ServiceNow (NYSE: NOW) raises AI target to $1.7 billion but GAAP operating profit falls

What happened

ServiceNow, Inc. (NYSE: NOW) raised its 2026 AI annual contract value target to $1.7 billion from $1 billion at the start of the year. It is the second increase this year. Third-quarter results, reported Oct. 28, beat the high end of guidance on every topline growth and profitability metric.

Subscription revenue reached $3.99 billion, up 21% from a year earlier and 20.5% in constant currency. Total revenue was $4.11 billion, up 20.5%.

CFO Gina Mastantuono said AI net new ACV exceeded expectations. She said agentic AI consumption in production is up more than 13x from a year earlier, year to date. She also pointed to lower capex and a full-year free cash flow margin target raised by 100 basis points to 36%.

Key numbers

Metric	Latest	Change	Source
Subscription revenue, Q3 2026	$3.99 billion	from $3.30 billion, +21%	SEC 8-K (earnings release)
Remaining performance obligations	$29.7 billion	+22%	SEC 8-K (earnings release)
GAAP income from operations	$385 million	from $572 million, -32.7%	Calculated from SEC 8-K
Free cash flow (non-GAAP)	$822 million	from $592 million, +38.9%	Calculated from SEC 8-K
2026 AI annual contract value target	$1.7 billion	+70%	SEC 8-K (earnings release)
Full-year free cash flow margin target	36%	+1.0 percentage points	SEC 8-K (earnings release)

Read more: ServiceNow (NOW) company research

Backlog and large deals

Contracted backlog is growing a little faster than revenue. Remaining performance obligations (RPO) were $29.7 billion, up 22% and 22.5% in constant currency. Current RPO, contract revenue to be recognized in the next 12 months, was $13.65 billion, up 20.5%, or 21% in constant currency.

CEO Bill McDermott's quote cites $30 billion in RPO growing 23 percent, higher than the results table. This story uses the table.

Large deals add to the picture. ServiceNow ended the quarter with 680 customers above $5 million in ACV, up approximately 23%. It also closed 19 transactions of that size in net new ACV, over 135% more than a year earlier.

Stock perps: every US stock that trades as a perpetual future, by leverage, live

Profit and cash flow

GAAP profit moved the other way. Income from operations fell to $385 million from $572 million a year earlier, a 32.7% drop by OptimistFi's calculation. The operating margin slid to 9.5% from 17%.

The filing's reconciliation adds back $633 million of stock-based compensation, up from $492 million. It adds back $198 million of amortization of purchased intangibles, up from $33 million, and $87 million of severance costs, up from $24 million. Non-GAAP operating income was $1.34 billion at a 32.5% margin, against 33.5% a year earlier.

Net income was $277 million, or $0.27 a share, against $502 million and $0.48. Interest expense rose to $81 million from $6 million. Cash paid for business combinations, net of cash acquired, was $9.17 billion in the first nine months, against $215 million a year earlier.

Long-term debt stands at $5.44 billion, against $1.49 billion at Dec. 31, 2025. Goodwill is $10.01 billion, against $3.58 billion.

Cash generation improved. Free cash flow, a non-GAAP measure, was $822 million, up 38.9% from $592 million by OptimistFi's calculation, for a 20% margin. Operating cash flow edged up to $839 million from $813 million. Purchases of property and equipment fell to $91 million from $235 million.

Why it matters

OptimistFi has argued that ServiceNow's value rests on becoming the default workflow and AI-governance layer inside large organizations. Rising large-deal counts and a higher AI target point that way, so the quarter strengthens the case.

The Control Tower Alliance, announced the same day, lists Anthropic, Amazon Web Services, Cisco, NVIDIA and OpenAI among its founding members. ServiceNow also announced an AI Passport solution to verify the scopes of first- and third-party AI agents in real time.

The caveat is profit quality. GAAP operating income fell, the headline margins depend on non-GAAP adjustments, and the AI figure is a target, not booked revenue.

What's next

For the fourth quarter, ServiceNow guides subscription revenue of $4.25 billion to $4.25 billion, growth of 22.5% to 23% or 21.5% in constant currency. Guided cRPO growth is 18.5%, below the third-quarter pace. The full-year guide is $15.78 billion to $15.79 billion in subscription revenue, with a 31.5% non-GAAP operating margin.

Executives have four dated appearances. Senior Vice President Josh Kahn speaks at the BMO conference on Nov. 12 and the RBC conference on Nov. 17. Mastantuono speaks at the Wells Fargo summit on Dec. 8 and gives a keynote at the Barclays conference on Dec. 9.

The next test is the Q4 2026 earnings release. Subscription revenue inside the guided range and cRPO growth near 18.5% would hold the case. A miss on either, or another year-over-year fall in GAAP operating income, would weaken it.

More from OptimistFi

• NOW stock: research and coverage of ServiceNow
• Stock research on every company OptimistFi covers

From OptimistFi Perps