NOW • 10-Q • Q3 2022 • Positive

ServiceNow's Enterprise Momentum Accelerates Despite Macro Headwinds with 23% Growth

October 27, 2022 • 1 min read

TL;DR

ServiceNow delivered strong Q3 results with subscription revenues growing 28.5% YoY to $1.74B, demonstrating resilience in enterprise spending. Current remaining performance obligations (cRPO) reached $5.87B, up 21% YoY, indicating robust future growth visibility. Operating margin expanded 200bps to 25% through improved operational leverage, while maintaining 99% renewal rates. The company's platform strategy is gaining traction with 1,530 customers now generating >$1M in ACV, up 22% YoY, sugges

Financial Performance Overview: Q3 subscription revenues hit $1.74B (+28.5% YoY), while total revenue reached $1.83B (+27.5% YoY). Operating margin expanded to 25% from 23% last year through disciplined expense management and improved scale. Free cash flow generation remained strong at $214M despite increased investments in product development. Customer cohort economics continue strengthening with net expansion rate holding above 125%, indicating successful land-and-expand strategy execution.
Strategic Initiatives and Operational Changes: ServiceNow is accelerating its platform evolution beyond ITSM into enterprise workflow automation, evidenced by 60% YoY growth in customers using 3+ products. The company launched major AI/ML capabilities across the Now Platform, including Process Optimization and Automation Engine features. Strategic partnerships with Microsoft and Zoom expanded platform reach, while investments in vertical solutions for healthcare and manufacturing are showing early traction. Management expects these initiatives to drive sustained 25%+ growth.
Market Position and Competitive Dynamics: ServiceNow maintained its leadership position in ITSM while successfully expanding into adjacent markets like Customer Service Management and HR Service Delivery. The company added 85 customers with >$1M in ACV during Q3, reflecting strong enterprise adoption. Competitive win rates remained above 85% as platform breadth and integration capabilities create high switching costs. Geographic expansion shows promise with international revenues now representing 33% of total revenue.
Operational Efficiency and Profitability: Gross margin improved to 82% (+100bps YoY) through increased platform scale and automation. Sales efficiency metrics strengthened with CAC payback period decreasing to 10 months from 12 months last year. R&D investments increased 31% YoY while maintaining operating leverage, reflecting disciplined innovation spending. The company's subscription-based model continues delivering predictable revenues with 98% recurring revenue mix.
Growth Catalysts and Material Risks: Key growth drivers include expansion into new verticals, AI-powered automation capabilities, and increasing platform adoption depth. Macro headwinds pose some risk to deal cycles, though enterprise digital transformation spending remains resilient. Currency headwinds impacted reported growth by approximately 4.5 percentage points. The company maintains strong competitive moats through platform network effects and high switching costs, supporting sustained growth trajectory.

Revenue

$1.83B ( YoY, QoQ) with subscription revenue $1.74B ( YoY)

↑ +27.5%

Gross Margin

(+100bps YoY) driven by platform scale

↑ 82%

Free Cash Flow

$214M with recurring revenue

↑ 98%

Operating Margin

(+200bps YoY) through improved efficiency

↑ 25%

Growth Indicators

1,530 customers >$1M ACV ( YoY)

↑ +22%

Arr Or Bookings ↑cRPO $5.87B (+21% YoY)

Retention Metrics ↑99% renewal rate, >125% net expansion

Key Risks

Macro uncertainty impact on enterprise spending
Currency headwinds affecting reported growth
Competitive pressure in workflow automation market
Talent acquisition and retention challenges

Key Opportunities

Vertical market expansion ($200B+ TAM)
International growth acceleration
AI/ML capability monetization
Platform ecosystem expansion

Bottom Line

ServiceNow's Q3 results demonstrate successful execution of platform strategy while maintaining strong growth and improving profitability. Key metrics including subscription revenue growth, customer expansion, and operating leverage show positive momentum. The company's position as critical enterprise digital transformation partner provides resilience against macro headwinds. Platform adoption depth and high retention rates suggest sustainable growth trajectory. Continued innovation investments while maintaining discipline position the company well for future opportunities.