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ServiceNow reported solid second-quarter earnings on Wednesday afternoon. Its shares were up 4.6% in late trading, after closing down 6.5% during the regular session. This comes amid the company’s attempt to remake itself as an orchestration and security platform for the artificial intelligence age.
The software firm reported adjusted earnings per share of 90 cents. That’s up from 82 cents last year and better than Wall Street projections for 86 cents. Revenue for the quarter reached $4 billion, ahead of expectations of $3.9 billion, and up 24% on the year.
The portion of the company’s backlog that it expects to convert to revenue in the next 12 months–known as cRPO–is a closely watched metric for ServiceNow, and the company was able to exceed its previous guidance and analyst projections. It hit $13.2 billion, up 21% on the year.
Earnings growth is being negatively impacted by the company’s $7.8 billion April acquisition of Armis, a cybersecurity provider. Last quarter, ServiceNow issued guidance for a second-quarter operating margin hit, but adjusted operating margin remained strong at 29.5%, just below what it was in the same quarter a year ago.
There was also additional interest expense from a short-term $4 billion loan for the purchase. The loan matures in October with an option to extend it another six months.
ServiceNow said that the acquisition would continue to negatively impact earnings in the third quarter.
The company’s outlook was mixed. For the third quarter, guidance for cRPO was good but projections for subscription revenue and adjusted operating margin fell short. For the year, the company edged up subscription revenue guidance, but its adjusted gross margin ticked lower.
Artificial intelligence threatens to hurt many kinds of enterprise software, especially those like ServiceNow that bill by the user. The company is fighting back by disrupting itself.
AI can write software, and it is leading some companies, like Palantir Technologies, to replace outside vendors with their own bespoke solutions. More dangerously to software companies, agents that can use AI models to accomplish complex tasks from simple conversational commands may be able to supplant many of the functions of software.
ServiceNow’s IT service management software is at the core of what it offers. Many investors have feared that agents will take over from people in dealing with ticketing and incident management. Fewer people means fewer subscriptions and less revenue.
Investors will keep a close eye for any slippage in the company’s subscription renewal rates, at 98% in the second quarter, the same as the year before.
Like many of its peers, ServiceNow is well aware of the threat and it is busy disrupting itself and its user-based pricing. It’s now pitching itself as the orchestration and security software layer for enterprise AI. Whereas previous editions of the company’s annual report didn’t emphasize AI as much, its latest from January begins, “ServiceNow delivers solutions that help public and private organizations govern, secure and manage artificial intelligence.”
It has its own agents for sale, and it has reorganized its product lines around being an AI-first platform for managing the breadth of an enterprise’s IT estate, providing crucial governance and orchestration of AI models and agents that don’t always perform as intended.
“We’re in the bull’s eye of AI, cybersecurity, workflow orchestration, integration, and automation,” CEO Bill McDermott said on the earnings call.
Moreover, the company has changed its pricing to a hybrid model that combines user-based subscriptions with AI consumption revenue on top of that. The subscription model has given ServiceNow high gross margins, but AI expenses are eating into that profitability and consumption-based sales will likely erode it further.
So far, ServiceNow has made up for the loss of gross margin by slowing down operating expense growth.
Write to Adam Levine at [email protected]
