ServiceNow Q3 Earnings: AI Growth Inflection Validates Multi-Year Monetization Thesis

The Growth Inflection Moment: ServiceNow Validates AI Monetization With 13% Earnings Beat#

Growth Inflection Validated#

ServiceNow reported third-quarter results that moved beyond the realm of guidance preservation and into the territory of growth re-acceleration, delivering a 13 percent earnings-per-share beat that surprised even optimistic equity analysts and signaling that the company's multi-year narrative around artificial intelligence monetization is beginning to translate into tangible financial reality. The company delivered adjusted earnings per share of $4.82 against a consensus expectation of $4.27, coupled with total revenues of $3.41 billion against a $3.35 billion baseline, and—critically—raised its full-year subscription revenue guidance to a range of $12.84 billion to $12.85 billion from a prior guidance range of $12.78 billion to $12.80 billion. This guidance raise, totaling approximately $60 million at the midpoint, is a critical marker because it signals that management did not merely meet the market's expectations and then guide to incremental upside in future periods; rather, ServiceNow actually detected renewed momentum in customer adoption and AI-driven pricing power sufficiently robust that management felt confident broadening its full-year outlook even after the quarter had closed. For investors who have spent the past eighteen months questioning whether NOW's elevated valuation multiple—which has fluctuated between 100 and 160 times forward earnings depending on market sentiment—could be justified by realistic near-term growth acceleration, the third-quarter results represent a materially different narrative: the company is not merely defending its market position against competitive threats from Salesforce, Oracle, and Workday, but is actively expanding its addressable market through AI-powered workflow automation and is capturing incremental value through consumption-based pricing models that sit atop its traditional subscription revenue.

The subscription revenue performance in particular underscores the depth of the beat. NOW reported third-quarter subscription revenues of $3.3 billion, representing growth of 20.5 percent on a constant-currency basis and exceeding the FactSet consensus estimate of $3.27 billion. This subscription revenue beat, combined with a larger-than-expected increase in current remaining performance obligations (CRPO)—a metric that measures contracted revenue expected to be recognized within twelve months—to $11.35 billion versus the $11.09 billion consensus forecast, provides evidence that the company's go-to-market machine is not merely preserving existing customer relationships but is successfully expanding those relationships through cross-selling of AI-powered modules and platform extensions. For a mature enterprise software vendor operating in what has become a commoditized workflow automation market, subscription revenue growth of 20 percent-plus is a material accomplishment, particularly when that growth is accompanied by expansion in CRPO, which signals that customers are committing to incremental spending in the quarters to come. This suggests that the partnership announcements highlighted in the weeks before earnings—including collaborations with NVIDIA, Dynatrace, and Tandym Group—are not merely public-relations exercises designed to buffer investor sentiment ahead of a potential earnings miss, but rather represent genuine inroads into new customer segments and use cases that were previously undermonetized.

AI Monetization Takes Form#

The most strategically significant disclosure in the quarter, however, was management's articulation of a concrete framework for AI monetization that extends beyond vague promises of future revenue upside and into the realm of quantified business metrics. Finance Chief Gina Mastantuono disclosed during the earnings call that the annual contract value (ACV) for NOW's artificial-intelligence business is projected to exceed $500 million in 2025 and is on track to reach the $1 billion milestone by the end of 2026. This disclosure is critical for two reasons: first, it translates the abstract narrative about "AI monetization" and "intelligent workflows" into a measurable financial metric that can be tracked, benchmarked against competitors, and scrutinized by institutional investors; second, it establishes a forward-looking framework that investors can use to test whether management's execution discipline is improving quarter-by-quarter.

