ServiceNow, Inc. Q4 FY2024 earnings call

• Business Fundamentals: Q4 results beat expectations, driving remaining performance obligation to nearly $23 billion, with a platinum balance sheet and strong free cash flow. Subscription revenue growth was 21%, and operating margin was 29.5%.
• AI Leadership: Stunning 150% quarter-over-quarter deal growth in Pro Plus AI offerings. IDC forecasts significant growth in AI software spending. ServiceNow's platform excels in AI agents, workflows, and orchestration. Examples of customer use include Petrobras, DoD agency, etc.
• Partner Ecosystem: Collaborations with AWS, Google Cloud, Visa, Five9, and Microsoft to accelerate AI transformation and deliver solutions.
• Public Sector: Poised for major modernization, with the US government spending $125B annually on IT, and ServiceNow having a strong foothold in government agencies.

In Q4 2024, subscription revenues were $2.866 billion, growing 21% year-over-year in constant currency, exceeding the high end of guidance by 50 basis points. RPO ended the quarter at approximately $22.3 billion, with 26% year-over-year constant currency growth. Current RPO was $10.27 billion, a 22% year-over-year constant currency growth and 50 basis point beat versus guidance. Industry-wise, manufacturing posted over 50% growth, public sector nearly 40%, and transportation/logistics had significant growth. The renewal rate was 98%, with the number of customers generating over $1 million in ACV rising to 2,109, and those with $20 million or more in ACV up 35% year-over-year. There were 170 deals greater than $1 million in net new ACV in Q4, including 19 over $5 million and 3 over $20 million.

• For 2025, subscription revenues are expected between $12.635 billion and $12.675 billion, representing 20% year-over-year growth at the midpoint in constant currency, reflecting an incremental FX headwind. Subscription gross margin is expected at 83.5%, operating margin at 30.5%, and free cash flow margin at 32%.
• For Q1 2025, subscription revenues are expected between $2.995 billion and $3 billion, 20% year-over-year growth at the midpoint in constant currency, with CRPO growth of 20.5% and an operating margin of 30%.

Q: Can you talk a little bit more about your decision to do a hybrid consumption and subscription?

A: Our goal is to combine subscription and consumption pricing. Customers start with a base subscription and can take advantage of agentic AI with a meter-based pricing. It's a Goldilocks model where they get predictability and the hockey stick growth from agentic AI.

Q: How are you assessing Chinese AI models like DeepSeek?

A: We are committed to responsible AI and supporting third-party large language models. Our platform is architected to integrate innovations, and we will look at DeepSeek while focusing on delivering outcomes for customers.

Q: Detail agent strategy in a fragmented landscape?

A: ServiceNow's AI orchestration serves as the control tower. Our platform handles orchestration and governance, with RaptorDB and integrations enabling seamless AI transformation. Customers see the architectural advantage and value in our solution.

Q: Did IT spending improve from September results?

A: IT spending environment has a shift to AI business model innovation. CEOs are opening pocketbooks for AI solutions, and public sector is seeing a renaissance with ServiceNow's solutions.

Q: Feedback on early cohorts of customers for Pro Plus SKU?

A: Early cohorts have Now Assist with consumptive elements. Agentic AI hockey stick of value takes time, but subscription revenue growth continues, with consumption adding to value over time.

Q: Color on go-to-market optimization?

A: ServiceNow is building on strength, with RaptorDB, connectors, and Now Assist. Go-to-market includes sales kickoff meetings using AI to optimize territory management, and consumption pricing adds to the core business model.

Q: Near-term headwinds on seat growth with hybrid pricing?

A: Not foregoing new subscription revenue. Now Assist continues to grow strongly, and agentic AI hockey stick of value will take time but adds to growth, with subscription revenue growth being an 'and' not 'or'.