ServiceNow's Q2 2023: Strong Performance and AI-Driven Growth

ServiceNow Q2: Strong Now Assist Growth (NYSE:NOW)

ServiceNow, Inc. (NYSE:NOW) released its Q2 results on July 24 after the market closed, beating the market expectations and raising the subscription revenues and operating margin guidance for FY24. I presented my "Strong Buy" thesis in my previous coverage published in March 2024, highlighting its future platforms powered by AI. Benefiting from the megatrend of cloud computing and AI training/inference, ServiceNow is likely to deliver 20%+ revenue growth in the near future, driven by its market expansion into mid-office and back-office platforms. I reiterate a "Strong Buy" rating with a one-year price target of $920 per share. My biggest takeaway from the earnings call is ServiceNow's strong growth in its Now Assist, with net new annual contract value (ACV) doubling quarter-over-quarter. Management has disclosed that the company signed 11 Now Assist Deals with $1 million+ ACV in Q2, two of which were over $5 billion. As discussed in my previous coverage, ServiceNow has been applying its AI technology to its platforms, which fuels the organic revenue and order growth. As depicted in the chart below, ServiceNow delivered 22.5% growth in both organic revenue and current remaining performance obligations (cPRO). I anticipate Now Assist and other AI technologies will continue to propel the growth of ServiceNow's major platforms for the following reasons: ServiceNow raised its guidance for both top line and margin expansion, as detailed in the table below. It is impressive that ServiceNow can deliver such high growth in enterprise software, amid a challenging macro environment. I am considering the following factors for its near-term growth: I anticipate ServiceNow will achieve 23.8% growth in revenue for FY24, assuming 20% growth in its core platforms including IT management, Customer Service Management and HR Service Management; 2% growth from AI add-ons; 0.8% growth from acquisitions. For the growth from FY25 onwards, I anticipate the company will grow its revenue by 20.8% assuming: I forecast ServiceNow will expand its margin by 250bps per year, reaching 33.5% by FY33, assuming: The discounted cash flow ("DCF") summary can be found as follows: I calculate the free cash flow from equity as follows: The cost of equity is calculated to be 15% assuming: risk-free rate of 4.2% (US 10Y Treasury Yield); beta of 1.65 (SA); and an equity risk premium of 7%. Discounting all the future free cash flow, the one-year price target is calculated to be $920 per share. During the earnings call, ServiceNow announced that CJ Desai, the President and COO, would offer his resignation from the company effective immediately. This was due to a policy violation related to a government contract and the hiring of a former US Army official. The investigation indicates that ServiceNow has an internal management issue with hiring policies. While ServiceNow treated the incident seriously, the management change could potentially create some disruptions in its internal operations and external sales activities with the public sector. Now Assist has become a strategic technology for ServiceNow, as the AI technology could power ServiceNow's core platforms, accelerating its revenue and cPRO growth. I reiterate a "Strong Buy" rating with a one-year price target of $920 per share.

ServiceNow Non-GAAP EPS of $3.13 beats by $0.29, revenue of $2.63B beats by $20M

ServiceNow press release (NYSE:NOW): Q2 Non-GAAP EPS of $3.13 beats by $0.29. Revenue of $2.63B (+22% Y/Y) beats by $20M. Subscription revenues of $2,542 million in Q2 2024, representing 23% year-over-year growth, 23% in constant currency Remaining performance obligations of $18.6 billion as of Q2 2024, representing 31% year-over-year growth, 31.5% in constant currency 88 transactions over $1 million in net new ACV in Q2 2024, up 26% year-over-year Board of Directors shares update on leadership transition; CJ Desai, President and Chief Operating Officer, departs company; Chris Bedi announced as interim Chief Product Officer More on ServiceNow ServiceNow's Integrated Business Model Is A Moat ServiceNow: Moving From Large Cap To Mega Cap, Now ServiceNow: Winning The AI Opportunity, Dodging Deal Scrutiny ServiceNow acquires Raytion to enhance GenAI-powered search ServiceNow Q2 earnings preview: Improving customer activity levels and Gen AI in foc

ServiceNow in charts: Subscription revenue continues to grow by nearly a quarter Y/Y in Q2

