ServiceNow Reveals a New Challenge From the Iran War: Deal Delays

The war in Iran has roiled markets over the last two months for a wide range of reasons.

Oil and fertilizer prices have spiked in response to Iran's closing of the Strait of Hormuz, driving up energy prices and making an increase in food prices likely as well. Higher prices for those goods threaten the global economy, and could even tip it into a recession. Earlier in the war, there seemed to be a chance of it spreading into a regional conflict, and there's still uncertainty around how and when it will end, as it's unclear if the current ceasefire will hold.

However, ServiceNow (NYSE: NOW) just added another concern for investors in its latest earnings report, as the software-as-a-service (SaaS) leader said that delays in closing large government deals in the Middle East weighed on first-quarter revenue growth. The stock fell 12% after hours on Wednesday.

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What happened with ServiceNow?

ServiceNow came into the quarter with a lot to prove, as software stocks have gotten pummeled this year on fears of disruption from new AI platforms like Anthropic.

First-quarter results matched estimates, and the company raised its full-year subscription revenue guidance, though the increase was driven by its acquisition of cybersecurity firm Armis. However, ServiceNow lowered its full-year adjusted operating margin guidance from 32% to 31.5%, and its billings, a forward indicator for revenue, missed expectations.

In spite of a new share buyback program and reassurance from management, the company couldn't shake the concerns about AI disruption either, but the comments about the Middle East shouldn't be ignored as they could have implications for the rest of the software sector and beyond.

Management said it faced a 75 basis-point headwind in revenue for delayed closings of some large on-premise deals due to the war. Part of the reason for that impact is that on-premise revenue is generally recorded as a one-time upfront purchase, rather than ratably like cloud revenue. The company expects to make up for that in the remainder of the year as those deals close.

ServiceNow wasn't alone among software companies in reporting challenges in the Middle East. IBM (NYSE: IBM), which also reported earnings after hours on Wednesday, said that the Iran war was weighing on guidance, even as the company beat estimates on the top and bottom lines in the first quarter. However, CEO Arvind Krishna said the company's Middle East business did well in the quarter.

The macroeconomic uncertainty led IBM to hold its guidance rather than raise it, and the stock fell 7% after hours as a result.

What it means for investors

Investors are about to get a raft of feedback on the impact of the war in Iran, as this is the first earnings season since the war began.

Prior to Wednesday's reports, investors seemed to have minimal expectations that the war in Iran would impact tech stocks, but that now seems to be changing. While the Middle East isn't a major consumer market and the U.S. didn't have diplomatic relations with Iran prior to the war, we'll likely see an impact across several industries from the war as well as muted guidance due to the related uncertainty.

Investors should be prepared for more such pullbacks as earnings reports roll in.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends International Business Machines and ServiceNow. The Motley Fool has a disclosure policy.