NOW's Subscription Growth Picks Up: A Sign of More Upside?

Core Insights - ServiceNow's AI-powered platform is facilitating business transformation for enterprises by automating workflows across various sectors, including IT, customer service, and business operations [1] - The primary driver of ServiceNow's financial performance is the growth in subscription revenues [1] Financial Performance - In Q2 2025, subscription revenues rose by 22.5% year-over-year to $3.11 billion, exceeding Zacks Consensus Estimates by 2.66% [2][10] - Current Remaining Performance Obligations (RPO) increased by 21.5% year-over-year to $10.92 billion in the same quarter [2][10] - ServiceNow secured 89 net new Annual Contract Value (ACV) deals over $1 million, including 11 deals above $5 million, indicating strong enterprise demand [2] Product Adoption and Innovation - The growth in subscription business is bolstered by the rising adoption of ServiceNow's innovative product suite, particularly the AI-enhanced Pro Plus tiers of core products [3] - Tools like Workflow Data Fabric and RaptorDB Pro are unifying data and supporting high-performance AI applications, with AI Pro Plus deal count increasing by over 50% sequentially [3] - ServiceNow closed its largest Now Assist deal to date, exceeding $20 million, with 21 large transactions involving five or more Now Assist products [3] Future Outlook - ServiceNow anticipates subscription revenues of $12.785 billion for 2025, with the Zacks Consensus Estimate at $12.661 billion, indicating continued growth driven by platform adoption and AI-driven SKUs [4] Competitive Landscape - ServiceNow faces significant competition in the subscription-driven workflow automation space from Salesforce and Pegasystems [5] - Salesforce is experiencing strong demand for its Einstein AI platform, which enhances customer relationship management and automation capabilities [6] - Pegasystems is leveraging its GenAI Blueprint solution to accelerate application development and expand its subscription-based platform [7] Stock Performance and Valuation - ServiceNow's shares have declined by 6.3% year-to-date, underperforming the broader Zacks Computer & Technology sector's return of 11.4% [8] - The stock is trading at a premium, with a forward 12-month Price/Sales ratio of 14.19X compared to the sector's 6.72X [12] - The Zacks Consensus Estimate for ServiceNow's Q3 2025 earnings is $4.22 per share, reflecting a 13.44% year-over-year increase [15]