More on ServiceNow ServiceNow's Integrated Business Model Is A Moat ServiceNow: Moving From Large Cap To Mega Cap, Now ServiceNow: Winning The AI Opportunity, Dodging Deal Scrutiny ServiceNow surpasses Q2 estimates; COO, President Desai leaves company ServiceNow Non-GAAP EPS of $3.13 beats by $0.29, revenue of $2.63B beats by $20M

ServiceNow Q2 Earnings: Revenue Beat, EPS Beat -- 'ServiceNow Intends To Reinvent Every Workflow, In Every Company, In Every Industry With GenAI' - ServiceNow (NYSE:NOW)

ServiceNow reports quarterly earnings of $3.13 per share, beating analyst estimates of $2.84 per share. ServiceNow Inc NOW reported financial results for the second quarter Wednesday after the bell. Here's a rundown of the report. Q2 Earnings: ServiceNow reported second-quarter revenue of $2.627 billion, beating the consensus estimate of $2.607 billion, according to Benzinga Pro. The company reported quarterly earnings of $3.13 per share, beating analyst estimates of $2.84 per share. Total revenue was up 22% on a year-over-year basis. Subscription revenues were up 23% year-over-year. ServiceNow said it had remaining performance obligations of $18.6 billion, up 31% year-over-year. "ServiceNow's elite-level execution is reflected in our continued outperformance across all topline growth and profitability metrics," said Bill McDermott, chairman and CEO of ServiceNow. "Our relevance as the AI platform for business transformation remains stronger than ever as CEOs are looking for new vectors of growth, simplification, and digitization. ServiceNow intends to reinvent every workflow, in every company, in every industry with GenAI at the core." Outlook: ServiceNow expects third-quarter subscription revenue of $2.66 billion to $2.665 billion, representing growth of 20% to 20.5% on a year-over-year basis. The company also guided for a third-quarter operating margin of 29.5%. ServiceNow sees full-year 2024 subscription revenue in the range of $10.575 billion and $10.585 billion. Management will hold a conference call to discuss ServiceNow's second-quarter results at 5 p.m. ET. ServiceNow also announced a strategic commitment to jointly elevate customer experiences through AI-powered self-service with Boomi. The company further announced that it will make a strategic investment in Prodapt, a leading provider of digital and network services for the telecom and technology industries. Check This Out: GDP Q2 Preview: 5 ETFs To Monitor Thursday As Economic Data Unfolds Leadership Changes: ServiceNow also announced that it reached a mutual agreement with president and COO CJ Desai under which Desai will resign from all positions with the company, effective immediately. ServiceNow also said it completed an internal investigation related to the hiring of the former chief information officer of the U.S. Army. The company's board determined that a company policy was violated during the hiring process. As a result, the individual has departed the company. ServiceNow appointed Chris Bedi as interim chief product officer, effective immediately. Bedi has been at ServiceNow for nearly a decade. Previous roles included chief digital information officer and chief customer officer. NOW Price Action: ServiceNow shares were up 6.17% after hours at $776 at the time of publication Wednesday, according to Benzinga Pro. Photo: Shutterstock. Market News and Data brought to you by Benzinga APIs

ServiceNow Stock: Strong Market Leader, But Fairly Valued (NYSE:NOW)

