NOW shares lower despite beat and raise quarter; Is this a sign of AI exhaustion?
AInvestThursday, Jan 25, 2024 1:50 am ET
2min read
NOW --

ServiceNow, a leading software company in workflow automation, announced Q4 results and provided an upward revision in its forecast for annual subscription revenue due to the growing demand for its generative artificial intelligence (AI) products. 

With businesses increasingly investing in workflow automation and improved communication, ServiceNow is well -positioned to benefit from this trend. The company's generative AI-integrated products, such as Now Assist, have garnered significant interest. 

In the fourth quarter, ServiceNow reported revenue of $2.44 billion, surpassing analysts' expectations of $2.40 The company's subscription revenue for the same period reached $2.37 billion, exceeding analysts' estimate of $2.32 billion. Compared to the corresponding period in the previous year, The company's revenue also experienced substantial growth, rising 26% to $2.44 billion.

ServiceNow's current remaining performance obligations (CRPO) exceeded expectations, reaching $8.6 billion, representing a 24% increase. CRPO bookings, which encompass deferred revenue and order backlog, serve as a key sales growth metric.

ServiceNow had a Q4 adjusted profit of $3.11 a consensus share on a fully diluted basis, surpassing the Street of $2.78 a share. Non-GAAP operating margin was 29%, beating the company's forecast of 27.5%. 

For the first quarter of 2024, ServiceNow expects subscription revenue to range from $2.510 billion to $2.515 billion, up between 24% and 24.5%, and exceeding the Street consensus at $2.461 billion. The company anticipates growth in current remaining performance obligations of 20% and a non-GAAP operating margin of 29%. 

For the entire year of 2024, ServiceNow projects subscription revenues between $10.555 billion and $10.575 billion, up between 21.5% and 22%, and above the Street consensus at $10.474 billion. The company expects a non-GAAP operating margin of 29% , higher than the 25.6% consensus; subscription gross margins of 84.5%, three points above the Street consensus; and a free cash flow margin of 31%, in line with estimates. 

Additionally, ServiceNow has secured a five-year deal with Visa to address cardholder disputes and has extended its partnership with professional services firm EY.

CEO Bill McDermott highlighted the significant impact the company's AI features introduced in September has had on its software, stating, We're seeing the largest net new contract contribution of any product we have ever introduced.

According to McDermott, the company has surpassed its goal of reaching $10 billion in cumulative annual contract value by 2025, achieving this milestone a year earlier than anticipated. As a result, ServiceNow has revised its full-year 2024 subscription revenue forecast to a range of $10.56 billion to $10.58 billion, surpassing its previous projection of $10.4 billion. 

Despite the positive earnings report, ServiceNow's stock price experienced a slight decline of 0.5% in after-hours trading, settling at $760 per share. 

In summary, ServiceNow has demonstrated strong financial performance, surpassing revenue and earnings expectations, driven by the increasing demand for its generative AI products and services. The company's ability to secure new customers, extend partnerships, and exceed its target contract value indicates a promising future. The integration of AI software into its core offerings has proven to be a significant growth driver, enabling ServiceNow to outperform the market.

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