Results:

Balance Sheet:

Guidance & Valuation:

So far this quarter, U.S. payments volume has accelerated from 7% to 8% Y/Y growth. This acceleration is coming from debit not credit, which not only bodes well for the economy, but for consumer balance sheets as well. When pairing this with credit repayment data from J.P Morgan, Bank of America, American Express and several others, economic and consumer health continues to be resilient in the USA. You’ll see that Mastercard said the same thing in a moment. Furthermore, U.S. consumer holiday spending saw some of its best traction with discretionary categories, showing the disposable income levels may be improving.

“Retail holiday spending growth was a couple of points higher than last year and retail spending growth on key shopping days from Thanksgiving to Cyber Monday was several points higher. E-commerce was a higher share of retail holiday spending versus last year. … Travel volumes performed well across our regional corridors due to broader strength in both consumer and commercial spending.”

CFO Christopher Suh

EPS is expected to smoothly compound at a 12.5% clip for the next two years. FCF is expected to grow by 21% this year and by 8% next year. Estimates should move higher following this report.

Results:

Balance Sheet:

Guidance & Valuation:

EPS is expected to grow by 9% this year and by 18% next year.

Consumer & Economic Health Commentary:

“The macroeconomic environment continues to perform well, and it is underpinned by healthy consumer spending as we've seen in today's news. The labor market is strong with low unemployment and continued wage growth. Inflation has moderated, but to varying degrees across categories and countries. Consumers remain engaged. Affluent consumers have benefited from the wealth effect, while the mass segment remains supported by the labor market.”

CEO Michael Miebach 

“Our Economics Institute expects a year of global economic expansion in 2025, defined by shifts in monetary and fiscal policy, albeit geopolitical concerns remain. Overall, we remain positive about our growth outlook.”

CEO Michael Miebach

“The macro environment remains supportive of our base case, reflecting healthy consumer spending.”

CFO Sachin Mehra  

“Cross-border volumes benefited from healthy spending, easier comps as well as a pull forward of travel spend..”

CFO Sachin Mehra 

“Now looking through the first 4 weeks of January, the metrics are holding up well and are generally in line with the fourth quarter.”

CFO Sachin Mehra

Results:

Balance Sheet:

Guidance & Valuation:

Revenue guidance missed by 5%; gross margin guidance missed by 300 bps; EPS guidance missed $0.08 estimates by $0.08. It also expects a 33.8% GAAP GPM and -$0.27 in GAAP EPS next quarter.

Results:

Balance Sheet:

Guidance & Valuation:

For 2025, IBM guided to 5% FXN revenue growth and 3% revenue growth. Analysts expected 4% Y/Y revenue growth. It also guided to $13.5 billion in FCF, which beat estimates by 3.8%. Finally, it guided to 50 bps of EBT margin expansion Y/Y, which beat estimates by 20 bps. This led to a modest rise in forward earnings estimates.

EPS is expected to compound at a 5% 2-yr pace. FCF is expected to compound at a 6% 2-yr pace.

ServiceNow is one of the largest enterprise software firms in the world. It automates workflows, tech stacks and projects to augment customer efficiency. For this reason, it calls itself the “leading digital workflow company.” Workflow automation buckets include: service management, operations, asset management, security, customer management, employee management and creator management. These are further grouped into workflow buckets like “Customer & Employee Workflows,” “Creative Workflows” and “Technology Workflows.” Two products to know within the Tech Workflow category include Information Technology Operations Management (ITOM) and Information Technology Service Management (ITSM). The names of these products tell you exactly which types of workflows they’re meant to automate.

All products and services are neatly tied into its “Now Platform.” The firm describes this overarching ecosystem layer as a way to “optimize processes, connect silos and accelerate innovation on a single unifying platform.” That’s a fancy way of saying that it makes every piece of work more seamless and expedient.