We expect the company's customer satisfaction and popularity to remain strong going forward, though we believe this has already been priced into its stock price. In our previous analysis of ServiceNow, Inc. (NYSE:NOW), we highlighted that the company has maintained a stable market share in the ITSM market of 40.1% in 2021 as well as the company's strong reputation reflected by its continuous leadership based on the Gartner Magic Quadrant matrix. In this analysis, we examined the company again to determine whether it could cement its dominance in the ITSM market and continue to support its growth outlook. We examined the company's competitiveness in comparison with its top competitors. First, we analyzed the company's AI features following announcements of its incorporation into its products as well as compared its pricing against competitors based on AI packages. Furthermore, we examined its customer satisfaction based on online reviews and ranked the company to determine how it stacks against competitors. Firstly, we examined the company's generative AI developments for ITSM products. The company's market share in the ITSM market increased to 45.2% in 2023 compared to 40.1% from our previous analysis, highlighting its significant market position. Since our previous analysis, ServiceNow has announced several generative AI features featured as part of their ServiceNow Pro Plans, which include benefits that management claimed from its latest earnings briefing, such as increasing agents' productivity, automating coding for developers, and optimizing enterprise processes. Furthermore, we compiled the ITSM generative AI features of ServiceNow and its top companies in the top 10 of the ITSM market from their websites based on their feature descriptions, which include key terms such as AI and machine learning. We then analyze the advantages that ServiceNow's AI features have over its competitors in terms of AI feature breadth and derive a ranking of these companies. Source: Company Data, Khaveen Investments ServiceNow has the highest number of AI features among the competitors (49), with the closest competitor trailing the company being Ivanti (28). One of the key differences that we identified between ServiceNow and Ivanti is AI search, which uses AI and Machine Learning to automate search requests used in ServiceNow's Service Portal, Now Assist for Virtual Agent, which uses Gen-AI to automate search queries and increase deflection rates, Automated Test Framework, which uses AI-powered test generation to improve regression testing. Based on the company's latest Q2 earnings briefing, the benefits cited for its AI tools include productivity and efficiency gains, such as case summarization and routine task optimization. Management also highlighted the popularity and strong adoption of its "NowAssist cogeneration capabilities within creative workflows, " which is included in 70% of its Gen AI customer deals. Overall, we determined the company ranks first among the top 10 companies within the ITSM market due to its superior number of AI features. We believe this company's strong AI capabilities are reflected as the largest pure-play ITSM company by market share (45.2%) due to its extensive capabilities in ITSM such as incident management, which assists IT departments in resolving incidents and problem management, which identifies and addresses underlying root causes of issues, change management which assist in the implementation of new technologies and many more. We believe this is due to the company's specialization in the ITSM space since its inception in 2003, founded to compete against legacy market solutions with its cloud-native platform targeting large enterprises by offering scalability advantage with cloud-based solutions. Moreover, the company built on its specialization with a focus on product development and enhancing its Now Assist platform. For example, based on ServiceNow's latest Q1 2024 Washington Release, ServiceNow has added 163 new product features with 34 being AI features, and added 149 new features during H2 2023 far more compared to competitors such as Ivanti which added 7 new features during Q1 2024 and 27 new features during H2 2023. Furthermore, ServiceNow is also significantly larger (7 largest Software company by market cap) than smaller pure-play ITSM competitors which indicates a resource advantage. Larger competitors entered the market later than ServiceNow such as Broadcom through the acquisition of CA Technologies in 2018 and IBM acquired Maximo in 2006. Furthermore, Microsoft generally focuses on the larger productivity software ($73 bln) and cloud markets ($270 bln) rather than ITSM ($10 bln), whereas IBM focuses on hybrid cloud ($99 bln) and enterprise software ($225 bln), and Broadcom's software businesses are expanding in the enterprise security and mainframe software market through Symantec and VMWare following its CA deal. All in all, we believe ServiceNow would remain in the lead due to its large existing gap to competitors in terms of AI feature breadth as well as continuous product development based on ServiceNow's Pro Plus roadmap, which shows it is planning to introduce more AI developments within Platform Analytics and Spoke Generator for Security Operations, Contract Lifestyle Management, Procurement for H2 2024, which we believe could further support its competitiveness. The company also highlighted its new RaptorDB offering to further "support new AI use cases" as well as completed an acquisition of data company Raizen to complete its NowAssist " Gen AI-powered search and knowledge management capabilities". Secondly, we examined whether the company's revenue growth could benefit from its Generative AI developments in terms of ARPU as well as determined its pricing competitiveness compared to top competitors. Furthermore, the company introduced premium Pro Plus which includes generative AI features with a 60% pricing premium compared to its standard pricing plan. We compiled the pricing details of the company and competitors based on their pricing plans from their websites in terms of non-AI pricing which includes their pricing plan without AI features and AI pricing which is based on their pricing plans which includes AI features. We excluded Microsoft, Broadcom, BMC and IBM, as we could not identify their pricing details on their websites. Source: Company Data, Khaveen Investments Based on the table, ServiceNow's AI pricing