The News: ServiceNow posted robust results for the third quarter (Q3) of 2023, driven by increases in subscription revenue, the completion of several large deals with average contract value of more than $1 million, and exceptional strength in the federal government sector. The company’s revenue rose to $2.288 billion, up 25% from $1.831 billion during the same period last year, and posted non-generally accepted accounting principles (non-GAAP) net income of $603 million, up 51.5% from $398 million a year ago.
See the full press release on the ServiceNow website.
By the numbers:
- Earnings: $2.92 per share versus the $2.56 per share consensus estimate published by Investing.com
- Revenue: $2.288 billion versus the $2.27 billion consensus estimated published by Investing.com
- Operating income was $676 million and increased 40.8% on a year-over-year (YoY) basis
- Net income was $603 million and increased 51.5%
ServiceNow Delivers Robust Results in Q3 2023, Beating Expectations
Analyst Take: ServiceNow reported robust results in Q3 2023, highlighting increases across all major metrics, including overall revenue, subscription revenue, profit, and earnings per share (EPS), reflecting what the company noted was a strong desire of companies to consolidate onto a single, AI-enabled platform. Company executives also highlighted the traction it is getting within the federal government, with 19 federal deals with average contract value of more than $1 million, including three deals with an annual contract value (ACV) of more than $10 million. Notably, the company’s top deal in the quarter came from the US Air Force, which was the third-largest deal in the company’s history.
CEO Bill McDermott noted on the earnings call with analysts that ServiceNow had 83 deals valued at greater than $1 million in average contract value, up from 69 a year ago, reflecting a 20% increase YoY.
ServiceNow continues to deliver strong growth despite economic uncertainties because companies such as ServiceNow have a strong value proposition whether the market turns up or down. Now just one of a very small handful of enterprise software companies doing $10 billion a year (run-rate). To win significant growth across its platform, ServiceNow is playing off the complexity of the AI revolution and customers’ needs to be more efficient and productive.
In a conversation with Bill McDermott, he shared how customers are realizing up to 30% more productivity from ServiceNow because the platform can simplify the average employee’s daily interaction with more than 13 enterprise applications and enable their work to be done with just one. Although this might be hard to believe, we are seeing this trendline to be true. With the massive growth of enterprise data and AI, simplicity is one of the most sought-after attributes of a strategic technology partner, and ServiceNow is winning against much of the competition in this area. Perhaps the most compelling note of the earnings remarks was the NVIDIA win–with the company expanding its spend on ServiceNow. When arguably the most prolific company in AI is using AI from ServiceNow, it is a clear reflection that the company’s solutions are being met positively by the market.
ServiceNow’s subscription revenue boost of 27% to $2.216 billion in Q3 underscored the success of its Now workflow automation platform and other enterprise software products. Although the company’s latest Vancouver release was available only on the last day of the quarter, McDermott noted that four large deals were signed.
Across its Q3 numbers, ServiceNow impressively continued its trend of achieving robust results and outpacing its guidance.
Here are the ServiceNow Q3 2023 fiscal year (FY) earnings by the numbers:
- Q3 2023 revenue of $2.288 billion, up 25% from $1.831 billion YoY. The revenue figure beat the $2.27 billion consensus estimate expected by analysts at Investing.com.
- Q3 2023 non-GAAP revenue of $2.243 billion, up 22 .5% from $1.929 billion YoY.
- Q3 2023 non-GAAP net income of $603 million, up 51.5% from $398 million YoY.
- Q3 2023 non-GAAP diluted EPS of $2.92, up from $1.96 per share YoY. The EPS price beat analyst consensus estimates of $2.56 per share from analysts at Investing.com.
- Q3 2023 non-GAAP gross profit of $1.875 billion, up 24.5% from $1.509 billion YoY.
- Q3 2023 non-GAAP gross margin of 82%, unchanged YoY.
- Q3 2023 non-GAAP income from operations of $676 million, up 40.8% from $480 million YoY.
- Q3 2023 non-GAAP operating margin of 30%, up from 26% YoY.
ServiceNow also reported current remaining performance obligations (cRPO) contract revenue of $7.43 billion as of September 30, 2023, which is up 27% YoY.
Large Contracts and Deepening Relationships with Customers
Within the quarter, ServiceNow increased its list of customers with more than $1 million in annual sales contract value to 1,789 customers, which is up 17% YoY. According to CFO Gina Mastantuono, ServiceNow’s robust results include successfully closing 83 deals greater than $1 million in net new ACV, with four deals greater than 10 million. Within this list, 18 of the top 20 net new ACV deals included eight or more products.
