ServiceNow, Inc. (NOW) Earnings

Management highlights

- Strategic Positioning * ServiceNow positions itself as the defining enterprise software company of the 21st century, targeting $32 billion in annual revenue by 2030 while operating at the Rule of 60 and beyond. * The company's core competitive advantage is its AI Control Tower, which provides a single governed layer of record for enterprise work, supporting any cloud, AI model, agent, or workflow, and delivering secure, auditable, actionable AI outcomes rather than just probabilistic advice. * ServiceNow already holds the position of the 8th largest enterprise cybersecurity business globally and is the fastest growing among the top 10, with a fully integrated end-to-end security platform covering cyber, risk, compliance, incident response, exposure management, identity security, and cyber physical security, augmented by recent acquisitions Vesa and Armis. - Product and Adoption Milestones * The percentage of renewal customers purchasing agentic AI for the first time has doubled both quarter-over-quarter and year-over-year, marking an inflection point for AI adoption at the company. * A new AI-native product line with product-led go-to-market motion is launching soon (generally available after beta testing), targeting the Fortune 500,000 segment with a no-ticket conversational service desk experience and AI-coded automation; this is the first of multiple new AI-native products planned for the near term. * Strategic partnerships with Microsoft, NVIDIA, and Accenture have been deepened, including deeper integration of AI Control Tower with Microsoft Agent 365, extended governance with Project Arc, and secured agent integration with the NVIDIA Open Shell Runtime. * Customer traction remains broad: the company closed 123 new net deals greater than $1 million in ACV, up 40% year-over-year, and 32 additional customers crossed the $20 million ACV threshold in the last year, bringing the total to 658 customers generating over $5 million in ACV. 18 of the top 20 deals included 8+ ServiceNow products, showing increasing customer consolidation on the platform. - Business Model Differentiation * 50% of net new business is already non-seat based, mitigating any risk of seat compression; the company maintains seat-based pricing per customer preference for predictable costs. * The company uses a hybrid pricing model combining license and usage-based pricing, delivering predictable costs for customers while tying revenue to achieved outcomes, resulting in 20-30% price uplifts for new AI-native SKUs, in line with prior guidance.

Guidance

- Full year 2026 guidance was raised modestly: subscription revenue guidance increased by $15 million at the midpoint, from $15.755 billion to $15.77 billion, representing 21% year-over-year constant currency growth. - For full year 2026, management expects: subscription gross margin of 81%, non-GAAP operating margin of 31.5%, free cash flow margin of 35%, and GAAP diluted weighted average outstanding shares of 1.04 billion. - Third quarter 2026 guidance calls for subscription revenue between $3.975 billion and $3.980 billion, representing 20% year-over-year constant currency growth; 20% constant currency CRPO growth; non-GAAP operating margin of 31%; and GAAP diluted weighted average outstanding shares of 1.05 billion. - The modest full-year revenue increase reflects that approximately half of the Q2 outperformance came from a timing pull-forward of U.S. federal on-premise revenue from Q3 to Q2; management retained conservative prudence for the second half of the year while passing through all net new ACV overachievement to guidance. The company is already tracking ahead of its target for AI to reach 30% of total ACV by 2030, and remains on track to hit $1.5 billion total AI ACV by the end of 2026.