is 60% higher compared to its non-AI pricing. However, the company's pricing is the highest among competitors while the competitor with the lowest pricing is Kaseya. However, although ServiceNow's pricing is the highest, its number of features is also the highest. Therefore, we compiled the features per pricing as an indication of the value provided. We see that ServiceNow is ranked 4 behind Atlassian, GoTo, and Kaseya due to the relatively lower pricing compared to ServiceNow. Source: Company Data, Khaveen Investments Overall, we believe the introduction of Generative AI features could benefit ServiceNow as the company's selling strategy involves bundling these together as a premium subscription plan with a 60% pricing premium compared to its non-AI plan. The company's strategy has been focused on upselling to its existing customer base. This is because the company's revenue growth has been increasingly more dependent on ARPU growth as seen in the table above. Its customer additions have been dwindling in the past few years as the company focuses on and targets enterprise customers as evidenced by 85% of Fortune 500 companies using its products. We ranked the company as 6 in terms of pricing, due to its higher pricing but we believe its pricing power could be supported by its wider breadth of AI features compared to competitors which we mentioned in the first section Furthermore, the company in its previous earnings briefing highlighted that it is "seeing monetization happening already" where "seven deals in the top 10 had Gen AI in it". In its recent earnings call, management further stated that "NowAssist net new ACV doubled quarter-over-quarter" and "became the fastest growing new product in the company's history", highlighting its strong growth momentum. In the last point, we examined how the company's customer satisfaction and popularity in ITSM could support its competitiveness against other competitors and gain market share. We compiled the company's and top competitors' average reviews and number of reviews based on Gartner for ITSM platforms and multiplied it to derive a popularity score. Source: G2, Gartner, Company Data, Khaveen Investments Based on the table, most of the companies' average reviews from Gartner are fairly similar, ranging between 4 to 4.4. ServiceNow's average rating is 4.3, which is very close to the highest of 4.4 and is slightly above the average of 4.3. Based on Gartner reviews, users generally highlighted its extensive customization, comprehensive features, intuitive user interface, scalability, and support. However, users highlighted that it can be complex and costly. ServiceNow trails in second behind Atlassian with a lower popularity score mainly due to a higher number of reviews despite a minor difference in the average reviews, with Atlassian being 0.1 higher than ServiceNow. This may be due to Atlassian's focus on catering to a larger market base with over 200,000 customers compared to ServiceNow which targets the enterprise market with over 8,000 customers. Some of the enterprises cited during its latest earnings for its Gen AI tools included Merck (MRK), Adobe (ADBE), Dell (DELL) and STMicroelectronics (STM). All in all, we ranked ServiceNow as second in terms of overall customer satisfaction and popularity, slightly edged out by Atlassian which we believe is due to the higher number of customers of the company as ServiceNow is focused on the enterprise market with a lower number of customers. However, ServiceNow's TAM ($275 bln) based on management is much larger, almost by 10x, compared to Atlassian ($29 bln), indicating a larger market opportunity in the enterprise market for ServiceNow with its premium pricing and wide feature capabilities to cater to large demands of enterprise customers. Furthermore, we expect the company's customer satisfaction and popularity to remain strong going forward as it has been able to consistently improve its customer renewal rate in the past 4 years to 99% in 2023 based on its investor day presentation. We believe one of the risks to the company is competition from competitors in AI product development. Several competitors such as Atlassian, and BMC have acquired AI companies to integrate the acquired company's proprietary software into their product offerings, leading to increased competitiveness of their AI product offerings. Furthermore, competitors such as BMC have announced 5 new product offerings and updated 57 previously released software during Q1 2024, leading to better-targeted ITSM solutions for their customers. Therefore, we believe new acquisitions and product roadmap updates from ServiceNow competitors could hamper the strength of ServiceNow's ITSM offerings. *BMC, Microsoft, Broadcom and IBM pricing based on average We compiled our ranking of ServiceNow and derived a competitive factor score of 1.1x for the company as we expect it to outperform the ITSM market CAGR of 15.9% due to its strong ITSM capabilities with AI and customer satisfaction and popularity for a total forward revenue growth projection of 17.96% which we applied for 2025 and beyond before tapering down in 2027 onwards. We believe this growth assumption is reasonable as the company raised its guidance for its full-year subscription revenue growth of 22% as well as highlighted its "Gen AI contributions exceeding expectations" in its latest earnings. All in all, we believe ServiceNow could remain competitive in the ITSM market over competitors with continuous AI-driven product development as evident with its Pro Plus roadmap, supporting its superior feature breadth. Additionally, we believe these developments could support its upselling strategy and revenue growth which has been increasingly reliant on ARP growth. In terms of popularity, we believe its high score reflects strong customer satisfaction, which also reflects its 99% customer renewal rate in 2023 according to management. Notwithstanding, we see other competitors such as Atlassian, BMC and GoTo having higher competitiveness with more attractive pricing options. Based on a discount rate of 9.4% (company's WACC) and terminal value based on the 5-year average EV/EBITDA of top software companies of 33.75x, we derived a limited upside of 9.62% for the company, thus we rate it as a Hold despite our positive outlook and a higher target price of $801.18 compared to $532.46 as the company's stock price had risen by 31% since our last coverage of the company.

