ServiceNow (NOW) Q1 2025 Earnings Call April 23, 2025 05:00 PM ET Company Participants Darren Yip - Vice President-Investor RelationsBill McDermott - Chairman and CEOGina Mastantuono - President & CFOKash Rangan - Managing DirectorAmit Zavery - President, CPO & COOMark Murphy - Executive DirectorKylie Towbin - Senior Equity Research AssociateKarl Keirstead - Managing Director - Software Equity ResearchMichael Tulin - Private Mortgage BankerSamad Samana - Managing DirectorRaimo Lenschow - Managing DirectorKi ...

Core Insights - ServiceNow has successfully navigated concerns regarding potential federal spending cuts, reporting strong growth in its public sector business [3][4][10] - The company achieved over 30% year-over-year growth in its US public sector business and added six new government customers in Q1 [3][2] - ServiceNow's stock rose by 11% in after-hours trading following the positive earnings report [3] Company Performance - ServiceNow's Q1 results exceeded Wall Street expectations, leading to an increase in subscription revenue guidance [3] - Approximately 10% of ServiceNow's revenue is derived from the US federal government, making it particularly sensitive to federal spending changes [2] Cost-Saving Solutions - The company provides cloud software that automates tasks and consolidates IT tools, helping organizations save costs and improve efficiency [4][5] - ServiceNow's software has been instrumental in helping government agencies replace outdated legacy systems, which can lead to significant cost savings [6][8] Case Study: Raleigh, North Carolina - The city of Raleigh utilized ServiceNow to streamline personnel processes, saving over 1,302 hours annually [8] - By replacing six legacy service-management solutions, Raleigh reduced its IT call center staff from eight to two, resulting in an estimated annual savings of $315,000 [9]

Q1 2025 Financial Performance - Subscription revenues reached $3,005 million, a 19% year-over-year increase, or 20% in constant currency[20] - Current Remaining Performance Obligations (cRPO) totaled $1031 billion, growing 22% year-over-year[20] - Remaining Performance Obligations (RPO) amounted to $221 billion, reflecting a 25% year-over-year increase, or 255% in constant currency[20] - Non-GAAP operating margin was 31%, up approximately 50 basis points year-over-year[20] - Non-GAAP free cash flow margin was 48%, an increase of approximately 100 basis points year-over-year[20] Q2 and FY 2025 Guidance - Q2 2025 subscription revenues are projected to be between $3,030 million and $3,035 million, representing a 19%-195% year-over-year increase[23] - Q2 2025 cRPO growth is expected to be 195%[23] - FY 2025 subscription revenues are guided to be between $12,640 million and $12,680 million, an 185%-19% year-over-year increase, or 195% in constant currency[23] - FY 2025 non-GAAP operating margin is expected to be 305%, an increase of approximately 100 basis points[23] - FY 2025 non-GAAP free cash flow margin is projected to be 32%, an increase of approximately 50 basis points[23] Customer and Workflow Insights - ServiceNow has approximately 8,400 global customers, with over 85% of the Fortune 500 relying on its solutions[18] - The company maintains a high renewal rate of 98%[50]

