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ServiceNow Inc. (NOW) stock plunged nearly 19% in Thursday's premarket trading after the enterprise software company reported mixed third-quarter results. Earnings fell short of Wall Street expectations despite strong revenue growth and rising demand for artificial intelligence.
Chairman and CEO Bill McDermott defended the company's performance, pointing to strong subscription growth, expanding margins and free cash flow.
ServiceNow reported third-quarter revenue of $4.11 billion, beating analysts' consensus estimate of $4.10 billion. Revenue rose 20.5% year over year. Adjusted earnings of $1 per share missed the $1.02 estimate.
Subscription revenue increased 21%, while remaining performance obligations rose 22% to $29.7 billion.
For the fourth quarter, ServiceNow forecast subscription revenue of $4.245 billion to $4.255 billion, representing growth of about 22.5% to 23%.
The company expects full-year 2026 subscription revenue of $15.78 billion to $15.79 billion.
ServiceNow also raised its annual AI contract value forecast to $1.7 billion, up 70% from the beginning of the year.
McDermott described ServiceNow as a "unicorn growth company" during an interview with CNBC's Jim Cramer.
He said the company's capital-light business model allows it to expand AI services without the heavy spending on chips and data centers facing other AI companies.
McDermott highlighted ServiceNow's Rule of 57, which combines 21% subscription revenue growth with a 36% free cash flow margin.
He expects the company to eventually reach the Rule of 60.
McDermott said ServiceNow's Superintelligence Control Tower helps businesses manage AI models, agents, data and infrastructure through a single platform.
He highlighted a partnership with NVIDIA Corp., under which ServiceNow establishes governance rules while NVIDIA OpenShell enforces them.
ServiceNow also announced an expanded partnership with OpenAI, a five-year agreement with Hewlett Packard Enterprise Co. (HPE) and an AI deal with Stagwell.
McDermott pointed to partnerships with Alphabet Inc., Anthropic, Amazon.com Inc., Cisco Systems Inc., Stripe and NVIDIA as part of its broader AI strategy.
McDermott attributed the 2-cent earnings miss to interest expenses related to recent acquisitions rather than weakness in ServiceNow's core business.
He said the company expanded its operating margin by 150 basis points despite completing acquisitions in April.
McDermott argued that subscription growth, remaining performance obligations, margins and free cash flow better reflect the company's financial strength.
McDermott said ServiceNow's AI token consumption jumped 13-fold year over year and 500% month over month.
He expects customers to increase spending as they expand AI adoption and renew contracts.
Unlike infrastructure-heavy AI companies, ServiceNow faces no major constraints related to computing capacity, memory or data-center construction, McDermott said.
He expects recurring revenue growth, improving margins and rising AI demand to support the company's long-term expansion.
NOW Price Action: ServiceNow shares were down 18.94% at $121.70 during premarket trading on Thursday, according to market data.
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