ServiceNow Reports Second Quarter 2024 Financial Results

ServiceNow (NYSE: NOW), the AI platform for business transformation, today announced financial results for its second quarter ended June 30, 2024, with subscription revenues of $2,542 million in Q2 2024, representing 23% year-over-year growth and 23% in constant currency. "ServiceNow's elite-level execution is reflected in our continued outperformance across all topline growth and profitability metrics," said ServiceNow Chairman and CEO Bill McDermott. "Our relevance as the AI platform for business transformation remains stronger than ever as CEOs are looking for new vectors of growth, simplification, and digitization. ServiceNow intends to reinvent every workflow, in every company, in every industry with GenAI at the core." As of June 30, 2024, current remaining performance obligations ("cRPO"), contract revenue that will be recognized as revenue in the next 12 months, was $8.78 billion, representing 22% year-over-year growth and 22.5% in constant currency. The company now has 1,988 total customers with more than $1 million in annual contract value ("ACV"), representing 15% year-over-year growth in customers. "Q2 was another fantastic quarter with NNACV and GenAI contributions exceeding expectations," said ServiceNow CFO Gina Mastantuono. "Our Knowledge event in May centered on 'Putting AI to Work for People' and received an incredible response from customers, generating more than $1 billion in pipeline. This robust pipeline, combined with our outperformance in the first half, gives us the visibility to raise our 2024 subscription revenue guidance and reinforces our confidence in achieving $15+ billion in 2026." As previously referenced in the Company's Form 10-Q for the quarter ended March 31, 2024, the Company received an internal complaint that raised a potential concern related to one of its employees. The Company initiated an internal investigation, with assistance of outside legal counsel, into the validity of these claims. The Company also promptly informed and is continuing to cooperate with government entities. As a result of the investigation, the Company's Board of Directors determined Company policy was violated regarding the hiring of the former Chief Information Officer of the U.S. Army. As such, the hired individual, who led the company's public sector thought leadership and business development efforts since March 2023, departed the company. In addition, the Company and CJ Desai, President and Chief Operating Officer, came to a mutual agreement that Desai would resign from all positions with the Company effective immediately. The company believes this was an isolated incident. The Company has appointed ServiceNow veteran Chris Bedi, as interim Chief Product Officer, effective immediately. Bedi has been at ServiceNow for nearly a decade with roles including Chief Digital Information Officer and Chief Customer Officer. Second Quarter 2024 GAAP and Non-GAAP Results: The following table summarizes our financial results for the second quarter 2024: Financial Outlook Our guidance includes GAAP and non-GAAP financial measures. The non-GAAP growth rates for subscription revenues are adjusted for constant currency by excluding effects of foreign currency rate fluctuations and any gains or losses from foreign currency hedge contracts, and cRPO are adjusted only for constant currency to provide better visibility into the underlying business trends. Since March 31, 2024, ServiceNow has seen a strengthening of the U.S. dollar resulting in an incremental foreign exchange ("FX") headwind of $20 million to 2024 subscription revenues when compared to our previous guidance provided on April 24, 2024. The following table summarizes our guidance for the third quarter 2024: The following table summarizes our guidance for the full-year 2024: Conference Call Details The conference call will begin at 2 p.m. Pacific Time ("PT") (21:00 GMT) on July 24, 2024. Interested parties may listen to the call by dialing (888) 330‑2455 (Passcode: 8135305), or if outside North America, by dialing (240) 789‑2717 (Passcode: 8135305). Individuals may access the live teleconference from this webcast. https://events.q4inc.com/attendee/627663058 An audio replay of the conference call and webcast will be available two hours after its completion and will be accessible for 30 days. To hear the replay, interested parties may go to the investor relations section of the ServiceNow website or dial (800) 770‑2030 (Passcode: 8135305), or if outside North America, by dialing (609) 800‑9909 (Passcode: 8135305). Investor Presentation Details An investor presentation providing additional information, including forward-looking guidance, and