ServiceNow (NOW) late last month delivered a strong Q4 earnings report, sending the stock in early February to a new record high of $815.32. Since then, the shares have lost some steam, dipping to $730.52 last week before recovering a bit to around $760.
ServiceNow’s Q4 total revenue of $2.437 billion advanced 26%, accelerating from 25% growth in the previous quarter and 23% growth in Q2. Total RPO of $18.0 billion rose 29%, accelerating 300 basis points sequentially. In Q4, the company saw healthy demand across a number of verticals—including energy, utilities, consumer services, education and government.
The December quarter closed out an excellent year for ServiceNow. Total revenue in 2023 gained 24% to $8.971 billion, powered by 26% growth in subscription revenue. Free cash flow totaled $2.72 billion. Last year, large enterprises continued to expand on the platform, while ServiceNow added more than 400 new accounts, bringing the total customer base to 8,100+. The number of deals with more than $1 million of net new annual contract value (ACV) rose 30%.
ServiceNow looks well-positioned to take advantage of what CEO Bill McDermott calls “a new era of business transformation powered by AI.” The company has a diversified portfolio of workflow solutions that increase automation, improve operating efficiencies and drive cost savings. The Vancouver platform update released in September included generative-AI powered Now Assist for IT service management (ITSM), HR, customer service and creator workflows.
Research firm Gartner estimates that total tech spending in 2024 will reach $5 trillion, with this figure expected to expand to $6.5 trillion in three years. By 2027, nearly all of the growth in global IT spending will come from software and IT services, according to Gartner. For the 2023 to 2027 period, the firm estimates that $3 trillion will be spent on AI alone. As one of the largest software vendors, ServiceNow will be a significant beneficiary of this spending tailwind.
Measured by revenue, ServiceNow’s product portfolio has really bulked up in just the past year. Today, ServiceNow has three major workflows (technology, customer service and creator) each with more than $1 billion in total ACV. Two of these workflows (customer service and creator) surpassed the $1-billion mark during the past two quarters. ServiceNow has 11 individual products each with more than $250 million in total ACV.
The company continues to steadily sign up large new customers (that typically go on to add multiple products). Once again in Q4, ServiceNow brought on a record number of large new logos. In fact, large new logo growth accelerated for the fourth consecutive quarter. In Q4, 10 new customers signed deals with $1 million+ in net new ACV, including a $10-million win with a large global financial services firm, representing the largest new logo in ServiceNow’s history.
Demand for new AI-powered solutions is helping to propel growth. In Q4, the Pro Plus SKU (with Now Assist) showed the strongest net new ACV contribution for any new ServiceNow product family for a first full quarter on the market, even topping the original Pro SKU. ServiceNow’s AI technology in Q4 was a significant catalyst for both HR and customer service workflows.
On the ServiceNow Q4 earnings call, McDermott said he met with a total of 186 CEOs over the past six months and came away with the general sense that these leaders “are now getting very involved with the generative AI revolution.” These CEOs realize that there has to be a full architectural adjustment to their environments and the manner in which they manage their data and platforms to actually take advantage of generative AI technology, McDermott said.
“There’s a real appetite to invest in generative AI” and “there’s no price sensitivity around it because the business cases are so unbelievable,” according to McDermott. “If you’re improving productivity 40%, 50%, it just sells itself,” he said. ServiceNow recently added Now Assist to its Virtual Agent bot to drive faster resolutions via conversational AI chat. In Q4, Now Assist helped propel net new ACV growth of 50%+ for the Field Service Management product.
On Wall Street, price targets went up across the board following the Q4 report, with many bulls now clustered in the $840 to $875 range. At the very upper end, Goldman Sachs has a target of $910. The firm called out the improving demand environment, an expanding contribution from generative AI and the fact that ServiceNow has the highest number of ramped sales reps in several years. Macquarie set a target of $900, saying ServiceNow is “lighting the way” in AI.