ServiceNow has been hard at work on GenAI innovation to bolster automation capabilities. Its Now Platform “Vancouver” release got the ball rolling by consolidating all GenAI model and app projects into an intuitive set of products. It recently built on that debut with Now Platform “Washington D.C.” and “Xanadu” releases. These are both essentially a large batch of GenAI-inspired upgrades to the Now platform. They add to the progress of the Vancouver release. Washington D.C. more seamlessly ties together NOW’s product categories to drive better interdepartmental work and communication. It makes using all of its tools and capabilities across teams more intuitive and obvious. Xanadu focused on completing the Microsoft Copilot integration and infusing Agentic AI (goal-oriented AI that you simply tell what to do) into the Now platform. More specifically, the release focused on two product categories. First, its security and threat management products. Xanadu uses models that are trained on a company’s own data, which has been shown to accelerate incident response. Automated threat triaging helps too. Second, Xanadu adds new capabilities within financial and supply chain workflows – starting in sourcing and procurement.

ServiceNow also offers the “workflow studio” as a way to create intricate workflows via a wonderfully easy, no-code or low-code drag-and-drop process. It’s a unified workspace to tap into all of the automation and workflow performance analytics tools ServiceNow provides, without needing to be a talented developer to work with them. Various teams can easily access the studio to enable seamless collaboration and better work.

These platforms establish the foundation for its own GenAI apps used internally and sold to customers. A big example is “Now Assist AI.” This is ServiceNow’s GenAI assistant/companion app infused across most of its products. More GenAI product examples include:

“Plus SKUs” are how ServiceNow bundles all of its GenAI work into subscription packages. It up-charges clients for access to these SKUs, as its approach to GenAI monetization has been more aggressive than most. These Plus SKUs do things like automate customer service, expedite issue resolution and provide more conversational fetching/querying of a firm’s data.

Missed $10.4 billion current remaining performance obligations (cRPO) estimates by 1.3% & missed cRPO guidance by 1.8%. 22.0% Y/Y FXN growth beat 21.5% guidance.

For the full year, subscription revenue guidance missed estimates by 1.7% due to $175 million in incremental FX headwinds. Excluding this hit, it missed estimates by 0.3%. Its 30.5% EBIT margin and 32% FCF margin guidance beat targets by 50 bps each, with implied EBIT & FCF dollar guidance both about in line with expectations. It guided to an 83.5% subscription GPM, with margin expansion being modestly held back by lapping the extension of useful lives of some assets in 2024. It expects 0.5% shareholder dilution for the year. Finally, it’s on pace to reach its $15 billion in 2026 revenue target.

For the first quarter, it guided to 19.5% cRPO growth, which missed 20.5% growth estimates. Excluding the 100 bps FX headwind, this would have roughly met expectations. Its 30% Q1 EBIT margin guide was also in line.

The combination of the revenue miss and the in line Q1 EBIT margin guide led to a 4.4% reduction in 2025 EPS analyst 090estimates. Based on management commentary during the call, I think it’s very likely that they sandbagged (just like always):

“This guidance is consistent with how we have guided in recent years. You'll recall, we consistently overachieved our stated goals.”

CEO Bill McDermott

“We're beginning the year with a thoughtful guide… I talked about 2 factors that we prudently factored into our guide. We talked about the monetization of the agentic AI (adding consumption-based revenue – more later)... The other piece is that we anticipate a more back-end weighted deal linearity in 2025 for federal, reflecting the outcome of the U.S. election. And so what I'd say is that we're giving you a 20% constant currency guide while de-risking the guidance. What would guidance be if we didn't do that? I would just say higher.”

CFO Gina Mastantuono

GenAI Product Releases:

ServiceNow unveiled a slew of new AI products this quarter to build on Xanadu’s (defined in section b) push into Agentic AI. To leadership, this makes ServiceNow the “AI agent control tower,” or a unified place to maintain, evaluate and deploy AI agents.

