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ServiceNow hits first $2bn quarter, beats expectations and raises guidance

Derek du Preez Profile picture for user ddpreez April 27, 2023
Summary:
ServiceNow CEO Bill McDermott says that the company is focused on delivering a “fast growth, durable, predictable cloud business model”

Image of Bill McDermott ServiceNow CEO
(Image sourced via Bill McDermott’s Twitter)

Cloud workflow vendor ServiceNow has released a strong set of Q1 2023 earnings, achieving its first $2 billion quarter, beating expectations and previous guidance. CEO Bill McDermott remains bullish about the company’s future prospects and said that the vendor’s platform approach is fuelling network effects that play well for future growth. 

ServiceNow has also issued new 2023 guidance, raising its subscription revenue outlook by $25 million at the midpoint to a range of $8.47 billion and $8.52 billion, representing 23% to 23.5% year-over-year growth on both a reported and constant currency basis.

Speaking with analysts this week, McDermott said: 

ServiceNow had an outstanding first quarter. Subscription revenue grew 27% in constant currency, which was 150 basis points above the high end of our guidance. CRPO (current remaining performance obligation) grew 25% in constant currency, a 100 basis points above our guidance. Operating margin was 26%, two full points above our guidance. 

We have 66 deals greater than $1 million in net new ACV. We saw a strong, sustained demand for ServiceNow's platform.

In January, we committed the company to performing beyond expectations. We said it, we did it.

The key figures released for Q1 2023 are:

  • Subscription revenues of $2,024 million in Q1 2023, representing 24% year‑over‑year growth, 27% adjusted for constant currency

  • Total revenues of $2,096 million in Q1 2023, representing 22% year‑over‑year growth, 24.5% adjusted for constant currency

  • Current remaining performance obligations ("cRPO") of $7.01 billion as of Q1 2023, representing 23% year‑over‑year growth, 25% adjusted for constant currency

The company also announced that it has appointed Deborah Black, VP of engineering at Netflix, to its Board of Directors. 

The macro context

As has been highlighted on diginomica in recent months, a number of vendors have been faced with a great deal of uncertainty in the current macroeconomic climate. Following a bountiful period during the height of the COVID-19 crisis, what has followed has been a series of layoffs announced at a number of companies and a number of ‘caution’ statements issued to markets. 

However, this hasn’t been the case for all, as some vendors have managed to successfully navigate the headwinds and secure strategic status amongst buyers. McDermott took time to share his thoughts on the current macro environment and said: 

Looking at the big picture, there is no question this remains a complicated macro environment, C-Level leaders are managing an endless array of headlines and mixed signals. 

When you filter all that noise, it comes down to one simple reality: there is an app for everything, but nobody wants every app. This consolidation is a tailwind for ServiceNow, as the intelligent platform for end-to-end digital transformation. 

We are now seeing conversations up level to business transformation. This is bringing CEOs directly into the process as principal executive sponsors. Nearly 40% of CEOs think their company will no longer be economically viable in a decade if they continue on the current path. 

They aren’t interested in turf battles between departments, they want enterprise level investments to drive business impact. This isn’t merely an inspection of what historically has been a big call center, this is CEOs engaging on a strategic level, insisting on a clear roster of technology partners to drive very specific business outcomes.

And perhaps taking a slight dig at some other technology vendors in the market that are rushing to roll out generative AI offerings, in the wake of the OpenAI Chat-GPT hype, McDermott said that ServiceNow’s platform approach is key. He explained: 

When it comes to technology in the age of generative AI, it’s a build, buy, operate conversation. They are looking for a single platform that can orchestrate the entire technology value chain. ServiceNow does just that. 

Businesses are also working hard to transform their customer experience. The AI opportunity here is when you integrate the front, middle, and back offices to better serve that customer. This is a ServiceNow core competency.

It bears repeating that while customers are aware of market excitement for individual technologies like generative AI, they expect a platform strategy to integrate the various tools. ServiceNow has AI, process mining, RPA, low-code and many other technologies built natively into a single workflow automation platform.

My take

An undeniably strong quarter for ServiceNow, and if its guidance is anything to go by, the company is edging closer and closer to that $10 billion annual revenue milestone. It’s worth highlighting that this has mostly been achieved through organic growth too, rather than via acquisition, as the company remains committed to keeping its platform coherent. We will be at ServiceNow’s annual user event next month in Las Vegas, so keep a close eye out for updates and customer stories. 

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