Overview of ServiceNow’s Financial Performance

ServiceNow, a leading provider of cloud-based workflow automation solutions, has reported strong financial results for the three and nine months ended September 30, 2024. The company’s total revenues grew by 22% and 23% respectively compared to the same periods in 2023, driven by continued growth in subscription revenues.

Subscription revenues, which make up 97% of total revenues, increased by 23% year-over-year for both the three and nine month periods. This was primarily due to increased purchases by new and existing customers of ServiceNow’s digital workflow and IT operations management (ITOM) products. The company’s digital workflow products, which are priced on a per-user basis, accounted for the majority of subscription revenues.

Professional services and other revenues, which represent the remaining 3% of total revenues, also saw healthy growth of 14% and 13% for the three and nine month periods respectively. This was driven by increased demand for services and training from new and existing customers.

Profitability and Margins

ServiceNow’s gross profit margin remained strong at 79% for both the three and nine month periods, consistent with the prior year. The subscription gross margin was 82%, also unchanged from the prior year, as the company was able to leverage its cloud infrastructure to support the growing customer base without a significant increase in costs.

The professional services and other gross margin improved to -1% for the nine months ended September 30, 2024, compared to -11% in the prior year period. This was due to an increase in revenue combined with a decrease in fixed personnel-related costs, as ServiceNow executed its strategy to shift more professional services work to variable-cost third-party partners.

Operating expenses increased year-over-year, with sales and marketing up 18% and 15%, research and development up 14% and 20%, and general and administrative up 6% and 9% for the three and nine month periods respectively. This was primarily driven by increased headcount and associated personnel-related costs to support the company’s growth. However, as a percentage of revenues, operating expenses declined, demonstrating improved operational leverage.

Overall, ServiceNow’s operating income grew by 73% and 93% for the three and nine month periods, reflecting the company’s ability to drive both top-line growth and margin expansion.

Cash Flow and Balance Sheet

ServiceNow generated strong free cash flow of $2.055 billion for the nine months ended September 30, 2024, up 48% compared to the prior year period. This was driven by the growth in subscription revenues and the company’s ability to manage operating expenses effectively.

The company’s balance sheet remains healthy, with $19.5 billion in remaining performance obligations (RPO) as of September 30, 2024, up 36% year-over-year. Current RPO, which represents the amount of RPO that will be recognized as revenue in the next 12 months, grew 26% to $9.4 billion. This provides good visibility into future revenue.

ServiceNow ended the quarter with $8.2 billion in cash, cash equivalents and short-term investments, up from $6.9 billion at the end of 2023. The company has a strong liquidity position and is well-positioned to fund its growth initiatives and strategic investments.

Geographical Performance

ServiceNow continues to see strong growth across its geographic regions. Revenues from North America, which accounted for 64% of total revenues, grew 22% and 22% for the three and nine month periods respectively. EMEA revenues grew 20% and 22%, while Asia Pacific and other regions grew 27% and 29%.

The company’s property and equipment, net, also grew across all regions, with North America up 24%, EMEA up 37%, and Asia Pacific and other up 21% compared to the end of 2023. This reflects ServiceNow’s ongoing investments to support its global expansion and customer base.

Key Metrics

ServiceNow continues to demonstrate strong execution on its key business metrics:

• Remaining performance obligations (RPO) grew 36% year-over-year to $19.5 billion, providing good visibility into future revenue.
• The number of customers with annual contract value (ACV) greater than $1 million increased 14% to 2,020, up from 1,772 in the prior year period.
• The company maintained a strong renewal rate of 98% for both the three and nine month periods.
• Free cash flow grew 48% year-over-year to $2.055 billion, reflecting the company’s ability to convert its subscription revenues into cash.

These metrics highlight ServiceNow’s ability to acquire new customers, expand within its existing customer base, and generate robust cash flows - all of which are critical to the company’s long-term success.

Outlook and Risks

Looking ahead, ServiceNow expects subscription revenues to continue growing in absolute dollars and remain relatively flat as a percentage of total revenues. The company also anticipates professional services and other revenues to increase in absolute dollars but remain flat as a percentage of total revenues.

While ServiceNow is closely monitoring the ongoing conflicts in Ukraine and Israel/Gaza, as well as broader macroeconomic events like higher interest rates and inflation, the company believes these factors will not have a material impact on its business and financial results in the near term. The company’s cash and investments are well-diversified, and it has not experienced any liquidity or operational issues due to these events.

However, the company does note that adverse determinations related to intellectual property claims or other litigation could prevent it from offering its services and adversely affect its financial condition and results of operations. ServiceNow is currently defending against a patent infringement lawsuit filed by InQuisient Inc., the outcome of which remains uncertain.

Overall, ServiceNow’s strong financial performance, robust key metrics, and prudent risk management position the company well to continue executing on its growth strategy and delivering value to shareholders.