For perspective, if NOW is generating $500 million in annual contract value from its AI business at the end of 2025 and targets $1 billion by the end of 2026, that implies a 100 percent year-over-year growth rate in the AI revenue base—a pace of expansion that is materially faster than the company's overall subscription revenue growth of 20 percent and that suggests management is successfully shifting the revenue mix toward higher-value-add AI-powered capabilities. This is precisely the narrative that equity analysts have been waiting to hear: concrete evidence that the company is not merely maintaining its legacy IT service management (ITSM) business while hoping that AI adoption lifts overall growth, but is actually cultivating a new growth engine within its existing customer base that operates at a fundamentally different growth rate and margin profile than the core business. The significance of this ACV disclosure cannot be overstated, as it provides a quantified pathway for investors to track whether the company is truly creating incremental revenue streams from artificial intelligence rather than simply rebranding existing offerings under a fashionable AI umbrella.

The Earnings Case: From Skepticism to Conviction#

The 13% EPS Beat and Guidance Raise#

The magnitude of the third-quarter earnings-per-share beat—13 percent above consensus—is noteworthy because it reflects not merely a beat on subscription revenues but an operating leverage inflection that suggests NOW's cost structure is scaling more efficiently than it has in prior quarters. Net income reached $502 million, or $2.40 per diluted share, compared to $432 million, or $2.07 per diluted share, in the same quarter a year prior. This represents a 16 percent year-over-year increase in net income, a pace that outpaces the 20 percent subscription revenue growth and signals that gross margins are expanding, operating expenses are being disciplined, and the company's path to profitability enhancement is beginning to accelerate. For a software company trading at elevated multiples, this operating leverage inflection is precisely the signal that equity analysts require to maintain conviction in a "Buy" thesis; without evidence that the company can translate revenue growth into expanding net income and improving returns on invested capital, the premium valuation becomes increasingly difficult to defend.

The fact that NOW delivered this operating leverage while simultaneously navigating U.S. government uncertainty (the company operates a material federal government business that grew more than 30 percent in the quarter) and a macroeconomic environment marked by mixed signals on enterprise software spending demonstrates that management's execution discipline is robust enough to absorb external headwinds and continue to deliver results. The guidance raise, in this context, becomes less a surprise and more a natural extension of the underlying momentum: if the company's core business is accelerating, if AI monetization is ramping, and if gross margins are expanding, then a moderate raise in full-year subscription revenue guidance ($60 million at the midpoint) appears conservative rather than aggressive.

Subscription Revenue Growth and CRPO Strength#

The CRPO metric, which reached $11.35 billion in the third quarter, warrants careful analysis because it serves as a leading indicator of future cash flow and future revenue recognition. Current remaining performance obligations represent contractual obligations that customers have already committed to and that will be recognized as revenue over the next twelve months. The fact that CRPO exceeded expectations by a margin of approximately $260 million suggests that customers are committing to larger contract values and, importantly, longer renewal terms than the market had priced into the consensus forecast. This is particularly significant in the context of enterprises that are attempting to consolidate vendors and simplify their technology stacks; if CRPO is expanding faster than subscription revenue, that suggests NOW is not merely replacing smaller point solutions or extending existing footprints, but is actually winning net-new deals or expanding scope within existing customers.

When an enterprise commits to a multi-million dollar, multi-year deployment of workflow automation and AI-powered IT operations, that commitment signals a strategic bet on NOW as a core platform rather than a tactical tool. The strength in CRPO therefore provides evidence that the company's sales organization is succeeding in positioning ServiceNow as a "control tower" for enterprise workflow automation and AI-driven process intelligence—precisely the narrative that management has articulated as central to the company's competitive positioning against vendors who offer point solutions in specific verticals or horizontal platforms with shallow AI capabilities. This positioning becomes increasingly valuable as enterprises recognize that fragmented point-solution architectures create operational friction and limit the ROI potential of intelligent workflow automation across their organizations.

