ServiceNow third-quarter earnings preview: After a sharp share-price rally, a return to faster growth is key
Morgan Stanley believes core workflows, new AI products and federal government demand support third-quarter performance, but the cRPO growth threshold investors are watching is now above company guidance.
Original source：Morgan Stanley & Co. LLCFirst published on Unhidea：Original source date：
Key takeaway
Morgan Stanley is positive on ServiceNow’s third-quarter demand, but after the sharp rise in its shares, the key test is whether growth can reaccelerate excluding acquisition contributions.
Why does growth need to reaccelerate in the third quarter?
After ServiceNow’s second-quarter cRPO and subscription revenue exceeded expectations by wider margins, its shares rose more than 70% over the following three months, compared with an average gain of 42% for large software companies over the same period. Morgan Stanley believes growth may need to reaccelerate for the shares to continue rising.
Market consensus expects cRPO to grow 20% year over year at constant currency in the third quarter, in line with company guidance but about 1.5 percentage points slower than in the second quarter. cRPO is remaining performance obligations expected to be recognized over the next 12 months and can be used to gauge the revenue base from recently signed contracts.
The bank estimates that investors are more likely to expect constant-currency cRPO growth of around 22%, 2 percentage points above guidance, which would also imply a modest acceleration in organic growth excluding acquisition contributions.
How high is the growth threshold excluding acquisition contributions?
Morgan Stanley estimates that Armis, Moveworks and Veza/Pyramid together account for about 3 percentage points of the third-quarter constant-currency cRPO growth guidance of 20%, implying organic growth of around 17%, about 1.75 percentage points slower than the second-quarter organic rate.
The bank believes investors also want the company to reflect some of the third-quarter revenue upside in its 2026 subscription revenue guidance; the company raised its full-year guidance in the third quarter of each year from 2023 through 2025. Its current full-year subscription revenue guidance is 15.76 billion to 15.78 billion dollars, representing constant-currency growth of 21%.
Morgan Stanley forecasts third-quarter subscription revenue of 3.978 billion dollars, up 20% year over year at constant currency; market consensus is 3.988 billion dollars, also up 20%.
What demand supports the case for acceleration?
Channel checks indicate that partner performance in the third quarter was broadly in line with to slightly above expectations, while demand for IT operations management, IT asset management and security products remained healthy. Large-deal activity was similar to the prior quarter, and customer adoption of a broader product portfolio was also relatively robust.
For new products, partner inquiries about AI offerings remained positive, with feedback improving from the prior quarter but still mixed. One partner said that more than 25% of the customers it serves had deployed AI Control Tower.
Federal government demand improved from a weak 2025. Partners cited progress in civilian and defense areas, and government spending data also showed multiple contracts worth millions to tens of millions of dollars; the public sector overall accounts for about 10% of ServiceNow’s revenue.
How will AI pricing affect the assessment?
Customers are moving to new packages such as Foundation, Advanced and Prime, and partners report generally positive pricing trends. But customers are scrutinizing hybrid pricing more closely, and some are hesitant because the economics of token costs are not sufficiently transparent.
Several partners also believe ServiceNow’s leadership across multiple workflow areas makes it harder for customers to migrate away from the platform. Morgan Stanley maintains its Overweight rating and 180-dollar price target; its base case depends on the core business and new products such as Now Assist jointly driving growth.
