ServiceNow Q2 Earnings Preview: All Eyes on AI Momentum and Federal Pipeline

ServiceNow (NOW) is set to report second-quarter results after the market close on Wednesday, and expectations are high for another strong quarter, driven by continued enterprise adoption, Pro Plus traction, and strategic AI expansion. While the macro backdrop remains somewhat uncertain—especially around Federal spending and tariff-related risks—investors are focused squarely on the company's ability to sustain its growth trajectory in subscription revenue and advance its positioning as a major enterprise AI platform. With shares down over 9% YTD, this print could mark a turning point if the company delivers the kind of execution analysts have come to expect.

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For the quarter, consensus forecasts call for EPS of $3.57, up roughly 14% year-over-year, on revenue of $3.12 billion, representing 18.6% growth. Subscription revenue—the company’s most important metric—is expected to come in between $3.030 billion and $3.035 billion, implying 19–19.5% YoY growth. Meanwhile, current remaining performance obligations (cRPO) are guided to grow at 19.5% YoY in constant currency. Analysts generally anticipate a modest beat-and-raise quarter, especially following cautious guidance last quarter tied to conservative assumptions in the Federal segment. The implied earnings move post-print is ±6.4%.

The company’s full-year 2025 subscription revenue guidance stands at $12.64–$12.68 billion, up from $12.62B previously, translating to 18.5–19% YoY growth. Operating margin guidance for Q2 is 27%, down from 31% in Q1 due to typical seasonal trends. Expectations around AI revenue are climbing: management recently raised its FY26 AI annual contract value (ACV) target to $1 billion, up sharply from $250 million just a quarter ago.

There are several key issues to watch as ServiceNow reports:

AI Monetization and Pro Plus Adoption – Analysts are looking for further traction in Pro Plus deals and progress toward AI revenue goals. Partner feedback from Knowledge 25 suggested strong interest, with several major deals signed.

Federal Segment Performance – While Q1 guidance was cautious, Piper Sandler and others believe the Federal vertical may show stability or even modest improvement heading into the September fiscal year-end.

cRPO Growth and Pipeline Visibility – Investors will look for upside to the 19.5% cRPO guidance, which could signal strength in large enterprise deals and help allay macro fears.

CRM Expansion Narrative – ServiceNow has increasingly framed itself as a disruptor in the CRM space with its AI-native front-office solutions. Commentary around competitive positioning here could be a catalyst.

In Q1 2025, ServiceNow posted subscription revenue of $3.005 billion, a 20% YoY increase and a slight beat relative to guidance. cRPO grew 22% in constant currency, exceeding guidance by 150bps. Operating margin came in at 31%, 100bps above target, while free cash flow margin was a robust 48%. The company closed 72 deals over $1 million in net new ACV, nine of which exceeded $5 million. Growth was especially notable in verticals like manufacturing (up 100%+) and healthcare/life sciences (up 70%+).

CEO Bill McDermott emphasized ServiceNow’s shift into “full platform mode,” highlighting AI integrations such as RaptorDB and the growing importance of usage-based pricing. The company’s AI opportunity is becoming central to the story, with the Now Assist platform underpinning the transition to consumption-based revenue models. CFO Gina Mastantuono reinforced operational discipline, citing record productivity metrics and the margin tailwinds from increased AI usage.

Recent analyst commentary has been broadly positive. Cantor Fitzgerald raised its price target to $1,200, citing stronger enterprise momentum, reduced Federal risk, and visibility into AI monetization. BMO, Stifel, and Jefferies all expect modest upside on cRPO, with positive deal activity noted in ITOM, SecOps, and CRM. OPCO maintained its $1,100 target and sees ServiceNow exceeding its $15B FY26 subscription revenue target while expanding margins faster than expected. Citizens echoed these views, noting that 72% of private companies they surveyed met or exceeded Q2 sales plans—a bullish read-through for NOW.

That said, not all commentary is euphoric. Erste recently downgraded the stock to Hold, pointing to a stretched valuation—2025 P/E estimates are well above sector averages. Seeking Alpha’s quant model agrees, assigning a D- for valuation, although the company scored A+ in profitability and B+ in growth. Risks include Federal budget constraints, shelfware from over-provisioned customers, and AI pricing skepticism.

In summary, ServiceNow heads into Q2 earnings with solid execution momentum, strong AI tailwinds, and tempered but improving sentiment around the Federal pipeline. If the company can deliver on cRPO upside, reinforce AI adoption, and reassure on macro risks, bulls may regain control. But given elevated expectations, execution will need to be nearly flawless to justify the ~$1,100 average price target and re-ignite investor confidence in the stock’s 2025 recovery story.