ServiceNow Beats Revenue Guidance Amid AI Push and Margin Headwinds

Date of Call: Jan 28, 2026

Financials Results

• Revenue: Q4 subscription revenue $3.466B, growing 19.5% YOY in constant currency, 150 bps above guidance high end.
• Gross Margin: 2026 subscription gross margin expected 82%, reflecting headwinds from hyperscaler expansion and AI investments.
• Operating Margin: Q4 operating margin 31%, 100 bps above guidance. 2026 operating margin expected 32%, up 100 bps YOY.

Guidance:

• 2026 subscription revenue expected $15.53B-$15.57B, representing 19.5%-20% YOY growth on constant currency basis.
• 2026 operating margin expected 32%, up 100 bps YOY.
• 2026 free cash flow margin expected 36%, up 100 bps YOY and 350 bps ahead of prior target.
• Q1 subscription revenue expected $3.650B-$3.655B, representing 18.5%-19% YOY growth on constant currency basis.
• Q1 operating margin expected 31.5%.
• cRPO growth for 2026 expected 20% on constant currency basis.

Business Commentary:

Strong Financial Performance:

• ServiceNow reported subscription revenue growth of 21% in Q4 2025, with 19.5% in constant currency, exceeding guidance by 1.5 points.
• The company's cRPO growth was 25%, with 21% in constant currency, surpassing guidance by 2 points.
• The growth was driven by strong demand for its AI and workflow solutions, with significant contributions from products like Now Assist and Workflow Data Fabric.

AI and Workflow Solutions:

• Now Assist surpassed $600 million in ACV, with more than 35 deals over $1 million in Q4 2025.
• The number of workflows and transactions grew over 33%, reaching $80 billion and $6.4 trillion, respectively.
• The expansion was driven by the increasing adoption of AI in business processes, with customers seeking to automate and enhance their operations.

M&A Strategy and Market Expansion:

• ServiceNow announced plans to acquire Veza and Armis, aiming to expand its security capabilities and address the growing attack surface in the AI era.
• These acquisitions are expected to contribute to the company's security and risk segment, which saw nearly 40% net new ACV growth year-over-year.
• The strategic moves are in response to customer demand for comprehensive security solutions to operate safely in an agentic AI world.

Customer Adoption and Retention:

• The company achieved a 98% renewal rate in Q4 2025, with 244 deals greater than $1 million in net new ACV.
• ServiceNow reported 32 deals over $1 million in ACV for Creator Workflows, highlighting strong customer engagement.
• This success was fueled by the company's ability to deliver AI-native solutions that modernize legacy systems and enhance customer experiences.

Sentiment Analysis:

Overall Tone: Positive

• Management stated: 'Our Q4 results beat expectations handily... Overall, Q4 NNACV growth accelerated both quarter-over-quarter and year-over-year in Q4.' 'We're guiding to 20% subscription revenue growth for 2026.' 'We have never acquired a single company for revenue alone.' 'ServiceNow is a build or buy winner. We'll win with the builders... We'll win for buyers...' 'This is a $1 trillion company in the making.'

Q&A:

• Question from Aleksandr Zukin (Wolfe Research, LLC): Give us a flavor of the tailwinds and headwinds in the demand environment and how to think about AI monetization and consumption layering into numbers.
  Response: CEO stated demand is strong with pipelines never better, customers seeking platform consolidation and ROI-driven deals. AI monetization via Now Assist is accelerating, with consumption (assist packs) adding quickly to subscription revenue as usage expands.

• Question from Sanjit Singh (Morgan Stanley, Research Division): How did federal perform relative to expectations and what are prospects for 2026?
  Response: CEO reported Fed business performed well despite government shutdown, with strong pipeline and OneGOV offering. Public sector broadly is growing, including state/local and global government up 80% YOY.

• Question from Gabriela Borges (Goldman Sachs Group, Inc., Research Division): On gross margin outlook, how much of the headwind from LLM costs is temporary vs. structural?
  Response: CFO indicated the bulk of gross margin headwind is from strategic shift to hyperscalers with lower margins, but these are offset by efficiencies and margins improve as these deals scale.

• Question from Samad Samana (Jefferies LLC, Research Division): Should we expect more Armis-sized M&A? What are Armis's financials?
  Response: CEO clarified no large-scale M&A on roadmap; recent moves were for talent/tech and customer-driven TAM expansion. CFO expects Armis to contribute ~1 point to 2026 revenue and up to 50 bps headwind to operating margin, with organic leverage absorbing dilution.

• Question from Peter Weed (Bernstein Institutional Services LLC, Research Division): Details on partnerships with OpenAI and Anthropic, and how customers choose between models.
  Response: CPO explained partnerships focus on unique use cases (e.g., OpenAI for voice/AI in CRM, Anthropic for coding agent) while keeping ecosystem open. Customer choice remains key, with ServiceNow providing context-driven enterprise use cases.

• Question from Patrick Walravens (Citizens JMP Securities, LLC, Research Division): How do you address customer concerns about monitoring agents, kill switches, grading, and red teaming?
  Response: CPO stated AI Control Tower addresses these governance/security questions head-on, providing real-time monitoring, control, and compliance, enabling rapid adoption of agentic use cases.

