Summary
ServiceNow closed its fiscal 2023 second quarter with total revenues of $2.15 billion, up 22.7% from $1.75 billion a year earlier. Subscription revenues of $2,075 million rose 25%, and the company said the lift came primarily from increased purchases by new and existing customers. Professional services and other revenues moved the other way, down 20% as customers took fewer services and training engagements. Gross profit was $1,679 million for the quarter, up 23.2%, and the gross margin edged to 78.1% from 77.8% in the prior-year quarter.
Profitability expanded sharply. Income from operations reached $117 million, up from $22 million a year earlier, and the operating margin climbed to 5.4% from 1.3%. On a non-GAAP basis, income from operations was $544 million, a 25% operating margin. GAAP net income of $1,044 million compared with $20 million in the prior-year quarter, and diluted earnings per share were $5.08 against $0.10. The bottom line carried a large one-time lift: a $910 million release of a valuation allowance on U.S. federal and state deferred tax assets recorded as a discrete tax benefit, plus $55 million recognized as part of the effective tax rate. Management said $86 million of that release should land in the remaining two quarters of 2023, while a $177 million valuation allowance against California deferred tax assets stays in place. Non-GAAP net income was $486 million, or $2.37 per diluted share.
Cash generation held up. Operating cash flow was $580 million for the quarter, up 33.9% from $433 million, and $1,482 million for the six months ended June 30, 2023, up 14.4%. Capital expenditures fell 12.6% to $132 million in the quarter, but the year-to-date figure of $297 million was up 21.7%. Free cash flow, which the company reports on a non-GAAP basis, was $451 million at a 21% free cash flow margin. Current deferred revenue stood at $4,613 million on June 30, 2023, up 25.1% year over year. Remaining performance obligations were $14.2 billion, up 23.5%, and current RPO was $7.20 billion, up 25%. The renewal rate was 99% for the three months ended June 30, 2023. ServiceNow counted 1,724 customers with annual contract value above $1 million as of June 30, 2023, an 18% increase, and 45 customers with more than $20 million in ACV, a 55% increase. It booked 70 transactions over $1 million in net new ACV during the quarter, up 30%. The board also authorized a share repurchase program of up to $1.5 billion to manage dilution from future equity grants.
Guidance for the third quarter of 2023 puts subscription revenues at $2,185 million to $2,195 million, growth of 25.5% to 26% on a GAAP basis and 23% to 23.5% in constant currency. For the full year 2023, subscription revenue guidance is $8,580 million to $8,600 million, or 24.5% to 25% growth, with a constant-currency growth rate of 24%. Third-quarter non-GAAP operating margin guidance is 27%. Full-year non-GAAP targets are a 26.5% operating margin, an 84% subscription gross margin and a 30% free cash flow margin. Weighted-average diluted shares are guided at 206 million for both the third quarter and the full year.
Product news centered on generative AI. ServiceNow released Generative AI Controller, Now Assist for Search and Now Assist for Virtual Agent, and announced an AI Lighthouse program with NVIDIA and Accenture plus an expanded partnership with KPMG. It closed the acquisition of G2K in July. The company also set out a plan to deploy $1 billion in investment capital by 2026 through ServiceNow Ventures. The filing lists a long set of risks: cybersecurity events, evolving privacy and data transfer rules, competition, the ability to convert remaining performance obligations into revenue, prolonged sales cycles with large enterprises and government buyers, foreign currency swings, inflation, interest rates and the war in Ukraine. The tax benefit that lifted GAAP earnings will not repeat, and the California valuation allowance remains a constraint on future tax benefits.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2023 | Q1 FY2023 | QoQ | Q2 FY2022 | YoY |
|---|---|---|---|---|---|
| Revenue | $2.15B | $2.10B | +2.6% | $1.75B | +22.7% |
| Gross profit | $1.68B | $1.66B | +1.3% | $1.36B | +23.2% |
| Gross margin | 78.1% | 79.1% | -1.0 pp | 77.8% | +0.3 pp |
| Research & development | $521.0M | $492.0M | +5.9% | $444.0M | +17.3% |
| Sales & marketing | $832.0M | $823.0M | +1.1% | $722.0M | +15.2% |
| General & administrative | $209.0M | $199.0M | +5.0% | $175.0M | +19.4% |
| Total operating expenses | $1.56B | $1.51B | +3.2% | $1.34B | +16.5% |
| Operating income (loss) | $117.0M | $144.0M | -18.8% | $22.0M | +431.8% |
| Operating margin | 5.4% | 6.9% | -1.4 pp | 1.3% | +4.2 pp |
| Net income (loss) | $1.04B | $150.0M | +596.0% | $20.0M | +5120.0% |
| Net margin | 48.6% | 7.2% | +41.4 pp | 1.1% | +47.4 pp |
| Diluted EPS | $5.08 | $0.73 | +$4.35 | $0.10 | +$4.98 |
Risks
Laws and regulations governing data privacy, AI and machine learning, and data sovereignty or residency may restrict ServiceNow's ability to optimize its platform and offer services globally. The company began an EU-centric services delivery model in 2022, requiring significant financial and human resources, and may face similar local-solution requests in other territories.
MD&A states rising interest rates, global inflation and bank failures have led to further economic uncertainty, and the Russia-Ukraine conflict could materially impact results if it continues or worsens, despite no material impact to date. The company monitors these conditions and holds cash across several large financial institutions.
For the six months ended June 30, 2023, the general strengthening of the U.S. Dollar relative to major currencies had an unfavorable impact on revenues; reported subscription revenues would have been $43 million higher at prior-year exchange rates. The same currency move favorably impacted cost of revenues, sales and marketing and R&D expenses.
MD&A expects cost of subscription revenues to increase in absolute dollars and subscription gross profit percentage to decrease slightly for 2023 compared to 2022. Professional services and other gross loss percentage increased to 13% for the six months ended June 30, 2023 from 6% for the six months ended June 30, 2022 and is expected to increase slightly for 2023.
SaaS KPIs
All quarters →Non-GAAP operating margin
Renewal rate
Current remaining performance obligations (cRPO)
Remaining performance obligations (RPO)
Summary, forecast, risks and KPIs are extracted from ServiceNow, Inc.'s SEC filings for Q2 FY2023 (10-Q / 10-K and the 8-K earnings release); GAAP figures in the summary are checked against the reported XBRL data. They can contain errors; the filings are authoritative. Processed Oct 2, 2026.