After matching Q1’s growth rate and raising guidance for the second half, ServiceNow CEO Bill McDermott described a riveting future for the company and its customers with “every leader in every department in every business in every industry writing a new playbook for the AI world.”
While optimistic and uplifting oratory are classic McDermott strengths, ServiceNow’s Q2 results create a detailed framework for the optimism he expressed for not just the second half of this year but for the foreseeable future.
In a larger context, ServiceNow’s achievement of matching in Q2 the very strong 25% subscription-revenue growth rate it posted in Q1 reflects a broader surge in customer demand for cloud-powered transformation projects in general and for generative AI services and technologies in particular.
ServiceNow joins SAP, Microsoft, and Google Cloud in sustaining their impressive Q1 growth rates in Q2. That leveling-off follows a year-long trend of declining growth rates across the Cloud Wars Top 10 (with the exception of Oracle) and indicates better times are at hand.
That’s an outlook that McDermott embraced eagerly and unequivocally in last week’s Q2 earnings call as he cited “an unprecedented market environment for enterprise software.”
“We see a sustained demand environment and pipeline for all of our product businesses, geographic regions, and industry verticals,” he said.
“We’re set up very well for a strong second half. And as you’ll hear from [CFO Gina Mastantuono], we are raising our full-year guidance for subscription revenue and operating margin. This is an unprecedented market environment for enterprise software.”
Inside the Numbers, and Outside the Numbers
To give you a wide-ranging view of what is driving McDermott’s optimism, I’ll first share some business highlights, and then some of McDermott’s unique perspectives on what’s happening in the market.
- Subscription revenue grew 25% in constant currency to $2.08 billion, exceeding the high end of the guidance range.
- RPO (remaining performance obligation) ended the quarter at $14.2 billion, up 22.5% in constant currency. Current RPO was $7.2 billion, up 24% in constant currency.
- The transportation and logistics industry business grew more than 80% in Q2, followed by very strong growth in education, business and consumer services, energy and utilities, and government.
- ServiceNow said its “best-in-class renewal rate” was 99%.
- It closed 70 deals greater than $1 million in net new ACV, up 30% from last year’s Q2.
- IT Service Management (ITSM) was in 16 of the top 20 deals with seven deals over $1 million.
- IT Operations Management (ITOM) was in 13 of the top 20, with seven deals over $1 million.
- Together, security and risk were in 17 of the top 20, with eight deals over $1 million.
- Customer workflows were in 16 of the top 20 deals with eight deals over $1 million.
- Employee workflows were in 14 of the top 20 with seven deals over $1 million
- Creator workflows were in 18 of the top 20, with eight deals over $1 million.
- Major customers cited in the earnings call: Barclays, BT, Honda, HP, Petrobras, CSB Bank in India, and Yokohama City in Japan.
McDermott’s Exuberance: Here’s Why
Since ServiceNow has become the third-fastest-growing vendor in the Cloud Wars Top 10 (behind Oracle’s 54% and Google Cloud’s 28%), here are some of the factors shaping McDermott’s bullish outlook.
- Platform position driving broad engagements: “I want to make the point about the significance of the platform. We had 19 of our top 20 deals with five or more products in the deal. And in nine of the deals, we had 10 or more products.”
- CEOs are driving generative AI initiatives: “Generative AI and these LLMs [large language models] are now putting CEOs in a position where they have to come up with a new playbook. So, if you’re talking, for example, to a telco, media, and technology CEO, they’re thinking, how do I reinvent my customer service orientation, the offers that I’m making? How do I manage the network? How do I deliver great service operations?
- “It’s all on the table now”: “A healthcare CEO who’s running probably the most prestigious healthcare institution in the world said, ‘How do I rethink healthcare and completely model something that doesn’t exist today as it relates to patient care? How can I move services from an in-house establishment to somebody’s home?'”
- New wave of generative AI services next month: “The pricing power in a technology company is always representative of its innovation… And we’re seeing the Pro version of the ServiceNow platform grow more than 50% year on year.”
- Partners ecosystem becomes force-multiplier: “I think it’s early days for those technology channel partners. The [solutions integrators] have all adopted us. All have now, and the big ones all have billion-plus practices. One is beyond $5 billion.”
- “This is real; this is happening.” “There is no lack of interest in the C-suite for GenAI. In fact, every one of them knows they have to have a playbook, and they’re extremely focused on this. And most of the really forward-leaning ones are demanding of their C-suite direct reports that they’re using this in their everyday business activities to run a better company, to run a more margin-efficient company, and ultimately a company that takes better care of their people and their customers.
- “So, this is set in stone now. This is real. This is happening.”
Several weeks ago, ServiceNow made the biggest jump in the Cloud Wars Top 10 that a ranked company has ever made, going from #10 to #6. At the time, my sense was that McDermott’s vision was finally being matched by a tangible expansion of a complete and highly differentiated product portfolio plus excellent leadership.
And with another very strong quarter under its belt, ServiceNow is proving that it truly deserved that big jump upward to #6 and that it is fully prepared to take full advantage of what McDermott called “an unprecedented market environment for enterprise software.”
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