Q2 2024 Summary
Published Jan 10, 2025, 5:10 PM UTC- ServiceNow reported robust RPO growth of 31% year-over-year, marking the largest quarterly growth in eight years, driven by increased average contract terms and a significant uptick in multiyear duration contracts.
- Strong early traction with AI offerings, as Now Assist net new ACV doubled quarter-over-quarter, becoming the fastest-growing new product in the company's history.
- Strategic partnerships, notably with Microsoft, are expanding addressable markets and driving significant deals, including a deal over $30 million in net new ACV.
- Internal compliance issues have led to executive resignations, including the President and COO, which could impact leadership stability.
- Future uncertainties in the federal business could lead to headwinds, as federal business headwinds may reoccur depending on the size of federal contracts.
- Growth in RPO and net new ACV may be driven by longer contract durations and early renewals rather than sustainable growth, which could affect future revenue growth rates.
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Strong RPO Growth and Deal Timing
Q: Were any deals pulled into Q2, contributing to strong RPO growth?
A: Gina reported that RPO grew 31% year-over-year, driven by increased average contract terms—the largest since 2018—and TCV from 5-plus year deals more than tripling. There were no significant deal pull-ins, only a slight uptick in early renewals against a prudent guide. -
Guidance and Pipeline Outlook
Q: Is the CRPO guidance for Q3 more conservative due to public sector uncertainty?
A: Gina stated they remain extremely confident in their pipeline, with coverage ratios strong and maturity better than the same time last year. They generated over $1 billion in pipeline following their Knowledge event. They continue to be prudent in their guidance due to some uncertainty in the back half of the year. -
CapEx Increase and Federal Business Impact
Q: What caused the CapEx increase, and is any federal business at risk?
A: Gina explained the CapEx increase is due to quarterly timing, with full-year expectations unchanged. There is no federal business they foresee needing to unwind as a result of the investigation. -
Leadership Changes and Business Continuity
Q: How are you ensuring a smooth leadership transition after CJ's departure?
A: Bill affirmed they have an unbelievable team already in execution mode. Chris is acting as Chief Product Officer, and they will hire a permanent CPO, possibly from inside or outside the company. They are confident they won't miss a step, emphasizing the U.S. public sector remains substantially important. -
AI Driving Strategic Engagements
Q: Is AI leading to larger, more strategic deals impacting RPO growth?
A: Gina confirmed that AI conversations are driving very strategic engagements, increasing average contract terms and leading to longer, more strategic partnerships. -
Encouraging AI Adoption Among Hesitant Customers
Q: How do you convince hesitant customers to adopt your AI solutions?
A: Bill noted that some customers are jaded by other AI offerings. ServiceNow demonstrates use cases, demos, and customer success stories, which convinces them to adopt. Gina added that they are arming partners to extend their go-to-market reach. -
Sales and Marketing Headcount Increase
Q: Is the increase in sales and marketing headcount signaling aggressive hiring?
A: Gina stated they are focused on hiring quota-bearing sales to drive opportunities, aligned with original plans, and will continue to hire to support growth. -
Operational Technology Opportunity
Q: Can you elaborate on the opportunity around operational technology?
A: Bill highlighted strong initial demand for their OT products, with deals closed in biotech, pharma, and automotive industries. They see OT increasing their technology workflow TAM by about $5 billion. -
Pipeline Strength Across Products
Q: Where is the pipeline strength, and are there standout areas?
A: Gina said pipeline growth is strong across the board, including IT, customer, employee, creator workflows, and Now Assist. They are operating on all cylinders with pipeline being generated very much across the board. -
Strategic Partnership with Microsoft
Q: How is the partnership with Microsoft progressing?
A: Bill stated they have a fantastic partnership with Microsoft, including a co-sell motion with their enterprise sales team. They closed seven $1 million-plus Now on Azure deals in Q2, with one over $30 million in net new ACV. -
Data Governance and RaptorDB
Q: Will ServiceNow play directly in data governance with RaptorDB?
A: Bill explained they aim to integrate with any data source using RaptorDB to automate workflows, not compete with data providers. They see this extending their reach and TAM. -
Impact of CrowdStrike Outage
Q: Did the CrowdStrike outage present opportunities for ServiceNow?
A: Bill said there was zero impact on customer systems from the CrowdStrike outage as it relates to ServiceNow. Thanks to their CMDB and service mapping, they had instant visibility, which could lead to more sales opportunities. -
CRPO Headwinds from Public Sector
Q: Did the expected CRPO headwind from the public sector occur, and will it normalize?
A: Gina confirmed the 200 basis points headwind played out as expected in Q2 and will normalize in Q3. Depending on the size of their federal business in Q3, it could impact future quarters. -
Subscription Revenue vs. CRPO Growth
Q: Why is subscription revenue decelerating while CRPO is accelerating?
A: Gina explained that net new ACV has reaccelerated in the first half of '24 versus '23. Expected on-prem mix in Q3 is a bit lower than last year, affecting subscription revenue growth. -
Early Renewals and Q2 Performance
Q: Were there any deals slipping from Q1 to Q2?
A: Gina stated there were no deals slipping from Q1 to Q2. The strong Q2 performance was due to incredible execution and net new ACV outperformance, with a little higher early renewals.