ServiceNow flags Middle East deal delays, shares crash
FILE PHOTO: Bill McDermott, chairman and CEO of ServiceNow, speaks during an interview on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., October 26, 2023. REUTERS/Brendan McDermid/File Photo
April 22 : ServiceNow reported on Wednesday that delays in closing several large government deals in the Middle East hurt first-quarter subscription revenue growth, sending its shares down 12 per cent in extended trading.
The company said its subscription revenue growth faced about a 75-basis-point headwind from delayed closures of several large on-premises deals in the region due to the ongoing conflict.
Chief Operating Officer Amit Zavery told Reuters that those deals are expected to close throughout the year. "We don't know when these conflicts will get sorted out, but we continue to work with these customers," he said.
ServiceNow, like its peers, is also facing investor concerns that artificial intelligence tools could shift enterprise clients away from traditional software by automating some of the tasks previously done by their products.
Advanced coding tools by Anthropic and OpenAI have sparked a sell-off in software stocks in recent months, leading to what Wall Street has dubbed "SaaSpocalypse" - a term reflecting the gloom around software-as-a-service companies.
Zavery said, "I am not worried about the narrative," as more than 50 per cent of new business comes from non-seat-based pricing models, where revenue is tied to platform usage rather than user licenses.
Its acquisition of cybersecurity startup Armis for $7.75 billion may also create near-term challenges in fiscal 2026, impacting free cash flow margin by about 200 basis points for the year and operating margin by about 125 basis points in the second quarter.
In the first quarter, ServiceNow secured 16 deals, each exceeding $5 million in annualized value.
CEO Bill McDermott said on a post-earnings call that the company had not faced pressure from customers to cut prices on its core products, even as clients increased spending on AI solutions.
ServiceNow expects 2026 subscription revenue to be between $15.74 billion and $15.78 billion, up from its earlier outlook of $15.53 billion and $15.57 billion.
The subscription revenue forecast of $3.815 billion to $3.820 billion for the second quarter also exceeded analysts' average estimate of $3.75 billion, according to LSEG-compiled data.
First-quarter revenue of $3.77 billion and adjusted earnings per share of 97 cents beat estimates of $3.74 billion and 96 cents, respectively.
