ServiceNow Q2 2024 Earnings Analysis
Dive into $NOW ServiceNow’s Q2 2024 earnings with review of financial performance, key metrics, operating expenses, dilution, customer growth, future outlook
Financial Results
↗️$2,627M rev (+22.2% YoY, +24.2% LQ) beat est by 0.7%
↗️GM* (82.6%, +0.6 PPs YoY)
↗️Operating Margin* (27.4%, +2.1 PPs YoY)
↘️FCF Margin (13.7%, -7.3 PPs YoY)🟡
↗️EPS* $3.13 beat est by 10.2%
*non-GAAP
Subscription Revenue
↗️$2,542.0M Subscription rev (+22.5% YoY)
↗️Subscription GM* (82.1%, +0.4% PPs YoY)
Key Metrics
➡️Renewal Rate 98% (98% LQ)
↗️сRPO $8.78B (+23.1% YoY)🟢
↗️RPO $18.60B (+32.9% YoY)🟢
↗️Transactions $1M+ net new ACV 88 (+26.0% YoY)🟢
Customers
↗️1,988customers $1M+ ACV (+15.0% YoY, +55)
Revenue by Geography
➡️North America $1,655M (+20.0% YoY, 63.0% of Rev)
➡️EMEA $657M (+22.0% YoY, 25.0% of Rev)
↗️APAC & Other $315M (+33.0% YoY, 12.0% of Rev)
Operating expenses
↘️S&M*/Revenue 31.2% (-1.9 PPs YoY)
↗️R&D*/Revenue 18.0% (+0.5 PPs YoY)
↘️G&A*/Revenue 6.6% (0.0 PPs YoY)
Quarterly Performance Highlights
↘️Net New ARR $76M (-62.7% YoY)
↗️CAC* Payback Period 149.2 Months (16.6 LQ)
Dilution
↗️SBC/rev 17%, +0.7 PPs QoQ
↘️Basic shares up 0.8% YoY, -0.1 PPs QoQ🟢
↘️Diluted shares up 1.2% YoY, -0.5 PPs QoQ
Guidance
➡️Q3'24 $2,660.0 - $2,665.0M guide (+20.1% YoY) in line with est
↗️$10,575.0 - $10,585.0M FY guide (+21.9% YoY) raised by 0.1% beat est by 0.4%
Key points from ServiceNow’s Second Quarter 2024 Earnings Call:
Strong Financial Performance:
ServiceNow reported strong financial metrics, with subscription revenue growing 23% year-over-year at constant currency. The company also raised its full-year guidance due to this performance.
Leadership Changes:
The company announced significant leadership changes following an internal investigation related to the hiring of a former U.S. government employee, which led to the departure of the COO, CJ Desai.
Product Innovations
AI Integration and NowAssist: ServiceNow has successfully integrated artificial intelligence across its platforms, with a significant focus on its AI tool, NowAssist. This tool has quickly become the fastest-growing new product in the company’s history, demonstrating substantial early adoption. NowAssist has been used to enhance productivity and efficiency across various functions, such as HR, finance, and IT, with significant customer wins in industries like banking, healthcare, and manufacturing.
Operational Technology (OT): ServiceNow is expanding into operational technology, which has increased their total addressable market by approximately $5 billion. This move is aimed at unifying IT and OT to streamline operations across various industries, enhancing data utilization, and improving process efficiencies.
RaptorDB: ServiceNow introduced RaptorDB, a new database offering designed to manage large-scale data ingestion from multiple sources, significantly enhancing the speed and efficiency of data analytics. This product aims to support enterprises with AI use cases by providing a robust data management tool capable of handling high transactional throughput and improving response times for analytic queries.
Now Platform Enhancements: ServiceNow continues to enhance its Now Platform by integrating AI capabilities, which has helped transform customer experiences by automating workflows and improving operational efficiencies. These enhancements are part of ServiceNow's broader strategy to become the AI platform for business transformation.
Gen AI Strategy: ServiceNow's approach to generative AI involves using domain-specific, multimodal language models that are more accurate and cost-effective compared to larger, generic models.
Customers and Market Expansion:
ServiceNow highlighted strong growth in the U.S. Federal sector, with net new Annual Contract Value (ACV) growing significantly year-over-year.
The company observed robust growth in manufacturing, energy, utilities, healthcare, and life sciences.
There was a notable increase in large deals, including contracts over $1 million in net new ACV, indicating strong enterprise demand for ServiceNow’s offerings.
International Growth
ServiceNow is seeing momentum in Japan with significant wins, including major companies like Nomura and Panasonic Information Systems.
Plans were announced for a ServiceNow UAE cloud hosted on Microsoft Azure to meet the transformation needs of both public and private sector entities in the UAE, highlighting its strategy for geographical expansion.
Strategic Partnerships:
ServiceNow continues to deepen its collaboration with Microsoft, integrating AI capabilities with Azure and co-selling to enterprise customers.
New and expanded agreements with global brands like BT Group and Bell Canada illustrate ServiceNow’s role in driving digital transformation at scale.
Future Outlook:
ServiceNow is bullish on AI driving business transformation, with AI integrated into their products to improve efficiency and productivity across enterprise operations.
With reaccelerated net new ACV, ServiceNow is confident in its journey toward $15 billion in revenue, underpinned by strong demand for its platform and solutions.
Management comments on the earnings call.
Product Innovations
William McDermott, CEO: "NowAssist net new ACV doubled quarter-over-quarter, significantly overachieving our expectations and it became the fastest growing new product in the company's history."
Competitors
William McDermott, CEO: "We set the tone on innovating with domain specific multimodal language models. This approach is more accurate. It doesn't have the hallucinations of the large models from the Internet."
Customers and Market Expansion
William McDermott, CEO: "Our Q2 results prove that we are delivering elite level execution. Subscription revenue grew 23% year-over-year at constant currency, which is 100 basis points above the high end of our guidance."
Gina Mastantuono, CFO: "We closed 88 deals greater than 1 million in net new ACV in the quarter, representing 26% growth year-over-year. This includes six new logos, two of which were G2K customers."
Strategic Partnerships
William McDermott, CEO: "ServiceNow is really helping customers streamline their migrations to Azure. And while Azure exposes us to a much wider spectrum of customers, I think we also help the relevance of Azure because we’re getting big."
Challenges
William McDermott, CEO: "The company received an internal complaint earlier this year regarding the hiring of an individual who had previously been a U.S. government employee...we are further sharpening our hiring policies and procedures as a result of the situation."
Future Outlook
William McDermott, CEO: "This is the largest, most compelling business opportunity in the world. We are bullish on what's ahead. That's why we have not only confirmed, but also raised our full year guidance."