ServiceNow Earnings: Operating on a Higher Plane With Another Strong Quarter

Key Morningstar Metrics for ServiceNow

• Fair Value Estimate: $1,050
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of ServiceNow’s Earnings

ServiceNow NOW‘s second-quarter revenue grew by 22% year over year in constant currency to $3.22 billion, driven by solid renewals, generative AI, and customer workflow adoption. Non-GAAP operating margin was 29.7% for the quarter. Results topped the high end of guidance on key measures.

Why it matters: Our initial read early in the reporting cycle is that software is performing well. ServiceNow is no exception, as it is benefiting from strong demand as uncertainty seems less of a headwind than it has been in recent quarters.

• Subscription revenue crushed the high end of guidance and grew 22.5% year over year to $3.11 billion. We see strength across workloads and geographies, with healthy large deals. Demand from US federal accounts was strong and is expected to remain so as modernization efforts continue.
• Generative artificial intelligence remains a key driver, one that should help maintain durable growth over the next five years. Management strength in Pro Plus solutions, with deal count up more than 50% sequentially, while deal size also increased.

The bottom line: We raise our fair value estimate for wide-moat ServiceNow to $1,050 per share from $1,010, based on results and guidance. We view the stock as slightly undervalued and believe it offers the best union of growth and profitability in software.

Coming up: Overall guidance is as impressive as results. ServiceNow raised its full-year revenue guide by $125 million at the midpoint while holding its margin outlook steady. For third quarter, guidance was better than expected for revenue and shy of what we anticipated for profitability.

• Management believes guidance incorporates some prudent conservatism around the public sector but noted strength in the US federal in the quarter.
• We are impressed by new product traction and think this could support even better revenue growth through 2026. Given margin performance thus far, we see room for margins to come in ahead of our updated model for the rest of the year.