Hi YXI friends,
We are covering ServiceNow in today’s Deep Dive, as it was added to our Systematic Portfolio this week.
ServiceNow had an excellent Q2, and the market has rewarded it for it. The bookings were as good as this business gets. Subscription revenue grew 23% YoY in constant currency and beat the top of management’s own guidance by 150 basis points. Current remaining performance obligation, which is the contracted revenue due inside a year, grew 21.5% YoY and beat its guide by 200 basis points. The renewal rate held at 98%. AI contract value crossed $1 billion for the first time. Management now expects to beat its own year-end target for it.
However, the profit line went the other way. GAAP operating income fell from $358 million to $162 million. Gross margin dropped from 77% a year ago to 71%. Full-year subscription gross margin guidance came down to 81%. Management named the cause without being asked: hyperscaler migration running ahead of plan, plus the cost of serving AI features it has bundled into a price tier rather than charging for by consumption.
What to make all of this? Below, I go through the multi-model signals, the fundamentals and what management did and did not guide, two independent valuation lenses, and the price technicals. Then where I come out on all four.
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