Yahoo Finance ServiceNow, Inc. (NYSE:NOW) Q1 2024 Earnings Call Transcript
ServiceNow, Inc. (NYSE:NOW) Q1 2024 Earnings Call Transcript April 24, 2024
ServiceNow, Inc. beats earnings expectations. Reported EPS is $3.41, expectations were $3.15. ServiceNow, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, everyone, and welcome to the First Quarter 2024 ServiceNow Earnings Conference Call. Today's call is being recorded. I would now like to turn the call over to Darren Yip, Group Vice President of Investor Relations. Please go ahead.
Darren Yip: Good afternoon, and thank you for joining ServiceNow's first quarter 2024 earnings conference call. Joining me are Bill McDermott, our Chairman and Chief Executive Officer; Gina Mastantuono, our Chief Financial Officer; and CJ Desai, our President and Chief Operating Officer. During today's call, we will review our first quarter 2024 results and discuss our guidance for the second quarter and full year 2024. Before we get started, we want to emphasize that the information discussed on this call, including our guidance is based on information as of today and contains forward-looking statements that involve risks, uncertainties and assumptions. We undertake no duty or obligation to update such statements as a result of new information or future events.
Please refer to today's earnings press release and our SEC filings, including our most recent 10-Q and 2023 10-K for factors that may cause actual results to differ materially from our forward-looking statements. We'd also like to point out that we present non-GAAP measures in addition to and not as a substitute for financial measures calculated in accordance with GAAP. Unless otherwise noted, all financial measures and related growth rates we discuss today are non-GAAP except for revenues, remaining performance obligations, or RPO, current RPO and cash and investments. To see the reconciliation between these non-GAAP and GAAP measures, please refer to today's earnings press release and investor presentation, which are both posted on our website at investors.servicenow.com.
A replay of today's call will also be posted on our website. With that, I'll turn the call over to Bill.
Bill McDermott: Thank you very much, Darren, and thank you, everyone, for joining today's call. ServiceNow's first quarter results were outstanding. We once again outperformed our guidance across all top line and profitability metrics. Subscription revenue grew by 24.5% year-over-year in constant currency. That's approximately 50 basis points above the high end of our guidance. CRPO grew 21% year-over-year in constant currency, 100 basis points above our guidance. Operating margin was over 30%, 150 basis points above our guidance. Even as Q1 is not traditionally a large quarter, we had eight deals over $5 million in net new ACV, a 100% increase year-over-year. Four deals were over $10 million, which is a 300% increase year-over-year.
ServiceNow is strengthening its position as the AI platform for business transformation. This is fueling strong performances for each of our key businesses. ITSM and ITOM were each in 16 of the top 20 deals. Security and risk, combined were an 11 of the top 20, customer creator and employee workflows were in 10 of the top 20 deals. GenAI adoption remained on a tear in Q1. Companies are leaning into GenAI as a powerful deflationary force to drive productivity. That's why NNACV for Pro Plus is record-breaking. In fact, it's the fastest selling offering in the company's history. Iconic brands are adopting ServiceNow's Now Assist AI as a standard for their GenAI roadmaps. This quarter, we expanded our long-standing partnership with Microsoft to include new Generative AI capabilities while also integrating Now Assist AI and Copilot into employee experiences, really exciting.
Hitachi Energy is using case summarization with NowAssist for ITSM to resolve cases faster, saving millions. Equinix is the deploying NowAssist AI for HR workflows, aiming to increase agent productivity by 30%. ServiceNow at IBM are combining the power of the Now Platform with Watson X to increase productivity for IBM's employees, customers, and partners. BNY Mellon and ServiceNow are exploring the utilization of AI and other leading technologies and IT service management helping to unlock additional value for the bank and its clients. We look forward to further demonstrating the exceptional Gen AI customer successes and a detailed roadmap at our Financial Analyst Day on May 6th in Las Vegas. From an industry perspective, public sector continues to excel globally.
Major transactions in Q1 included government of Australia's Health Department and the government of Italy's IT division, Sojek. The government of Sao Paulo Motor Vehicle Department created an app on ServiceNow to give customers, in that case, Citizens, a fast, transparent digital experience that handles requests in minutes. Our global footprint is booming. We're seeing a vast expansion in our most important geographies. This quarter, our Japan team signed the largest NNHCV deal in its history. Novartis in Switzerland is implementing ServiceNow Gen AI technology to transform the business into one of the most innovative companies in therapeutic medicine. NEOM is harnessing ServiceNow's single data model along with other partners to scale its IT services across the Middle East region, while seeking to create the first cognitive city where data-driven intelligence meets urban everyday needs.
