AI, federal government revenue boost ServiceNow Q3 results

Key Points

• After gapping up at the open, ServiceNow stock remained up 4.99% mid-session on October 26, ranking among the S&P's top gainers.
• The stock showed strength despite the broader S&P 500 and tech sector trading lower.
• ServiceNow boosted its guidance, citing robust federal government business and AI product launches.

Shares of cloud-computing services giant ServiceNow Inc. NYSE: NOW gapped up at the open on October 26 on the heels of a blowout earnings report. The company cited strong business from the federal government and AI-related revenue generated.

In the third quarter, ServiceNow earned $2.92 a share on revenue of $2.288 billion, up 49% and 29%, respectively. That topped the company's guidance, as well as analysts' forecasts.

In the past eight quarters, earnings and revenue have seen double-digit growth. 

ServiceNow provides cloud-based solutions for streamlining and automating workflow and service delivery processes for government and private-sector customers.

Bulls and bears battle it out

After gapping up 7.32% in the first minute of trading, ServiceNow stock gradually retreated along with the broader market. You can track that pullback using MarketBeat’s ServiceNow chart and compare it to the broad market decline using the SPDR S&P 500 ETF Trust NYSEARCA: SPY chart. 

Nonetheless, ServiceNow was still up 4.99% mid-session on October 26, ranking it among the S&P’s top 10 gainers. 

Bulls and bears were battling it out, with ServiceNow stock fighting the broad downward trend as the S&P 500 falls into a correction. 

Within the Technology Select Sector SPDR Fund NYSEARCA: XLK, ServiceNow was the biggest mover. ServiceNow has outperformed the wider S&P and tech stocks in the XLK ETF. 

ServiceNow has been forming a flat base with a 14% correction, below a July 19 high of $614.36. It formed a floor above a September 28 low of $528. Strictly speaking, the buy point is north of $614.36, but more aggressive investors might consider the stock's September 11 $607.90 high.

Company's best quarter for federal contracts

In the earnings conference call, ServiceNow CEO Bill McDermott said the third quarter was the best for federal government revenue in the company's history. Net new annual contract value was up more than 75% year-over-year. "U.S. federal agencies are standardizing on a single platform with a core set of end-to-end solutions," he said.

He added that ServiceNow had 19 federal deals valued over $1 million, including three deals valued at more than $10 million. Its top deal in the quarter, the U.S. Air Force, was the third-largest deal in the company's history. 

That was among the factors that led the company to boost its full-year earnings and revenue guidance. 

There was more good news. Contrary to companies that are just talking up the potential of AI, ServiceNow is seeing revenue from its generative AI apps.

AI products, not press releases

In a jab at companies mentioning AI just to get attention, McDermott said, "Others issued press releases; we released products. At ServiceNow, our strategy isn't about exuberance; it's about execution."

In the third quarter, ServiceNow launched its Vancouver Platform release, which embedded generative AI across all workflows throughout its offerings. 

Now Assist, ServiceNow’s generative AI app, expands the company’s generative AI capabilities to help customers improve productivity and cost efficiencies. Now Assist incorporates generative AI features such as case, incident, and agent chat summarization, as well as virtual agent and search capabilities. 

In the earnings call, McDermott said CEOs are moving to increase productivity or slash costs, both of which bode well for ServiceNow. 

Enterprise looking to consolidate tech stack

In its 2023 analysts’ day presentation, the company said 62% of companies are undertaking cost reductions to offset declining labor productivity, while 40% of CEOs are exploring new business models to remain viable. Meanwhile, a whopping 93% want to consolidate their spending on tech vendors rather than building a tech stack from various sellers.

ServiceNow doesn't pay a dividend as a growth stock but has a share repurchase program. During the quarter, ServiceNow repurchased 500,000 shares of its common stock for $282 million — approximately $1.2 billion remains available for future share repurchases under the existing program.