ServiceNow's Q3 2025 Earnings Call: Contradictions in AI Demand, Pricing Models, and Control Tower Strategies

Date of Call: October 29, 2025

Financials Results

• Revenue: $3.299B subscription revenue in Q3, up 20.5% year-over-year in constant currency
• Gross Margin: Subscription gross margin expected 83.5% (guidance)
• Operating Margin: Non-GAAP operating margin 33.5% in Q3 (300 bps above guidance); full-year operating margin target raised to 31% (up 50 bps)

Guidance:

• Raised 2025 subscription revenue midpoint by $55M to $12.835B–$12.845B, implying 20.5% YOY (20% constant currency).
• Raised 2025 operating margin target to 31% (up 50 bps) and free cash flow margin target to 34% (up 200 bps).
• Q4 subscription revenue $3.42B–$3.43B (19.5% YOY; 17.5%–18% CC); cRPO growth expected 23% YOY (19% CC); Q4 operating margin 30%; GAAP diluted shares 210M.
• Continue to expect subscription gross margin of 83.5%; guidance prudently factors potential U.S. federal procurement timing impacts.

Business Commentary:

* Revenue and Growth Leadership: - ServiceNow reported subscription revenue growth of 20.5% year-over-year, surpassing the high end of their guidance by 1%. - The growth was driven by strong execution across the platform with broad-based demand, leading to 103 deals greater than $1 million in net new ACV.

• AI Product and Customer Adoption:
• AI products are on pace to exceed $0.5 billion in ACV this year, with 12 Now Assist deals over $1 million in Q3.

• The significant growth in AI adoption is due to the increasing interest and effectiveness of AI solutions in various workflows, enhanced by the company's integrated AI platform and forward-deployed engineers.

• Customer Experience and CRM Transformation:

• The CRM and industry workflows segment contributed to 14 of the top 20 deals with 15 deals over $1 million in quarter-over-quarter growth.

• The increased adoption is attributed to ServiceNow's AI-first system of action, enhancing customer loyalty and growth through AI-powered CPQ solutions and improved service experiences.

• Geographic and Industry Expansion:

• The transportation and logistics sector saw over 90% year-over-year growth in net new ACV, with strong momentum in retail, hospitality, and education.
• This expansion is due to ServiceNow's ability to address critical workflow needs across diverse industries and the successful integration of AI solutions into traditional systems.

Sentiment Analysis:

Overall Tone: Positive

• Management said results “absolutely shattered expectations,” raised full-year revenue and margin targets, and highlighted Q3 operating margin of 33.5% (300 bps above guidance) and free cash flow margin of 17.5%. Repeated commentary on strong demand, AI momentum (Now Assist tracking to $0.5B ACV this year), and raising 2025 guidance support a positive tone.

Q&A:

• Question from Kasthuri Rangan (Goldman Sachs Group, Inc., Research Division): With Agentic technology adoption, what are your thoughts on integration/implementation support (e.g., forward deployed engineers) to institutionalize Agentic adoption?
  Response: ServiceNow has 100+ prepackaged Agentic workflows and is investing in forward-deployed AI 'black-belt' engineers (FD model) to speed implementations to weeks and reduce handholding.

• Question from Samad Samana (Jefferies LLC, Research Division): Is the broader sales organization and partner base getting better at selling AI solutions (less top-down), and how should we think about that impact going forward? Also, how did you factor prudence around the federal government timing into guidance?
  Response: Now Assist is becoming standard across the sales organization (1,700 customers live; 55x assist growth since May) and Gina said they prudently added timing-related conservatism to Q4 guidance due to the government shutdown despite healthy demand.

• Question from Aleksandr Zukin (Wolfe Research, LLC): Demand trends/linearity through the quarter and how consumption/token utilization is trending? Any update on renewal cohort heading into Q4?
  Response: Management said demand and linearity are very strong; token/consumption shows a hockey-stick as assists are used and reloaded, and about half of a large renewal cohort was pulled into Q3, improving momentum into Q4 with stronger Plus attach rates.

• Question from Tyler Radke (Citigroup Inc., Research Division): What is driving the 55x consumption increase (any vertical concentration), and how is Now Assist tracking to the $0.5B ACV and $1B target for next year?
  Response: Agentic workflows multiply Assist calls (10x+ per use case) driving consumption; prepackaged workflows accelerate go-lives; Now Assist is tracking ahead of plan to exceed $0.5B ACV this year (subscription-only) and remains on path to the $1B target, though guide not yet increased.

• Question from Michael Turrin (Wells Fargo Securities, LLC, Research Division): Q4 subscription revenue guide (~18% CC) is lower than cRPO growth — is the public sector comment the main driver or are there other assumptions (renewals, on-prem) to consider?
  Response: Gina said the Q4 guide reflects public sector timing risk and some on-prem factors; Q3 beat was already flowed into the full year and they applied prudence for government procurement timelines.

• Question from S. Kirk Materne (Evercore ISI Institutional Equities, Research Division): How important is delivering industry-specific AI/workflow solutions versus horizontal capabilities when selling to CEOs?
  Response: Management emphasized industry specialization is critical—ServiceNow builds industry data models and tailored Agentic flows and aligns coverage by industry to deliver domain-specific, faster outcomes.

• Question from Unknown Analyst (Morgan Stanley for Keith Weiss): Any updates on MoveWorks and how it will affect Now Assist and the AI suite?
  Response: Expect to close MoveWorks toward end of Q4; Now Assist momentum is independent of MoveWorks today, but MoveWorks will bring AI talent and accelerate the roadmap and capabilities once integrated.

