10-Q: ServiceNow Reports Strong Q2 2025 Growth Driven by Subscription Revenue and AI Acquisitions

ServiceNow, Inc. announced robust financial results for the second quarter and first half of 2025, showcasing significant increases in subscription revenue, net income, and remaining performance obligations, alongside strategic acquisitions in AI and CPQ technologies.

Summary

• Total revenues for the three months ended June 30, 2025, increased by 22% to $3,215 million, up from $2,627 million in the same period of 2024.
• Subscription revenues grew by 22% to $3,113 million for the three months ended June 30, 2025, compared to $2,542 million in the prior year.
• Net income for the three months ended June 30, 2025, rose by 47% to $385 million, from $262 million in the corresponding period of 2024.
• Diluted net income per share increased by 46% to $1.84 for the three months ended June 30, 2025, up from $1.26 in the prior year.
• For the six months ended June 30, 2025, total revenues increased by 21% to $6,303 million, compared to $5,230 million in 2024.
• Net cash provided by operating activities was $2,393 million for the six months ended June 30, 2025, a 22% increase from $1,961 million in 2024.
• Non-GAAP free cash flow for the six months ended June 30, 2025, was $2,012 million, a 27% increase from $1,584 million in 2024.
• Remaining Performance Obligations (RPO) reached $23.9 billion as of June 30, 2025, representing a 29% increase year-over-year.
• The number of customers with Annual Contract Value (ACV) greater than $5 million increased to 528 as of June 30, 2025, up from 442 in the prior year.
• The company completed the acquisition of Logik.io Inc. on May 30, 2025, for $506 million, enhancing its CRM and sales/order management capabilities with AI-powered CPQ technology.
• A definitive agreement was signed in March 2025 to acquire Moveworks, Inc. for approximately $2.9 billion, expected to close in Q4 2025 or later, to strengthen the AI platform with agentic AI assistants.
• The share repurchase program was expanded by an additional $3.0 billion in January 2025, with $2.6 billion remaining available as of June 30, 2025.
• Subscription gross profit percentage slightly decreased to 80% for the three months and 81% for the six months ended June 30, 2025, from 82% in both prior periods.
• Professional services and other gross profit percentage was 3% for the three months ended June 30, 2025, but a gross loss percentage of 2% for the six months ended June 30, 2025, compared to a 2% gross profit in both prior periods.

Sentiment

Score: 8

Explanation: The company demonstrates very strong financial performance with significant revenue and net income growth, robust cash flow generation, and a healthy backlog (RPO). Strategic acquisitions in AI and an expanded share repurchase program signal strong future prospects and management confidence. While there's a slight margin compression in subscription services and a gross loss in professional services, these appear to be strategic investments for long-term growth. The ongoing legal proceeding, though stated as not material, introduces a degree of uncertainty, preventing a perfect score.

Positives

• Total revenues increased by 22% for the quarter and 21% for the six months ended June 30, 2025, demonstrating strong top-line growth.
• Subscription revenues, the primary revenue driver, grew by 22% for the quarter and 21% for the six months, indicating continued demand for cloud-based offerings.
• Net income saw substantial growth, increasing by 47% for the quarter and 39% for the six months ended June 30, 2025.
• Diluted net income per share increased significantly by 46% for the quarter and 38% for the six months ended June 30, 2025.
• Operating cash flow increased by 22% and non-GAAP free cash flow increased by 27% for the six months ended June 30, 2025, reflecting strong cash generation from operations.
• Remaining Performance Obligations (RPO) grew by 29% year-over-year to $23.9 billion, indicating a robust backlog and future revenue visibility.
• The number of large customers (ACV > $5 million) increased by 19.5% to 528, showing success in attracting and expanding relationships with high-value clients.
• Strategic acquisitions of Logik.io Inc. and the pending acquisition of Moveworks, Inc. are expected to expand CRM capabilities and strengthen the AI platform, aligning with market trends.
• The company's share repurchase program was expanded by an additional $3.0 billion, signaling confidence in future performance and a commitment to returning value to shareholders.
• The renewal rate remained high at 98% for both the three and six months ended June 30, 2025, indicating strong customer retention.

Negatives

• Subscription gross profit percentage slightly decreased to 80% for the quarter and 81% for the six months ended June 30, 2025, from 82% in the prior year periods, due to increased costs to support growth and regulated markets.
• Professional services and other gross profit percentage declined, showing a gross loss of 2% for the six months ended June 30, 2025, compared to a 2% gross profit in the prior year, primarily due to increased partner ecosystem spend outpacing revenue growth.
• Net cash used in financing activities increased significantly to $944 million for the six months ended June 30, 2025, from $580 million in the prior year, largely due to increased common stock repurchases and taxes paid related to equity awards.

Risks

• Ongoing conflicts in Russia/Ukraine and the Middle East, while currently immaterial, could worsen and materially impact business and results of operations due to greater global economic disruptions and uncertainty.
• Macroeconomic events, including interest rates, global inflation, and tariffs, could lead to economic uncertainty and impact business and financial results.
• The company is subject to a Department of Justice investigation related to the hiring of a former U.S. Army CIO, which could result in unpredictable timing, outcome, or possible impact.
• Fluctuations in foreign currency exchange rates can cause variability in Remaining Performance Obligations (RPO) and impact revenues and expenses, despite hedging efforts.
• Seasonality in customer agreements, with a significantly higher percentage signed in the fourth quarter and U.S. federal government agreements in the third quarter, can cause variability in RPO and cRPO.
• Self-hosted offerings, where a portion of revenue is recognized upfront, can cause greater variability in subscription revenues and subscription gross margin.
• Increased costs are expected to attract customers in regulated markets by adopting public cloud offerings and providing increased support for new data residency requirements.
• Future acquisitions may lead to increased cost of subscription revenues due to additional non-cash charges associated with the amortization of intangible assets.
• The professional services and other gross loss percentage is expected to increase for the year ending December 31, 2025.
• Stock-based compensation is inherently difficult to forecast due to fluctuations in the company's stock price.

Future Outlook

Subscription revenues for the year ending December 31, 2025, are expected to increase in absolute dollars and remain relatively flat as a percentage of total revenue. Professional services and other revenues are also anticipated to increase in absolute dollars and remain relatively flat as a percentage of revenue. Cost of subscription revenues is projected to increase in absolute dollars and slightly as a percentage of revenue, while the professional services and other gross loss percentage is expected to increase. Sales and marketing, research and development, and general and administrative expenses are all expected to increase in absolute dollars, with sales and marketing expenses decreasing slightly as a percentage of revenue, and R&D and G&A remaining relatively flat as a percentage of revenue. Stock-based compensation is expected to increase in absolute dollars but remain relatively flat as a percentage of revenue, with a long-term trend of declining as a percentage of revenue. The company anticipates that cash flows from operations, along with existing cash and investments, will be sufficient to meet liquidity needs for at least the next 12 months and aims to continue growing cash flows to fund operations and business growth beyond that period. The company is currently evaluating the impact of the recently enacted 'One Big Beautiful Bill Act' on its financial statements.

Management Comments

• Our intelligent platform, the Now Platform, is a cloud-based solution that helps enterprises and organizations across public and private sectors digitize workflows, in line with our purpose of making the world work better for everyone.
• The Now Platform is the AI platform for digital transformation.
• We are closely monitoring the ongoing conflicts in Russia/Ukraine and the Middle East. While these events are still evolving and the outcomes remain highly uncertain, we do not believe these conflicts will have a material impact on our business and results of operations.
• We have not experienced any impact to our liquidity or to our current and projected business operations and financial condition due to recent macroeconomic events.
• We believe information regarding the total number of customers with ACV greater than $5 million provides useful information to investors because it is an indicator of our growing customer base and demonstrates the value customers are receiving from the Now Platform.
• We expect our cost of subscription revenues for the year ending December 31, 2025 to increase in absolute dollars as we provide subscription services to more customers and increase usage within our customer instances and increase slightly as a percentage of revenue compared to the year ended December 31, 2024.
• We will continue to incur incremental costs to attract customers in regulated markets by adopting public cloud offerings as well as increased support for customers impacted by new and evolving data residency requirements.
• We expect our subscription gross profit percentage to decrease slightly for the year ending December 31, 2025 compared to the year ended December 31, 2024.
• We expect our professional services and other gross loss percentage to increase for the year ending December 31, 2025 compared to the year ended December 31, 2024.
• We expect sales and marketing expenses for the year ending December 31, 2025 to increase in absolute dollars and to decrease slightly as a percentage of revenue compared to the year ended December 31, 2024, as we continue to see leverage from increased sales productivity and marketing efficiencies.
• We expect R&D expenses for the year ending December 31, 2025 to increase in absolute dollars but remain relatively flat as a percentage of revenue compared to the year ended December 31, 2024, as we continue to improve the existing functionality of our services, develop new applications to fill market needs and enhance our core platform.
• We expect G&A expenses for the year ending December 31, 2025 to increase in absolute dollars and to remain relatively flat as a percentage of revenue compared to the year ended December 31, 2024, as we continue to see leverage from continued G&A productivity.
• We expect stock-based compensation to continue to increase in absolute dollars for the year ending December 31, 2025 as we continue to issue stock-based awards to our employees, but remain relatively flat as a percentage of revenue compared to the year ended December 31, 2024. We expect stock-based compensation as a percentage of revenue to decline over time as we continue to grow.
• We have generated positive operating cash flows for more than ten years as we continue to grow our business in pursuit of our business strategy, and we expect to grow our business and generate positive cash flows from operations during 2025.
• We anticipate cash flows generated from operations, cash, cash equivalents and investments will be sufficient to meet our liquidity needs for at least the next 12 months.

Industry Context

ServiceNow operates in the rapidly expanding cloud-based enterprise software and digital transformation market, with a strong focus on AI-powered workflow automation. The company's strategic acquisitions of Logik.io (CPQ) and pending acquisition of Moveworks (agentic AI) demonstrate a clear commitment to enhancing its 'Now Platform' as a leading AI platform for digital transformation. This aligns with broader industry trends of enterprises seeking to leverage AI to automate business processes, improve productivity, and enhance customer and employee experiences. The continued growth in subscription revenue and large customer base indicates strong market adoption and a competitive position in the evolving enterprise software landscape, where AI integration is becoming a critical differentiator.

Comparison to Industry Standards

• The company's 22% year-over-year subscription revenue growth for Q2 2025 is strong for a large-cap enterprise software company, often outpacing many mature competitors in the SaaS space.
• The 98% renewal rate is indicative of high customer satisfaction and sticky products, which is a benchmark for successful SaaS companies, comparable to top-tier industry players.
• The increase in customers with ACV greater than $5 million (from 442 to 528) demonstrates effective upselling and cross-selling strategies, a key growth driver for enterprise software firms.
• While the subscription gross profit percentage of 80-81% is healthy, the slight decrease and the shift to a gross loss in professional services (from 2% profit to 2% loss for six months) suggest that the company is investing heavily in partner ecosystems and regulated markets, which may temporarily impact margins but could be strategic for long-term market penetration. This contrasts with some pure-play SaaS companies that maintain higher professional services margins or outsource more of this function.
• The company's significant investment in AI-focused acquisitions (Logik.io, Moveworks) positions it competitively against other enterprise software giants like Salesforce, Microsoft, and SAP, who are also aggressively integrating AI into their platforms.

Management Changes

Corporate Governance

Legal Proceedings

• The company is party to certain litigation and other legal proceedings, but does not believe the ultimate resolution is likely to result in a material loss.
• An internal investigation was conducted into a complaint raising potential compliance issues related to a government contract, specifically concerning the hiring of the Chief Information Officer of the U.S. Army as the company's Head of Global Public Sector in March 2023.
• The investigation found that the company's President and Chief Operating Officer and the hired individual violated company policy regarding a possible conflict related to the hiring.
• The President and Chief Operating Officer resigned on July 24, 2024, and the other individual also departed the company.
• The Department of Justice, Department of Defense Office of Inspector General, and the Army Suspension and Debarment Office have been informed, and the Department of Justice has commenced its own investigation into these matters. The timing, outcome, or possible impact of this investigation cannot be predicted.

Stakeholder Impact

• Shareholders: Positive impact due to strong revenue and net income growth, increased RPO, healthy cash flows, strategic acquisitions, and an expanded share repurchase program. However, the ongoing legal investigation and management changes introduce some uncertainty.
• Employees: Continued growth and strategic acquisitions suggest ongoing opportunities. Stock-based compensation remains a significant part of compensation, with new grants to current and new employees. Management changes due to policy violations could impact morale or perception of internal controls.
• Customers: Benefit from enhanced product offerings through strategic acquisitions (AI-powered CPQ, agentic AI assistants) and continued investment in the Now Platform. Increased costs to support regulated markets and data residency requirements indicate a commitment to serving diverse customer needs.
• Suppliers: The supply chain finance program allows suppliers to sell receivables early, providing liquidity options, though the company's payment terms remain generally 90 days.
• Regulatory Authorities: The company is cooperating with the Department of Justice, Department of Defense OIG, and Army Suspension and Debarment Office regarding the internal investigation, indicating adherence to regulatory processes.

Next Steps

• Finalize the valuation for the Logik.io Inc. acquisition within one year from the acquisition date (May 30, 2025).
• Complete the acquisition of Moveworks, Inc., expected during the fourth quarter of 2025 or later, subject to customary regulatory approvals and closing conditions.
• Continue to monitor the direct and indirect impact of macroeconomic events on business and financial results.
• Evaluate the impact of the 'One Big Beautiful Bill Act' (tax code changes enacted July 4, 2025) on consolidated financial statements.
• Continue to grow cash flows necessary to fund operations and business growth beyond the next 12 months.
• Continue to execute the share repurchase program, with approximately $2.6 billion remaining available for future repurchases.

Key Dates

Recommendation

ServiceNow's Q2 2025 results demonstrate robust financial health, with strong double-digit growth in subscription revenue, net income, and free cash flow. The significant increase in Remaining Performance Obligations (RPO) provides excellent forward visibility, and the growing number of large customers underscores strong market adoption and expansion. Strategic acquisitions in AI and CPQ are well-aligned with industry trends and enhance the company's core platform, positioning it for continued innovation and competitive advantage. The expanded share repurchase program signals management's confidence and commitment to shareholder returns. While there are minor concerns regarding professional services margins and an ongoing legal investigation, the overall operational performance and strategic direction are highly positive, suggesting continued upside potential for the stock.

Keywords

Cloud computing, Workflow automation, AI platform, Digital transformation, SaaS, Enterprise software, CRM, CPQ, Financial results, SEC filing, 10-Q, Subscription revenue, Remaining Performance Obligations, Cash flow, Acquisitions, Share repurchase