A month has gone by since the last earnings report for ServiceNow (NOW). Shares have added about 17.6% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is ServiceNow due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its latest earnings report in order to get a better handle on the important drivers.
NOW Q1 Earnings Beat Estimates, Revenues Rise Y/Y
ServiceNow delivered first-quarter 2026 earnings of 97 cents per share, beating the Zacks Consensus Estimate by 2.11%. Earnings rose 19.8% year over year.
Total revenues were $3.77 billion, edging past the consensus mark by 0.57% and increasing 22.1% year over year. At constant currency (cc), revenues increased 19% year over year to $3.67 billion.
Results reflected resilient demand for the company’s subscription model and another quarter of strong profitability and cash generation.
NOW Rides on Strong Subscription Revenue Growth
Subscription revenues were $3.671 billion in the first quarter of fiscal 2026, up 22% year over year, underscoring broad platform demand as customers lean into AI-enabled workflow automation. At cc, subscription revenues increased 19% year over year to $3.57 billion.
Management noted that first-quarter subscription revenue growth faced an approximately 75-basis-point (bps) headwind from delayed closings of several large on-premise deals in the Middle East due to regional conflict
Professional services and other revenue rose to $99 million, up 18.5% year over year. At cc, Professional services and other revenues increased 15.5% year over year to $96 million.
Management highlighted accelerating adoption tied to new AI experiences and platform expansion. The company said it delivered a complete AI-native experience across every commercial tier in April, with governance, security, workflow execution, and data connectivity built in by default. NOW also introduced new “Build Agent Skills” aimed at helping developers deploy agentic capabilities directly on the platform.
ServiceNow Expands Backlog and Lands Larger Deals
Backlog metrics continued to point to durable demand. Current remaining performance obligations, which represent contracted revenues expected to be recognized over the next 12 months, were $12.64 billion at the quarter end, up 22.5% year over year. Total remaining performance obligations were $27.7 billion, up 25% year over year.
Deal activity remained a notable support. ServiceNow reported 16 transactions above $5 million in net new annual contract value (ACV) in the quarter, nearly 80% higher year over year. NOW finished the period with 630 customers generating more than $5 million in ACV, up about 22% from the prior year. The company also called out strong enterprise traction for Now Assist, noting that the number of customers spending more than $1 million in ACV on the product grew more than 130% year over year.
NOW’s Operating Details
In the first quarter of 2026, non-GAAP total gross margin was 79.5%, down 250 bps year over year. Subscription gross margin was 81.5%, which contracted 300 bps year over year. Professional services and other gross losses were $9 million against gross income of $4 million reported in the year-ago quarter.
As a percentage of revenues, operating expenses decreased 260 bps on a year-over-year basis to 61.7%.
On a non-GAAP basis, operating margin was 32% in the first quarter of fiscal 2026, up 100 bps year over year. On a GAAP basis, income from operations was $503 million, representing a 13.5% operating margin. The gap between GAAP and non-GAAP profitability largely reflects stock-based compensation and amortization of purchased intangibles, along with business combination-related costs.
Management also discussed near-term pressure tied to integrating recent acquisitions, while emphasizing that platform leverage and internal AI efficiencies are expected to support longer-term margin expansion.
ServiceNow Cash Flow Remains Strong as Buybacks Accelerate
ServiceNow’s cash generation stayed robust in the reported quarter. Net cash provided by operating activities was $1.670 billion, and free cash flow was $1.665 billion, representing a 44% free cash flow margin. In the fourth quarter of 2025, NOW generated $2.24 billion as cash flow from operations and free cash flow were $2.03 billion with a free cash flow margin of 57%.
Capital returns were meaningful. The company repurchased about 20.1 million shares in the first quarter, including 18.5 million shares through a previously announced $2 billion accelerated share repurchase program, plus 1.6 million shares via open market purchases totaling $225 million. ServiceNow ended the quarter with about $4.2 billion remaining under its share repurchase authorization.
Liquidity remained solid. As of March 31, 2026, cash and cash equivalents were $2.702 billion, and marketable securities totaled $5.204 billion when combining current and long-term holdings.
NOW Lifts 2026 Subscription Revenue Outlook After Q1 Beat
Guidance moved higher following the quarter, with management citing strong execution and contributions from recently closed acquisitions. For second-quarter 2026, ServiceNow guided subscription revenues to $3.815-$3.820 billion, implying 22.5% year-over-year growth on a GAAP basis. On a non-GAAP basis, subscription revenues are expected to grow between 21% and 21.5%. The company’s non-GAAP operating margin outlook for the quarter is 26.5%.
For 2026, ServiceNow raised its subscription revenue outlook to $15.735-$15.775 billion (prior outlook range was $15.53-$15.57 billion), indicating 22% to 22.5% year-over-year growth on a GAAP basis. On a non-GAAP basis, subscription revenues are expected to grow between 20.5% and 21%.
The company expects a non-GAAP subscription gross margin of 81.5%, a non-GAAP operating margin of 31.5%, and a free cash flow margin of 35% for the year.
ServiceNow has incorporated a prudent view of geopolitical timing risk into the remainder of its fiscal 2026 outlook.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review.
The consensus estimate has shifted -23.81% due to these changes.
VGM Scores
At this time, ServiceNow has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a score of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Interestingly, ServiceNow has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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This article originally published on Zacks Investment Research (zacks.com).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
