Story Stocks^®

ServiceNow (NOW) is trading lower despite reporting strong Q2 results and raising its full-year subscription revenue outlook. Adjusted EPS beat expectations, while revenue increased 24% yr/yr to $3.99 bln, also ahead of consensus. Key metrics were also strong, with subscription revenue increasing 24.5% to $3.877 bln and cRPO growing 21.5% in CC to $13.2 bln, exceeding guidance by 200 bps. More importantly, ServiceNow AI crossed $1 bln in ACV, keeping NOW on track to exceed its $1.5 bln year-end target.

• Demand and large deals: NOW closed 123 transactions above $1 mln in net-new ACV, up nearly 40% yr/yr, while 18 of its top 20 deals included at least eight products. The renewal rate remained at 98%, and average contract duration increased, supporting continued visibility into subscription growth.
• AI monetization: Customers running agentic AI products in production increased ninefold over the past nine months, while deals including at least five AI products increased 5.5x yr/yr. AI-native offerings are also producing pricing uplifts of roughly 20-30%.
• Seats and consumption: Management said active seats continue to rise. At the same time, roughly half of net-new business is already non-seat-based, giving NOW exposure to increased AI consumption while retaining the predictable seat model preferred by customers.
• Margins: Non-GAAP operating margin of 29.5% exceeded guidance by 300 bps. NOW maintained its 31.5% full-year operating margin outlook but lowered subscription gross margin guidance by 50 bps to 81%, reflecting faster AI adoption and greater use of hyperscaler infrastructure.
• Guidance: NOW raised its FY26 subscription revenue outlook to $15.760-15.780 bln from $15.735-15.775 bln. The increase was modest relative to the Q2 outperformance, as roughly half of the subscription revenue upside reflected federal on-premise revenue shifting forward from Q3.

Briefing.com Analyst Insight

NOW's Q2 report was encouraging, with AI standing out as the main takeaway. ServiceNow AI remains on track to exceed its $1.5 bln year-end ACV target, an important sign that customers are increasing their use of agentic capabilities across the platform. Customers are also adopting more products together and expanding spending beyond the traditional seat model, while healthy cRPO growth, longer contract durations, and rising active seats suggest AI is strengthening ServiceNow's role within the enterprise rather than disrupting demand for its core platform. The modest full-year subscription revenue raise and lower subscription gross-margin outlook temper some of the enthusiasm, but the quarter provided further evidence that AI is becoming an increasingly important growth driver for NOW.