Release Date: July 24, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Subscription revenue grew 23% year over year at constant currency, exceeding the high end of guidance by 100 basis points.
- Operating margin was over 27%, nearly 250 basis points above guidance.
- ServiceNow Inc (NOW, Financial) raised its full-year guidance for 2024, reflecting strong performance and confidence in future growth.
- Significant growth in large deals, with 88 deals greater than $1 million in net new ACV, a 26% year-over-year increase.
- Strong adoption of AI products, with Now Assist net new ACV doubling quarter over quarter and becoming the fastest-growing new product in the company's history.
Negative Points
- Leadership changes due to an internal complaint, resulting in the departure of the President and COO, which may cause some short-term uncertainty.
- Potential macroeconomic uncertainties, including upcoming elections, could impact the business environment in the second half of the year.
- Despite strong performance, there is a cautious outlook on early renewals and their impact on future quarters.
- Increased CapEx in Q2, although attributed to timing, could raise concerns about future capital expenditure management.
- Continued need to educate and convince potential customers about the value of AI, as some remain hesitant due to past experiences with less effective AI solutions.
Q & A Highlights
Q: Bill, can you talk a little bit more about what enabled you guys to get these contracts closed in an environment where many CIOs are tentative?
A: William McDermott, CEO: The key is our incredible platform and the difference it makes. CEOs today want new vectors of growth and to simplify their companies through digitization. Our GenAI built into the platform demonstrates undeniable ROI. Our culture is built to deliver value, and our team knows how to describe and execute it effectively.
Q: Gina, was there any unusual activity in terms of deals slipping from Q1 to Q2?
A: Gina Mastantuono, CFO: No, we saw great execution across the board in Q2. The net new ACV outperformance was much more impactful, and there was no significant deal slipping from Q1 to Q2.
Q: Bill, you mentioned some use cases like BT achieving good results with smaller, more efficient functioning AI models. Is this a blueprint for AI going forward?
A: William McDermott, CEO: Yes, our domain-specific models are lightening quick, secure, and inexpensive to run. They provide real-time value across various industries, from improving productivity to enhancing customer satisfaction. This approach is proving highly effective.
Q: Bill, what could be the bigger macro unlocks as we head towards more rate cuts ahead?
A: William McDermott, CEO: Consolidating the past doesn't move the ball forward; innovating the future does. We're scaling the company to be the defining one in the enterprise. The broader macro trends, like investments in AI and hardware, are favorable, and we're well-positioned to capitalize on these opportunities.
Q: What are the key operational steps to ensure a smooth transition following the leadership changes?
A: William McDermott, CEO: We have an incredible team, and we're already in execution mode. Chris Bedi is serving as Interim Chief Product Officer, and we're considering both internal and external candidates for a permanent role. Our business remains in great shape, and we don't intend to miss a beat.
Q: For companies that haven't adopted AI yet, what do you think is causing them to hold out, and how do you get them to join the party?
A: William McDermott, CEO: Many companies are jaded by whitewashed AI stories from pretenders. We need to show them real use cases, demos, and customer success stories. Once they see our roadmap and the productivity gains, they realize they don't want second-mover advantage.
Q: Gina, can you revisit the second half outlook for cRPO, given the election uncertainty and the importance of Q3 for the public sector?
A: Gina Mastantuono, CFO: We remain confident in our pipeline and demand, but we're being prudent in our assumptions due to some uncertainty in the back half of the year. Our pipeline coverage ratios are strong, and we have good visibility into our top-line guide.
Q: Can you provide some color on where you're seeing pipeline strength across the stack?
A: Gina Mastantuono, CFO: The pipeline strength is across the board, including IT, customer, employee, creator, and Now Assist. There's significant excitement and attention around GenAI, driving strong pipeline growth into the back half of the year and beyond.
Q: Bill, can you expand on the opportunity around operational technology (OT) for ServiceNow?
A: William McDermott, CEO: The initial demand for OT has been strong, increasing our technology workflow TAM by about $5 billion. We're seeing traction in various industries, and it's becoming a meaningful part of our portfolio. Our ability to link engineering development with customer needs is a key strength.
Q: Gina, can you comment on the big step-up in CapEx this quarter and the cadence we should expect going forward?
A: Gina Mastantuono, CFO: The step-up in CapEx is more about quarterly timing. Our full-year expectations haven't changed, and the focus is on AI and GenAI. This is already baked into our guidance.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