Segment performance

For the second quarter of 2026: - Total subscription revenues reached $3.877 billion, growing 23% year-over-year (constant currency). Total remaining performance obligations (RPO) hit $29 billion, growing 22% year-over-year (constant currency), and current RPO (CRPO) reached $13.2 billion, growing 21.5% year-over-year (constant currency). - By workflow segment: 1. Technology Workflows: 50 deals over $1 million, including 9 over $5 million; ITSM was included in 15 of the top 20 largest deals. 2. IT Operations Management (ITOM): Had an outstanding quarter, included in 18 of the top 20 largest deals with 14 deals over $1 million. 3. Security and Risk Solutions: Included in 16 of the top 20 largest deals with 24 deals over $1 million; this is already a $1 billion+ annual business and the fastest growing among the top 10 enterprise cybersecurity companies. 4. CRM and Industry Workflows: Included in 16 of the top 20 largest deals with 15 deals over $1 million; this is already a $2 billion ACV business, with sales CRM average deal size doubling year-over-year, and on track to deliver over 2 billion service CRM cases in 2026. 5. Core Business Workflows: Included in 12 of the top 20 largest deals with 24 deals over $1 million, driven by strong demand for EmployeeWorks. 6. Creator Workflows: Included in 18 of the top 20 largest deals with 14 deals over $1 million. - By industry: Business and consumer services led net new ACV growth at over 600% year-over-year; Education grew over 125% year-over-year; Telco and Media grew nearly 40% year-over-year; Manufacturing also delivered strong growth. - AI segment: ServiceNow AI total ACV exceeded $1 billion in Q2, with net new ACV growing over 40% quarter-over-quarter. Deals including 5+ AI products grew 550% year-over-year, and $1 million+ AI deals tripled year-over-year. The number of customers with agentic AI in production grew 9x over the past 9 months. EmployeeWorks deal volume grew 150% quarter-over-quarter. RaptorDB Pro deal volume grew 80% year-over-year, and Workflow Data Fabric was included in 17 of the top 20 largest deals. - Profitability: Non-GAAP operating margin was 29.5%, and free cash flow margin was 16%. The overall customer renewal rate was a best-in-class 98%.

Risks & headwinds

Management did not highlight material new incremental operational failures or unforeseen risks during the call. The standard forward-looking statement disclaimer notes that actual results may differ materially from guidance due to general market and business risks referenced in the company's SEC filings (10-Q and 10-K). The company acknowledges broader industry risks including growing enterprise AI attack surfaces, ungoverned AI agent proliferation, token cost volatility, and potential IT spending reallocation to AI hardware, but management has positioned ServiceNow to benefit from these trends rather than face material downside from them.

Analyst Q&A

• Q: What early results and monetization traction has the L1 ITSM AI product delivered?

  A: Over 40 customers are already using L1 AI specialists for end-to-end service request resolution, closing 80-85% of requests without human interaction. The product cuts resolution time from multiple days to 20 minutes, delivering massive productivity gains, and monetizes via labor arbitrage value. Traction is strong, and the product is on track to help the company hit its target of 30% of ACV from AI by 2030, which the company is already tracking ahead of.

• Q: Is there any pricing pressure from competitors' outcome-based AI pricing, and does ServiceNow have a price advantage?

  A: ServiceNow uses a hybrid predictable pricing model that combines base licenses and usage-based charges, which already ties revenue to customer outcomes without the complexity of hard-to-measure pure outcome-based contracts that don't work well for enterprise software. The company's unique deep enterprise context from 7 trillion annual workflows gives it a product advantage no competitor can match, and the company still delivers 20-30% price uplifts for new AI SKUs, as customers willingly pay for the proven value.

• Q: What is driving upside to AI targets: new customers or upsells to existing customers?

  A: AI adoption is growing across both segments: deal volume for first-time ServiceNow AI buyers grew over 45% year-over-year, with new customers increasingly adopting AI-first. Once customers start using one agentic AI use case, they rapidly expand to additional cross-departmental use cases, creating significant cross-sell and upsell opportunity for existing customers. The total number of customers with agentic AI in production has grown 9x over nine months, showing broad-based adoption.

• Q: What is ServiceNow's cybersecurity strategy and how does it fit with converging observability markets?

  A: ServiceNow is building the most integrated end-to-end cybersecurity platform covering pre-breach vulnerability/exposure management (via Vesa and Armis) to post-breach incident response, built on ServiceNow's existing core platform and CMDB foundation. The company does not need to enter every cybersecurity niche, and continues to partner with existing leading security companies. For observability, ServiceNow integrates agentic AI use cases into its existing ITOM platform rather than building a standalone observability product, and integrates with third-party observability tools to deliver end-to-end actionability.