Housekeeping:

Hi friends! I had a bit of a personal health issue today that required an impromptu visit to two eye doctors. I’m fine, but my pupils were dilated a few different times amid all of the testing. My vision is still a bit blurry, but I’m pretty confident I was able to edit this effectively. If there’s an extra typo in here, I apologize. The Chipotle review will be out tomorrow before the market close. The Alphabet review will be out Friday morning. I have a follow-up appointment late tomorrow afternoon that I can’t re-schedule and my vision will be messed up for most of the night. This won’t be a f recurring issue and I apologize. I’m frustrated by this but I have to take care of myself.

In case you missed it:

ServiceNow is one of the largest enterprise software firms in the world. It automates workflows, tech stacks and projects to augment customer efficiency. For this reason, it calls itself the “leading digital workflow company.” Workflow automation buckets include: service management, operations, asset management, security, customer management, employee management and creator management. These are further grouped into workflow buckets like “Customer & Employee Workflows,” “Creative Workflows” and “Technology Workflows.” Two products to know within the Tech Workflow category include Information Technology Operations Management (ITOM) and Information Technology Service Management (ITSM). The names of these products tell you exactly which types of workflows they’re meant to automate.

All products and services are neatly tied into its “Now Platform.” The firm describes this overarching ecosystem layer as a way to “optimize processes, connect silos and accelerate innovation on a single unifying platform.” That’s a fancy way of saying that it makes every piece of work more seamless and expedient.

ServiceNow has been hard at work on GenAI innovation to bolster automation capabilities. Its Now Platform “Vancouver” release got the ball rolling by consolidating all GenAI model and app projects into an intuitive set of products. It recently built on that debut with Now Platform “Washington D.C.” and “Xanadu” releases. These are both essentially a large batch of GenAI-inspired upgrades to the Now platform. They add to the progress of the Vancouver release. Washington D.C. more seamlessly ties together NOW’s product categories to drive better interdepartmental work and communication. It makes using all of its tools and capabilities across teams more intuitive and obvious. Xanadu focused on completing the Microsoft Copilot integration and infusing Agentic AI (goal-oriented AI that you simply tell what to do) into the Now platform. More specifically, the release focused on two product categories. First, its security and threat management products. Xanadu uses models that are trained on a company’s own data, which has been shown to accelerate incident response. Automated threat triaging helps too. Second, Xanadu adds new capabilities within financial and supply chain workflows – starting in sourcing and procurement.

ServiceNow also offers the “workflow studio” as a way to create intricate workflows via a wonderfully easy, no-code or low-code drag-and-drop process. It’s a unified workspace to tap into all of the automation and workflow performance analytics tools ServiceNow provides, without needing to be a talented developer to work with them. Various teams can easily access the studio to enable seamless collaboration and better work.

These platforms establish the foundation for its own GenAI apps used internally and sold to customers. A big example is “Now Assist AI.” This is ServiceNow’s GenAI assistant/companion app infused across most of its products. More GenAI product examples include:

“Plus SKUs” are how ServiceNow bundles all of its GenAI work into subscription packages. It up-charges clients for access to these SKUs, as its approach to GenAI monetization has been more aggressive than most. These Plus SKUs do things like automate customer service, expedite issue resolution and provide more conversational fetching/querying of a firm’s data.

Revenue growth from the manufacturing sector and the U.S. public sector were the two quarterly standouts. Manufacturing doubled Y/Y while the public sector rose 30% Y/Y to comfortably surpass expectations. Much more on this later. Finally, there were no changes in demand patterns or behavior from tariffs. Meaning? There were no pull-forwards to help this quarter’s revenue in a one-off manner (a good thing).

For the full year, ServiceNow slightly raised annual subscription revenue guidance, which is slightly better than expected. This was related to FX favorability, as it actually lowered FXN growth guidance from 19.75% to 19.5% Y/Y. ServiceNow explicitly said it took a “prudent approach to 2025” guidance. It only included a portion of this quarter’s outperformance in its updated targets. All things considered, I found this to be quite positive.

It also reiterated 83.5% subscription GPM guidance, 30.5% EBIT margin guidance and 32% FCF margin guidance. All three targets were in line.

NOW trades for 50x forward EPS and 38x forward FCF. Estimates will probably be stable following this report but could rise modestly. EPS is expected to compound at a 20% clip for the next two years. FCF is expected to compound at a 32% clip for the next two years.

The Platform Play & Macro:

Regardless of ServiceNow’s insulation from the trade war and its software suite being spared from paying tariffs, it’s not immune. As we worked through in the earnings season preview… nobody is fully immune. Many of their customers are more materially impacted by new trade policy, while sales cycle elongation amid heightened macroeconomic chaos is all but invariable. So how is it cutting through all of this and proving resilient amid all of the noise? Its product suite is built to help companies do more with less. It’s created to let clients shed reliance on expensive, clunky, disparate 3rd-party vendors and to embrace a truly cohesive platform. Through AI, automation and intuitive user interfaces, it greatly lowers total cost of ownership (TCO) for managing workflows. Simply put… it continues to win because it continues to innovate, provide more value and make customers more efficient. Its demand pipeline is enjoying strong momentum (including in AI) as a “renewed focus on cost takeout” inspires more enterprises to embrace NOW. The company performed “rigorous analysis” on any potential sales cycle elongation or budget scrutiny for NOW’s offering, and all of that was baked into its resilient guidance.

“ServiceNow platforms remain a deflationary tool that customers are leaning into in times of uncertainty.”

