ServiceNow (NOW) – Earnings Review – April 27, 2024

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ServiceNow (NOW) – Earnings Review – April 27, 2024

ServiceNow is one of the largest enterprise software firms in the world. It automates workflows, tech stacks and projects to augment customer efficiency. For this reason, it calls itself the “leading digital workflow company.” Workflow automation buckets include: service management, operations, asset management, security, customer management, employee management and creator management. These are further grouped into workflow buckets like “customer workflows” and “creative workflows.”

  • Key acronyms here include Information Technology Operations Management (ITOM) and Information Technology Service Management (ITSM). 

All products and services are neatly tied into its “Now Platform.” To bolster automation capabilities, ServiceNow has been hard at work on GenAI innovation. Its Vancouver Platform release got the ball rolling by consolidating all model and app work into an intuitive set of products. It recently built on that debut with a “Washington D.C. Platform” release this year (more on this later) These platforms are a foundation for its GenAI apps and a key example of these apps is “Now Assist AI.”  This is ServiceNow’s GenAI assistant/companion being infused across most of its products. “Plus SKUs” are how ServiceNow bundles all of its GenAI work into subscription packages. It upcharges clients for access to these SKUs as its approach to GenAI monetization has been more aggressive than most others. These Plus SKUs do things like automate customer service, expedite issue resolution, guide workflows and provide more conversational fetching/querying of a firm’s data.


  • Met subscription revenue guidance. Its 24.1% 3-year revenue CAGR compares to 25.0% Q/Q and 25.8% 2 quarters ago.
  • Secured 8 deals worth $5 million or more in average contract value (ACV) vs. 4 deals Y/Y.
  • Slightly beat revenue estimates.
  • Beat 20% Y/Y current remaining performance obligation (cRPO) estimates. cRPO is a key leading indicator for demand.
  • Gross revenue retention (GRR) remained at a strong 98%.

Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases

Margins & Profitability

  • Beat EBIT estimates by 5.0%; beat EBIT margin guidance by 140 bps. Timing of marketing spend, OpEx efficiency gains and revenue outperformance drove the beat.
  • Beat $3.13 EPS estimate by $0.32.
  • Beat FCF estimates by 26%. Note that quarterly free cash flow generation is heavily influenced by in-period collections and is somewhat seasonal. Annual FCF generation is a better thing to track for this specific profit metric.

Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases

Balance Sheet

  • $8.8B in cash, equivalents and investments.
  • $1.5B in debt.
  • Diluted shares grew by 2.0% Y/Y.
  • Basic shares grew by 1.0% Y/Y.

Guidance & Valuation

ServiceNow slightly raised its annual subscription revenue guide. Guidance implies 21.5%-22% Y/Y growth and the raise is despite $17 million in incremental FX headwinds. In Q1 2024, NOW started utilizing an FX hedging program to reduce volatility from currency fluctuations. Still, this doesn’t completely hedge out all risk, hence the added FX headwinds in the new guide. It reiterated 84.5% subscription gross margin, 29% EBIT margin and 31% FCF margin guidance. 

For next quarter, 20.5% Y/Y cRPO guidance needs a bit of added context. ServiceNow had a banner Q3 2023 for U.S. Federal Government wins. These contracts are generally longer in duration, which is a cRPO headwind of about 2 points for next quarter. Its 99% U.S. Federal renewal rate, thus far, bodes very well for these high value customers being retained for the long haul.

NOW trades for 53x 2024 earnings, with earnings expected to grow by 25% Y/Y.

Call & Release

The Platform Play:

For the last year, we’ve talked about how platform plays in enterprise software are winning. Platforms allow companies to consolidate vendors, streamline interdepartmental communication, cut costs and improve outcomes. They’re a powerful force multiplier for efficiency, and ServiceNow is that platform within digital workflows. The results speak for themselves. 15 of its 20 largest deals included 7 or more modules. ITSM and ITOM (already defined) were each included in 16 of its 20 largest deals. Security and Risk was in 11 of its largest 20 deals; creator as well as employee workflows were in half of its 20 largest deals. These customers continue to renew at a gross retention rate near 100% and continue to lean on more of its products to modernize their tech stacks. Need more evidence? NOW enjoyed 50% Y/Y growth in customers paying them $20 million or more annually.

