ServiceNow is teaming up with Nvidia and Accenture on a new program called "AI Lighthouse" that will help companies develop and adopt their generative AI initiatives. In an interview with Yahoo Finance Live, ServiceNow CEO Bill McDermott says the program will help companies build "transformative" generative AI systems. As for its impact on ServiceNow, McDermott says its unclear exactly when the company will see the financial benefit from "AI Lighthouse" but that it is building a "bull-case" for the company.

Video Transcript

BRAD SMITH: Shares of ServiceNow, they are also on the move this morning as the enterprise software company reported second quarter earnings after the bell yesterday. Beating analysts' expectations on the top and bottom line, revenue came in at $2.15 billion-- street was expecting $2.13 billion. That's a beat. And diluted earnings per share, that was $2.37 versus the $2.05 expected. The company also announcing a new strategic partnership with NVIDIA and Accenture.

Joining us now to help us break all of this down, we've got Bill McDermott, ServiceNow CEO. Bill, always a pleasure to speak with you and get some of the insights from the quarter, perhaps as well some of the outlook. Coming off of a partnership like this with NVIDIA, how did that come to be and what are you expecting that to do in terms of delivering some future type of financial performance to the business as well?

BILL MCDERMOTT: Well, thank you for having me, Brad. You know, we announced a ServiceNow AI Lighthouse customer program, where we're co-developing with NVIDIA-- so NVIDIA on the generative AI tech stack, ServiceNow on the workflow automation, and Accenture on the services and implementation for the most significant brands in the world to really take AI and transform their business.

And if you think about each of these industries, they all have something a little bit different about them. Insurance, for example, might be looking to use AI-based decision making to reinvent the underwriting process, or you could have manufacturing, where they're trying to automate the shop floor or provider onboarding to reinvent the supply chains.

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And then, you know, just think about health care and big pharma, obviously, everybody wants to give the patient a better experience. And you have to put natural language knowledge support in front of the clinicians so they can care for the patient, instead of keyboarding stuff into a computer. So all these industries are going to be completely reinvented with the power of generative AI, and ServiceNow is the first mover and enterprise software to bring a platform to market that does just that.

JULIE HYMAN: So you mentioned a couple of examples of how this would work, Bill. Hey, it's Julie. It's good to see you.

- Hi Julie.

- Hi. How quickly do you expect this to be implemented? Talk to me about what you're hearing from customers, and how soon they want this product.

- Yeah. It's a great question, Julie, because we, as you know, have had AI in the ServiceNow platform for years now. We were the first to do that in an enterprise software platform for the enterprise. So whatever the function is, whether IT, or you're taking better care of your employees, or caring for your customers, or even taking your innovative developers and giving them the opportunity to text to code, or text to a workflow, or text to new application development, we've been doing that.

And that business where we have AI-infused innovation in our platform is growing well over 50% on a year over year basis. And that is in our current results and our current forecast. The big upside, though, are these transformative gen AI use cases, where we're specifically innovating on the ServiceNow platform to do very big and transformational things. Is that going to be 2, 3, or 4 months? Will we see those results more in 2024 than 2023? That still remains to be seen.

But what I can tell you is there's 125 of the world's largest brands and multiple industries lined up to participate in this program because the CEOs and the c-suite executives want to go forward on a gen AI basis. And what's happening and why they're so excited is the enterprise data is their data. So you don't have the hallucination challenges of the open internet, and we're really working with their data to do highly transformative things. So I think it's going to happen pretty quick, and that's why we have such a bull case in mind for ServiceNow going forward.

- I mean, it is interesting, though. As you said that you didn't incorporate this into the forecast as of yet, are you panic at all-- I know we've talked to you about this before-- about the spending cycle on the part of clients? We're going into a period where, I mean, I know we've been predicting an economic slowdown for a while now that hasn't quite materialized, but what are you seeing from your perspective and why didn't you sort of bake this more into your forecast?

- Well, there's a couple of things. One if you think about the IT budgeting cycle for major corporations, they tend to do it on an annual basis. So big innovation like this is now coming in essentially the third quarter of an annual budget cycle. So I think you're going to see many more companies plan for large transformative gen AI projects to take place in 2024.

Having said that, the business case for these gen AI opportunities in terms of taking cost out, bringing productivity in, or going after growth are so significant that to me it's going to be hard for companies to refuse them, or even delay them, but that still remains to be seen. And that's why we gave a beat and raise quarter, as has become a habit here-- knock on wood-- and also a very strong guide where we up the guidance, but we didn't completely implement all of the expectations for this bull case on gen AI until it actually begins happening. And I think that's just prudent guidance.

- How do you ensure that generative AI doesn't cannibalize other parts of the business going forward too?

