ServiceNow (NYSE:NOW) saw its stock price decline in late-morning trading on Wednesday, as the company's second-quarter contract backlog failed to excite investors, even though the company reported an increase in revenue. Shares of the enterprise software firm fell 4.9% to $97.04, as market participants digested the implications of the backlog figures ahead of the company's full earnings report due after the market close.
Backlog Growth Deceleration Raises Questions
The key metric under scrutiny is the current remaining performance obligations (cRPO), which represents contract revenue expected over the next 12 months. In the first quarter, ServiceNow's cRPO grew 21% on a constant-currency basis to $12.64 billion. However, the preliminary outlook for the second quarter suggests a deceleration, with the company forecasting 19.5% growth. Morgan Stanley estimates that after adjusting for the impact of the recent Armis acquisition, organic cRPO growth is closer to 17%.
This deceleration has raised concerns among investors about the sustainability of ServiceNow's growth trajectory, especially as the company navigates the integration of artificial intelligence into its product offerings and adjusts to evolving market dynamics. The stock's decline was not an isolated event; other software companies also experienced downward pressure, with Salesforce (NYSE:CRM) falling 3.2%, Workday (NASDAQ:WDAY) dropping 4.3%, and Oracle (NYSE:ORCL) easing 1.1%.
Revenue and Earnings Expectations
Despite the backlog concerns, ServiceNow's revenue performance remains strong. The company expects second-quarter subscription revenue to be between $3.815 billion and $3.820 billion, representing approximately 22% year-over-year growth. Analysts' consensus forecasts revenue at $3.93 billion and adjusted earnings per share of $0.86, which would represent a 5% increase in EPS.
The company's non-GAAP operating margin is expected to be around 26.5% for the quarter, though some analysts, such as those at Jefferies, anticipate a potential beat of about two percentage points, projecting a margin of roughly 28.5%. The Armis acquisition, valued at $7.8 billion, is expected to have a 125-basis-point negative impact on the second-quarter operating margin.
AI Momentum and Business Transformation
ServiceNow continues to see strong momentum in its AI-related offerings. The number of customers with over $1 million in spending on Now Assist rose by more than 130% in the first quarter. CEO Bill McDermott has stated that AI growth is "far exceeding even our own expectations." The company reports that over 50% of its new business now adopts non-seat pricing, indicating a shift toward value-based pricing models.
The company's renewal rate remains steady at 97%, consistent with the 97%-98% range observed since early 2025. This high retention rate underscores the stickiness of ServiceNow's platform and its critical role in enterprise IT operations.
Market Context and Analyst Views
Morgan Stanley analyst Sanjit Singh noted that the setup for the quarter looks achievable, but investors likely expect cRPO headline growth in the 20.5%-21.5% range. Jefferies, on the other hand, sees potential for higher results, citing early renewals, improved European trends, and several seven-figure Now Assist deals in recent checks. The firm also projects an operating-margin beat of around two points.
Some analysts caution that advance purchases ahead of July 1 pricing adjustments in Australia could boost second-quarter results, potentially complicating comparisons for the third quarter. Risks to the outlook include potential overstatement of cRPO from early renewals or acquisitions, delays in Middle East contracts, integration expenses, and weaker overall software spending.
Stock Performance and Valuation
ServiceNow's stock is currently trading at $97.04, down roughly 54% from its 52-week high of $210.20. Barron's reported a 47% decline over the past year. The market has already priced in substantial execution risk, reflecting the challenges the company faces in maintaining its growth momentum amid a rapidly changing technology landscape.
The earnings call is scheduled for 5 p.m. EDT. Key numbers to watch are organic cRPO growth and guidance for the third quarter. A standard EPS beat may not be sufficient to reassure investors; the focus will be on whether the company can demonstrate sustained organic growth and provide a convincing outlook for the AI-driven transformation.
