ServiceNow Challenges AI Concerns with Upbeat Forecasts

⚡

Key Takeaways

1ServiceNow announced an increase in its forecasts despite a 13% drop in its stock after the close.

2Subscription revenues reached $3.67 billion, up 22% despite delays in the Middle East.

3CEO Bill McDermott downplays the threats of AI, forecasting $1.5 billion in AI software sales by 2026.

💡Why it matters — ServiceNow is betting on AI to overcome economic challenges and strengthen its market position.

Strong Results Despite Turbulence

ServiceNow has unveiled impressive results for the first quarter of 2026, raising its annual forecasts despite concerns surrounding artificial intelligence. CEO Bill McDermott highlighted the growth of the company's AI products while downplaying competitive threats in this area.

However, ServiceNow's stock fell by 13% in after-hours trading, erasing some of the gains accumulated since April 10. The company attributed this decline to "delayed closures of several large on-site contracts in the Middle East," a direct consequence of the ongoing conflict in the region. This factor has been taken into account in ServiceNow's forecasts for the remainder of 2026.

Subscription Revenue Growth

Despite macroeconomic challenges, particularly those related to the Middle East, ServiceNow reported subscription revenues of $3.67 billion for the quarter, a 22% increase compared to the previous year. The company exceeded its forecasts across all growth and profitability metrics, raising its subscription revenue guidance for the full year.

For 2026, ServiceNow now expects subscription revenues to be between $15.7 billion and $15.8 billion, representing growth of 22% to 22.5%, surpassing the expectations of Cowen analysts.

Impact of Acquisitions

ServiceNow's full-year forecasts, however, raise questions, particularly due to its numerous recent acquisitions. The purchase of cybersecurity firm Armis for nearly $8 billion has bolstered subscription revenues and RPO forecasts while influencing projected profit margins for the year. Excluding Armis, the forecasts for 2026 are considered "mixed" by RBC analysts.

McDermott's Approach to AI

Bill McDermott reiterated his confidence in the company's momentum, dismissing the threat posed by AI. "The results speak much louder than words," he stated, emphasizing the growing adoption of ServiceNow's AI products as a growth driver. The company initially projected $1 billion in AI software sales for 2026, but McDermott now expects that figure to reach at least $1.5 billion.

ServiceNow's remaining performance obligations, a key indicator, increased by 25% to $27.7 billion, while current RPO grew by 22.5% to $12.64 billion.

AI's "Showroom Tricks"

Shares of software companies, including ServiceNow, have been affected by fears that generative AI models could replace traditional software services. McDermott brushed aside these concerns, asserting that ServiceNow is benefiting from this evolution. He pointed out that customers considering a direct adoption of AI models often find these approaches to be more expensive than anticipated due to unpredictable usage-based pricing.

McDermott cited an example where a customer evaluated a direct approach to AI models for their IT operations, which would have cost ten times more than ServiceNow's AI solutions. He referred to these offerings as "showroom tricks," highlighting the accuracy and predictability of ServiceNow's solutions.