NOW • 10-Q • Q2 2022 • Positive

ServiceNow's Enterprise Momentum Accelerates Despite Macro Headwinds, Margins Expand

July 28, 2022 • 1 min read

TL;DR

ServiceNow delivered strong Q2 results with subscription revenues growing 25% YoY to $1.658B, demonstrating resilience in enterprise spending. Operating margins expanded 200bps to 23% through improved operational efficiency and scale benefits. Customer counts with >$1M in ACV increased 22% YoY to 1,463, highlighting successful enterprise penetration. The company maintained full-year guidance despite macro uncertainty, suggesting continued momentum in workflow automation adoption.

Financial Performance Overview: Q2 subscription revenues grew 25% YoY to $1.658B while total revenues reached $1.752B (+24% YoY). Operating margins expanded 200bps to 23% through improved scale and disciplined spending. Current remaining performance obligations (cRPO) grew 21% YoY to $5.75B, indicating strong forward visibility. Free cash flow margins improved 300bps to 29%, demonstrating the inherent leverage in the model. The company maintained its FY22 subscription revenue growth guidance of 23-24% despite FX headwinds.
Strategic Initiatives and Operational Changes: ServiceNow expanded its Now Platform with new AI and automation capabilities, including RPA Hub and Process Optimization. The company deepened its vertical focus with new industry solutions for manufacturing, healthcare, and financial services. Strategic partnerships with Microsoft and Zoom enhanced enterprise integration capabilities. Management highlighted increased focus on multi-product deals and platform adoption, with 85% of new ACV coming from customers buying multiple products.
Market Position and Competitive Dynamics: ServiceNow maintained its leadership position in IT Service Management while expanding into adjacent workflows. Net retention rate remained strong at 125%, reflecting successful land-and-expand motion. The company saw increased competitive wins in HR and Customer Service workflows against legacy vendors. Average deal size increased 15% YoY, suggesting deeper enterprise penetration. No customer represented more than 2% of revenue, indicating healthy diversification.
Operational Efficiency and Profitability: Gross margins improved 100bps to 82% through increased automation and platform efficiency. Sales efficiency metrics strengthened with CAC payback period decreasing to 10 months from 12 months last year. R&D investments remained disciplined at 19% of revenue while delivering increased platform capabilities. The company demonstrated operating leverage with G&A expenses growing slower than revenue at 18% YoY.
Growth Catalysts and Material Risks: Key growth drivers include expansion into new workflows, increased platform adoption, and international penetration. Macro headwinds pose risk to deal cycles and IT spending, though mission-critical nature of offerings provides resilience. FX impact expected to be 4.5% headwind to 2H22 growth. Rising competition in workflow automation space requires continued innovation. Management sees $11B in pipeline opportunities across product portfolio.

Revenue

$1.752B ( YoY, QoQ) with subscription revenue $1.658B

↑ +24%

Gross Margin

(+100bps YoY) driven by platform efficiency

↑ 82%

Free Cash Flow

$514M ( YoY) with margin

↑ +28%

Operating Margin

(+200bps YoY) showing operating leverage

↑ 23%

Growth Indicators

1,463 customers >$1M ACV ( YoY)

↑ +22%

Arr Or Bookings ↑cRPO $5.75B (+21% YoY)

Retention Metrics ↑125% net retention rate

Key Risks

Macro IT spending uncertainty with potential deal delays
FX headwinds impacting reported growth by 4.5% in 2H22
Competitive pressure in workflow automation market
Talent acquisition and retention challenges

Key Opportunities

Workflow expansion beyond IT ($11B pipeline identified)
Vertical solution penetration in manufacturing, healthcare, financial services
International market expansion (<35% current revenue)
AI/ML platform capabilities enhancement

Bottom Line

ServiceNow's Q2 results demonstrate successful execution of platform strategy while maintaining profitability discipline. Key themes of multi-product adoption, vertical expansion, and operational efficiency support sustainable growth trajectory. While macro uncertainty creates near-term visibility challenges, strong pipeline and mission-critical nature of offerings provide resilience. Focus areas for Q3 include international expansion execution, vertical solution traction, and maintaining sales productivity. The company appears well-positioned to navigate current market environment while investing for long-term growth.