- Wonderful-- wonderful point. So Brad, here's how that one works. We have pro pricing built into our platform for all the existing AI cases we already have. You have to have the Pro version of the ServiceNow platform, and the generative AI transformational results and solutions will be something we're calling Pro Plus, and they will be additive to the pricing methodology for ServiceNow because, again, the benefit that the customer will get is so big and the benefit that ServiceNow will get is a fraction of the value that we add to the customer relationship.

But it is an uplift in the pricing structure of the company, and that is why the flywheel for innovation at ServiceNow is so important to us because the customer gets the big benefit, we get a fraction of it. But obviously, that helps our company continue to be the defining enterprise software company of the 21st century.

- Bill, looking at some of the customer data from the quarter, customers with more than $1 million in annual contract value up 18%, although that is a bit of a slowdown. Going forward with a lot of the expansion and abilities of some of these products you're talking about, do you expect your growth to come from a higher number of customers or existing customers spending more with ServiceNow?

- We're getting a lot of net new logos, Julie, where companies that were not initiated on the ServiceNow brand have heard about ServiceNow. And they haven't heard anything but good things about ServiceNow because all of our customers love us. And that's very unique. You don't hear that very often about enterprise software companies. If you look at our top 20 deals in the quarter, 19 of those top 20 deals had 5 or more products in the bill of materials that the customer signed up for.

We had 9 customers sign up for 10 or more products. And our deals that are greater than $20 million in average or annual contract value are up 55% on a year over year basis. So what you're seeing is an insatiable appetite for the ServiceNow platform for new customers, and then the existing customers we have, we have the highest retention rate in the enterprise software industry at 99%-plus. And we have a very aggressive customer base that generally grows 25%, 30% on a year over year basis by expanding their use of the ServiceNow platform.

And what you see with ServiceNow is an intelligent platform for end-to-end digital transformation across the entire enterprise. We reinvent IT. We give you a better employee experience. We take care of your customer and how you service your customer in the front, mid, and back office. And ultimately, we galvanize the innovation-- your engineers and innovators are able to deliver for your customers. And that really is the perfect recipe for a growth company in software.

- Bill, just lastly here, you perhaps for our viewers, a gauge of how confident businesses and their CEOs, their leaders, and even kind of their kind of cost structures are right now is to know how long some of these deals are being netted for because when businesses are confident, they're coming to you like-- they're coming to ServiceNow and saying, hey, we're comfortable in having an extended term deal. Are you seeing any moderation in the length or the extent of deals that you're seeing come through right now?

- And if anything, our customers want to do bigger deals over longer periods of time because they really want to be locked and loaded on the roadmap of ServiceNow. So they get a peek behind the curtain on where we're taking the innovation cycle so they can plan for it. And I think that's a super, super encouraging sign. I was the guy that said, there's no chance in 2023 that IT budgets would be cut. That's a fact.

I'm also the guy that's saying the IT strategy has become the business strategy. And I do expect a large tailwind of investment going into the generative AI area, and I'm unaware of a single CEO that I have met that hasn't said full speed ahead on gen AI, and I expect my full management team based on their position in the company to adopt use cases that are AI-driven that can take cost out Improve productivity, or get me to a higher rate of growth.

Every C-level executive is on this one, which is why I personally believe this is an iPhone moment for enterprise software. And if you have first mover advantage like we do with gen AI and you have amazing partners like we do in the case of NVIDIA and Accenture and many more.

I'm just super proud of the NVIDIA partnership with Jensen because not only is he a great friend, but he's running really one of the greatest companies of all time, thanks to his personal domain, expertise, and leadership and it's just an encouraging sign to see somebody like that lean all in with ServiceNow in the belief that we have the platform to solve this generation's biggest opportunities and biggest challenges. And that's what we're going after. We really think we can lift the world GDP by $7 trillion over the next 10 years. And ServiceNow, NVIDIA, Accenture, and others will have a big hand in doing that.

- Yeah. And Jensen has also talked about this being an iPhone moment. So you guys are on the same page in more ways than one. Bill McDermott, good to see you. ServiceNow CEO, appreciate it.

- Thank you, Julie and Brad.

- Take care.

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• ServiceNow exceeds guidance across all Q2 2023 topline growth and profitability metrics; raises 2023 subscription revenues and operating margin guidance

• Subscription revenues of $2,075 million in Q2 2023, representing 25% year-over-year growth, 25% adjusted for constant currency

• Total revenues of $2,150 million in Q2 2023, representing 23% year-over-year growth, 22.5% adjusted for constant currency

• Current remaining performance obligations of $7.20 billion as of Q2 2023, representing 25% year-over-year growth, 24% adjusted for constant currency

• 70 transactions over $1 million in net new ACV in Q2 2023, up 30% year-over-year

• ServiceNow ended Q2 with 45 customers with more than $20 million in ACV, representing 55% year-over-year increase

SANTA CLARA, Calif., July 26, 2023--(BUSINESS WIRE)--ServiceNow (NYSE: NOW), the leading digital workflow company making the world work better for everyone, today announced financial results for its second quarter ended June 30, 2023, with subscription revenues of $2,075 million in Q2 2023, representing 25% year-over-year growth, 25% adjusted for constant currency.

