ServiceNow Earnings: Monster Quarter for U.S. Federal Drives Overall Strength, While AI Arrives

Key Morningstar Metrics for ServiceNow

• Fair Value Estimate: $640.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of ServiceNow’s Earnings

Wide-moat ServiceNow NOW once again delivered results that came in better than our expectations for both revenue and profitability for its third quarter. Guidance was also a little better than we were anticipating. The key takeaway involves impressive U.S. Federal strength. Solid results in other areas should not be overlooked, nor should the building momentum in generative artificial intelligence in Pro Plus versions of the platform, which was released at the end of the quarter. While macroeconomic conditions remain largely unchanged, we see initial signs of improvement.

Based on results and guidance, we raise our fair value estimate to $640 from $625 previously and see shares as attractive.

We continue to favor the stock for both its resilient near-term performance and its long-term organic-driven growth—this is as it leverages its strength in workflow automation to bring its existing customers more deeply into IT, and more broadly with human resources and customer service-specific products, as well as its continued push into industry segment-specialized versions and operating efficiency. We also see a burgeoning AI opportunity with substantially higher pricing than Pro versions that should contribute to revenue this year.

ServiceNow’s Sales Momentum Hard to Overstate

Total revenue grew 25.0% year over year as reported, or 22.5% in constant currency, to $2.288 billion, which was ahead of our model. Growth accelerated both year over year and sequentially, which is highly unusual in this environment. Subscription revenue of $2.216 billion grew 27% year over year as reported, which was $21 million above the high end of guidance. Strength was driven by solid results across the board, including segments, products, and geographies. U.S. Federal was exceptional, with annual contract value growing in excess of 75% year over year, 19 deals over $1 million in ACV, three deals over $10 million in ACV, and the third-largest deal in the company’s history.

The sales momentum is hard to overstate. Strength in large deals continues, with 83 deals in excess of $1 million in ACV, compared with 70 last quarter, and four deals in excess of $10 million. ServiceNow boasts 1,789 customers generating in excess of $1 million in ACV, which usually implies the involvement of multiple solutions. To that end, the firm saw 14 of its 20 largest deals involve all of its workflow solutions. We see good traction in both vertical solutions and premium offerings, which help both growth and margins, as these solutions enjoy a material pricing uplift.