Over the next several weeks, subscribers will get 40+ earnings reviews, ongoing fundamental news coverage and real-time updates of my own portfolio/performance.
They've already gotten Alphabet, Netflix and Taiwan Semi reviews. ServiceNow is coming later today.
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Table of Contents
Throughout this piece, I will reference various products in the ServiceNow product suite. If you’re not familiar with something, definitions can be found in my ServiceNow 101 article here.
a. Key Points
- Reiterated 2030 targets.
- Ongoing AI momentum driving rapid scaling.
- Margins are currently pressured by a few headwinds.
b. Demand
- Beat revenue estimate by 1.5%.
- A small amount of revenue was pulled from Q3 into Q2 due to strong federal demand and early deployments.
- Beat subscription (sub) revenue estimate by 1.6% and beat guidance by 1.6%.
- 23% constant currency (CC) growth beat 21.8% growth estimate and 21.25% growth guidance. Love to see this.
- 21.5% CC current remaining performance obligation (cRPO) growth beat 19% growth estimate & 19.5% growth guidance. I also love to see this.
- Overall RPO growth was 22% CC. Duration elongation helped growth here a bit (and is also a sign of customers being comfortable with longer term commitments).
- It was great to see its customer renewal rate move back from 97% to 98% Q/Q. That points to customers sticking with the company amid AI disruption risk.
“Our $29 billion in remaining performance obligations is fueled by longer customer commitments and skyrocketing demand from our partner ecosystem. We are who we said we were: a defining company that is only just getting started.” – CEO Bill McDermott
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c. Profits & Margins
- Missed 81.5% subscription GPM estimate by 100 basis points (bps; 1 basis point = 0.01%).
- Higher AI costs from rising customer usage, a shift from on-premise to public cloud-hosted revenue and M&A are all weighing on GPM. The first two headwinds will ease with scale. NOW also plans to mix in cheaper AI as they see customer preference among the various models vanishing as the products all become more similar. That should allow them to enjoy lower token costs over time as well.
- Beat EBIT estimate by 12.5%. The delayed timing of some marketing spend lowered Q2 costs and amplified the beat.
- EBIT margin was nearly flat, but that was because of the timing note. This is something to keep an eye on. NOW's margins are falling due to AI spend, and they need to be right about these headwinds easing if they're going to hit their 2030 targets. Leadership is confident that they will.
- Beat $0.86 EPS estimate by $0.04.
- Roughly met FCF estimate.
d. Balance Sheet
- $6.6B in cash, equivalents & marketable securities.
- $2B in long-term investments.
- $7.5B in debt.
- -1.3% Y/Y dilution.
- Headcount rose by 11% Y/Y due mostly to M&A and a bit of sales hiring. They remain committed to exiting this year at pre-M&A headcount, meaning some layoffs are likely coming.