ServiceNow’s Q3 2024 Results: AI-Driven Growth and Record Performance Propel the Company Forward

ServiceNow reported its third-quarter financial results for 2024 last week, marking a robust performance driven by strong subscription growth and impressive gains in artificial intelligence (AI) capabilities. The company’s results exceeded expectations on both revenue and earnings fronts, showcasing a remarkable 23% year-over-year growth in subscription revenues and expanded gross margins. This quarter reflects the growing demand for ServiceNow’s generative AI solutions, particularly its Now Assist platform, which continues to solidify the company’s strategic positioning in the enterprise software market.

Key Highlights from ServiceNow’s Q3 2024

ServiceNow’s third-quarter revenue totaled $2.8 billion, representing a 22% increase compared to the same period in 2023. The company’s subscription revenues reached $2.7 billion, exceeding the high end of management’s guidance by 200 basis points. This substantial growth demonstrates the strong demand for business transformation and AI-driven solutions in enterprises globally.

The company’s remaining performance obligations (RPO), a key metric reflecting the future revenue potential from existing contracts, also saw a healthy increase. Total RPO reached $19.5 billion, a 33% year-over-year increase. Notably, the current RPO grew by 23.5%, further highlighting the sustained confidence from ServiceNow’s customer base in its long-term growth potential.

Strong Adoption of AI Solutions

ServiceNow’s AI solutions, particularly Now Assist, have been a pivotal driver of its success in Q3 2024. The platform saw accelerated adoption, with 44 customers contributing more than $1 million in annual contract value (ACV). Six of these deals surpassed $5 million, and two deals exceeded $10 million. The rapid uptake of Now Assist demonstrates that AI-driven automation is a priority for enterprises looking to optimize operations, enhance customer experience, and drive productivity.

The company’s recently launched AI innovations, including the Xanadu release, have been well-received. Xanadu, which includes over 350 new AI capabilities, has positioned ServiceNow as a leader in AI-powered enterprise automation. The platform enables businesses to integrate AI into various workflows, ranging from customer service and IT operations to human resources and security. As AI continues to reshape the enterprise landscape, ServiceNow’s focus on autonomous AI agents that can operate without human prompts positions it at the forefront of the digital transformation wave.

Expanding Enterprise Deals and Federal Growth

ServiceNow’s ability to land large deals is another significant contributor to its financial performance. In Q3 2024, the company closed 96 deals with a net new ACV of over $1 million, reflecting a 14% year-over-year increase. These include 15 deals over $5 million and six deals exceeding $10 million. Furthermore, the number of customers contributing over $20 million in ACV grew by nearly 40%, showcasing the company’s ability to scale within its existing customer base.

ServiceNow’s presence in the U.S. federal sector remains strong, contributing to its robust growth. The company secured five deals exceeding $5 million and two over $20 million in this segment, underscoring the federal government’s trust in ServiceNow’s solutions for mission-critical applications. Industries such as technology, media, telecom, retail, and hospitality also saw impressive growth, with net new ACV in these verticals increasing by over 100% and 80%, respectively.

Margin Expansion and Financial Strength

Improvements in profitability complemented ServiceNow’s strong revenue growth. The company’s non-GAAP operating margin expanded by 160 basis points year-over-year to 31.2%, surpassing management’s guidance by 150 basis points. This margin expansion reflects disciplined spending and increased operational efficiency, which helped offset the ongoing investments in AI and product innovation.

In terms of gross margin, ServiceNow reported an 82.6% non-GAAP gross margin for Q3, up 60 basis points from the previous year. Subscription gross margin rose to 84.9%, further highlighting the scalability and profitability of the company’s subscription-based business model.

Outlook and Investor Sentiment

ServiceNow raised its full-year 2024 guidance, reflecting strong confidence in its growth trajectory. The company now expects subscription revenues for 2024 to range between $10.65 billion and $10.66 billion, representing a 23% year-over-year growth at constant currency. Additionally, the company expects to maintain an operating margin of 29.5% and a free cash flow margin of 31%, further reinforcing its financial strength and stability.

Despite the impressive quarterly performance, some analysts caution that ServiceNow’s valuation remains stretched, making it a potentially risky bet for investors. However, with shares already up 28.5% year-to-date and consistently outperforming the broader technology sector, the company’s solid fundamentals and leadership in AI-driven enterprise automation make it an attractive long-term investment.

Conclusion

ServiceNow’s Q3 2024 results underscore its ability to execute at an elite level in a challenging macroeconomic environment. The company’s focus on AI innovation, expansion into large enterprise deals, and federal government contracts have positioned it for continued growth. With a robust product pipeline and strong financial outlook, ServiceNow is poised to remain a dominant player in the enterprise software landscape as organizations increasingly prioritize AI and digital transformation initiatives.