Morningstar

ServiceNow Earnings: Shrugs Off Recent Software Stumbles With Strong Results

We continue to believe ServiceNow is a key software beneficiary of artificial intelligence.

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Securities in This Article
ServiceNow Inc
(NOW)

Key Morningstar Metrics for ServiceNow

  • Fair Value Estimate
    : $165.00
  • Morningstar Rating
    : ★★★★
  • Morningstar Economic Moat Rating
    : Narrow
  • Morningstar Uncertainty Rating
    : High

What We Thought of ServiceNow’s Earnings

ServiceNow’s NOW second-quarter revenue grew by 22.5% year over year in constant currency to $3.99 billion, driven by broad-based demand. Non-GAAP operating margin was 29.5% for the quarter.

Why it matters: Results are meaningfully better than both the company’s outlook for the quarter and our expectations. Some of the revenue upside was from US Federal revenue being pulled from the third quarter to the second, while the remainder was driven by strong overall demand.

  • Subscription revenue grew 24.5% year over year, topping guidance by about 200 basis points. We see good performance across geographies and workflows. We also see rarely mentioned industries, like education, as among the highest growth industries in the quarter, which is bullish, in our view.
  • We continue to believe ServiceNow is a key software beneficiary of artificial intelligence. The firm now has more than $1 billion in annual contract value, or ACV, which saw acceleration to 40% sequential growth. Deals including five or more AI products grew 5.5 times year over year.

The bottom line: We maintain our fair value estimate for narrow-moat ServiceNow at $165 per share, and we view the stock as attractive. ServiceNow offers one of the best blends of growth and margins in enterprise software, and results continue to show AI is not hurting the firm’s fundamentals.

  • Management is excited about the pipeline, which shows solid forward-looking metrics. Current remaining performance obligations grew 21.5% year over year in constant currency to $13.2 billion, which was nicely better than guidance. We see cybersecurity as contributing materially to the pipeline, with strength in both Veza and Armis.

Coming up: The firm raised its full-year revenue outlook by $15 million to account for net new ACV while holding non-GAAP operating margin guidance flat at 31.5%. Third-quarter guidance was slightly lower than we expected, but based on demand pull-in for the second quarter, we are not concerned.

Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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