Convincing customers to incorporate multiple products further binds the customer to the vendor and creates significant revenue opportunities on a move-forward basis. Plus, as ServiceNow continues to incorporate generative AI products within its premium SKU offerings, the company is well positioned to capture additional incremental revenue and generate robust results in subsequent quarters.
Strength from Federal Government, Transportation, and Education
ServiceNow’s robust results also benefited from extremely strong activity within the federal government market, with 19 federal deals with an average contract value of more than $1 million, including three deals with an ACV of more than $10 million. According to CEO McDermott, “Federal agencies are really looking to consolidate contracts, point solutions, the messy middle, and they really want to standardize on a platform with a core set of products that they can grow with. And our gen AI offerings, for example, are really reinforcing our ability to help accelerate their transformation journey, and they’re seeing really tremendous opportunity in gen AI on our platform.”
Outside of the federal government contracts, ServiceNow is also seeing significant activity in other sectors, such as transportation and logistics, each of which has been growing at more than 100% YoY, followed by education, which grew more than 75%, according to CFO Mastantuono.
ServiceNow Revenue Guidance for Q3 2023
ServiceNow is seeing extremely strong demand for its product suite, largely because of the company’s approach to incorporating generative AI into industry- and process-specific workflows. ServiceNow raised its financial guidance for both Q4 2023 and for the full FY 2023. For Q4, the company expects subscription revenue between $2.320 billion and $2.325 billion, with YoY growth of 24.5% to 25%. For the full FY 2023, ServiceNow expects subscription revenue of $8.635 billion to $8.640 billion, with YoY growth of 25.5%, or 25% on a constant-currency basis.
Ultimately, ServiceNow is very well positioned to benefit from a major trend within enterprise software users. Organizations are seeking to consolidate their technology stacks, and standardize on a common platform that allows for more integrated data sharing and activation, along with more efficient use of embedded AI across the entire stack. ServiceNow’s Vancouver release checks this box and combined with the deployment of the company’s domain-specific ServiceNow large language model (LLM), organizations can rest assured that their use of generative AI is relevant to their business needs.
We expect to see ServiceNow will continue to exceed expectations and generate robust results through the next quarter and throughout the fiscal year. The company has a strong AI vision and execution plan, and has been able to successfully translate it to closing deals that deeply bind customers to the ServiceNow product ecosystem.
Disclosure: The Futurum Group is a research and advisory firm that engages or has engaged in research, analysis, and advisory services with many technology companies, including those mentioned in this article. The author does not hold any equity positions with any company mentioned in this article.
Analysis and opinions expressed herein are specific to the analyst individually and data and other information that might have been provided for validation, not those of The Futurum Group as a whole.
Other insights from The Futurum Group:
ServiceNow Vancouver Embeds Generative AI Into Now Assist Workflows
ServiceNow Announces AI Lighthouse Program to Fast-Track GenAI Adoption
ServiceNow Revenue Up in Q2 2023 to $2.15 Billion, Beating Estimates
Author Information
Daniel is the CEO of The Futurum Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise.
From the leading edge of AI to global technology policy, Daniel makes the connections between business, people and tech that are required for companies to benefit most from their technology investments. Daniel is a top 5 globally ranked industry analyst and his ideas are regularly cited or shared in television appearances by CNBC, Bloomberg, Wall Street Journal and hundreds of other sites around the world.
A 7x Best-Selling Author including his most recent book “Human/Machine.” Daniel is also a Forbes and MarketWatch (Dow Jones) contributor.
An MBA and Former Graduate Adjunct Faculty, Daniel is an Austin Texas transplant after 40 years in Chicago. His speaking takes him around the world each year as he shares his vision of the role technology will play in our future.
Keith Kirkpatrick is VP & Research Director, Enterprise Software & Digital Workflows for The Futurum Group. Keith has over 25 years of experience in research, marketing, and consulting-based fields.
He has authored in-depth reports and market forecast studies covering artificial intelligence, biometrics, data analytics, robotics, high performance computing, and quantum computing, with a specific focus on the use of these technologies within large enterprise organizations and SMBs. He has also established strong working relationships with the international technology vendor community and is a frequent speaker at industry conferences and events.
In his career as a financial and technology journalist he has written for national and trade publications, including BusinessWeek, CNBC.com, Investment Dealers’ Digest, The Red Herring, The Communications of the ACM, and Mobile Computing & Communications, among others.
He is a member of the Association of Independent Information Professionals (AIIP).
Keith holds dual Bachelor of Arts degrees in Magazine Journalism and Sociology from Syracuse University.