Suzuki, Tokyo Gas iNet, ANA systems are all top deals signed in Q1. And this is just scratching the surface of what we achieved this quarter. There's a lot of guesswork out there right now about the geopolitics and economic policies among other things. ServiceNow's philosophy is simple. We focus on the things we can control, building great products, delivering great service for our customers, and forging a winning culture, where people can do the best work of their careers. And that's why we perform well when some others don't. It's also why our guidance, as you'll hear from Gina, remains ever strong. Let's talk about the demand environment for enterprise software. AI is not simply a fast maturing technology. AI is a catalyst for business transformation.
When I speak to CEOs all over the world, they recognize this is a change moment. Over the past 15 years, enterprise has experienced a massive decentralization of technology governance. As every department became an IT buyer, the result was too many systems, too many apps, low data quality, and high vulnerability to cybersecurity risk. And here's the key. Those decisions have been made. So, even as CEOs want to consolidate on to strategic platforms for the long-term, they also don't want to delay the potential of net new innovation in the short-term. They want to derisk the past while getting immediate business value from AI. Process optimization is the number one Gen AI use case in the global economy today. This is why ServiceNow's strategic relevance as the AI platform for business transformation has never been higher.
Every business workflow in every enterprise will be engineered with Gen AI at its core. We are the single pane of glass that enables end-to-end digital transformation. At ServiceNow, we pride ourselves on being the living embodiment of an AI run company through our now on Now strategy. Every week that passes the impact of our own Now on Now AI deployments continues to grow. Gen AI depletion rates have doubled for both our employees and customers, and they are improving each and every month. So for engineers are accepting 48% of Texaco generation. These are meaningful productivity improvements and it's only the beginning. That's why IDC estimates an $11 trillion impact from AI in the next three years. It's also why businesses will spend more than $0.5 trillion on Gen AI in 2027, according to IDC.
So contrary to some opinions out there, we are witnessing the biggest enterprise software market opportunity in a generation. Business leaders are waking up to the fact that they have a fresh choice now. They can radically simplify the tech stack. We are entering a new frontier. We are in a race to put AI to work for people, and that's a ray ServiceNow intends to win for our customers. There's a lot happening at ServiceNow that only heightens our optimism for the remainder of this year and beyond. Our recent Washington, D.C. platform release included very exciting new features for our customers. Now Assist AI for ITOM AIOPs supercharges ServiceNow's market-leading solution, applying generative AI to speed up issue resolution. Sales and order management unites the sales order life cycles across the front, middle and back office teams on the ServiceNow platform.
ServiceNow is also staying at the forefront of building innovative enterprise Gen AI applications. As one example, Now Assist AI for telecommunications service management, what we call TSM, which also uses NVIDIA AI, will boost agent productivity and build on our great partnership. It's also worth noting the ServiceNow research team is stacked with world-renowned AI experts helping our customers stay on the cutting edge. We're expanding our ecosystem capacity to meet growing customer demand. One example is our investment in platformation, a global IT consultancy and leading ServiceNow implementation partner to enhance expertise and generative AI-enabled technology. And anyone who'd like to get the full story, I warmly invite you to join us for Knowledge 2024 in Las Vegas on May 7.
In closing, I'll end how I began, the company is in a market-leading position. We have the product recognition from the industry analysts. All of them were showing up on all of the most admired company lists and we're moving up the ranks every year. Those things are always encouraging, and we're proud of it all. But the biggest indication I can give you is qualitative. It's how our team feels about what we're doing together. This culture is different. It's rooted in ServiceNow as early as days as a customer-obsessed company. We are ever-hungry, ever-humble. So when I'm told that over 1 million people applied to join us last year, I'm not surprised. When you have a galvanizing ambition to become the defining enterprise software company in the 21st century, people want to be a part of that.
They recognize this is about more than technology. This is about helping people to know more, care more and do more. We'll continue on this mission in Q2, I'd like to thank all of you for the trust that you've invested in ServiceNow. We're going to keep working hard for you, and we're going to keep striving to honor our brand promise. The world works with ServiceNow. I'll now hand things over to our outstanding CFO, Gina Mastantuono. Gina, over to you.