• Question from Peter Weed (Sanford C. Bernstein & Co., LLC., Research Division): How does buyer demand for the AI control tower evolve—do buyers adopt early or only at maturity—and how material can this be commercially?
  Response: AI control tower resonates early because customers immediately need governance/security; adoption grew ~4x this quarter and is pulling security/risk conversations and driving consumption and platform demand.

• Question from Bradley Sills (BofA Securities, Research Division): Has the Now Assist pricing change (hybrid subscription + consumption) been well received and can lighthouse accounts catalyze further deals?
  Response: The hybrid subscription-plus-consumption model is well received—providing flexibility and predictability—and lighthouse customers (e.g., NVIDIA, Ulta, AstraZeneca) act as strong references to accelerate adoption.

• Question from Arjun Bhatia (William Blair & Company L.L.C., Research Division): Which workflows are customers adopting first (IT then expand to CRM/HR), and of the $0.5B Now Assist ACV, how much is subscription vs consumption?
  Response: Common entry points are CRM, autonomous IT and security, then expansion to HR/finance/supply chain; Gina said the $0.5B ACV is subscription-only today and consumption monetization will layer in more in 2026.

• Question from Keith Bachman (BMO Capital Markets Equity Research): Is security accelerating as it crosses $1B ACV and does AI contribute to that? Also, does the prior 2026 margin cadence still hold on the higher base?
  Response: Amit said AI spurs security/risk demand (AI control tower plus incident/triage automation) and security has crossed $1B ACV and is growing; Gina said they raised 2025 margins but will comment on 2026 specifics next year—AI efficiencies support further margin expansion though they may reinvest for growth.

Contradiction Point 1

AI Demand and Market Expansion

It involves differing perspectives on the demand for AI solutions and the expansion of the AI market, which are critical for understanding the company's growth prospects and investor expectations.

As Agentic technology grows in relevance, is integration and implementation expertise essential for success? - Kasthuri Rangan (Goldman Sachs)

2025Q3: AI is transforming business models, and enterprises are prioritizing AI transformation as their number one objective. This has led to a surge in demand for ServiceNow's AI platform. - William McDermott(CEO)

Did you see any change in the Q2 selling environment? - Karl Keirstead (UBS Investment Bank)

2025Q2: The demand for AI innovation remains strong. Geopolitical and economic changes require AI solutions for real-time responses. - William McDermott(CEO)

Contradiction Point 2

Customer Demand for AI Solutions

It involves differing statements about the demand for AI solutions from customers, which are crucial for assessing the company's ability to capitalize on AI opportunities.

What's driving the increase in AI consumption, and how does it impact the $500 million Now Assist ACV target? - Tyler Radke (Citigroup)

2025Q3: Agentic workflow adoption is driving significant consumption. The consumption and utilization of AI credits have increased significantly. - William McDermott(CEO)

How are the Now Assist Pro Plus products performing with customers, and what is the potential for revenue growth? - Matthew Hedberg (RBC Capital Markets)

2025Q2: Pro Plus adoption has been high, with usage increasing 9x in three months. - Amit Zavery(CPO)

Contradiction Point 3

AI Control Tower and Market Positioning

It involves differing statements about the role and positioning of the AI Control Tower, which is important for understanding the company's strategy in the AI landscape.

How does the AI control tower fit into AI adoption, and what is its commercialization trajectory? - Peter Weed (Alliance Bernstein)

2025Q3: The AI control tower provides a central nervous system for managing AI complexities. - Amit Zavery(CPO)

Do you see customers using AI Control Tower as a central control plane for all agents, including third-party agents? - Mark Murphy (JPMorgan Chase & Co)

2025Q2: We envision our AI platform managing all agents, including third-party ones. - William McDermott(CEO)

Contradiction Point 4

AI Pricing Model and Revenue Impact

It involves the explanation of the hybrid pricing model's impact on revenue growth, which is crucial for investor understanding.

Are sales teams and partners effectively selling AI solutions and shifting from top-down approaches? - Samad Samana (Jefferies)

2025Q3: Our new pricing model, we introduced that last quarter for AI, which is a bundled subscription and consumption model and it in a way, helps us from as we said previously, from a revenue perspective. - Gina Mastantuono(CFO)

How will removing the consumption element from the hybrid subscription and consumption pricing model affect revenue growth? - Kash Rangan (Goldman Sachs)

2024Q4: The pro forma subscription revenue growth without consumption would be higher than the guided growth of 20%. - Gina Mastantuono(CFO)

Contradiction Point 5

AI Consumption and Revenue Growth

It relates to the impact of AI consumption on revenue growth, which is a vital aspect of the company's financial performance.

Can you discuss trends in AI credit demand and usage? - Alex Zukin (Wolfe Research)

2025Q3: Our AI business is continuing to grow strongly. AI activities, including Agentic workflows and the consumption associated with Now Assist are well ahead of expectations. - Gina Mastantuono(CFO)

Is ServiceNow considering adopting the DeepSeek AI model? What are ServiceNow's plans to maintain leadership as AI costs decrease? - Mark Murphy (JPMorgan)

2024Q4: The ramp is on track ahead of our expectations. And as we noted last quarter, the consumption will ramp over the course of the next few years. - Gina Mastantuono(CFO)