Investments in generative AI drive strong revenue growth for ServiceNow, but weak guidance weighs on stock price

Enterprise workflow software provider ServiceNow Inc. today reported first-quarter results that beat analysts’ expectations, but the company’s stock fell in after-hours trading on lukewarm expectations that matched only Wall Street guidance.

The company reported earnings, excluding certain costs such as stock-based compensation, of $3.41 per share, comfortably beating consensus estimates of $3.14. Revenue for the period was $2.6 billion, an increase of 24% year-over-year and beat the consensus estimate of $2.59 billion. Subscription revenue rose 25% to $2.523 billion, also slightly above the Street’s target of $2.52 billion.

Overall, the company achieved net income of $347 million and an adjusted operating margin of 30% at the end of the quarter, slightly above its own expectations of 29%. Current remaining performance obligations, a measure of work under the contract but not yet performed over the next 12 months, increased by 21% to $8.45 billion.

ServiceNow has been growing steadily in recent months as it races to integrate generative artificial intelligence capabilities into its core products. These investments allowed the company to get off to a “fast start.” [to the year] We had a great first quarter,” said Chief Executive Bill McDermott (pictured).

The executive said the company’s years of AI investments have given it a “first mover advantage” and can drive significant productivity gains for its customers. “Our GenAI product is the fastest-selling in the company’s history, and we are humbled by the trust our customers have invested in our platform,” McDermott said in a statement. “Every business in every company can incorporate Now Assist AI into their workflows to help people know more, care more, and do more.”

Most of ServiceNow’s AI investments are focused on the Now Assist family of generative AI agents that deliver built-in intelligent automation across the workflow platform. Last month, the company announced a major update with the Now Platform Washington DC release. This brings new AI enhancements within the IT Service Management, Customer Service Management, HR Service Delivery, and Workflow Creator modules.

In an interview with Barron’s, McDermott boasted that ServiceNow has quickly become “the AI ​​platform for business transformation.” He added that process optimization is currently the most popular use case for generative AI in the world, and promised that eventually every business’ workflow will be redesigned with this 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 per year saw him increase by more than 100%, and contracts worth more than $10 million per year saw him increase by a whopping 300%.

Despite the strong numbers, ServiceNow plans to provide only cautious guidance for the next quarter. Officials said they expect subscription revenue to be between $2.525 billion and $2.53 billion, compared to the Street consensus estimate of $2.53 billion. The company also expects operating margin to be 25%, below TheStreet’s estimate of 25.9%.

It’s clear that investors were expecting more optimistic numbers, and many chose to bail out the company following the report. As a result, ServiceNow stock fell 5% in after-hours trading. This decline effectively wipes out year-to-date gains. Prior to today’s news, the stock had risen 5.7% since the beginning of the year.

Mr. McDermott explained that the operating profit margin shortfall was related to seasonal factors such as the timing of expenses. He pointed out that the company’s full-year profit margin outlook remains unchanged at 29%.

However, the company provided at least slightly improved full-year guidance, saying it expects annual subscription revenue to be between $10.56 billion and $10.575 billion. The upper end of the range is unchanged from three months ago, but the lower end has improved from the previous $10.555 billion.

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

Photo: SAP SE