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ServiceNow will report its second-quarter earnings on Wednesday afternoon in a troubled time for software companies. Though analyst projections for the next couple of years are still pretty rosy, ServiceNow is one of the firms at the center of the software-stock meltdown, with its shares down 47% in the past year.
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, the only way forward.
Wall Street analysts are expecting the company to report 86 cents of adjusted earnings per share, up from 82 cents the year before. Sales are seen growing much faster—by 22% to $3.9 billion.
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, and there will also be 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.
But likely the key metric that analysts will be looking at is the firm’s contract backlog that is expected to convert to revenue in the next 12 months. Three months ago, second-quarter guidance was disappointing, and that played into the AI-eats-software narrative. The stock plunged 18% the next day. Beating expectations here would go a long way to soothing investor concerns.
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, last seen at 97%.
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 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.
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 a very high gross margins but AI is already eating into it 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]