Even with an uptick in multi-million-dollar AI deals, ServiceNow's earnings results weren't enough to win over software skeptics
ServiceNow raised its full-year AI contract target to $1.7 billion as high-dollar enterprise deals surged.
ServiceNow's mixed third-quarter results on Wednesday weren't enough to convince investors of its artificial-intelligence momentum.
The company's pipeline of new AI deals was overshadowed by an earnings miss, leading ServiceNow (NOW) shares to fall 14% in after-hours trading.
Revenue for the quarter came in at $4.106 billion, growing 20.5% year-over-year and edging past FactSet consensus estimates of $4.095 billion. Adjusted earnings per share of $1.00 fell slightly short of the $1.02 analysts were expecting.
ServiceNow president and CFO Gina Mastantuono attributed the earnings shortfall to lower interest income and additional debt costs following the acquisition of cybersecurity company Armis earlier this year.
However, the company's investments in cybersecurity are paying off as customers move from AI pilots to scaled production, resulting in an uptick in deal volume. ServiceNow's AI Control Tower allows organizations to enact the proper governance and security protocols for AI agents.
"We're seeing enterprises really deploy governed AI at scale, and our Q3 results show that ServiceNow is becoming even more strategic to that work," Mastantuono told MarketWatch.
Mastantuono highlighted that AI beneficiaries are expanding beyond just the companies building data-center infrastructure. "The first wave of value went to compute and now models, and the next is going to be putting intelligence to work, which is where ServiceNow plays," she said.
Current remaining performance obligations, a metric reflecting contracted sales set to be recognized over the next 12 months, rose 20.5% to $13.65 billion, beating analyst expectations of $13.56 billion. Total remaining performance obligations grew 22% to $29.7 billion, higher than the $29.3 billion anticipated by Wall Street.
Large deals drove much of that expansion, as transactions worth over $5 million in net new annual contract value rose 135% from the year-ago period. The momentum led ServiceNow to lift its 2026 target for AI annual contract value to $1.7 billion, up from the $1.5 billion it established back in May.
ServiceNow announced an expanded partnership with OpenAI, introducing a ChatGPT integration that allows AI agents to access ServiceNow workflows. The two companies are also collaborating on security and risk solutions through OpenAI's cybersecurity models.
Additionally, ServiceNow rolled out a new Control Tower Alliance with companies like OpenAI, Anthropic, Amazon (AMZN) Web Services, Nvidia (NVDA) and others to help enterprise IT teams supervise autonomous AI tools securely.
At the same time, ServiceNow is reducing its spending and raising its full-year free cash flow margin outlook to 36%, up from 35% previously. The move is "pretty remarkable and definitely differentiated right now," Mastantuono said. Many Big Tech companies are doing the opposite as their data-center investments lead their free cash flow to turn negative.
For the fourth quarter, ServiceNow expects subscription revenue between $4.245 billion and $4.255 billion, matching FactSet expectations at the low end. For the full year, the company increased its subscription revenue outlook to a range of $15.78 billion to $15.79 billion.
-Christine Ji