Leadership spoke about 15 years of “decentralizing technology governance.” The 21st century has pushed all departments to invest in information technology – not just for software developers. That meant disparate usage of 3rd party vendors, heightened cybersecurity risk and low quality outcomes. It’s very hard to go back and properly integrate these vendors. It’s a lot easier to use fewer vendors who can do much more for you on their own. That’s the ServiceNow value prop – just like Salesforce in customer resource management (CRM)… just like CrowdStrike in endpoint security.

GenAI Amplifying This Platform Play:

Unsurprisingly, ServiceNow is directly integrating its Now Assist AI companion across all product categories to ensure they work as well together as humanly (or I guess artificially) as possible. The GenAI boom is becoming another avenue for more powerful cross-selling. As explained in the intro, Now Assist AI is driving significant utility and potential for how to improve and automate tedious digital workflows. GenAI was in 7 of its 10 largest contracts as clients looked to “de-risk” their tech stack siloes with ServiceNow’s unifying suite. This is why its Plus SKUs (including its GenAI services) are setting new records for ACV.

“Every business workflow in every enterprise will be engineered with GenAI at its core. We are the single pane of glass that enables end-to-end digital transformation… They can radically simplify the tech stack with us.” – CEO Bill McDermott

  • ServiceNow’s overarching platform, including Now Assist AI for ITSM, is helping Hitachi resolve client issues more expediently while saving millions. More with less… with Service Now.
  • Equinix is using Now Assist AI for Human Resource workflows to raise agent productivity by 30%.

Product News:

ServiceNow launched the “Washington, D.C.” platform this quarter. This is essentially a large batch of GenAI-inspired upgrades to the Now platform. It builds on the progress of the previous Vancouver platform release. It more seamlessly ties together NOW’s product categories to drive better interdepartmental work and communication. It offers the “workflow studio” as a unified workspace to manage productivity across teams. It allows for seamless database refreshes without complex coding; it goes deeper in terms of intelligently automating customer service and order management workflows.

ITOM for AI operations is another newer product to discuss. This, as the name indicates, laces Now Assist AI into ITOM to prioritize, rank and contextualize IT alerts with recommendations for remediation.

ServiceNow debuted StarCoder2 as part of a collaboration with Hugging Face and Nvidia. This provides access to large language models (LLMs) to automate code creation. It also deepened an already tight Nvidia partnership to include new GenAI tools for the telecom space, among other things. Finally, it added its new GenAI tools to a close Microsoft partnership for shared customers.

Going Global:

  • New AoraNow partnership in Japan to accelerate its traction there. This was a banner quarter for new business in that nation.
  • New $500 million investment earmarked for Saudi Arabia, which includes plans for two data centers.
  • Added significantly more business with Novartis during the quarter.
  • “NEOM” in the Middle East is using the Now Platform to “build the first cognitive city.” 
  • Added Australia’s Health Department, Italy’s IT division and a local division of Sao Paulo’s government in Brazil as customers during the quarter.

“In terms of geopolitics, we focus on what we can control. We build great products and services and have a winning culture. That’s why we perform well when others don’t.” – CEO Bill McDermott


Another rock solid quarter from one of the highest quality enterprise software names on the planet. No drama. Just more execution. I see how the stock reacted to the report; I do not think long term shareholders should be concerned with that move in the least. Well done, ServiceNow.

Disclaimer: Third party content is provided for informational purposes only and should not be construed as an offer to sell or a solicitation of an offer to buy or sell any security. Third party content is not intended to serve as a recommendation to buy or sell any security and is not intended to serve as investment advice. Third party content creators are not affiliated with BBAE Holdings LLC, (“BBAE”) Redbridge Securities LLC (“Redbridge Securities”) or BBAE Advisors LLC (“BBAE Advisors”). All investments involve risk, including the possibility of total loss of principal. For additional important information, please click here.

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