Financial Performance - As of March 31, 2025, the remaining performance obligations (RPO) totaled $22.1 billion, with 47% representing current remaining performance obligations (cRPO), reflecting increases of 25% and 22% compared to March 31, 2024[93]. - Free cash flow for the three months ended March 31, 2025, was $1,477 million, a 21% increase from $1,225 million in 2024[95]. - Non-GAAP consolidated income from operations for the three months ended March 31, 2025, was $953 million, representing a 20% increase from $791 million in 2024[96]. - GAAP income from operations for the three months ended March 31, 2025, was $451 million, a 36% increase from $332 million in 2024[97]. - Total revenues for the three months ended March 31, 2025 were $3,088 million, a 19% increase from $2,603 million in the same period of 2024[109]. - Income before income taxes increased by 31% to $555 million for the three months ended March 31, 2025, up from $425 million in 2024[133]. - Provision for income taxes was $95 million for the three months ended March 31, 2025, a 22% increase from $78 million in the same period of 2024[133]. Revenue Breakdown - Subscription revenues increased by $482 million to $3,005 million for the three months ended March 31, 2025, representing a 19% increase compared to the same period in 2024[109]. - The renewal rate for the three months ended March 31, 2025, remained stable at 98%, consistent with the rate for the same period in 2024[96]. - Revenues outside North America represented 36% of total revenues for the three months ended March 31, 2025, slightly down from 37% in the same period of 2024[128]. - Direct sales organization accounted for 77% of total revenues for the three months ended March 31, 2025, compared to 78% in 2024[100]. Expenses and Costs - Cost of subscription revenues rose by $120 million to $561 million for the three months ended March 31, 2025, primarily due to increased headcount and costs to support subscription growth[114]. - Research and development expenses increased by $97 million to $703 million for the three months ended March 31, 2025, primarily due to increased headcount[122]. - Sales and marketing expenses increased by $131 million to $1,054 million for the three months ended March 31, 2025, primarily driven by increased personnel-related costs[120]. - Stock-based compensation increased by $48 million to $470 million for the three months ended March 31, 2025, representing 15% of total revenues[126]. Cash Flow and Investments - Net cash provided by operating activities was $1,677 million for the three months ended March 31, 2025, compared to $1,341 million in 2024, driven by higher collections from revenue growth[140]. - Net cash used in investing activities decreased to $217 million for the three months ended March 31, 2025, from $734 million in 2024, primarily due to a $573 million decrease in net purchases of investments[141]. - Net cash used in financing activities was $398 million for the three months ended March 31, 2025, down from $443 million in 2024, mainly due to a decrease in business combination payments[142]. - The company has generated positive operating cash flows for over ten years and expects to continue this trend in 2025[134]. - As of March 31, 2025, the company had cash and cash equivalents, short-term investments, and long-term investments totaling $10.9 billion[134]. Strategic Outlook - The company expects subscription revenues for the year ending December 31, 2025 to increase in absolute dollars while remaining relatively flat as a percentage of total revenue[110]. - The company is monitoring ongoing geopolitical conflicts but does not anticipate a material impact on its business operations[89]. - Macroeconomic factors such as interest rates and global inflation are being monitored, with no current impact on liquidity or financial condition reported[90]. - Interest income increased by $14 million to $115 million for the three months ended March 31, 2025, compared to $101 million in the same period of 2024, representing a 14% increase[130]. - Other expense, net rose by $3 million to $11 million for the three months ended March 31, 2025, compared to $8 million in the same period of 2024, reflecting a 38% increase[131]. Shareholder Returns - The company authorized a share repurchase program of up to $4.5 billion, with approximately $3.0 billion remaining available for future repurchases as of March 31, 2025[136].

