ServiceNow president Desai: generative AI technology strong out of the gate

ServiceNow’s generative AI-enabled technologies are expected to be a big growth driver for the vendor as results are released

Strong execution during a time of economic pressure and a bullish performance in the US federal market gave ServiceNow a big financial boost for its third fiscal quarter 2023.

The vendor reported a 25 per cent year-over-year growth in total revenues to $2.3bn. Subscription revenues also grew 27 per cent to $2.2bn in Q3 2023.

That boost is likely to continue with the help of the company's burgeoning business with its newly introduced generative AI technologies, said C.J. Desai, president and COO for the California-based developer of digital workflow technologies.

ServiceNow in late September introduced its new Now Platform Vancouver release, and on the last day of its third fiscal quarter 2023, launched the release's generative AI products, Desai told CRN.

"And we were still able to get very strategic customers to buy those products even though we had one day left in the quarter based on the work we have done with generative AI on the ServiceNow platform," he said.

Within that Vancouver release, ServiceNow's IT service management, customer service management and HR technology are all generative AI-enabled, while Creator Plus, aimed at developers on the ServiceNow platform, makes it possible to leverage generative AI to write code, Desai said.

Looking ahead, ServiceNow plans to add new generative AI capabilities in November, with more to follow two months after that, Desai said.

"We are constantly releasing," he said.

"It's a such a fast-moving space. We first released this in production [in September], and then we will have, for lack of a better term, a ‘rolling thunder' of releases."

For the third fiscal quarter 2023, rising interest rates and economic pressures across different regions of the world didn't stop ServiceNow's team from delivering very strong results that beat consensus expectations, Desai said.

"It's a pretty big deal to us at ServiceNow in how we serve our shareholders because 27 per cent growth on an $8.8bn run rate - nobody else is doing that," he said.

"And our profit margins were also very high. We delivered higher operating margin than consensus. So, we are growing, but growing profitably."

ServiceNow also saw significant growth in its US federal business, Desai said.

"Our platform was almost designed for state, local and federal governments because it can do multiple use cases," he said.

"We are not a CRM system, or we are not an ERP system. We have a system that allows you to do whatever you want to do, whatever type of work you want to digitise or automate, whether you're a federal government, state government or city."

Desai said that over 90 per cent of ServiceNow implementations are done by channel partners.

"That ecosystem of ServiceNow partners continues to grow as ServiceNow continues to grow," he said.

"So, as we sell more, our partners 90 per cent-plus of the time do the implementations, which is correct for our ecosystem. And whether it's a local partner, regional partner or a global system integrator, it is amazing."

ServiceNow also sells products and services through MSPs, and that business continues to do well, Desai said.

However, he declined to break out specific numbers related to the different channel partner types.

Desai declined to provide guidance for fiscal 2024.

But when asked about whether macroeconomic factors will play a role in the company's business in the coming year, he said ServiceNow feels cautiously optimistic about demand for its platform.

"In terms of business climate, I would say the overall business climate is still cautious," he said.

"Is the IT budget increasing for 2024 for most of the companies we serve? The answer is yes, in the upper single digits based on various sources.

"When I speak to the CIOs, CTOs and others, yes, IT spending is increasing. We are seeing that America continues to be fairly resilient in terms of how we are seeing the business.

"We are also seeing good traction now with Japan or Central Europe. Those are some of the economies I'm calling out on purpose because, given what ServiceNow does, we see traction.

"I cannot speak for other people or their technology, but for ServiceNow Europe, southern Europe, Central Europe, Japan, South Asia, the Americas, the IT budgets are increasing and our platform seems to be resonating."

ServiceNow Wednesday also unveiled an expansion of its alliance with Deloitte to integrate Now Assist generative AI capabilities with Deloitte's next-generation managed services.

In addition, ServiceNow said it is partnering with Bangalore, India -based ANSR to establish ServiceNow Centres of Excellence in over 60 of ANSR's global capability centres to train 3,500 employees across India on the ServiceNow platform.

Results low-down

For its third fiscal quarter 2023, however, ServiceNow also reported professional services and other revenue of $72m, down from $89m the previous quarter.

Financial analysts had been expecting subscription revenue of between $2.185bn and $2.195bn, according to Zacks Equity Research.

ServiceNow also reported GAAP net income of $242m, or $1.17 per share, up significantly from last year's $80m, or 39 cents per share.

On a non-GAAP basis, net income was reported as $603m, or $2.92 per share, up from last year's $398m, or $1.96 per share.

Looking ahead, ServiceNow expects fourth fiscal quarter 2023 subscription revenue of $2.320bn to $2.325bn, which would be up 24.5 per cent to 25.0 per cent over last year.

For is full fiscal year 2023, ServiceNow anticipates subscription revenue to be $8.635bn to $8.640bn, or up about 25.5 percent over fiscal 2022.