ServiceNow Earnings: Operating on a Higher Plane Within Enterprise Software

Key Morningstar Metrics for ServiceNow

• Fair Value Estimate: $840.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of ServiceNow’s Earnings

We are raising our fair value estimate of ServiceNow NOW to $840 per share from $790 after the firm delivered exceptional results against a stubborn macro backdrop. After raising our estimates in the near term to account for guidance, with strong profitability flowing through the next several years, we see shares as attractive.

While there were many highlights from better-than-expected headline numbers, including revenue and profitability, we were most impressed by the growth in remaining performance obligations, which accelerated meaningfully during the quarter. Generative artificial intelligence embedded in the firm’s Pro Plus tier was a powerful factor in attracting new customers. After several quarters of ServiceNow seeing this type of traction, we think the firm is emerging as a clear AI leader. Beyond that, results reinforce our thesis that the company is leading the charge in automating and simplifying processes for enterprise customers.

Persistent revenue strength and growth reminiscent of much smaller peers are a testament to ServiceNow’s technology leadership and excellent sales execution. Total revenue grew 22.2% year over year, as reported, to $2.63 billion. This was ahead of our aggressive model, driven primarily by strong net new annual contract value performance with good early renewals lending an assist. Currency was a modest headwind to overall growth. Subscription revenue of $2.54 billion grew 22.5% year over year as reported, which was 50 basis points better than the high end of guidance. Outperformance was across the board, including segments, products, and geographies. Management called out the public sector, manufacturing, utilities, and energy as notably robust during the quarter while noting that macroeconomic conditions are unchanged and the entire sales process remains elongated.