Financial Performance - Subscription revenues for Q1 2025 reached $3,005 million, representing a 19% year-over-year growth and 20% in constant currency[2] - Total revenues for Q1 2025 were $3,088 million, indicating an 18.5% year-over-year growth and 19.5% in constant currency[7] - Net income for Q1 2025 was $460 million, compared to $347 million in Q1 2024, reflecting a 32% increase[44] - Gross profit for Q1 2025 was $2,437 million, representing a gross margin of approximately 79%[44] - Non-GAAP net income for the three months ended March 31, 2025, was $846 million, an increase of 19.7% from $707 million in the same period last year[51] - GAAP subscription gross profit increased to $2,444 million for the three months ended March 31, 2025, compared to $2,082 million in the prior year, reflecting a growth of 17.3%[50] - The company reported a diluted net income per share of $2.20 for Q1 2025, up from $1.67 in Q1 2024[44] - The company reported net cash provided by operating activities of $1,677 million, a 54.5% increase year-over-year[16] Revenue Guidance - For Q2 2025, ServiceNow expects subscription revenues between $3,030 million and $3,035 million, representing a growth of 19% to 19.5% year-over-year[22] - Full-year 2025 subscription revenue guidance is set at $12,640 million to $12,680 million, indicating an 18.5% to 19% year-over-year growth[24] Shareholder Actions - The company repurchased approximately 316,000 shares for $298 million, with about $3 billion remaining for future repurchases from an authorized amount of $4.5 billion[10] Customer Metrics - The company had 72 transactions over $1 million in net new annual contract value (ACV) during Q1, with 508 customers having more than $5 million in ACV, a 20% year-over-year growth[3] Cash and Assets - Current assets increased to $9,270 million as of March 31, 2025, compared to $9,187 million at the end of 2024[46] - Cash and cash equivalents rose to $3,369 million from $2,304 million year-over-year[46] - Cash, cash equivalents, and restricted cash at the end of the period totaled $3,377 million, compared to $2,064 million at the end of the same period last year, marking a 63.7% increase[48] Profit Margins - ServiceNow's subscription gross profit margin for Q1 2025 was 81.5%[16] - The company reported a GAAP gross margin of 79% for the three months ended March 31, 2025, down from 80% in the previous year[50] - Non-GAAP subscription gross margin was 84.5% for the three months ended March 31, 2025, compared to 85.5% in the prior year[50] - GAAP operating margin improved to 14.5% for the three months ended March 31, 2025, compared to 12.5% in the prior year[51] - The company expects a GAAP operating margin of 10% for the three months ending June 30, 2025[54] - Non-GAAP operating margin guidance for the twelve months ending December 31, 2025, is projected at 30.5%[55] Future Plans - ServiceNow plans to acquire Moveworks and Logik.ai to enhance its AI capabilities and CRM offerings[8] - ServiceNow plans to host its Financial Analyst Day on May 5, 2025, to discuss financial updates and AI integration[30] - The company is actively participating in multiple investor conferences throughout 2025 to enhance market engagement[34] Free Cash Flow - Free cash flow for the period was not explicitly stated, but the company emphasizes its importance as an indicator of operational strength[39]

Core Viewpoint - ServiceNow is expected to report strong first-quarter 2025 results, with significant revenue and earnings growth driven by subscription services and AI advancements [1][3][4]. Revenue and Earnings Estimates - The Zacks Consensus Estimate for first-quarter revenues is $3.08 billion, reflecting an 18.37% increase year-over-year [1]. - The consensus estimate for earnings is $3.79 per share, indicating an 11.14% growth from the previous year [1]. - Subscription revenues are projected between $2.995 billion and $3 billion, suggesting an 18.5-19% year-over-year improvement [3]. Subscription Revenue Growth - The Zacks Consensus Estimate for subscription revenues is $2.997 billion, indicating an 18.8% year-over-year growth [4]. - ServiceNow's new Yokohama platform is expected to enhance productivity and streamline workflows, contributing to subscription revenue growth [4][16]. Customer Growth and AI Integration - ServiceNow ended Q4 2024 with 2,109 customers, representing a 14% year-over-year increase in customers with over $1 million in annual contract value [5]. - The company is leveraging AI and machine learning technologies to enhance its solutions, which is expected to attract more clients [16]. Market Performance - ServiceNow shares have declined 27.1% year-to-date, underperforming the Zacks Computer & Technology sector and the Computers – IT Services industry [6][9]. - Despite the decline, ServiceNow shares returned 7% on a trailing 12-month basis, outperforming the sector's return of 2.8% [9]. Strategic Partnerships - ServiceNow has expanded partnerships with major companies like Google Cloud, NVIDIA, and DXC Technology to enhance its offerings and market reach [17][18][19]. - The collaboration with NVIDIA focuses on integrating advanced AI capabilities into ServiceNow's platform [18]. Challenges and Concerns - The company anticipates a $175 million unfavorable forex impact for 2025, which may affect subscription revenue growth [20]. - Tariff-related issues and a challenging macroeconomic environment are also expected to impact the federal business [9][20]. Conclusion - ServiceNow's strong AI portfolio and partnerships are expected to drive long-term subscription revenue growth, despite facing forex challenges and a stretched valuation [21].

