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ServiceNow eyes $8.5 billion revenue in 2023 - delivers solid quarter

Derek du Preez Profile picture for user ddpreez January 26, 2023
Summary:
ServiceNow CEO Bill McDermott believes that the current macroeconomic conditions are working in the vendor’s favor, as buyers make more informed decisions about value.

Bill McDermott

Cloud workflow vendor ServiceNow’s Q4 and FY 2022 financial results fell in line with analyst expectations, but the company did beat the high end of its guidance and has said that it could hit $8.5 billion in revenue by the end of its 2023 fiscal year. 

The current macroeconomic headwinds being seen in the market aren’t putting McDermott off his ambition of making ServiceNow the ‘defining enterprise software company of the 21st Century’, where he said he will see this ambition “through to completion”. ServiceNow hopes to broadly double its revenue over the next three years or so. 

McDermott also announced that ServiceNow has appointed Chirantan CJ Desai as President and COO of ServiceNow. Desai joined ServiceNow in December 2016 as the Chief Product Officer and was promoted to the role of Chief Operating Officer in January 2022.

Commenting on the overall trends in the market, McDermott said: 

Here is the main takeaway. Even in a complex operating environment, ServiceNow is executing at the rule of 58.5%. We are driving net new innovation, fast growth and operating leverage. ServiceNow is the proverbial safe harbor in all weather conditions.

Let me unpack the current environment for you. The secular tailwinds of digital transformation aren't going anywhere. IDC's research makes it clear that technology budgets are growing. They forecast IT spend will grow 5% in 2023, software spend at 8% and Software-as-a-Service spend at 15%. 

So as businesses increase spend, the only question then is where will all that investment go? And this answer has everything to do with the great reprioritization. The theme in Davos this year was cooperation in a fragmented world. It all begins with a fragmented enterprise.

C-level buyers don't want long-term road maps to clean up a siloed mess of point solutions. They want integration, speed, automation, great experiences and business impact.

The key numbers released this week are: 

  • Subscription revenues of $1,860 million in Q4 2022, representing 22% year‑over‑year growth

  • Total revenues of $1,940 million in Q4 2022, representing 20% year‑over‑year growth

  • Current remaining performance obligations (“cRPO”) of $6.94 billion as of Q4 2022, representing 22% year‑over‑year growth

  • Fully year 2022 revenue of $6.891 billion, representing 24% year-over-year growth 

In terms of its 2023 outlook, ServiceNow expects its subscription revenues to reach between $8.44 billion and $8.5 billion, representing 22.5% to 23.5% year-over-year growth. 

Playing to strengths 

In addition to the figures above, ServiceNow reported that in Q4 it secured 126 deals greater than $1 million, including its largest deals ever worldwide in EMEA and in Latin America. McDermott said: 

When we started to sense noise in the macro early in 2022, we shifted immediately to a conservative cost management posture in running the company. 

This allowed us to focus on execution with our team rather than look to workforce actions to leverage. It also allowed us to continue hiring, especially in engineering and quota-carrying roles. 

In terms of its product segments, ServiceNow said: 

  • ITSM was in 14 of its top 20 deals, with 15 deals over $1 million. 

  • ITOM was in 16 of its top 20, with 14 deals over $1 million. 

  • Security and Risk Solutions were in 13 of its top 20, with 9 deals over $1 million. 

  • Customer workflows were 13 of the top 20, with 13 deals over $1 million. 

  • Employee workflows were 13 of the top 20, with 11 deals over $1 million. 

  • And creator workflows were in 19 of the top 20, with 11 deals over $1 million.

But given that the markets are cautious given the macro environment and some of the largest technology companies in the market are seeing weak results and announcing huge layoffs, what impact is ServiceNow seeing? McDermott believes that the vendor is well positioned to capitalize on buyers’ needs, where he sees them seeking out experience, guidance and strategic platforms. He said: 

What I see in the market is commodity tech that was at the peak of the hype-cycle during the pandemic being dialed down or eliminated. And I see that investment freeing up to platforms that actually matter. 

So I do think our circumstances are actually improving because of this particular macro, because it's well known now that ServiceNow can take the cost down, if that's what you need immediately. 

And given the layoffs that we're seeing and the stories that we're reading, I clearly see that our company is rising accordingly. And I see that in the pipeline. I see that in the maturity of the pipeline which is a really important fact. 

And this year, we came in with sales productivity at least 20% better than I had at the start of last year based on the feet on the street and the readiness of those feets because they've been well trained and certified to do their job. 

All these forces are coming together in a way that gives me a feeling the market will be on our side, but our executional excellence will never have to rely on the weather conditions. We're ready.

My take

Perhaps not the expectation-beating quarter that some may have hoped, but ServiceNow beat its guidance and most of its performance indicators suggest it has a solid 2023 ahead of it. It’s been steadily building out its product portfolio, expanding its partner programme and mobilizing its sales force. Buyers aren’t slowing down, they’re just being more selective - ServiceNow needs to capitalize on that opportunity. 

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