ServiceNow (NOW) experienced a sharp decline of approximately 18.7% in afternoon trading on Thursday, despite reporting first-quarter results that surpassed Wall Street expectations and raising its full-year subscription revenue forecast for 2026. The stock last changed hands at $83.77, reflecting investor unease over delayed government contracts in the Middle East and lingering questions about the impact of artificial intelligence on enterprise software demand.
Q1 Performance and Guidance
The Santa Clara, California-based company posted first-quarter subscription revenue of $3.671 billion, a 22% increase year-over-year, while total revenue reached $3.77 billion. Adjusted earnings came in at 97 cents per share, comfortably above analyst estimates. Management also lifted its 2026 subscription revenue outlook to a range of $15.735 billion to $15.775 billion, up from the previous $15.53 billion to $15.57 billion range.
Middle East Contract Delays
Despite the strong headline numbers, investors focused on a specific headwind: delays in several sizable government contracts for on-premises software deployments in the Middle East. These holdups reduced first-quarter subscription growth by approximately 75 basis points, or 0.75 percentage point. Chief Operating Officer Amit Zavery noted that the company continues to work with these customers but cannot predict when the conflicts will be resolved.
AI Concerns and Market Context
ServiceNow's report comes amid broader market anxiety about the potential for generative AI platforms like Anthropic and OpenAI to disrupt traditional software business models. As one of the first major cloud software companies to report this quarter, ServiceNow's results are being viewed as a bellwether for the sector. Before the release, J.P. Morgan had flagged ServiceNow as a common hedge-fund short, with short interest at roughly 2.9%, indicating many investors had already positioned for downside.
Core Demand Remains Strong
Despite the market's reaction, the company reported solid underlying demand. ServiceNow secured 16 contracts each exceeding $5 million in annual value during the quarter. The number of customers spending at least $1 million annually on Now Assist AI products surged more than 130% from a year ago. Chief Executive Bill McDermott stated that “AI growth was far exceeding even our own expectations.”
Pricing and Business Model Evolution
Zavery highlighted that over half of new deals now rely on usage-based pricing, where customers are billed based on actual platform usage rather than employee licenses. This shift could reduce the company's vulnerability if AI alters software buying patterns. McDermott added that there has been no real downward pressure on ServiceNow’s main offerings.
Broader Market Impact
The selloff in ServiceNow rippled through the software sector. IBM (IBM) fell 10.3% after its own earnings, while Microsoft (MSFT) dropped 2.7% and Adobe (ADBE) lost 3%. In contrast, semiconductor stocks moved higher. UBS strategist Kiran Ganesh noted that this divergence between software and chip names could be a major driver for markets going forward.
Acquisition Impact
ServiceNow’s acquisition of Armis, finalized on April 20, is expected to reduce full-year free cash flow margin by roughly 2 percentage points and cut second-quarter operating margin by about 1.25 points. The company is betting on the deal to strengthen its security portfolio.
Analyst Take
Despite the beat-and-raise, the market’s anxiety persists. “Nothing software companies report this quarter is likely to refute that long-term bear case surrounding AI,” said Joe Maginot, portfolio manager at Madison Investments. ServiceNow’s strong results did not move the needle on those concerns.