"ServiceNow results were supercharged by unprecedented demand for our organic innovation," said ServiceNow Chairman and CEO Bill McDermott. "We’re in a powerful new ‘AI world,’ where imagination is the only limit. ServiceNow is already seeing our own significant productivity increases with the generative AI solutions we’re releasing to the market, which will rapidly accelerate breakthrough innovation for our customers."

As of June 30, 2023, current remaining performance obligations ("cRPO"), contract revenue that will be recognized as revenue in the next 12 months, was $7.20 billion, representing 25% year-over-year growth and 24% adjusted for constant currency. The company now has 1,724 total customers with more than $1 million in annual contract value ("ACV"), representing 18% year-over-year growth in customers.

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"Q2 was another strong quarter for ServiceNow as we exceeded the high end of our guidance range for all of our key performance metrics," said ServiceNow CFO Gina Mastantuono. "The better-together story is resonating with C-suites driving larger multi-product deals, as enterprises are looking to consolidate purchasing with strategic platforms like ServiceNow. Our intelligent platform for end-to-end digital transformation uniquely positions us to seize the opportunities in front of us as we continue to deliver durable topline growth and margin expansion on our journey to becoming the defining enterprise software company of the 21st century."

Recent Business Highlights

• In Q2, ServiceNow delivered new solutions that will embed generative AI across the Now Platform. Generative AI Controller, Now Assist for Search, and Now Assist for Virtual Agent build on ServiceNow’s already extensive AI functionality and drive new levels of automation.

• Today, ServiceNow announced further generative AI capabilities with case summarization and text-to-code, its approach to commercialization with new premium SKU offerings, and the introduction of its AI Lighthouse program with NVIDIA and Accenture to assist customers across industries in the design, development, and implementation of new generative AI use cases.

• ServiceNow also announced today an expanded partnership with KPMG to reimagine finance, supply chain, and procurement operations with a joint investment to co-develop new offerings. This follows ServiceNow and Cognizant’s recent partnership to accelerate adoption of AI-driven automation across industries.

• During the quarter, ServiceNow hosted its annual Knowledge conference, which generated significant pipeline and featured announcements including a generative AI partnership with NVIDIA, the launches of Finance and Supply Chain Workflows and ServiceNow.org, and a commitment to deploy $1 billion in investment capital by 2026 to ServiceNow Ventures.

• In addition, as announced at Financial Analyst Day in May, the Board of Directors authorized a share repurchase program of up to $1.5 billion in shares of common stock to manage the impact of dilution from future employee equity grants and employee stock purchase programs.

• ServiceNow received significant recognition during the quarter, being named to the Fortune 500 list for the first time, and being recognized as a Visionary in the 2023 Gartner® Magic Quadrant for Application Performance Monitoring (APM) and Observability, and a Leader in The Forrester Wave™: Low-Code Development Platforms for Professional Developers, Q2 2023.

• In July, ServiceNow closed the acquisition of AI-powered platform G2K to transform retail and other industries, and opened two new Innovation Centers to serve as digital incubation hubs in India and Singapore.

Second Quarter 2023 GAAP and Non-GAAP Results:

The following table summarizes our financial results for the second quarter 2023:

Financial Outlook

Our guidance includes GAAP and non-GAAP financial measures. The non-GAAP growth rates for subscription revenues and cRPO are adjusted only for constant currency to provide better visibility into the underlying business trends.

The following table summarizes our guidance for the third quarter 2023:

The following table summarizes our guidance for the full-year 2023:

Conference Call Details

The conference call will begin at 2 p.m. Pacific Time (21:00 GMT) on July 26, 2023. Interested parties may listen to the call by dialing (888) 330‑2455 (Passcode: 8135305), or if outside North America, by dialing (240) 789-2717 (Passcode: 8135305). Individuals may access the live teleconference from this webcast.

https://events.q4inc.com/attendee/590657753

An audio replay of the conference call and webcast will be available two hours after its completion and will be accessible for 30 days. To hear the replay, interested parties may go to the investor relations section of the ServiceNow website or dial (800) 770‑2030 (Passcode: 8135305), or if outside North America, by dialing (647) 362‑9199 (Passcode: 8135305).

Investor Presentation Details

An investor presentation providing additional information, including forward-looking guidance, and analysis can be found at https://investors.servicenow.com.

Upcoming Investor Conferences

ServiceNow today announced that it will attend and have executives present at three upcoming investor conferences.

These include:

• ServiceNow President and Chief Operating Officer CJ Desai will participate in a keynote presentation at the KeyBanc Technology Leadership Forum on Tuesday, August 8, 2023, at 11:00am PT.

