ServiceNow (NYSE:NOW) saw its shares decline 2.7% to $100.50 during late-morning trading on Monday, as the broader iShares software-sector ETF (NYSEARCA:IGV) slipped 0.3%. The dip comes as investors weigh the company's upcoming second-quarter earnings report, with a particular focus on backlog metrics that may offer clearer signals than top-line revenue.
Analyst consensus projects total revenue between $3.92 billion and $3.93 billion for the quarter, with adjusted earnings per share expected at $0.86. However, the revenue target itself provides limited new insight, as it closely aligns with ServiceNow's prior outlook combined with first-quarter services revenue. The company had forecasted Q2 subscription revenue in the range of $3.815 billion to $3.820 billion, and factoring in Q1's services run rate of $99 million yields an estimate of about $3.917 billion, roughly $3.5 million below the Zacks consensus.
Given this alignment, investors are turning to backlog—specifically current remaining performance obligations (cRPO)—as a more reliable indicator of future growth. ServiceNow reported $27.7 billion in total RPO at the end of Q1, a 25% increase year-over-year, which is nearly double its trailing twelve-month revenue. Current RPO climbed 22.5% to $12.64 billion. However, management has guided for cRPO growth of 19% in Q2, which is 3.5 percentage points below the subscription revenue growth target of 22.5%. When adjusted for constant currency, the gap narrows to 1.5 to 2 percentage points, suggesting that revenue may be recognized more rapidly than short-term obligations are increasing.
The difference cannot be fully attributed to acquisitions. Armis, which ServiceNow acquired, contributes approximately 1.25 percentage points to each of the projected growth rates, but certain Armis contracts include termination-for-convenience provisions that limit their impact on cRPO. Thus, the shortfall may reflect broader industry dynamics rather than company-specific issues.
Concerns about enterprise software spending were heightened last week when International Business Machines (NYSE:IBM) reported preliminary Q2 revenue of $17.2 billion, a 1% increase that fell short of analyst expectations of $17.86 billion. IBM CEO Arvind Krishna cited “numerous large deals” that failed to close as customers redirected spending to servers, storage, and memory. This has raised fears of budget-related delays across the sector.
ServiceNow, however, entered Q2 with stronger contractual momentum. The company completed 16 transactions in the first quarter, each exceeding $5 million in net new annual contract value, representing an increase of nearly 80% year-over-year. By the end of March, ServiceNow had 630 customers with annual contract values above $5 million. Benchmark analyst Yi Fu Lee described ServiceNow as “one of the most misunderstood large-cap software names,” noting that IBM and ServiceNow have different growth approaches and business models.
Monday's trading reflects investor caution. Shares fell 2.7%, while IGV slipped 0.3%. Brokers remain divided on the stock's outlook. Cantor Fitzgerald raised its price target to $141 on Monday, while D.A. Davidson lowered its target to $170 but maintained a Buy rating. CLSA initiated coverage with an Underperform recommendation and a $72 price target.
A solid positive outcome for ServiceNow would be cRPO growth at or above 19%, coupled with stable full-year guidance. Simply surpassing revenue expectations would not clarify the IBM comparison, while missing cRPO would reinforce arguments for budget-related delays. Risks to cRPO include currency fluctuations, renewal schedules, contract timing, and acquisition mix. IBM remains much more exposed to mainframe-related spending, and performance in a single quarter may not indicate a broader trend for the software sector.
ServiceNow will release its results after the market close on Wednesday, followed by an earnings call at 5 p.m. EDT. Investors will be watching closely for signs of sustained momentum or emerging headwinds.