GenAI Product Releases – AI Agent Orchestrator:

A big piece of this launch is its new AI Agent Orchestrator. As we’ve talked about a few times now, Agentic AI entails more complex, multi-step tasks that routinely require context and information from various pieces of an enterprise’s ecosystem. If I prompt an Agentic AI to go build a new consumer app, it will need to pull from design specs, brand and mission statements, company code, customer analytics data etc. in order to create the most compelling end product. But? For many companies, requiring AI agents to scrape from multiple, often siloed places leads to signal loss, confusion and task failure. With the AI Agent Orchestrator, ServiceNow ensures that all company agents are properly integrated, with the proper context and an open ability to painlessly communicate and collaborate with one another.

“This ensures AI agents can efficiently share information and hand off tasks regardless of where the process starts, making them indispensable for managing complex workflows.” – Press Release

GenAI Product Releases – AI Agent Studio:

To build on its Workflow Studio (already defined), part of this week’s AI-related releases included the new AI Agent Studio. This is a secure environment for developers to access data and tools required to build “fully customized AI agents.” This leads us to another interesting advantage for ServiceNow. Most of their customers have been building apps and workflows with NOW for years. The studio augments those capabilities on a platform they already know, use, and have complete integrations with. So? Building Agentic AI products on ServiceNow allows for less disruption. It means seamless updating rather than cumbersome ripping and replacing. That’s always cheaper. This characteristic also means building products on the same platform where many companies house their lucrative data. This type of vendor consolidation cuts data transference costs, improves overall efficiency, creates stickier customers and drives better financial results. Alongside this product, ServiceNow is also offering thousands of its own AI agents and templates to inspire and guide new creations.

Leadership ripped on competing GenAI offerings and how companies oversell the amount of utility they provide while functioning as single-step chat bots, rather than goal-oriented Agentic AI. NOW views itself as one-of- one here, but I’m sure other software companies would disagree.

GenAI Product Releases – Go-To-Market:

This new batch of innovation will launch in March. ServiceNow will include it in current Plus subscriptions instead of increasing pricing and will add more consumption-based revenue this year to monetize these launches. Simply put, when customers move beyond subscription usage limits for these new products, they’re charged for incremental consumption. It thinks this will lower friction associated with testing the products and it’s confident in popular usage once clients start using these tools. ServiceNow is evolving its go-to-market to account for this shift, which is included in guidance.

“We are enabling elements of consumption-based pricing as AI agents become a potent value driver for the enterprise. While we could have launched an additional SKU and offered AI agents as an add-on to drive more immediate revenue growth, our strategy prioritizes accelerating adoption. So by foregoing upfront incremental new subscriptions, we are enabling faster penetration into our customer base… As the agents become increasingly productive they will drive the consumption pricing meter.”

CEO Bill McDermott

New AI Product Launches Supporting Demand for Data & Other Core Products:

I’ve said it before and I will say it again: GenAI is only as good as the data that end products are built on. Having better data is the way to durably create better apps in an enterprise software world where everyone is using a handful of models. This is why ServiceNow’s scale and complementary data services are so extremely important. 

Its AI Agents directly pull from Workflow Data Fabric, NOW’s “unified data management platform” that conjoins, organizes & deploys 1st and 3rd party data sources to cohesively train products. It works with structured and unstructured data “no matter where it resides.” This ability to process such large sums of information, without performance bottlenecks, crippling latency or frequent outages, is made possible by RaptorDB. This database service is vital to Workflow Data Fabric functioning. RaptorDB added new data integration partnerships with Oracle and Google Cloud during the quarter.

Whether we want to call it GenAI, Agentic AI, General AI or anything else… one thing is clear. Innovation in this field directly supports demand for all data-related products it offers. And better yet? ServiceNow thinks the ability to provide great GenAI apps, data tools and its core workflow automation suite together is why it’s winning vs. the competition.  In their mind, competitors resemble stitched-together platforms that create complexity instead of utility.

“The whole agentic AI revolution is a lot like the chicken and the egg, right? Is the agentic AI pulling the core? Or is the core pulling agentic AI? In our case, both are working for each other, which is truly a beautiful thing.”

