ServiceNow CEO Bill McDermott described the company's latest quarter as an "inflection point."

The very next day, its stock plunged nearly 27%, the largest single-day decline in company history.

What's interesting is that the quarter itself was actually pretty good.

ServiceNow exceeded its guidance, AI adoption continued to accelerate, and management raised its AI sales target for the second time this year.

But the outlook told a different story.

Which raises an interesting question.

What if management is right about the inflection point, but wrong about which direction the business is heading?

Let's take a closer look at what happened.

Disclaimer: This is not financial or investment advice. I'm sharing my personal investment decisions and reasoning for educational and informational purposes. Always do your own research before making any investment decisions.

ServiceNow provides enterprise software that helps companies manage and automate workflows across IT, HR, customer service, and security. The company generates most of its revenue through subscriptions to its cloud-based platform, which increasingly incorporates AI to automate business processes. The third quarter delivered another period of strong subscription revenue growth and accelerating AI adoption, although that momentum has yet to translate into faster growth across the broader business.

Quarter at a Glance

What Mattered

1/ AI Demand Continues To Build

ServiceNow's AI business continued to exceed expectations in Q3. AI net new annual contract value (ACV) grew 65% YoY, prompting management to raise its year-end AI ACV target from $1.5B to $1.7B. This marks the second increase this year, up from an initial target of $1B. The number of AI deals exceeding $1M also grew 4.5x YoY, indicating that larger AI contracts are becoming more common.

Adoption is also broadening across the platform. Deals involving five or more AI products increased over 8.5x YoY, while Control Tower net new ACV grew more than 6x as businesses look to manage AI agents across different systems. Customers are also putting these products to work, with production consumption of agentic AI increasing more than 13x YoY YTD. These are impressive growth rates, although they come from a relatively small base as AI adoption is still in its early stages. Management also did not disclose absolute consumption figures, making it difficult to gauge the scale of that usage.

ServiceNow is also expanding how it monetizes this growing demand. The company announced an expanded partnership with OpenAI, allowing ChatGPT to initiate workflows through its Action Fabric. As Chief Product Officer Amit Zavery explained, ServiceNow still performs the underlying work and charges for the associated AI consumption, even when customers interact through another company's assistant. This creates another avenue for monetization without requiring customers to access workflows directly through ServiceNow's own interface.

2/ Still Waiting for Acceleration

Despite the strong AI momentum, ServiceNow has yet to see a corresponding acceleration in its broader business. Subscription revenue grew 20.5% YoY in constant currency, slowing from 23% in Q2, while current remaining performance obligations (cRPO), a measure of contracted revenue expected to be recognized over the next 12 months, grew 21%, compared with 21.5% last quarter. Underlying customer demand remained healthy, with a 98% renewal rate and 680 customers generating more than $5M in ACV, up 23% YoY.

The outlook, however, told a less encouraging story. Management guided Q4 cRPO growth to 18.5% in constant currency, including approximately 175 bps from Armis, implying growth of roughly 16.75% before that contribution. Full-year subscription revenue guidance also increased by just $15M, with $12M attributable to FX. CFO Gina Mastantuono explained that several factors were obscuring underlying demand, including renewals pulled forward into Q3, a higher mix of on-premise government contracts, and contractual termination provisions that exclude some backlog from cRPO. ServiceNow is also providing additional deployment support to select large customers to accelerate AI adoption, which shifts some revenue from subscriptions to professional services. Management expects this to reduce Q4 subscription revenue growth by approximately 50 bps.

During the Q&A, analysts repeatedly pressed management on when accelerating AI demand would translate into faster companywide growth. CEO Bill McDermott reiterated his confidence in the business and pointed to a more meaningful AI-driven acceleration in 2027, as customers move from purchasing AI products to actively consuming them. This is consistent with the multiyear adoption framework presented at Investor Day in May, although management offered little additional clarity on the magnitude or timing of the broader growth inflection.

3/ The Cost of Growth

ServiceNow's continued expansion is coming with some pressure on profitability. Despite strong double-digit revenue growth, non-GAAP EPS increased just 5%, while non-GAAP operating margin declined 100 bps to 32.5%. Although this exceeded management's guidance by 150 bps, non-GAAP subscription gross margin also fell 300 bps to 80%. GAAP profitability was weaker, with operating margin declining to 9.5% from 17%, weighed down by higher stock-based compensation, acquisition-related amortization, and severance costs.

At the same time, management highlighted growing productivity gains from using AI internally. According to CFO Gina Mastantuono, ServiceNow is now generating more than $1B in annualized value from its own AI tools, more than double the level at the end of 2025. These efficiencies are helping the company avoid additional hiring, rather than representing $1B in direct cash savings. ServiceNow is adding quota-carrying salespeople and AI engineers while reducing operational and support roles, with overall headcount declining approximately 5% QoQ. Management believes these efficiencies are helping offset the costs of acquisitions and continued investment in the business.

Cash flow presented a more encouraging picture. Non-GAAP free cash flow increased 39% to $822M, although operating cash flow grew just 3%. Much of the improvement reflected lower CapEx, which fell from $235M to $91M, alongside acquisition-related cash costs excluded from the non-GAAP calculation. Management also raised its full-year free cash flow margin target from 35% to 36%, primarily due to reduced CapEx. The result is stronger cash generation, even as the benefits of internal AI productivity have yet to produce consistent quarterly margin expansion.