ServiceNow CEO Touts 'Different' AI Offerings After Earnings
The stock is testing resistance after second quarter financial results hit the tape.
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On Wednesday evening, ServiceNow NOW released the firm's second quarter financial results. I had been long the stock since the spring. It had failed to break out of a cup with handle pattern. I took my profits. Apparently, now, that was early and a tactical error.
On Wednesday night, the shares closed at $956.43. After the stock was clearly reacting well to what had been released, I tried to short the stock at $1,050. The stock did trade that high. In fact, that was the high. I never came off of that limit. A big swing and miss. Oh for two. That does not mean that I am not a fan of both the business and of CEO Bill McDermott, who I think of as a top-five to-ten CEO running an American business in 2025. Let's dig in.
For the three-month period ended June 30, ServiceNow posted an adjusted EPS of $4.09 (GAAP EPS: $1.84) on revenue of $3.215 billion. Both the adjusted and GAAP bottom-line results crushed expectations, while the top-line print (also a beat) was good enough for year-over-year growth of 22.4%.
Subscription revenues were up 22.5%, 21.5% in constant currency. Current remaining performance obligation was up 24.5% (21.5% in constant currency) to $10.92 billion. Remaining performance obligation in total increased 29% (25.5% in constant currency) to $23.9 billion. Total customers worth more than $20 million in annual contract value to the firm was up 30% year over year.
The CEO
CEO Bill McDermott, who may be the coolest guy in American business, had something to say during last night's call. McDermott wrapped up his address with this gem:
"Analysts predict a genetic AI will be ubiquitous, embedded in software platforms and applications, transforming user experiences and workflows. AI is the new UI, and that's why the software industrial complex of the 21st century is converging into ServiceNow as the extensible AI operating system for the agentic enterprise. This gives us a monumental future value creation for our customers and shareholders."
In answering a question from an analyst, McDermott added:
"We've become the CEO's agentic AI story in enterprise software. And notice I didn't say SaaS. We actually don't live in (an) SaaS neighborhood. We live in an enterprise AI neighborhood on a one-on-one platform, and that differentiation is now being comported to our customers and to our partners in a clear and articulate manner. And that's why we're different."
Operations
Revenue was rising 22.4% to $3.215 billion, almost completely driven by subscription services. The cost of those revenues rose 31.2% to $724 million. That left a gross profit of $2.491 billion (+20.1%) on a gross margin of 77.5%, down from 77.6%. Total operating expenses grew 16.2% to $2.133 billion. That left a GAAP operating income of $358 million (+49.2%) on a GAAP operating margin of 11%, up from 9.1%. On an adjusted basis, operating income amounted to $955 million on an operating margin of 29.5%.
After accounting for interest, other income and expenses and taxes, GAAP net income hit the tape at $385 million (+47%), which works out to $1.84 per fully diluted share versus the year-ago comparison of $1.26. Once adjusted, net income became $854 million, which worked out to $4.09 per fully diluted share. This compares well to the adjusted $3.13 for the same period last year. Adjustments were made primarily for the purpose of stock-based compensation.
Guidance
For the current quarter, ServiceNow is projecting subscription revenue of $3.26 billion to $3.265 billion, which would be good for growth of 20% to 20.5%. Wall Street had been looking for something down around $3.21 billion, which has something to do with the overnight rally. The firm expects to see cPRO growth of 18.5% and adjusted operating margin of 30.5%.
For the full year, the firm is projecting subscription revenue of $12.775 billion to $12.795 billion, which would amount to growth of roughly 20%. Wall Street had been looking for $12.68 billion. Adjusted subscription gross margin is seen at 83.5%, while adjusted operating margin, as for Q3, is seen at 30.5%. Free cash flow margin is projected at 32%.
Fundamentals
For the quarter reported, ServiceNow generated operating cash flow of $716 million. Out of that came $190 million in capex spending. Tack on $9 million for some cost I didn't bother reading into and free cash flow hit the tape at $535 million, up 49% from the year-ago comp. Out of that number, ServiceNow repurchased $361 million worth of common stock for the firm's treasury. The firm does not pay out a cash dividend to shareholders.
Moving on to the balance sheet, the firm ended the period with a cash position of $6.132 billion and current assets of $9.275 billion. Current liabilities add up to $8.495 billion. None of that is short-term debt, but $6.802 billion is in the form of deferred revenues which are not a true financial obligation unless the services purchased go undelivered. This puts the firm's headline current ratio at an okay 1.09. However, once adjusted for those deferred revenues, this ratio rises to a quite muscular 5.48.
Total assets amount to $22.051 billion, of which just $2.097 billion or 9.5% is in goodwill or other intangibles. That's fine by me. Total liabilities less equity comes to $11.119 billion. This does include long-term debt of $1.49 billion, which is something the firm could pay off out of pocket more than four times over. This is an exceptional balance sheet.
Charts
Readers will see in this two-month chart, why the stock is up so much on the performance and increase guidance. On Wednesday night, the shares took back their 200-day SMA, 21-day EMA and 50-day SMA, in that order. This got the swing crowd on board while also forcing professional managers to increase long side exposure. So, where to go from here? Good question. There is a catch. Let's zoom out a bit:
Here, readers will see the cup-with-handle pattern that we had discussed in the past. The pivot coming off of that pattern stands at $1,046. The stock tried to take that pivot in very early July and failed. The stock tried that level overnight and failed. The stock tried that level again after the opening bell and again, failed. This leads me to believe that there is heavy institutional resistance at that level.
I could not get my short off overnight, but that looks like the spot to me. On the bright side, the 50-day SMA has also been tested and also held. Nothing would please me more than to see a $50 trading range develop in this name. For those about to ask, right now, aggressive traders can get paid about $23 to write August 15 $1,000 puts and/or almost $16 to write August 15 $1.050 calls. If it makes sense to drop down to the 200-day SMA, the August 15th $975 puts are going for a rough $17.
At the time of publication, Guilfoyle had no positions in any securities mentioned.
