Generative AI investments drive strong revenue growth for ServiceNow, but light guidance weighs on stock

Enterprise workflow software provider ServiceNow Inc. beat analysts’ expectations as it delivered its first quarter financial results today, but its stock was trading lower after-hours following a tepid forecast that only matched Wall Street’s guidance.

The company reported earnings before certain costs such as stock compensation of $3.41 per share, beating the consensus estimate of $3.14 quite comfortably. Revenue for the period came to $2.6 billion, up 24% from the same period one year earlier and above the consensus estimate of $2.59 billion. Subscription revenue rose 25% to $2.523 billion, also slightly ahead of the Street’s target of $2.52 billion.

All told, the company delivered net income of $347 million, with an adjusted operating margin of 30% at the end of the quarter, just above its own forecast of 29%. Current remaining performance obligations, which is a measure of work under contract for the next 12 months but not yet delivered, rose 21% to $8.45 billion.

ServiceNow has been growing steadily in recent months at a time when it has been racing to integrate generative artificial intelligence capabilities in its main products. It’s these investments that enabled the company to get off to a “fast start [to the year] with an outstanding first quarter,” said Chief Executive Bill McDermott (pictured).

The executive said the company’s AI investments over the years have given it a “first mover advantage” that enables it to drive significant productivity improvements for its customers. “Our GenAI offerings are the fastest selling in the company’s history. We are humbled by the trust our customers are investing in our platform,” McDermott said in a statement. “As we engineer Now Assist AI into every business workflow across every enterprise, we are giving people the power to know more, care more, and do more.”

Most of ServiceNow’s AI investments have been focused on its Now Assist family of generative AI agents, which deliver embedded intelligent automation across its workflow platform. Last month, the company announced a major update with its Now Platform Washington D.C. release, which delivered new AI enhancements within its IT Service Management, Customer Services Management, Human Resources Services Delivery and Workflow Creator modules.

In an interview with Barron’s, McDermott boasted that ServiceNow has rapidly become “the AI platform for business transformation”. He added that process optimization is the single most popular generative AI use case in the world today, and promised that every business workflow will eventually be re-engineered with the technology.

McDermott said on a conference call that the company had a strong quarter in terms of large deals. Contracts worth more than $5 million a year increased by more than 100%, while contracts valued at more than $10 million per year rose by an impressive 300%.

Despite the strong numbers, ServiceNow would only offer cautious guidance for the coming quarter. Officials said they’re expecting subscription revenue to come between $2.525 billion and $2.53 billion, compared to the Street’s consensus estimate of $2.53 billion. The company is also forecasting an operating margin of 25%, below the Street’s forecast of 25.9%.

Investors were clearly hoping for more optimistic numbers, and many chose to bail on the company in the wake of the report. Consequently, ServiceNow’s stock was down 5% in the after-hours trading session. The decline virtually erases gains made in the year to date. Prior to today’s report, the stock had risen 5.7% since the start of the year.

McDermott explained that the operating margin miss was related to seasonal factors such as the timing of expenses. He noted that the company’s full-year margin guidance remains unchanged at 29%.

However, the company did at least offer a slightly improved full-year forecast, saying it expects annual subscription revenue of $10.56 billion to $10.575 billion. While the higher end of the range is unchanged from three months ago, the bottom end improved from $10.555 billion previously.

During the quarter, ServiceNow bought back $175 million of common stock as part of its ongoing share repurchase program.

Photo: SAP SE