 deals over $1 million; customer service management was in 13 of its top 20 deals, with 10 deals over $1 million.

McDermott added: 

We see growth everywhere for ServiceNow. Our customers now view us as the standard platform for digital transformation. Our engineers continue to strengthen this highly innovative, scalable platform architecture. Our customer success teams have navigated the COVID challenges without missing a beat. 

Our partner ecosystem continues to build ServiceNow practices with even bigger commitments for long-term growth. The market forces are moving even more intensely in our direction.

Our purpose is to make the world work better for everyone. Our ambition is to be the defining enterprise software company of the 21st century. ServiceNow's 2021 results and strong 2022 guidance signal our unshakable confidence in that goal. 

Our performance should leave no doubt, we are executing on all cylinders, and we will continue to do so.