analysis can be found at https://investors.servicenow.com. Upcoming Investor Conferences ServiceNow today announced that it will attend and have executives present at three upcoming investor conferences. These include: The live webcast will be accessible on the investor relations section of the ServiceNow website at https://investors.servicenow.com and archived on the ServiceNow site for a period of 30 days. Statement Regarding Use of Non-GAAP Financial Measures We use the following non-GAAP financial measures in addition to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. Our presentation of non-GAAP financial measures may not be comparable to similar measures used by other companies. We encourage investors to carefully consider our results under GAAP, as well as our supplemental non-GAAP information and the reconciliation between these presentations, to more fully understand our business. Please see the tables included at the end of this release for the reconciliation of GAAP and non-GAAP results for gross profit, income from operations, net income, net income per share, and free cash flow. Use of Forward-Looking Statements This release contains "forward-looking statements" regarding our performance, including but not limited to statements in the section entitled "Financial Outlook." Forward-looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward-looking statements. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, our results could differ materially from the results expressed or implied by the forward-looking statements we make. Factors that may cause actual results to differ materially from those in any forward-looking statements include, among others, experiencing an actual or perceived cyber-security event or weakness; our ability to comply with evolving privacy laws, data transfer restrictions, and other foreign and domestic standards related to data and the Internet; errors, interruptions, delays or security breaches in or of our service or data centers; our ability to maintain and attract key employees and manage workplace culture; alleged violations of laws and regulations, including those relating to anti-bribery and anti-corruption and those relating to public sector contracting requirements; our ability to compete successfully against existing and new competitors; our ability to predict, prepare for and respond promptly to rapidly evolving technological, market and customer developments; our ability to grow our business, including converting remaining performance obligations into revenue, adding and retaining customers, selling additional subscriptions to existing customers, selling to larger enterprises, government and regulated organizations with complex sales cycles and certification processes, and entering new geographies and markets; our ability to develop and gain customer demand for and acceptance of existing, new and improved products and services; our ability to expand and maintain our partnerships and partner programs, including expected market opportunity from such relationships; global economic conditions; fluctuations in the value of foreign currencies relative to the U.S. Dollar; fluctuations in interest rates; our ability to consummate and realize the benefits of any strategic transactions or acquisitions; the impact of armed conflicts and bank failures on macroeconomic conditions; inflation; and fluctuations and volatility in our stock price. Further information on these and other factors that could affect our financial results are included in our Form 10-K for the year ended December 31, 2023, and in other filings we make with the Securities and Exchange Commission from time to time. We undertake no obligation, and do not intend, to update these forward-looking statements, to review or confirm analysts' expectations, or to provide interim reports or updates on the progress of the current financial quarter. About ServiceNow ServiceNow (NYSE: NOW) is putting AI to work for people. We move with the pace of innovation to help customers transform organizations across every industry while upholding a trustworthy, human centered approach to deploying our products and services at scale. Our AI platform for business transformation connects people, processes, data, and devices to increase productivity and maximize business outcomes. For more information, visit: www.servicenow.com. © 2024 ServiceNow, Inc. All rights reserved. ServiceNow, the ServiceNow logo, Now, and other ServiceNow marks are trademarks and/or registered trademarks of ServiceNow, Inc. in the United States and/or other countries. Other company names, product names, and logos may be trademarks of the respective companies with which they are associated.