• ServiceNow Senior Vice President and General Manager, Technology Workflow Products, Pablo Stern will participate in a fireside chat at the Deutsche Bank 2023 Technology Conference on Thursday, August 31, 2023, at 9:30am PT.

• ServiceNow Chairman and Chief Executive Officer Bill McDermott will participate in a keynote presentation at the Goldman Sachs Communacopia and Technology Conference on Wednesday, September 6, 2023, at 1:05pm PT.

The live webcasts will be accessible on the investor relations section of the ServiceNow website at https://investors.servicenow.com and archived on the ServiceNow site for a period of 30 days.

Statement Regarding Use of Non-GAAP Financial Measures

We use the following non-GAAP financial measures in addition to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP.

• Revenues. We adjust revenues and related growth rates for constant currency to provide a framework for assessing how our business performed excluding the effect of foreign currency rate fluctuations. To present this information, current period results for entities reporting in currencies other than U.S. Dollars ("USD") are converted into USD at the average exchange rates in effect during the comparison period (for Q2 2022, the average exchange rates in effect for our major currencies were 1 USD to 0.94 Euros and 1 USD to 0.80 British Pound Sterling ("GBP")), rather than the actual average exchange rates in effect during the current period (for Q2 2023, the average exchange rates in effect for our major currencies were 1 USD to 0.92 Euros and 1 USD to 0.80 GBP). Guidance for related growth rates are derived by applying the average exchange rates in effect during the comparison period rather than the exchange rates for the guidance period. We believe the presentation of revenues and related growth rates adjusted for constant currency facilitates the comparison of revenues year-over-year.

• Remaining performance obligations and current remaining performance obligations. We adjust cRPO and remaining performance obligations ("RPO") and related growth rates for constant currency to provide a framework for assessing how our business performed. To present this information, current period results for entities reporting in currencies other than USD are converted into USD at the exchange rates in effect at the end of the comparison period (for Q2 2022, the end of the period exchange rates in effect for our major currencies were 1 USD to 0.96 Euros and 1 USD to 0.82 GBP), rather than the actual end of the period exchange rates in effect during the current period (for Q2 2023, the end of the period exchange rates in effect for our major currencies were 1 USD to 0.92 Euros and 1 USD to 0.79 GBP). Guidance for the related growth rate is derived by applying the end of period exchange rates in effect during the comparison period rather than the exchange rates in effect during the guidance period. We believe the presentation of cRPO and RPO and related growth rates adjusted for constant currency facilitates the comparison of cRPO and RPO year-over-year, respectively.

• Gross profit, Income from operations, Net income and Net income per share - diluted. Our non-GAAP presentation of gross profit, income from operations, and net income measures exclude certain non-cash or non-recurring items, including stock-based compensation expense, amortization of debt discount and issuance costs related to our convertible senior notes, loss on early note conversions, amortization of purchased intangibles, legal settlements, business combination and other related costs, the related income tax effect of these adjustments, and the income tax benefit from the release of a valuation allowance on deferred tax assets. The non-GAAP weighted-average shares used to compute our non-GAAP net income per share - diluted excludes the dilutive effect of the in-the-money portion of convertible senior notes as they are covered by our note hedges, and includes the dilutive effect of time-based stock awards, the dilutive effect of warrants and the potentially dilutive effect of our stock awards with performance conditions not yet satisfied at forecasted attainment levels to the extent we believe it is probable that the performance condition will be met. We believe these adjustments provide useful supplemental information to investors and facilitates the analysis of our operating results and comparison of operating results across reporting periods.

• Free cash flow. Free cash flow is defined as net cash provided by (used in) operating activities plus cash paid for legal settlements, repayments of convertible senior notes attributable to debt discount and business combination and other related costs including compensation expense, reduced by purchases of property and equipment. Free cash flow margin is calculated as free cash flow as a percentage of total revenues. We believe information regarding free cash flow and free cash flow margin provides useful information to investors because it is an indicator of the strength and performance of our business operations.

Our presentation of non-GAAP financial measures may not be comparable to similar measures used by other companies. We encourage investors to carefully consider our results under GAAP, as well as our supplemental non-GAAP information and the reconciliation between these presentations, to more fully understand our business. Please see the tables included at the end of this release for the reconciliation of GAAP and non-GAAP results for gross profit, income from operations, net income, net income per share and free cash flow.

Use of Forward-Looking Statements

This release contains "forward-looking statements" regarding our performance, including but not limited to statements in the section entitled "Financial Outlook." Forward-looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward-looking statements. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, our results could differ materially from the results expressed or implied by the forward-looking statements we make.

