Cloud workflow vendor ServiceNow has had another excellent quarter, exceeding its guidance across all Q3 2023 top line growth and profitability metrics. The company has also raised its full year 2023 subscription revenues and operating margin guidance.
However, away from the numbers, CEO Bill McDermott also spent a decent amount of time on the call pointing to ServiceNow’s recent AI announcements, which diginomica covered back in May. The main takeaway is that the vendor is looking beyond general purpose generative AI to domain-specific use cases, whilst working in partnership with NVIDIA.
McDermott said that AI has strengthened the market dynamics for enterprise software, after a bit of a turbulent time as the world entered the Vaccine Economy and scaled back spending. He added:
Generative AI represents 36% of AI spending overall. We believe every dollar of global GDP will be impacted by AI over the next several years. This isn't a hype cycle. It is a generational movement. In the last year, ServiceNow has doubled down on our AI investments. Our Vancouver release includes generative AI-powered Now Assist for every workflow. Others issued press releases. We released product.
At ServiceNow, our strategy isn't about exuberance. It's about execution. We carefully laid the groundwork for success and talent and resources and technology. This investment is accelerating our already robust pipeline with customers lining up to be first-movers in this next wave of business transformation. The question we've been asked repeatedly, does AI drive growth?
“The definitive answer is, yes, it does. Generative AI represents a tailwind of growth for ServiceNow. We have over 300 customers in our pipeline from every industry, every buying center and every stage of testing. Our GenAI SKU drove the highest number of customer requests for a pre-release product in our history.
The key figures for ServiceNow’s Q3 2023 earnings include:
Subscription revenues of $2,216 million in Q3 2023, representing 27% year‑over‑year growth, 24.5% in constant currency
Total revenues of $2,288 million in Q3 2023, representing 25% year‑over‑year growth, 22.5% in constant currency
Current remaining performance obligations of $7.43 billion as of Q3 2023, representing 27% year‑over‑year growth, 24% in constant currency
83 transactions over $1 million in net new ACV in Q3 2023, up 20% year‑over‑year
ServiceNow ended Q3 2023 with 49 customers with more than $20 million in ACV, representing 58% year‑over‑year increase
A very strong set of numbers indeed - and McDermott said that this was the best US Federal quarter in the company’s history. Net new annual contract value for federal government business was up over 75% year-over-year, with 19 federal deals over $1 million, including three deals over $10 million. In fact, ServiceNow’s top deal in the quarter went to the United States Air Force, which was the third largest deal in the company’s history.
For 2023, ServiceNow is also raising its subscription revenues outlook by $48 million at the midpoint to a range of $8.635 billion to $8.640 billion, representing 25% year-over-year growth or 25% on a constant-currency basis. The vendor is also raising its full year operating margin target from 26.5% to 27%, with an expectation of subscription gross margin of 84%, free cash flow margin of 30%, and GAAP-diluted weighted average outstanding shares of 206 million.
Commenting on some customer wins, McDermott said:
We're proud that our company once again delivered beyond expectation.
We're increasing the full year guidance on the top line and the bottom line and here is the key takeaway. We launched Vancouver on September 29th. That left us one day in Q3 to sign deals, and we signed four large deals. A US government agency selected our premium SKU offerings, to be an early adopter of generative AI.
Real estate leader, CBRE, is harnessing generative AI with ServiceNow to deliver superior service to customers and employees, while reducing costs. NVIDIA is accelerating its own ServiceNow journey with generative AI. Among other leading companies, Teleperformance joined ServiceNow's AI Lighthouse program. They will collaborate on new generative AI use cases that boost productivity while increasing customer and employee satisfaction in key industries.
We have a wide range of other customer wins in the quarter as well. FedEx is using ServiceNow to simplify their IT workflows, while building a universal employee portal to improve employee experience for half million global employees.
Some of the other deals mentioned on the call include companies such as Philips, Mars, Bank of California, the US Department of Defense, Fujitsu, and the State of California
Guidance beaten. Future guidance raised. A whole host of new logos. Growth in deals over $1 million. And a playful dig at ServiceNow’s AI competition. McDermott is jubilant and he sees AI as the next phase of growth for the company. He said:
We see a meaningful path for all customers to recognize value from generative AI, in the quarters to come. Our innovation velocity is very high. Pipeline is growing fast and capacity to execute is well proven and this is just the beginning.
A solid quarter all round.