ServiceNow (NOW.US) Q3 net profit fell nearly 45% year-over-year to US$277 million; shares dropped more than 18% after hours.

After the U.S. market close on Wednesday, enterprise software company ServiceNow (NOW.US) reported its third-quarter 2026 financial results, and its shares fell more than 18% after hours. Data showed that quarterly revenue reached US$4.106 billion, up 20.5% year-over-year, or 20% at constant currency; GAAP net profit was US$277 million, down about 45% from US$502 million a year earlier; GAAP diluted earnings per share were US$0.27, below US$0.48 a year earlier. Non-GAAP adjusted net profit was US$1.039 billion, up about 5% from US$992 million a year earlier; adjusted diluted earnings per share were US$1.00, above US$0.95 a year earlier. ServiceNow said third-quarter revenue growth and profitability metrics both exceeded the upper end of its prior guidance, and announced an upward revision to its full-year 2026 subscription revenue and free cash flow margin outlook. Subscription revenue rose 21%; AI business drove expansion of contract scale As ServiceNow's main source of revenue, subscription revenue reached US$3.988 billion in the third quarter, up 21% year-over-year, or 20.5% at constant currency. Professional services and other revenue was US$118 million, up 10% year-over-year. As of the end of September, current remaining performance obligations (cRPO) reached US$13.65 billion, up 20.5% year-over-year, or 21% at constant currency. This metric mainly reflects contracted revenue expected to be recognized over the next 12 months. Meanwhile, total remaining performance obligations (RPO) reached US$29.7 billion, up 22% year-over-year, or 22.5% at constant currency, reflecting continued expansion of the company's future contracted revenue scale. On large-customer demand, ServiceNow closed 19 new transactions in the third quarter with annual contract value exceeding US$5 million, with the number of such transactions up more than 135% year-over-year. As of the end of the third quarter, the number of customers with annual contract value exceeding US$5 million reached 680, up about 23% year-over-year. AI business growth accelerates; full-year contract value target raised to US$1.7 billion The artificial intelligence business became an important highlight of ServiceNow's quarterly report. The company announced it was further raising its 2026 AI annual contract value (ACV) target to US$1.7 billion, 70% above the US$1 billion target set at the beginning of the year. This was also ServiceNow's second upward revision to the target this year. ServiceNow President and Chief Financial Officer Gina Mastantuono said new annual contract value from the AI business exceeded company expectations, prompting management to raise the full-year target again. At the same time, enterprise customers are accelerating adoption of AI agents. The company disclosed that so far this year, customers' use of agentic AI in production environments has increased more than 13-fold year-over-year. Chairman and Chief Executive Officer Bill McDermott said the company is gradually becoming a unified management platform for intelligent enterprise operations, helping customers manage AI agents, reduce technical complexity and address growing cybersecurity risks. McDermott noted that accelerating AI adoption is driving the company's business development, with remaining performance obligations approaching US$30 billion. Expanding partnership with OpenAI to accelerate enterprise AI adoption In terms of AI business layout, ServiceNow announced a further expansion of its partnership with OpenAI to help enterprises turn AI model reasoning capabilities into manageable and executable business processes. Under the arrangement, the two sides will launch a ChatGPT plug-in based on Action Fabric technology and plan to advance integration in areas including cybersecurity, risk management, code development and voice interaction. In addition, ServiceNow announced the establishment of the Control Tower Alliance, joining with multiple AI, cloud computing and cybersecurity companies to help customers manage different AI models and agents on a unified platform. The company also launched the AI Passport solution, used to verify in real time the permission scope of internal and third-party AI agents, strengthening enterprise monitoring, management and security control of AI systems. ServiceNow said these products and partnership plans are aimed at advancing enterprise AI applications from mere information generation to automated execution of complex business processes. GAAP net profit fell 45%; operating margin narrowed significantly Despite double-digit revenue growth, ServiceNow's third-quarter GAAP profitability declined. The report showed third-quarter GAAP operating profit was US$385 million, down about 33% from US$572 million a year earlier; GAAP operating margin was 9.5%, below 17% a year earlier. GAAP gross profit was US$2.895 billion, up about 10% year-over-year, but gross margin fell to 70.5% from 77.5% a year earlier. Meanwhile, third-quarter operating expenses reached US$2.510 billion, above US$2.061 billion a year earlier. Among them, sales and marketing expenses were US$1.271 billion and research and development expenses were US$956 million, both higher than a year earlier. The report showed stock-based compensation expense for the quarter was US$633 million, above US$492 million a year earlier; amortization of acquired intangible assets increased to US$198 million from US$33 million a year earlier; severance costs increased to US$87 million from US$24 million. The increase in these expense items put pressure on GAAP operating profit. Excluding stock-based compensation, amortization of acquired intangible assets and other adjustment items, ServiceNow's third-quarter non-GAAP operating profit was US$1.338 billion, up about 17% year-over-year; non-GAAP operating margin was 32.5%, below 33.5% a year earlier. Full-year subscription revenue guidance raised; free cash flow margin target lifted to 36% Looking ahead to the fourth quarter of 2026, ServiceNow expects subscription revenue of between US$4.245 billion and US$4.255 billion, up 22.5% to 23% year-over-year, or about 21.5% at constant currency. The company expects fourth-quarter current remaining performance obligations to grow 18.5% year-over-year, with a non-GAAP operating margin of about 32%. For full-year 2026, ServiceNow raised its subscription revenue guidance to US$15.78 billion to US$15.79 billion, expected to grow 22.5% year-over-year, or 21% at constant currency. On profitability, the company expects full-year non-GAAP subscription gross margin of about 81% and non-GAAP operating margin of about 31.5%. Notably, ServiceNow also raised its full-year non-GAAP free cash flow margin target by 100 basis points to 36%. The company said that as its AI business continues to expand, it will continue to capture growth opportunities in the enterprise artificial intelligence market through a capital-efficient business model. On cash flow, ServiceNow's third-quarter operating cash flow was US$839 million, above US$813 million a year earlier; free cash flow calculated on the company's non-GAAP basis was US$822 million, above US$592 million a year earlier, with free cash flow margin rising to 20% from 17.5%. As of the end of September, the company held US$2.393 billion in cash and cash equivalents.