Factors that may cause actual results to differ materially from those in any forward-looking statements include, among others, experiencing an actual or perceived cyber-security event; our ability to comply with evolving privacy laws, data transfer restrictions, and other foreign and domestic standards related to data and the Internet; errors, interruptions, delays, or security breaches in or of our service or data centers; our ability to maintain and attract key employees and manage workplace culture; alleged violations of laws and regulations, including those relating to anti-bribery and anti-corruption and those relating to public sector contracting requirements; our ability to compete successfully against existing and new competitors; our ability to predict, prepare for and respond promptly to rapidly evolving technological, market and customer developments; our ability to grow our business, including converting remaining performance obligations into revenue, adding and retaining customers, selling additional subscriptions to existing customers, selling to larger enterprises, government and regulated organizations with complex sales cycles and certification processes, and entering new geographies and markets; our ability to develop and gain customer demand for and acceptance of existing, new and improved products and services; our ability to expand and maintain our partnerships and partner programs, including expected market opportunity from such relationships; global economic conditions; fluctuations in the value of foreign currencies relative to the U.S. Dollar; fluctuations in interest rates; our ability to consummate and realize the benefits of any strategic transactions or acquisitions; the impact of the Russian invasion of Ukraine and bank failures on macroeconomic conditions; inflation; and fluctuations and volatility in our stock price.

Further information on these and other factors that could affect our financial results are included in our Form 10-K for the year ended December 31, 2022, our Form 10-Q that will be filed for the quarter ended June 30, 2023 and in other filings we make with the Securities and Exchange Commission from time to time.

We undertake no obligation, and do not intend, to update these forward-looking statements, to review or confirm analysts’ expectations, or to provide interim reports or updates on the progress of the current financial quarter.

About ServiceNow

ServiceNow (NYSE: NOW) makes the world work better for everyone. Our cloud-based platform and solutions help digitize and unify organizations so that they can find smarter, faster, better ways to make work flow. So employees and customers can be more connected, more innovative, and more agile. And we can all create the future we imagine. The world works with ServiceNow™. For more information, visit: www.servicenow.com.

© 2023 ServiceNow, Inc. All rights reserved. ServiceNow, the ServiceNow logo, Now, and other ServiceNow marks are trademarks and/or registered trademarks of ServiceNow, Inc. in the United States and/or other countries. Other company names, product names, and logos may be trademarks of the respective companies with which they are associated.

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Contacts

Media Contact:
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408.250.8644
press@servicenow.com

Investor Contact:
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ir@servicenow.com

July 26, 2023, 04:13 PM EDT

‘This is the leader in AI computing power in Nvidia and the leader in workflows across the enterprise in ServiceNow coming together to connect the dots with the most powerful technology to come our way in decades to what is happening day to day on the ground in the enterprise,’ says ServiceNow Senior Vice President of Global Partnerships Erica Volini.

ServiceNow is teaming up with AI behemoth Nvidia as part of an “AI Lighthouse” program to “fast-track” the development and adoption of large language model generative AI solutions in the enterprise.

The expanded Nvidia partnership and AI Lighthouse program is aimed at driving breakthrough ServiceNow AI enterprise workflows through the implementation of generative AI large language models.

“This is the leader in AI computing power in Nvidia and the leader in workflows across the enterprise in ServiceNow coming together to connect the dots with the most powerful technology to come our way in decades to what is happening day to day on the ground in the enterprise,” said ServiceNow Senior Vice President of Global Partnerships Erica Volini in an interview with CRN. “This is about making generative AI real. Customers don’t need to worry about that. We are developing the large language models and we are embedding them into our workflows. All our customers need to tell us is how do they want to use them and what are they trying to do with their digital transformation. We are literally hitting the easy button on this incredibly transformative technology that is going to change the technology landscape for decades.”

[RELATED: How ServiceNow Elite Partner Windward Consulting Moved To The Next Level]

The AI Lighthouse program is a watershed moment for partners to bring the power of AI solutions to enterprise customers directly through the ServiceNow platform, the market leader in enterprise IT automation, said Volini.

“This tees up the next wave of digital transformation for our partners,” said Volini. “This is going to allow our partners to continue to help their customers transform with enterprise AI workflows. That is what they are in business to do. This gives partners the ability to have the next digital transformation conversation, getting ahead by using technology that is already in place. This is taking what partners already have and hypercharging it through generative AI. This is about dreaming big about the AI transformation going forward. It is the dream conversation partners want to have with customers. We’ve got the technology taken care of. Partners can focus on the transformation.”

The first partner in the Lighthouse program is $61 billion AI systems integrator powerhouse Accenture, said Volini. “Accenture is and has been one of our most strategic partners,” she said. “The reason we selected them is they have a demonstrated track record of innovation with deep industry and functional expertise across the enterprise. We think they are going to surface the most innovative use cases for the large language models that really help set the course for where we take the ServiceNow product moving forward.”

Accenture has a full team working hand in hand with ServiceNow to understand what are the “biggest transformation opportunities that exist that we need to point these large language models to,” said Volini.

