Digital workflow vendor ServiceNow delivered an upbeat quarter, beating its guidance for both the company’s revenue growth and operating margin. However, CEO Bill McDermott slightly softened ServiceNow’s annual subscription revenue forecast as macro headwinds will continue to play out throughout 2022.
That said, McDermott is keen to stress that these are short-term adjustments and looking to the future, the company’s ambitions remain firm. He said:
Through 2022, our confidence in our midterm aspirations, which we raised earlier this year to $11 billion plus by 2024 and $16 billion plus by 2026, is solid. In other words, ServiceNow’s fundamentals are unshakable.
The key numbers of Q2 2022 are:
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Subscription revenues of $1.658 billion, representing 25% year-over-year growth, 29.5% adjusted for constant currency
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Total revenues of $1.752 billion, representing 24% year-over-year growth, 29.5% adjusted for constant currency
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Current outstanding performance obligations of $5.75 billion in Q2 2022, representing 21% year-over-year growth, 27% adjusted for constant currency
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ServiceNow now has 100 customers paying over $10 million in annual contract value by Q2 2022, representing more than 50% year-over-year growth
The company said annual subscription revenue would rise 24% to a midpoint of $6.92 billion, down from the 26% growth to $7.03 billion it forecast in April. The company said currency fluctuations were the biggest factor, costing ServiceNow $220 million in 2022 revenue.
Commenting on this quarter’s results, McDermott said:
Like other leading technology companies that we manage through the current macro…we’ve just come back to the outlook that we originally set out for you in January of this year on a constant currency basis.
Unlike others, while the currency impact on our margin also applies, ServiceNow will maintain our full-year margin guidance of 25%. We will offset the impact through disciplined cost management, as we run more efficiently on the ServiceNow platform.
Gina Mastantuono, Chief Financial Officer of ServiceNow, pointed to the company’s 99% renewal rate as evidence of the company’s resilience and said it ended Q2 with 1,463 customers paying over $1 million in ACV, up 22% year-over-year. over-year. However, as well as currency headwinds, the company is also experiencing longer deal cycles. Mastantuono explained:
While our business remains robust, we expect the extended deal cycles we experienced in the last two weeks of June to continue for the remainder of the year. We’ve taken that into account in our updated guide.
We have a well-diversified customer base with over 80% of our business in large global enterprises. As a result, we expect to maintain our best-in-class renewal rates. More than 85% of our new business comes from existing customers, driving our steady net expansion and predictable growth. We also continue to see a very strong pipeline at our recent Knowledge event, which some of you attended in Q2, we drove a 40% increase in pipeline year over year.
We are confident that we are appropriate in considering macro trends as we see them now and will continue to be transparent as the rest of the year unfolds.
Demand for digital is strong
Taking a bigger picture view of what is happening in the market, McDermott emphasize that while there is volatility in some areas throughout the economy, the demand from consumers for digital is constant. This gives the company confidence in its ambitions beyond this year. McDermott said:
Secular digital transformation tailwinds are stronger than macro crosswinds. ServiceNow creates an unmatched combination of organic growth and profitability at scale. We believe there is a generational value creation opportunity here at every level of our company. Therefore, we are hiring, expanding and investing for the future. Growth companies don’t get much stronger than this one.
Let me offer some additional colors to emphasize the state of the business. Enterprise software is an all-time industry. Some outdoor businesses prioritize improved productivity over lower costs. Others are changing business models to fuel growth. They all know very well that digital technology is the only answer. That’s why the demand environment for software is consistent and strong.
And all our businesses are performing well. In Q2, ITSM was in 12 of the top 20 deals with seven deals over $1 million. ITOM is in 13 of the top 20 with nine deals over $1 million. Customer Workflows are 14 out of the top 20. Employee Workflows 13 out of the top 20. And Creator Workflows are an impressive 20 out of the top 20.
In the end, we face the truth, but do not follow it. Our Q2 beat on the top line and the bottom line reinforces who we are. The imperative of digital transformation will not move to the sidelines. We will continue full speed ahead on our growth journey to become the defining enterprise software company of the 21st century. We are determined because now the world works with ServiceNow.
I take it
The markets don’t react well to companies softening their guidance, but as I’ve said, thinking quarter to quarter does not make for a successful strategy. What is important is looking at long-term indicators. Deal size increases. Existing customers are expanding their footprint. Strong renewal rate. By these metrics, ServiceNow is well positioned to address any short-term disruption. And McDermott is right, while some companies may be cautious this year, they also know that cutting back on digital and technology investments is not the answer.
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