ServiceNow beats every target and the share still falls 6.5 percent

ServiceNow beat every single target in the second quarter of 2026. Subscription revenue rose 24.5 percent to 3.877 billion dollars, and 23 percent on a currency adjusted basis, which is 1.5 percentage points above the upper end of its own guidance.

Total revenue reached 3.987 billion dollars, up 24 percent. Adjusted earnings came in at 90 cents per share against an estimate of 86 cents. The adjusted operating margin was 29.5 percent and therefore three percentage points above guidance.

The share nevertheless fell 6.47 percent to 95.46 dollars at first, before recovering 4.75 percent to 99.99 dollars after the close.

The short version

• Subscription revenue rose 24.5 percent in the second quarter of 2026 to 3.877 billion dollars, and 23 percent on a currency adjusted basis.
• The share fell 6.47 percent to 95.46 dollars at first, before recovering 4.75 percent after the close.
• Annual contract value from the AI offerings passed one billion dollars for the first time in the quarter.

The margin is the reason

The trigger for the share price reaction sits in the guidance. The target for the gross margin in the subscription business is 81 percent, and the operating margin 31.5 percent for the full year.

As reasons for the pressure the group names two points. More and more customers use the computing capacity of large cloud providers instead of its own infrastructure. And the use of its own programs for artificial intelligence is accelerating faster than expected.

Both cost margin. Anyone who buys computing power from a third party gives away part of the revenue. And programs that carry out tasks on their own consume considerably more computing time than classic software.

ServiceNow therefore faces the same conflict as other providers of enterprise software. The new functions drive growth and depress the margin at the same time.

One billion dollars from AI contracts

The most striking single figure concerns exactly that area. Annual contract value from the AI offerings passed one billion dollars for the first time in the quarter. The increase in new contracts was more than 40 percent against the previous quarter.

The number of customers running such programs in live operation has, according to chief executive Bill McDermott, risen ninefold within nine months.

The renewal rate stood at 98 percent. Remaining performance obligations were 29.0 billion dollars, of which the portion due within twelve months was 13.20 billion dollars.

That combination describes very high planning certainty. At 98 percent renewal and a 29 billion dollar book, a large part of future revenue is already fixed.

Large customers write bigger cheques

In the quarter there were 123 deals with more than one million dollars of new annual contract value, an increase of almost 40 percent. The number of customers with more than five million dollars of annual contract value rose to 658.

The company counts around 8,800 customers worldwide, among them about 90 percent of the 500 largest American corporations.

Guidance raised only slightly

For the full year 2026 ServiceNow now expects subscription revenue of 15.760 to 15.780 billion dollars, which corresponds to 21 percent currency adjusted growth. The midpoint therefore rose only marginally.

That restraint stands out because the quarter came in clearly above expectations. Part of the explanation lies in a shift in timing. Strong demand from American federal agencies pulled revenue forward from the third into the second quarter.

On top of that comes the exchange rate. Since 31 March the dollar has strengthened, which creates an expected headwind of around 35 million dollars on the current portion of the order book for the third quarter. In the second quarter the currency had still helped slightly.

For the third quarter subscription revenue of 3.975 to 3.980 billion dollars is expected at an operating margin of 31 percent. The free cash flow margin in the second quarter was 16 percent, and 35 percent is targeted for the full year.

Frequently asked questions

Why did the share fall despite beaten targets

The trigger sits in the guidance. The target for the gross margin in the subscription business is 81 percent, and the operating margin 31.5 percent for the full year. As reasons the group names the use of outside cloud capacity and the faster than expected rise in use of its own AI programs.

How large is the business in artificial intelligence

Annual contract value from the AI offerings passed one billion dollars for the first time in the quarter. The increase in new contracts was more than 40 percent against the previous quarter, and the number of customers running such programs live has risen ninefold in nine months.

Why was full year guidance raised only slightly

Part of the explanation lies in a shift in timing. Strong demand from American federal agencies pulled revenue forward from the third into the second quarter. On top of that comes an expected currency headwind of around 35 million dollars on the current portion of the order book.

This analysis is for information only and is not investment advice.