Shares of ServiceNow (NOW) have risen 27% since the company in late October delivered strong Q3 results. The stock, up 73% YTD, this week hit a new 52-week high of $678.03. The all-time high of $707.60 from November 2021 is now coming into view.
Broad strength across all major workflows drove outperformance on both the top and bottom lines in ServiceNow’s latest quarter. The company continues to be well-positioned in the current macro environment because it’s providing enterprise customers with solutions that enhance productivity and reduce costs. For 2023, ServiceNow’s latest upwardly revised subscription revenue outlook of $8.635 billion to $8.64 billion represents growth of 25.5%.
In Q3, total revenue advanced 25% to $2.29 billion, above the consensus of $2.27 billion. Subscription revenue of $2.216 billion easily surpassed the high end of the guidance range and grew 27%, accelerating from growth of 25% in the previous quarter. Per-share earnings of $2.92 beat the consensus by 36 cents. Operating margin of 30% gained 500 basis points sequentially and topped the guide by 300 basis points. Free cash flow came in at $196 million (9% margin).
ServiceNow’s core IT service management (ITSM) business remains a key growth driver, representing 60% of net new annual contract value (ACV) in the September quarter. The ITSM unit is always a major contributor to large-deal momentum. In Q3, ServiceNow closed 83 transactions with over $1 million in net new ACV (including four deals over $10 million), up 20% year over year. At least 70% of the top 20 deals in Q3 included an ITSM component.
About 25% of Q3 net new ACV came from customer service management (CSM) & employee (HR) workflows. Within the HR segment, there were seven deals over $1 million, including one deal over $10 million. The Employee Pro SKU saw net new ACV more than double. Creator workflows represented the remaining 15% of Q3 net new ACV contribution. It’s notable that total ACV for creator workflows crossed above $1 billion in the September quarter.
Large new logo growth accelerated for the third consecutive quarter. On the Q3 earnings call, ServiceNow CEO Bill McDermott said the company is focused on landing “the right new customers.” By standardizing on ServiceNow, large enterprises can simplify IT workflows and run their businesses more efficiently. In Q3, 18 of the top 20 net new ACV deals included eight or more products. ServiceNow now has 49 customers with ACV over $20 million, up 58% year over year.
From an industry perspective, U.S. federal in Q3 had its best quarter in company history, with net new ACV up more than 75% year over year. ServiceNow closed 19 federal deals worth more than $1 million, including three over $10 million. The largest Q3 deal was with the U.S. Air Force—it was also ServiceNow’s third-largest deal ever. Other strong verticals: transportation & logistics (net new ACV up 100%+), education (up over 75%), manufacturing and technology.
Launched at the very end of Q3, ServiceNow’s Vancouver release features a number of platform innovations—including generative AI-powered Now Assist to enhance productivity across key ITSM, CSM, HR and creator workflows. Now Assist offers recommended actions, summarizes case information and helps users search more efficiently. Within one day of debuting the Vancouver update, ServiceNow closed four generative AI deals with enterprise customers.
Gartner forecasts that $3 trillion will be spent on AI and generative AI between 2023 and 2027, with generative AI representing 36% of all AI spend. ServiceNow already has more than 300 customers from every major industry in its AI pipeline. Over the coming years, ServiceNow’s large and expanding partner network is expected to contribute a much larger share of net new revenue, especially when it comes to AI business.
Following the strong Q3 report, several Wall Street firms boosted their ServiceNow price targets. Citi lifted its target to $706 from $700, saying the Q3 beat was impressive on a few counts, noting strong U.S. federal deal momentum and healthy growth in large new logos. Baird raised its target to $680 from $650, calling out the solid Q4 subscription revenue growth outlook of 24.5% to 25%. Wells Fargo raised its target to $675 from $650, saying ServiceNow’s resilient profile stands out favorably in the current tight enterprise spending environment.
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