Core Viewpoint - ServiceNow's stock has experienced a significant decline, dropping over 35% from its peak earlier this year, and is now in a bear market, with expectations for upcoming financial results [1][4]. Company Overview - ServiceNow is a leading technology company in the U.S., specializing in a cloud-based platform for IT Service Management (ITSM), focusing on automating workflows for IT services, customer services, and low-code development [2]. - The company serves thousands of clients globally, including major firms like Accenture, Adidas, Amazon, Walmart, Apple, and Vodafone Group [3]. Financial Performance - ServiceNow's annual revenue has increased from $4.5 billion in 2020 to over $10.98 billion projected for 2024, indicating strong business growth [3]. - Analysts anticipate a revenue increase of 18.5% to $3.09 billion for the upcoming financial results, with an expected earnings-per-share (EPS) of $3.83, up from a previous estimate of $3.41 [4][5]. Valuation Metrics - Concerns regarding ServiceNow's valuation persist, with a current price-to-earnings (P/E) ratio of 112.8, down from a high of 179 last year, and a forward P/E ratio of 95.7, significantly above the sector median of 23.2 [6]. - Compared to other SaaS companies, ServiceNow's valuation appears high, with Adobe, Microsoft, and Salesforce having forward P/E multiples of 21, 28, and 22, respectively [7]. Growth and Profitability - ServiceNow's revenue growth rate is approximately 21%, with a net profit margin of 16%, resulting in a rule-of-40 metric of 38%, suggesting the stock may be slightly overvalued [8]. - However, when considering its free cash flow (FCF) margin of 37%, the overall valuation may not be excessively high [8]. Stock Price Analysis - The stock price has fallen from a high of $1,196 in January to around $722, forming a double-top pattern that indicates a potential downturn [10]. - A death cross has formed, indicating bearish sentiment, and the stock is expected to continue declining post-earnings, with an initial target of $680 [11].

Core Viewpoint - ServiceNow's stock faced downward pressure following two consecutive price target cuts by analysts, leading to a more than 3% decline in share price while the S&P 500 saw a slight gain [1]. Analyst Price Target Cuts - Deutsche Bank analyst Brad Zelnick reduced his price target for ServiceNow from $1,300 to $1,050 but maintained a buy recommendation [2]. - TD Cowen analyst Derrick Wood also cut his target from $1,300 to $1,100, while keeping his buy recommendation intact [3]. Reasons for Price Target Adjustments - Zelnick's reasons for the price target cut were not immediately clear, while Wood cited concerns over the impact of the Trump administration's Department of Government Efficiency (DOGE) initiative on ServiceNow's public-sector business [4]. Market Sentiment and Upcoming Earnings - The market is showing nervousness ahead of ServiceNow's upcoming earnings release, scheduled for April 23, with analysts expecting year-over-year growth in revenue and profitability [5]. - Consensus estimates for revenue and earnings per share are $3.09 billion and $3.83, representing year-over-year improvements of 19% and 12%, respectively [5]. Long-term Outlook - Despite potential challenges in the government sector, ServiceNow's success in the private sector suggests a positive long-term outlook for the company [6].

Core Insights - ServiceNow (NOW) is expected to report quarterly earnings of $3.79 per share, reflecting an 11.1% increase year over year, with revenues projected at $3.08 billion, indicating an 18.4% growth compared to the previous year [1] - Analysts have revised the consensus EPS estimate down by 0.7% over the last 30 days, indicating a reevaluation of initial projections [1][2] Revenue and Profit Metrics - The estimated revenue from 'Professional services and other' is projected to be $84.10 million, a 5.1% increase from the prior year [4] - The 'Subscription' revenue is expected to reach $3.00 billion, representing an 18.8% year-over-year growth [4] - Current Remaining Performance Obligations (cRPO) are anticipated to be $10.10 billion, up from $8.45 billion a year ago [4] - Remaining Performance Obligations (RPO) are forecasted to be $21.42 billion, compared to $17.7 billion in the same quarter last year [5] - Gross Profit (Non-GAAP) from Subscription services is expected to be $2.51 billion, an increase from $2.16 billion year over year [5] - Gross Profit (Non-GAAP) from Professional services and other is projected at $10.12 million, down from $13 million a year ago [6] Stock Performance - Over the past month, ServiceNow shares have declined by 5.6%, while the Zacks S&P 500 composite has decreased by 6.3% [6] - ServiceNow holds a Zacks Rank of 3 (Hold), suggesting that its performance is likely to align with the overall market in the near term [6]

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