The new AI Lighthouse program is part of ServiceNow CEO Bill McDermott’s mantra of dreaming big, said Volini. “This will be one of the most exciting things we will be able to bring to the partner community,” she said. “This is what the partners are all about – driving digital transformation and customer value. There will not be a single conversation we have with partners moving forward that does not talk about generative AI. It will be in every single conversation, offering and customer interaction moving forward.”

C.R. Howdyshell, CEO of Advizex, a Fulcrum IT Partners company, said he sees the AI Lighthouse program as a sign of increased channel commitment by ServiceNow and Nvidia to drive as a service solutions. “This is a big commitment by ServiceNow and Nvidia to allow the channel to deliver AI software and services,” he said.

Advizex is already providing ServiceNow services and working with Nvidia Nvidia Global OEM Channel Go To Market leader Walter Leverett to build out an AI-as-a-service offering.

“We are seeing a significant sales pipeline for Nvidia AI as a service opportunities,” he said. “Our goal is to give customers the opportunity to consume AI as a service. Obviously a lot of work needs to be done to make that happen. We are already talking with Nvidia, Dell and HPE on how to get there.”

Providing AI-as-a-service is critical given that many AI startups are focused on spending their cash on AI software development and are looking for help from partners to provide as a service based infrastructure and services, said Howdyshell. “Most of these deals are in the $30 million-plus range,” he said.

Howdyshell praised ServiceNow and Nvidia for stepping up to assist partners making the investments necessary to be successful in the fast-growing AI market. “This is opening the door for partners to provide AI infrastructure, software and services,” he said. “These investments show that ServiceNow and Nvidia want to be AI market leaders. We want to be right there in lockstep with them to deliver AI as a service to customers.”

The ServiceNow AI offensive comes with the company set to unleash a robust AI enterprise workflow platform with its ServiceNow Vancouver release set for September. That includes new premium offerings for generative AI for IT Service Management, Customer Service Management and Human Resources Service Delivery.

ServiceNow CEO Bill McDermott said in a prepared statement that the expanded partnership with Nvidia and Accenture will provide a “market leading blueprint for AI-first enterprise innovation.”

McDermott said he expects the AI Lighthouse program to “inspire breakthrough ideas” with massive ROI: return on intelligence).”

Nvidia CEO Jensen Huang said in a prepared statement that the partnership will help customers “lead their industries by deploying generative AI tools that harness their own invaluable knowledge to transform the applications” they use.

The AI Lighthouse program comes with industries “racing” to add generative AI tools to their operations at a “faster pace” than any previous technology shift, said Huang.

Julie Sweet, CEO of Accenture, which plans to invest $3 billion in AI over the next three years, said in a prepared statement that the expanded partnership will help clients “more quickly” realize the value of AI technology with “powerful, relevant and responsible generative AI use case studies.”

July 26 (Reuters) - ServiceNow (NOW.N) reported quarterly revenue above Wall Street estimates on Wednesday, boosted by a growing demand for its artificial intelligence solutions.

The rising demand for workflow automation and the company's continued efforts to expand its portfolio with new generative AI solutions helped drive growth.

"ServiceNow is already seeing our own significant productivity increases with the generative AI solutions we’re releasing to the market, which will rapidly accelerate breakthrough innovation for our customers," said CEO Bill McDermott.

The company forecast third-quarter subscription revenue in the range of $2.19 billion to $2.20 billion. Analysts on average expected $2.15 billion, according to Refinitiv data.

Separately on Wednesday, ServiceNow also announced a program along with Nvidia (NVDA.O) and Accenture , called AI Lighthouse, designed to help the development and adoption of generative AI at enterprises.

ServiceNow's overall subscription revenue for the quarter was $2.15 billion, higher than analysts' average estimate of $2.13 billion, according to Refinitiv data.

On an adjusted basis, the company earned $2.37 per share during the quarter, compared with a profit estimate of $2.05 per share, according to Refinitiv.

ServiceNow's shares were down more than 3% after the bell.

Our Standards: The Thomson Reuters Trust Principles.

ServiceNow Inc.’s stock was gaining 2% in extended trading Wednesday after the software company reported quarterly earnings more than doubled on strong subscription sales.

“That’s the economics of the cloud,” ServiceNow Chief Executive Bill McDermott said in an interview Wednesday. “What’s incredible is we have a 99% renewal rate.”

ServiceNow — a Santa Clara, Calif. provider of digital workflow services — has enjoyed a nearly 50% increase in its stock price in 2023.

After reporting growth and profitability above expectations and raising guidance for the year on July 26, its stock lost 5% of its value in after-market trading.

That looks like an opportunity for investors. My interview with CEO Bill McDermott suggests ServiceNow’s new line of generative AI products could accelerate growth — and perhaps put in reach the $800 a share price target he shared with me in 2022.

ServiceNow’s Strong Results And Guidance

The general rule for public company CEOs is if you report better than expected revenue and earnings growth and raise your guidance, investors reward you by boosting your stock price.