CEO Bill McDermott

Financial Impact of AI:

ServiceNow delivered 150% Q/Q growth in AI deals this quarter as its Now Assist AI suite continues to be its fastest growing launch ever. ServiceNow has been among the most successful companies within the GenAI app layer in terms of monetization. In my mind, that’s because it actually creates real value. Not slide decks… but actual value. For example, a multinational conglomerate enjoyed a 45% reduction in live chat customer service needs and expects to save millions in 2025. The New Zealand Parliamentary used ServiceNow to “reduce employee request response times from weeks to two days.” The Department of Defense is using its AI suite to gain superior insight and a better understanding of its “critical data and assets.” It’s examples like these (especially the first) that bode well for sustainably strong AI sales growth as companies start to demand more near-term ROI from these investments. ServiceNow is one of the few that is already delivering ROI and that’s why AI-included contracts are  delivering a 30% value uplift vs. contracts without any AI products. With IDC forecasting a 41% AI software CAGR through 2028, this is a good spot to be in.

DeepSeek impact:

As explained earlier this week, DeepSeek and cheaper model training are uniformly positive for ServiceNow. It means that NOW can build far cooler apps for customers and give them much better tools to build their own apps. It will mean more usage of all of its products – all else equal.

“It doesn't matter to ServiceNow who builds the models with the precipitous drop in LLM compute costs. There is much more capital allocation available for the business impact layer.”

CEO Bill McDermott

Platform Play:

Quarter after quarter, NOW deepens its position as the obvious workflow automation platform play. Evidence was again on full display this quarter. It signed 19 $5 million contracts, inked its largest new logo deal ever and saw customers over $100 million in contract value jump from 2 to 4 Q/Q. $20 million+ contract customers rose 35% Y/Y. ITSM, ITOM and IT Asset Management (ITAM) were all in 15 or more of its 20 largest deals and ITAM was in all 20 of its largest 20 deals. Employee and creative workflow deal inclusion was strong, just like customer and industry workflow was. Furthermore, NOW enjoyed its 6th straight year of rising average customer size, as it successfully cross-sells more and more products.

“We don't have to try to translate between our AI models and some third-party system. We sell, fulfill and service on one platform, one architecture and one data model. Other software vendors need to communicate across multiple systems and stitch them together to make their software work, resulting in poor customer experiences saddled with technical debt.” – CEO Bill McDermott

Leadership on the Department of Government Efficiency:

“The United States government alone spends $125 billion a year on IT, much of which is un-auditable, not cataloged and not tracked against actual usage. That's why we're so enthusiastic about the new Department of Government Efficiency mandate from President Trump.”

CEO Bill McDermott

More News:

“On the IT spending environment, I think it's similar in the IT spending environment to what it's been. But I do think the big change is the move from AI fascination to AI business model innovation.”

CEO Bill McDermott

I know the stock reacted poorly to this report, but I thought it was very positive. The misses are FX-related and the core business is rocking. ServiceNow is in a league with Microsoft and Palantir in terms of most meaningful GenAI monetizers in software.. Its recipe of elite automation and data tools positions it for a long, high-margin growth runway even from here and its established businesses give it all the context and signal needed to create more world-class offerings to bolster the cross-selling engine. There’s a reason why this trades for 60x earnings and a roughly 3x PEG ratio. This is an elite company. A tiny guidance miss (which they explicitly said they intend to beat) related to exogenous factors is not concerning in the least. More wonderfully boring execution here.

Oracle and Alphabet Cloud are introducing joint services in 8 cloud regions.

Oppenheimer expects a strong Alphabet quarter next week. Bank of America also expects advertising strength to power a strong quarter for Alphabet. Both cited Meta’s strong performance for evidence.

Amazon will cut 50% of its fulfillment usage with UPS by the end of next year.

The U.S. is imposing 25% tariffs on Mexico and Canada and 10% on China. Tariffs will also likely be imposed on Europe soon. There’s going to be a ton of news flow around this in the coming years. My point of view is that if our companies are reliant on favorable regulatory outcomes, it’s probably not a great investment case. In my mind, this is largely noise and not something I will pay much attention to. For the vast majority of companies including every single name that I own, I think that’s the correct decision.

Inflation:

Consumer & Employment:

Output: