Santa Clara, CA – ServiceNow, Inc. (NYSE: NOW), a leading force in cloud-based enterprise workflow automation, has once again demonstrated its market dominance with a stellar second quarter in 2025. The company reported impressive financial results that not only surpassed analyst expectations but also underscored the burgeoning demand for its AI-enhanced solutions. With the stock closing at a robust $996.18, reflecting strong investor confidence, ServiceNow’s trajectory appears set for sustained expansion and innovation.
Record-Breaking Revenue and Subscription-Led Growth
For the second quarter, ending June 30, 2025, ServiceNow reported a remarkable $3.22 billion in revenue, marking a substantial 22% year-over-year increase from $2.63 billion in Q2 2024. This performance comfortably exceeded the consensus estimate of $3.12 billion, extending a consistent track record of execution despite persistent macroeconomic challenges such as inflation and geopolitical tensions impacting the broader tech sector.
The driving force behind this impressive growth was unequivocally subscription revenue, which constituted 97% of the total, reaching $3.113 billion. This represents a robust 22.5% increase from the prior year, highlighting the high-margin, recurring nature of ServiceNow’s business model. Professional services and other revenues contributed a modest $102 million, growing by 2%, providing essential ancillary support to the core platform.
Profitability Surges with Operational Efficiency
ServiceNow’s commitment to operational leverage was evident in its profitability metrics. GAAP gross profit reached $2.491 billion, translating to a 77.5% margin, a slight improvement from 77.3% in the previous year. On a non-GAAP basis, gross profit stood even stronger at $2.604 billion, achieving an 81% margin.
While operating expenses climbed to $2.133 billion—a deliberate investment in sales, marketing, and research & development to capitalize on burgeoning AI opportunities—the company’s disciplined cost controls were clear. GAAP operating income surged to $358 million, representing an 11% margin, a notable increase from $240 million (9.1% margin) in Q2 2024. Non-GAAP operating income was particularly impressive, hitting $955 million with a 29.5% margin, surpassing guidance by more than 2.5 percentage points.
Net income under GAAP was reported at $385 million, a significant jump from $262 million in Q2 2024, yielding diluted earnings per share (EPS) of $1.84 compared to $1.26. Non-GAAP figures showcased even stronger performance, with $854 million in net income and $4.09 per diluted share, comfortably exceeding the anticipated $3.57. This outperformance is largely attributed to higher-margin subscriptions and efficient scaling, with the company specifically crediting its latest Vancouver release and cutting-edge AI features like Now Assist for driving both upsells and new customer acquisitions.
Fortress Balance Sheet and Robust Cash Flow
ServiceNow’s financial health is further affirmed by its robust cash flow metrics. Operating cash flow reached $716 million, equating to 22.5% of revenue. Free cash flow (FCF), calculated as operating cash flow less capital expenditures, totaled $535 million. While nominally lower than the $349 million reported in the prior year, the FCF margin improved by 3 points year-over-year to 16.5%, reflecting enhanced efficiency. Capital expenditures of approximately $181 million were strategically deployed to bolster data centers and technological infrastructure, crucial for handling the escalating AI workloads.
The quarter concluded with a formidable $5.4 billion in cash, cash equivalents, and current investments, an increase from $5.3 billion in Q1. Furthermore, the company’s net debt decreased to $1.5 billion from $1.6 billion, demonstrating a disciplined approach to managing its financial obligations and maintaining a strong balance sheet to support aggressive growth initiatives.
Sustained Momentum and Customer Entrenchment
Key performance indicators (KPIs) underscore ServiceNow’s sustained momentum and deep entrenchment within enterprise operations. Current remaining performance obligations (RPO) grew by an impressive 21% to $9.3 billion, while total RPO advanced by 21.5% to $19.5 billion, providing excellent visibility into future revenue. The company’s customer renewal rate remained exceptionally high at 98%, a testament to the indispensable nature of the Now Platform for its clients.
During the quarter, ServiceNow secured 89 deals valued at over $1 million, including significant expansions with Fortune 500 clients across diverse sectors such as finance, healthcare, and manufacturing. These wins highlight the measurable return on investment (ROI) that AI-driven automation delivers through substantial cost savings and productivity gains for these enterprises.
The AI Revolution: A Defining Catalyst for Growth
ServiceNow’s strong performance is deeply intertwined with the ongoing AI boom. The company’s strategic integration of AI and machine learning into its Now Platform has positioned it at the forefront of digital transformation. Features like Now Assist, which leverages generative AI, are not merely enhancements but fundamental drivers of new business and expansions, enabling customers to streamline complex workflows and enhance decision-making processes.
The enterprise software industry, particularly cloud-based workflow automation, continues to demonstrate remarkable resilience and robust demand. ServiceNow has proactively integrated emerging technologies, ensuring its offerings remain cutting-edge and resistant to technological disruption. The company’s consistent 20%+ revenue growth through periods of significant economic volatility, including the COVID-19 pandemic and recent uncertainties, validates the inherent stability of this sector and the meaningful contribution of its AI products to the top line.
Competitive Moat and Industry Leadership
ServiceNow operates within a somewhat concentrated market dominated by a handful of tech giants, yet it maintains a commanding position. The firm boasts a robust competitive moat characterized by high switching costs, as enterprises deeply embed the Now Platform into their operations, making replacement prohibitively expensive and disruptive. Network effects further bolster this advantage, with a vibrant marketplace of thousands of third-party applications and extensions that grow more valuable with each participant.
ServiceNow contends with formidable rivals such as Salesforce (CRM), which excels in customer relationship management but lacks the comprehensive IT operations breadth; Microsoft (MSFT), leveraging its Azure and Office ecosystem but without ServiceNow’s depth in specialized, low-code workflows; and Oracle (ORCL), a powerhouse in databases and ERP but weaker in intuitive, user-centric platforms. ServiceNow’s key differentiators—a single, unified architecture and pioneering AI innovations like predictive intelligence—position it favorably for holistic, cross-departmental enterprise automation, often outpacing rivals in this crucial aspect. The 98% customer renewal rate and consistent top rankings in Gartner’s Magic Quadrant for IT Service Management Tools further solidify its market leadership.
The One Big Beautiful Bill Act (OBBBA): A Potential Game Changer
A significant new catalyst for ServiceNow’s financial trajectory is the recent enactment of the One Big Beautiful Bill Act (OBBBA) on July 4, 2025. This sweeping legislation is poised to supercharge the company’s cash flows beyond baseline calculations. OBBBA introduces 100% bonus depreciation for qualified property—including servers, data centers, and software development tools—through 2030. This provision allows for immediate expensing, which could defer millions in annual tax liabilities related to ServiceNow’s substantial infrastructure investments.
Coupled with the full deductibility of U.S.-based R&D expenditures (reversing prior amortization requirements), the bill aligns perfectly with ServiceNow’s impressive $2.64 billion trailing twelve-month (TTM) R&D outlay. This could potentially boost after-tax cash by 15-20% in the near term, assuming current spending levels. Other facets, such as enhanced Section 179 expensing caps at $2.5 million and EBITDA-based interest deduction limits, further preserve liquidity for a company already benefiting from modest leverage (debt-to-equity ratio of 0.24).
While these benefits were not reflected in historical free cash flow figures used in traditional valuations, they are anticipated to elevate future FCF by an estimated $500-700 million annually. This newfound financial flexibility could support accelerated share repurchases, strategic acquisitions, or further investments in AI R&D, ultimately enhancing intrinsic value estimates by 10-15% over a five-year horizon. To account for OBBBA’s prospective impacts, valuation models have been adjusted upward, assuming a 15% uplift to projected FCF from these anticipated tax savings.
Management’s Confident Outlook and Future Prospects
During the Q2 earnings call, CEO Bill McDermott exuded confidence, proclaiming “unprecedented momentum” in AI adoption. Management highlighted the record 89 mega-deals over $1 million, a burgeoning pipeline, and the immediate impact of the Vancouver release’s AI features in driving customer expansions.
The company also uplifted its full-year 2025 guidance:
- Subscription revenue growth is now projected to reach 21.5% (up from 21%).
- Non-GAAP operating margin is expected to hit 29.5%.
- Free cash flow margin is forecasted at 31%.
For the third quarter, projections include subscription revenue between $3.15 billion and $3.16 billion (representing approximately 20% growth), a 29% operating margin, and diluted EPS of $3.45 to $3.50. Executives emphatically emphasized AI’s transformative potential, with innovations like Now Assist and other generative AI tools poised to capture significant market share in a total addressable market (TAM) estimated at $220 billion.
Valuation and Investment Considerations
ServiceNow’s intrinsic value was assessed using two complementary approaches, now incorporating the anticipated cash flow enhancements from OBBBA.
- The Buffett-Inspired method projects FCF at a conservative 3% growth rate for 10 years from an adjusted TTM FCF of $4,387 million (baseline 3,814millionplusa15-5,004 million), and divides by 209 million shares, applying a 40% margin of safety.
- The McGrew Growth method employs a more dynamic 25% initial growth (5-year FCF CAGR), tapering to 6% by year 10 on the uplifted FCF, with analogous terminal and discounting mechanics.
These adjustments yield an average intrinsic value of $777.50 per share, suggesting strong potential aligned with the company’s robust growth prospects, although it is important to note the current market price of $996.18 exceeds the Buffett-Inspired intrinsic value, suggesting caution from that perspective.
Intrinsic Value Results Table
| Stock Ticker | Valuation Method | Intrinsic Value per Share | Price with 40% Margin of Safety | Last Closing Price | Action |
|---|---|---|---|---|---|
| NOW | Buffett-Inspired | $428.00 | $256.80 | $996.18 | Consider Selling |
| NOW | McGrew Growth | $1,127.00 | $676.20 | $996.18 | Hold |
Concluding Thoughts
ServiceNow’s Q2 2025 results unequivocally underscore its commanding position in the AI-powered enterprise software market. The company’s consistent beats across revenue, margins, and EPS, coupled with the addition of 89 large deals and growing AI contributions, signal accelerating adoption and a robust future. The newly enacted OBBBA, with its significant tax advantages, could prove to be a pivotal game-changer, potentially inflating free cash flow and supporting further upside.
The company’s balance sheet remains a fortress, boasting $5.4 billion in liquidity, low net debt, and over 80x interest coverage, providing ample flexibility for continued share repurchases ($296 million in Q2) and future strategic capital allocation. Absent dividends, the entirety of its free cash flow is channeled back into fueling growth, ensuring agility and continued innovation.
With an expansive $220 billion total addressable market (TAM) spanning IT, HR, and other critical enterprise functions, ServiceNow is exceptionally well-positioned for sustained, AI-driven gains. The upward revised guidance from management inspires confidence, reinforcing the notion that AI delivery will be the defining factor in the company’s long-term success.
Additional Quantitative Results Table
| Metric Name | Value | Timeframe |
| ROE | 17.1% | 3-Year Avg |
| ROE | 36% | 5-Year CAGR |
| ROE | 16.5% | Latest Year |
| ROE | 16.4% | TTM |
| ROIC | 18.6% | 3-Year Avg |
| ROIC | 40% | 5-Year CAGR |
| ROIC | 21.2% | Latest Year |
| ROIC | 20.5% | TTM |
| Gross Profit Margin | 78.9% | 3-Year Avg |
| Gross Profit Margin | 5.2% | 5-Year CAGR |
| Gross Profit Margin | 78.7% | Latest Year |
| Gross Profit Margin | 78.9% | TTM |
| Net Profit Margin | 15.5% | 3-Year Avg |
| Net Profit Margin | 48.4% | 5-Year CAGR |
| Net Profit Margin | 13.0% | Latest Year |
| Net Profit Margin | 14.5% | TTM |
| Return on Tangible Assets (ROTA) | 22.6% | 3-Year Avg |
| Return on Tangible Assets (ROTA) | 42.3% | 5-Year CAGR |
| Return on Tangible Assets (ROTA) | 21.8% | Latest Year |
| Return on Tangible Assets (ROTA) | 22.0% | TTM |
| Debt-to-Cash and Equivalents | 0.36 | Latest Year |
| Debt-to-Equity Ratio | 0.24 | Latest Year |
| Ultra-Conservative Cash Ratio | 1.12 | Latest Year |
| Earnings Growth Rate | 48.4% | 5-Year CAGR |
| Revenue Growth Rate | 24.8% | 5-Year CAGR |
| Free Cash Flow Yield | 1.8% | TTM |
| Operating Margin | 14.0% | TTM |
| Current Ratio | 1.12 | Latest Year |
| Interest Coverage Ratio | 82.3 | TTM |
| Capital Expenditures (CapEx) as % of FCF | 24.8% | TTM |
| Dividend Payout Ratio | 0% | TTM |
| Per Share Book Value Growth | 23.5% | 5-Year CAGR |
| Share Buyback/Dilution Trends (Shares Outstanding Change) | 2.1% dilution | 3-Year Avg |
| Capital Structure (Short-Term vs. Long-Term Debt) | 4% short-term, 96% long-term | Latest Year |