Review|NOW 2Q25:Sustained Stability; Accelerated AI Product Development, but Limited Short-Term Contribution
ServiceNow once again delivered a stable quarter, in line with both our and market expectations. Driven by early renewals of several large on-premise deals, 2Q25 cc subscription revenue exceeded guidance by 160 bps, significantly higher than the 30bps seen in the past two quarters. 3Q cc sub revenue growth is guided at flat sequentially. However, due to a conservative outlook on the Federal business in 2H25, the full-year guidance raise was smaller than the Q2 beat. Management was bullish AI product sales and accelerated product development, without new ACV disclosure. Overall, we believe this the quarter underscores NOW’s stability and top-tier execution as a leader in the Enterprise SaaS sector, but it does not yet alleviate long-term market concerns about the impact on the seat-based SaaS business model from AI.
Q2 Review: Revenue Beat Largest in Recent Quarters
Subscription revenue up 21% yoy cc, beat high end of guidance by 160bps, marking the largest beat in the past six quarters (typically 30-80bps). However, management noted that half of this outperformance stemmed from the early renewal of certain large on-premise contracts
cRPO up 21.5% yoy cc, exceeding the high end of guidance by 200bps, also the largest beat in several quarters
Despite a sequential decline in gross margin, adjusted OPM beat guidance by 250bps. Management attributed this to efficiency gains from internal AI applications.
Q3 and Full-Year Guidance Remain Conservative
3Q25 subscription revenue/cRPO guidance is set at 19.5%/18% yoy cc, in line with sell-side expectations but is slightly below bogey
Q3 cRPO growth is expected to face approximately 200bps of headwind due to a batch of large customer renewals planned for Q4 2025
The company maintains a relatively conservative assumption for its Fed business. In the previous quarter, the company anticipated no sequential growth in government ACV for Q2-Q4 of this year
The full-year subscription revenue guidance raise was less than the Q2 beat, as the incremental revenue from early on-premise large deal renewals was not included in the full-year guidance
The implied Q4 growth rate is expected to accelerate to 21% yoy cc. Considering management's consistently conservative guidance style, the Q4 exit rate is better-than-feared