• Question from Matthew Hedberg (RBC Capital Markets, Research Division): Will ServiceNow pivot completely from seat-based to consumption/value-based pricing?
  Response: CPO and CEO emphasized hybrid model resonates with customers for flexibility and predictability. Seats remain important for ROI predictability, while consumption adds for value, with expansion driven by derived benefits.

• Question from Brian Schwartz (Oppenheimer & Co. Inc., Research Division): How will AI inferencing/training workloads split between ServiceNow's LLMs and third-party models in 2026?
  Response: CPO expects customer choice to remain, with frontier models used for specific inferencing needs but ServiceNow's own LLMs retained for sovereignty/private data requirements. Most value comes from ServiceNow's platform integration, not just model inferencing.

Contradiction Point 1

Federal Business Performance and Guidance

Contradiction on the federal business performance and the factors affecting Q4 guidance.

How did the federal business perform in Q4 compared to expectations, given the government shutdown, and what are the prospects for the rest of 2026? - Sanjit Singh (Morgan Stanley)

2025Q4: Despite the government shutdown limiting deal approval cycles, ServiceNow still secured strong deals in U.S. Federal. The OneGOV offering has been well-received... - William McDermott(CEO)

Is the prudence in Q4 guidance for the U.S. federal business different from 90 days ago or due to the government shutdown? - Samad Samana (Jefferies)

2025Q3: ...The Q4 guidance includes additional prudence due to the timing dynamics of standard procurement processes required to complete deals once the government reopens. The overall public sector opportunity remains strong. - Gina Mastantuono(CFO)

Contradiction Point 2

Nature of AI Monetization and Pricing

Contradiction on the primary model for AI monetization and pricing flexibility.

What are the current demand environment's tailwinds and headwinds, and how do you approach AI monetization, particularly the consumption component, and its integration into financials? - Aleksandr Zukin (Wolfe Research)

2025Q4: AI monetization is happening through a hybrid pricing model, with customers quickly adding Now Assist packs as they consume tokens. - Amit Zavery(CPO)

How is the new hybrid pricing model for Now Assist received, and are its lighthouse accounts driving more deals? - Bradley Sills (BofA Securities)

2025Q3: The hybrid model is very well received, offering customers flexibility and predictability. It has driven rapid consumption growth as expected. - Amit Zavery(CPO)

Contradiction Point 3

AI Monetization and Pricing Model

Contradiction on the primary driver and predictability of AI-related revenue growth.

Will ServiceNow shift completely from seat-based pricing to consumption or value-based pricing as agentive workloads grow? - Matthew Hedberg (RBC Capital Markets)

2025Q4: AI monetization is happening through a hybrid pricing model... Deal sizes often include multiple ServiceNow products... When customers derive extra value from Now Assist, they renew and expand. - William McDermott(CEO), Amit Zavery(CPO & COO)

How are customers responding to the early adoption of Now Assist Pro Plus, and how might this revenue source grow? - Matthew Hedberg (RBC Capital Markets)

2025Q2: Pro Plus adoption is very quick... Revenue from Pro Plus continues to grow. The company is confident in reaching the $1 billion ACV target by 2026. - Amit Zavery(CPO & COO), Gina Mastantuono(CFO)

Contradiction Point 4

Federal Business Outlook and Guidance Conservatism

Contradiction on the performance and forward-looking guidance for the U.S. Federal sector.

How did the federal business perform relative to expectations in Q4, considering the government shutdown, and what are the prospects for the remainder of 2026? - Sanjit Singh (Morgan Stanley)

2025Q4: Despite the government shutdown... ServiceNow still secured strong deals in U.S. Federal.... The OneGOV offering has been well-received... Growth is not limited to U.S. Fed... - William McDermott(CEO)

What is the current outlook for the federal pipeline and the conservatism in Q3 guidance, considering the public sector environment? - Aleksandr Zukin (Wolfe Research)

2025Q2: Market conditions in the U.S. federal sector played out as anticipated... However, for the remainder of 2025, the guidance includes prudence due to tightening budgets and shifting mission demands. - Gina Mastantuono(CFO)

Contradiction Point 5

AI Control Tower's Role and Capabilities

Contradiction on the AI Control Tower's primary function and the necessity for a single-platform governance strategy.

How do you address customer concerns about real-time AI agent monitoring, kill switches, grading, and red teaming? - Patrick Walravens (Citizens JMP Securities)

2025Q4: The AI Control Tower... provides real-time monitoring, observability, cost management, security, and governance for all AI agents (both ServiceNow and third-party) within a single system... removing a major barrier to AI adoption. - Amit Zavery(CPO & COO), William McDermott(CEO)

Are customers using AI Control Tower as a central control plane for all agents, including third-party ones, and if ServiceNow’s custom LLM (Nemotron with NVIDIA) succeeds, could ServiceNow agents replace third-party agents to prevent fragmentation? - Mark Murphy (JPMorgan Chase & Co.)

2025Q2: The goal is for the CEO to use ServiceNow’s platform for enterprise-wide AI governance. - William McDermott(CEO)