That rule did not work when ServiceNow reported second quarter results July 26. Despite beating expectations, raising guidance, and introducing new GAI products with considerable revenue potential, its shares fell after-hours by about 3.5%.

Here are the highlights of its report, according to Investor’s Business Daily:

• Revenue: $2.15 billion, up 23% and $20 million more than expected.
• Adjusted Earnings Per Share: $2.37, up 46% and 34 cents more than analysts expected.
• Current Remaining Performance Obligations: $7.2 billion, up 25% — three percentage points above the company’s forecast.
• 2023 Subscription Revenue Outlook: $8.59 billion, up about 25% — some $85 million above the analysts’ estimate.

ServiceNow is thrilled about its performance and its future. As McDermott told me in a July 26 interview, “We beat the high end of our guidance and raised our revenue and operating margin forecast. The big story is Generative AI. It will be a $7 trillion gross domestic product opportunity in the next ten years. AI will be a dominant force and we are announcing new products” to help our customers benefit from it.

New Generative AI Products Could Boost ServiceNow’s Growth

ServiceNow’s new GAI products aim to increase its clients’ productivity. Since ServiceNow currently benefits from the technology within its own operations, it can offer them valuable insights.

AI Lighthouse To Help ServiceNow Customers Operate More Effectively

One of the company’s new AI services is AI Lighthouse, “a first-of-its-kind program in partnership with NVIDIA and Accenture ACN , designed to fast-track the development and adoption of enterprise generative AI capabilities,” according to an email from Emily Scher, a ServiceNow spokesperson.

McDermott struck me as very excited about its potential. As he said, “We are partnering with Nvidia’s CEO Jensen Huang and Accenture to bring the best engineering talent to provide companies with high payoff Generative AI applications for their customers and frictionless employee onboarding.”

AI Lighthouse will use GAI to develop industry-specific solutions. With case summarization — which uses GAI “to read and distill case information across IT, HR, and customer service cases,” according to ServiceNow — text to code, text to workflow and a natural language human interface, our solutions will Improve operations for specific industries including telecommunications, financial services, public sector, and manufacturing.

ServiceNow does not see GAI reducing corporate employment. McDermott said, “80% of employers are struggling to find and keep employees. Gen AI will help these companies attract and keep workers by offloading the soul-crushing part of their jobs to AI and leaving the more interesting work for the employee. Turnover will drop and employee satisfaction will increase.”

ServiceNow Uses GAI To Boost Productivity

ServiceNow currently is using GAI to enhance the performance of its internal operations — specifically in sales and engineering.

As Rajeev Sethi, ServiceNow’s VP, Emerging Technologies, told me in a July 21 interview, “We have 10 use cases at ServiceNow. The most popular one is Sales Assist which enables our new sales employees to get answers to questions about a product or specific-industry from a ChatGPT-like interface. This frees up the time of the experienced sales people who answered those questions and boosts the productivity of new sales people who no longer need to pore through product collateral.”

In addition, ServiceNow has boosted the productivity of its engineers by 30% with help from a GAI application enabling new engineers to convert text to code and to get clear explanations of ServiceNow’s existing code, Sethi explained.

The quality of these solutions depends on the relevance and accuracy of the data used to train them. ServiceNow solves the data quality problem by pulling “information from within a customer’s environment to ensure results are more accurate and to help reduce the likelihood of error or hallucinations,” noted Sethi.

Where ServiceNow Stock Goes Next

How much will ServiceNow’s GAI products add to the company’s revenue?

While optimistic, McDermott declined to provide a specific amount. As he told me, “Our AI Lighthouse Customer Program will increase our growth and add to shareholder value. We have 125 of the largest companies seeking to participate in this program. One of the best engineers in the world who worked at Apple AAPL told me, ‘Bill, I worked on the Internet and the iPhone and GAI is going to be bigger than the iPhone.’ ”

An analyst who covers the GAI industry sounds optimistic about ServiceNow’s prospects. In a July 26 email, Daniel Newman — CEO of Futurum Group, a technology research company — noted, “While $NOW has not yet revealed its expected incremental growth from AI, I expect it to have a sizable impact on both growth, retention, and net revenue expansion.”

He expects three-fold growth in AI spending by 2028 at a compound annual rate of 22%. Newman wrote, “The market should be using that number as the bar for incremental revenue growth from AI capabilities and services across the portfolio. [ServiceNow] is showing no signs of deceleration with a fairly sizable upside if its AI story converts as I expect it should.”

Morningstar is bullish on ServiceNow. As Senior Equity Analyst Dan Romanoff wrote July 26, “ServiceNow exceeded our expectations for both revenue and profitability for its second quarter, provided good guidance for the third quarter, and raised its full-year outlook. Strong revenue paired with disciplined operations drove good margins.”

Romanoff describes ServiceNow’s performance as “impressive, especially as the macro environment is unchanged.” He sees a revenue contribution from GAI coming later this year “with substantially higher pricing” of the company’s Pro versions of its product.