Gina Mastantuono: Thank you, Bill. Q1 set a strong precedent for the year ahead. Building on the momentum from Q4, our team delivered another exceptional outperformance. We surpassed all of our top line and profitability guidance metrics for the quarter. With Gen AI conversations serving as a digital transformation catalyst, we see that momentum carrying into Q2. Turning to our results. In Q1, subscription revenues were $2.523 billion, growing 24.5% year-over-year in constant currency, exceeding the high end of our guidance range by approximately 50 basis points. RPO ended the quarter at approximately $17.7 billion, representing 27% year-over-year constant currency growth. We continue to see average contract terms increase year-over-year as the strategic importance of the Now Platform has driven longer duration deals.
Current RPO was $8.45 billion, representing 21% year-over-year constant currency growth, a 100 basis point beat versus our guidance. From an industry perspective, technology, media and telecom was extremely robust, growing net new ACV over 100% year-over-year. Education had a fantastic quarter, growing nearly 50% year-over-year. Transportation and Logistics, Business and Consumer Services and Retail and Hospitality also saw strength. Our renewal rate was a best-in-class 98% as the Now Platform remains a strategic imperative for our customers' operations. We closed 59 deals greater than $1 million in net new ACV in the quarter with four deals greater than $10 million, representing 300% year-over-year growth. Our focus on selling a comprehensive platform continue to drive more multi-product deals as 15 of our top 20 deals included seven or more products.
We now have 1,933 customers paying us over $1 million in ACV. In addition, the number of customers paying us $20 million or more grew over 50% year-over-year. In Q1, our Gen AI products continue to see very healthy adoption. As Bill mentioned, our Pro Plus net new ACV to-date continued the trend ahead of any new product family launched for the comparable period. Our Gen AI products were in seven of our top 10 deals, and we closed seven deals over $1 million in ACV in the quarter. We had wins at a second Wall Street Bank, a leading cybersecurity firm and many more, including a significant win for ITOM Pro Plus, which just launched in March. Turning to profitability. Non-GAAP operating margin was over 30%, approximately 150 basis points above our guidance, driven by the timing of marketing spend, OpEx efficiencies and our top line outperformance.
Our free cash flow margin was 47%, up 12 points year-over-year. We ended the quarter with a robust balance sheet, including $8.8 billion in cash and investments. In Q1, we bought back 225,000 shares as part of our share repurchase program with the primary objective of managing the impact of dilution. As of the end of the quarter, we have approximately $787 million remaining of the original $1.5 billion authorization. Together, these results continue to demonstrate our ability to drive a strong balance of world-class growth, profitability and shareholder value. Moving to our guidance. In Q1, we initiated a program to hedge a portion of our foreign currency denominated revenues. The initiative is expected to lessen the impact of recent movements in the euro and pound, but the incremental strengthening of the US dollar has still resulted in FX headwinds compared to our previous guidance.
Given our Q1 outperformance, we are raising our 2024 top line outlook to more than offset those moves. For 2024, we are raising our subscription revenues by $20 million at the midpoint of the range to more than offset an incremental $17 million headwind from FX. This raises a net increase of $3 million on a narrowed range of $10.560 billion to $10.575 billion, representing 21.5% to 22% year-over-year growth or 21.5% on a constant currency basis. We continue to expect subscription gross margin of 84.5%, operating margin of 29% and free cash flow margin of 31%. Finally, we expect GAAP diluted weighted average outstanding shares of $208 million. For Q2, we expect subscription revenues between $2.525 billion and $2.530 billion, representing 21.5% to 22% year-over-year growth or 22% on a constant currency basis.
We expect CRPO growth of 20.5%, both on a reported and constant currency basis. We expect an operating margin of 25%. Finally, we expect 208 million GAAP diluted weighted average outstanding shares for the quarter. In summary, Q1 was a great start to what we expect to be another tremendous year. Organizations are under more pressure than ever to maximize the benefits of the technology investments. In this environment, ServiceNow's traction as the intelligent platform for end-to-end digital transformation continues to intensify. GenAI is only as powerful as the platform is built on. The Now platform gives us deep insights with the remarkable ability to tailor AI outputs to the specific needs of our customers. Business users need AI to power actions across the enterprise.
Our workflows are designed to do just that, deliver complete solutions to supercharge experiences, creating extraordinary value. You'll hear more about these experiences, our strategy and long-term opportunities at our upcoming Investor Day on May 6, which will be webcast on our Investor Relations website. Finally, before moving on to Q&A, I want to thank all of our employees worldwide for helping make ServiceNow one of the Fortune 100 Best Places to Work yet again in 2024. ServiceNow's greatest asset is its people, and you all continue to make us, ServiceNow strong. Bill and I couldn't be prouder of this incredible team. With that, I'll open it up for Q&A.
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