CFO Gina Mastantuono

“Yes… CEOs are mindful that the global economy is in a fluid state. No… They are not standing still.”

CEO Bill McDermott

This all sounds nice… but how about some numbers and quantitative evidence beyond headline financials? ServiceNow closed 72 $1M average contract value (ACV) deals vs. 63 Y/Y. ITSM, ITOM security and risk product categories were all in 10 or more of its 20 largest deals; creator workflows were included in all 20 of the largest wins. Industry-specific workflows for finance, supply chain management, industrials and more were all in more than half of its 20 biggest contracts, while 8 of them added more than $1M in ACV to the agreement. Finally, 19/20 of its largest deals included 5 or more products. Sticky, sticky.

“And what sets ServiceNow apart is simple, our platform. We integrate across the entire tech stack, bringing all that data into a single model. We elevate into the workflow layer, transforming data into insights… in times of uncertainty, customers focus on maximizing ROI and reducing costs. That’s exactly where the ServiceNow Platform excels.”

CEO Bill McDermott

A Bit More on Macro:

Tariffs are arguably pushing clients closer to NOW. Its abilities to shift supply chains in real-time to lower-tariff regions, help develop new geographic options and accelerate certifications for new partners are all helping a ton right now. More value creation = more demand resilience. This is the theme.

Fantastic AI Traction:

AI represents bountiful opportunities for ServiceNow. It helps NOW make all existing products better, helps it expand the overall product offering and allows it to get more efficient internally. Starting with making existing products better, the clearest sign of this happening is plus SKU adoption. That’s where all of the AI work presides. Plus pro deals rose 4x Y/Y and beat internal expectations, while 39 of these deals included 3 or more of its AI products. ACV per plus deal rose 33% Q/Q as clients continued to land larger. ITSM Plus was in 15 of its 20 largest deals while ITOM plus net new ACV rose 70% Q/Q. Security Operations Plus enjoyed 300% Q/Q ACV growth while creator plus delivered 200% Q/Q growth. The bases for both of these products remain small, but that will not be the case for long if this keeps up. The overarching AI product umbrella (Now Assist AI) remains the firm’s fastest-growing product launch.

In terms of new AI innovation to drive more traction, the firm unveiled the latest Now Assist AI platform update teased last quarter. It’s called Yokohama and is meant to vastly deepen NOW’s agentic AI capabilities. It’s also aimed to augment and more tightly integrate Workflow Data Fabric (ServiceNow’s unified data management platform) and RaptorDB. One of the more interesting products is its new AI Agent Orchestrator. Because Agentic AI features multi-step tasks with a goal-oriented, reasoning-based approach, they need to pull information from many different places. They need to organize all of that information in an actionable manner. And? They need tools to bring this actionable information to life. ServiceNow gives them all of that. It allows companies to scrape from a vast supply of Now-hosted data, 3rd party providers, the public web etc. Whether it’s unstructured or structured, ServiceNow can ingest and arrange it all. That’s where Workflow Data Fabric really comes in handy.

With AI Agent Orchestrator, ServiceNow ensures all client agents can openly communicate with each other and borrow context whenever needed. It effectively unleashes Agentic AI for companies without the internal drive or capabilities to do everything on their own. Pairing nicely with this launch is its AI Agent Studio, which builds on its workflow studio by providing a managed environment for creating specific agents.

Finally, ServiceNow is aggressively adding its own AI work to internal workflows to boost productivity. It is called “Now on Now.” The initiatives have already improved sales lead conversion rates by 16x and fostered an 86% deflection rate in some previously manual and tedious workflows.

Aside from maybe Palantir and Microsoft, ServiceNow has been the most successful AI monetizer within the app layer of the opportunity. We can try to explain this relative outperformance a million different ways… but at the end of the day… contracts follow unique value creation and that is what NOW is providing. For evidence, Orca (mining and infrastructure solutions) boosted IT support deflection rate from 18% to 94% with NOW and reduced incident resolution time by 36 hours. We hear concrete AI-related case studies like this every quarter from this firm.

Data is the New Oil:

Public Sector Demand:

McDermott continued to speak positively about the Department of Government Efficiency. They do think there could be some short-term disruption with the new administration, but see the overall opportunity accelerating and demand levels remaining strong. If that agency wants to drive new cost controls and “do more with less,” they’ll do so through cohesive software-based platforms like this one. If anything, DOGE should accelerate public sector demand for this firm and the other value creators in enterprise software. The companies that need to be worried are the leeches collecting their annual checks and providing no utility. That’s not ServiceNow. For evidence, U.S. public sector net new ACV rose 30% Y/Y as it signed a brand new federal agency as a client. Overall, it inked 11 $1M+ federal deals vs. 8 Y/Y.

M&A & Partnerships:

Wonderfully resilient quarter amid a highly volatile and fluid backdrop. Despite the FX help, I found the small raise to overall annual revenue guidance to be impressive and its margin reiterations equally impressive. Enterprise software is insulated from trade wars… but not immune. I’ll keep saying it. And apparently NOW will keep overcoming it.

ServiceNow continues to lead most of enterprise software in its ability to provide real GenAI and Agentic AI value within its products. That’s why AI is already a financial needle mover for it while that’s not the case for most peers. ServiceNow is an elite company with a durable competitive moat, a massive runway and a consistent ability to capture that runway at elevated margin. The team is elite; the balance is beautiful; the product launches are all working. This would be a good quarter in any environment, but it’s a great quarter in this one. When every analyst is congratulating you during the Q&A, you know things went well.