CNN Business says 34 analysts’ median 12-month price target for ServiceNow is $642 — some 11% above its current price.

If ServiceNow exceeds expectations in the third quarter, its stock could hit $800.

ServiceNow Inc. said today it’s expanding its Now Assist family of artificial intelligence features with the launch of two brand new capabilities.

The new features include Case Summarization, which uses generative AI to distill key information automatically across information technology, human resources and customer service use cases, and Text-to-Code, which converts natural language text prompts into executable code for the company’s Now Platform.

ServiceNow’s namesake cloud platform helps IT and HR teams manage their day-to-day work. Administrators can use the platform to answer employee support requests, tackle cybersecurity risks and perform other tasks. ServiceNow’s software is also used outside IT departments for tasks such as processing customer service tickets.

The company explained that the new generative AI features are meant to accelerate decision making by automating many of the most repetitive tasks workers need to perform when using the Now Platform.

For customer service teams using the Now Platform, Case Summarization works by memorizing and distilling information such as customer and incident details, previous touch points, actions taken by the parties involved, and the eventual resolution. It can create accurate case summary notes in seconds, automating a manual process to enable much faster handoffs among internal teams, the company explained. In this way, customer incidents and problems can be resolved much faster, freeing up workers to focus on more valuable tasks.

The new text-to-code feature is aimed at developers, providing them with a more streamlined way to create code for routine commands, ServiceNow said. For example, developers can simply write a plain, natural-language description of the code they want to generate, and it will instantly be converted into high-quality code suggestions, or even complete sections of code. The generated code is then shared with the developer in-line, enabling them to review, edit and implement it.

ServiceNow President and Chief Operating Officer CJ Desai said the new capabilities will “unlock productivity across the enterprise by enabling exceptional experiences and enhanced outcomes for our customers.” The new tools are available to a limited set of customers now, and will become generally available in September with ServiceNow’s Vancouver release, the company said.

Case summarization and text-to-code are both powered by ServiceNow’s proprietary large language model, which was developed specifically to comprehend the Now Platform and its workflows, processes and automation use cases. ServiceNow said its LLM is a customized version of the 15 billion-parameter StarCoder LLM, which was developed via the open BigCode initiative and trained and tuned using Nvidia Corp.’s DGX Cloud platform.

ServiceNow’s decision to train its own LLM was a good move, because using an existing model from a provider such as OpenAI LP would have raised a lot of questions around security, privacy, tenancy and data sharing, said Andy Thurai, vice president and principal analyst of Constellation Research Inc. “However, it instead means there will be questions asked about the accuracy of its models compared to existing, high-performance models such as LLaMA,” Thurai said. “Customers will also want to know how often it will be retrained.”

Assuming ServiceNow is able to address and mitigate issues around the performance of StarCoder LLM, the case summarization capabilities should prove to be extremely useful for customers, Thurai predicted. “Case summarization from documents is one of those really cool and low-risk use cases where generative AI can perform really well without worrying about ownership, piracy, copyright or IP infringement issues,” the analyst explained. “It can be useful to IT departments, customer services and sales teams, enabling them to easily decide customer sentiment, frustration, and the possibility of churn very quickly. It will also help teams to understand if there are any common underlying issues across channels that would otherwise be siloed.”

Thurai was more cautious about the text-to-code feature, saying this use case is very difficult to get a handle on. Most previous attempts to use LLMs to generate code have experienced issues around security vulnerabilities and the usefulness of the code that’s produced, he said. “Most of the other code-generative LLMs face these issues,” Thurai added. “In fact, GitHub and OpenAI are both being sued by the GitHub open-source community, where they trained their Copilot and Codex models. Unless those models were trained on local language code, it could cause some problems.”

The analyst said he wishes ServiceNow would have introduced more generative AI tools, given its dominance of the IT ticketing, service management and operations management spaces. “It should be churning out many more generative AI use cases, based on my conversations with its customers,” Thurai said. “Hopefully, we will see them soon.”

Although it can clearly do much more with generative AI, ServiceNow has moved fairly quickly to embrace the potential of the technology. The company partnered with Hugging Face Inc. to launch StarCoder in May, and that was followed by multiple AI updates at its Knowledge 2023 event in Las Vegas later that month. There, ServiceNow introduced its Generative AI Controller, which serves as the foundation of all generative AI functionality within the Now Platform and also enables users to connect to Microsoft Corp.’s Azure OpenAI Service and access OpenAI LP’s latest AI models, such as GPT-4.

Finally, in June, ServiceNow debuted the first of its focused generative AI tools, including Now Assist for Search, which allows users to fetch data from their internal systems using natural language queries, and Now Assist for Virtual Agent, enhancing the ability of AI-powered virtual assistants to engage with customers and employees in a more conversational way.

Image: vecstock/Freepik