ServiceNow’s stock skids as Middle East conflict drags on revenue

ServiceNow Inc. today delivered first-quarter results that surpassed Wall Street’s expectations, but its stock fell hard in late trading after it said the ongoing war in Iran was dragging on its subscription revenue.

The company reported earnings before certain costs such as stock compensation of 97 cents per share, edging past the Street’s target of 96 cents. Revenue for the period rose 22% from the same period one year earlier to $3.77 billion, ahead of the $3.74 billion analyst forecast. All told, ServiceNow delivered net income for the quarter of $469 million, up from $460 million one year ago.

While subscription revenue grew during the quarter, Chief Executive Bill McDermott (pictured) told analysts on a conference call that the company was hit by a 75 basis point headwind from delayed closings of “several large on-premise deals in the Middle East,” which was blamed on the ongoing conflict in the region.

McDermott explained that a number of its sovereign customers in the Middle East insist on on-premise installation. “In on-premise, you don’t recognize the revenue ratably — you recognize the revenue all at once — so if the business slows in the Middle East, or the business cancels in the Middle East, you have an impact that’s immediate,” he pointed out.

However, McDermott told analysts that the worst may be over, for the Middle East is “starting to get a little bit more normal” than it was, with customers talking about resuming business once more. All told, subscription revenue came to $3.67 billion in the quarter, just ahead of the $3.65 billion analyst target.

Looking to the second quarter, ServiceNow forecast subscription revenue of between $3.815 billion and $3.82 billion, above the analyst consensus estimate of $3.75 billion. For the full year, the company increased its subscription revenue forecast to a range of $15.74 billion to $15.78 billion, up from an earlier forecast of $15.53 billion to $15.57 billion. Chief Financial Officer Gina Mastantuono told CNBC in an interview that the company’s full-year guidance reflects a “prudent assessment of the geopolitical environment.”

The company said it repurchased around 20 million shares during the quarter, more than double the amount it bought during the entirety of fiscal 2025. That came after it approved an additional $5 billion in funding for stock buybacks in the previous quarter. It also reported $12.64 billion in current remaining performance obligations in the quarter, surpassing the Street’s estimate of $12.56 billion. It saw 16 transactions that will bring in more than $5 million in annual contract value during the quarter, up 80% from the prior year.

Although the hit to ServiceNow’s revenue from the Middle East conflict wasn’t as big as some might have feared, investors still reacted negatively, with the company’s stock falling more than 12% in late trading. The stock is now down more than 32% in the year to date, a victim of the artificial intelligence hammer blow to software stocks amid rising fears that the technology may ultimately put them out of business. ServiceNow’s response to fears over AI has been to embrace the technology. The company has been trying to position itself as a kind of “control tower” for autonomous AI agents that can get work done on behalf of human employees with minimal supervision, and it has made some progress in this direction.

On the call, McDermott told analysts that the number of large customers spending at least $1 million per year on its Now Assist AI suite rose 130% in the quarter. He said those customers are now beginning to rely on ServiceNow to be their “AI control tower for business reinvention,” because they trust its platform and because it can integrate with any AI model, cloud, data source and software system. “As new technologies create both opportunity and risk, our two decades of engineering combined with deep business context enable us to orchestrate and secure the agentic enterprise,” McDermott said. “With this foundation, our AI growth is far exceeding even our own expectations, reinforcing our position as one of the fastest growing enterprise software companies ever.”

This week, ServiceNow also announced an expanded deal with Google Cloud and completed its $7.75 billion acquisition of the cybersecurity startup Armis Inc., earlier than expected.

Photo: ServiceNow