ServiceNow, Inc. Q2 FY2024 earnings

ServiceNow reported total revenue of $2.63 billion for the quarter ended June 30, 2024, up 22.2% year over year. Gross profit rose 23.6% to $2.08 billion, and gross margin reached 79.0%, up 0.9 percentage points. Operating income more than doubled, up 105.1% to $240 million, and operating margin expanded 3.7 percentage points to 9.1%. The gap between those results and the non-GAAP numbers stays wide: non-GAAP income from operations was $720 million for a 27% margin, with stock-based compensation doing most of the work in the reconciliation.

Net income moved the other way. It fell 74.9% to $262 million, and diluted EPS fell 75.2% to $1.26. The drop is a tax comparison rather than an operating one, because the prior-year quarter carried a large release of a valuation allowance on deferred tax assets that was not repeated. On a non-GAAP basis, net income was $651 million and diluted EPS was $3.13.

Cash flow tells a mixed story. Operating cash flow was $620 million in the quarter, up 6.9%, while capital expenditures rose 98.5% to $262 million as the company expands its data center footprint. Free cash flow, a non-GAAP measure, was $359 million, a 14% margin, down from $451 million a year earlier. The balance sheet and backlog look sturdier. Deferred revenue (current portion) was $5.62 billion as of June 30, 2024, up 21.7% year over year, and remaining performance obligations were $18.6 billion, up 31.0%. Current RPO, the portion billable within 12 months, was $8.78 billion, up 22%, or about 47% of total RPO.

Demand indicators held up. The company counted 1,988 customers with annual contract value above $1 million, up 15% year over year, and signed 88 transactions over $1 million in net new ACV, up 26%. Now Assist, the GenAI offering, doubled net new ACV quarter over quarter, with 11 deals greater than $1 million. The Knowledge event in May drew more than 20,000 customers and partners, produced more than $1 billion in pipeline, and pipeline created in the first 60 days after the event was up more than 50% year over year. Subscription represented 97% of total revenue. Renewal rate was 98%, down from 99% a year earlier.

Guidance for the third quarter calls for subscription revenue of $2,660 million to $2,665 million, growth of 20% to 20.5%, or 20.5% in constant currency, and a non-GAAP operating margin of 29.5%. For the full year 2024, management guided subscription revenue to $10,575 million to $10,585 million, up 22% year over year, with a non-GAAP operating margin of 29.5% and a free cash flow margin of 31%. Those full-year subscription revenue and operating margin targets were raised from prior guidance. A stronger U.S. dollar adds a $20 million headwind to 2024 subscription revenue. Management reiterated confidence in reaching $15 billion or more of subscription revenue in 2026.

Two risks stand out. The first is governance. An internal investigation, run with outside counsel, found that company policy was violated in the hiring of the former Chief Information Officer of the U.S. Army. That individual left the company, and President and Chief Operating Officer CJ Desai resigned by mutual agreement. ServiceNow says it is cooperating with government entities and believes the incident is isolated, and Chris Bedi, a veteran of nearly a decade, is interim Chief Product Officer. The second is execution against a rich backlog. Turning remaining performance obligations into revenue depends on renewals, long sales cycles in government and regulated markets, and customer budgets, with foreign currency swings, cybersecurity and data residency rules, and competition adding pressure. Revenue outside North America was 37% of the total, so currency and geopolitics carry more weight each year.