AI Monetization: The $500M Milestone and Path to $1B#

ACV as Leading Indicator#

The disclosure of $500 million-plus in annual contract value for artificial intelligence capabilities in 2025, with a target of $1 billion by 2026, establishes a quantified benchmark against which investors can measure management's execution discipline on a quarter-by-quarter basis. This metric is valuable because it is forward-looking and aspirational—it is not merely a reflection of what has already been achieved, but a projection of what management believes it can achieve if market adoption of AI-powered workflows continues to accelerate and if the company's sales organization continues to improve its messaging and positioning around the ROI of intelligent automation. For competitive comparison, the AI revenue bases disclosed by NOW's closest competitors suggest that ServiceNow is positioning itself as a leader in AI monetization among enterprise software vendors; Oracle and Salesforce have made vague statements about AI revenue contributions, but neither has disclosed a specific ACV target or a forward-looking revenue framework as concrete as NOW's.

This transparency, while potentially exposing NOW to scrutiny if the company misses these targets, also signals management confidence that the roadmap is achievable and that the AI TAM (total addressable market) expansion narrative is grounded in real customer demand rather than speculative positioning. The $1 billion ACV target by 2026 implies that the AI business will represent a meaningful fraction of NOW's total revenue growth during 2026, and if the company achieves this target, the mix shift toward higher-value AI services will have a material impact on the company's revenue quality and margin profile. Institutional investors will be closely monitoring ACV progress in every earnings call, using it as a primary metric to validate whether the company's broader growth narrative is materializing as promised.

Pro Plus Pricing Model: Consumption + Subscription#

The mechanism through which NOW is monetizing its AI capabilities is instructive: the company introduced a "Pro Plus" tier that combines traditional per-seat subscription pricing with a consumption-based component wherein customers purchase AI tokens that are renewable and that enable customers to utilize AI-powered workflow automation capabilities at scale. This two-tiered pricing model is important because it addresses a fundamental challenge in software pricing: how to monetize incremental value created by AI without simply raising per-seat prices to economically unsustainable levels that trigger customer backlash and churn. By introducing a consumption layer, NOW is able to capture incremental value as customers expand their usage of AI-powered capabilities, without forcing a wholesale repricing of the entire subscription.

The Pro Plus tier was cited by management as a material driver of the third-quarter revenue beat, suggesting that customer adoption of the consumption-based pricing model is accelerating faster than even internal projections anticipated. For investors concerned that artificial intelligence might cannibalize software subscriptions by automating tasks that currently require manual intervention (and therefore current software licenses), the Pro Plus model provides reassurance that NOW has engineered a pricing architecture that is likely to expand revenue per customer even as AI reduces the labor intensity of certain IT operations. The fact that total licenses sold continued to grow in the quarter, despite the software industry's widespread concerns about AI-driven displacement, further supports the thesis that NOW is not losing customers to automation but is instead upselling existing customers on AI-powered extensions of the core platform.

Stock Split as Confidence Signal#

Accessibility and Strategic Timing#

NOW's announcement of a 5-for-1 stock split, with an effective date in early December 2025, reflects a deliberate capital allocation decision that carries significance beyond the mechanical reduction in share price. CEO Bill McDermott explicitly stated that the stock split is intended to make shares more accessible to retail investors and employees who may be interested in participating in NOW's AI growth narrative but who face a psychological barrier to purchasing shares trading at roughly $900 per share. While the advent of fractional share trading has technically eliminated the price barrier to retail share ownership, McDermott's rationale suggests that ServiceNow management believes there is genuine retail and employee demand for NOW shares at a lower nominal price, and that enabling this demand is strategically valuable both for broadening the shareholder base and for improving employee retention through equity compensation incentives.

The timing of the stock split announcement, coinciding with the third-quarter earnings release, signals management's confidence in the company's trajectory; stock splits are typically announced by companies experiencing positive momentum and are rarely deployed by companies facing existential headwinds. The fact that NOW, which had experienced a 13 percent year-to-date stock price decline prior to the earnings announcement, is proceeding with the stock split despite this weakness suggests that management is confident the stock price will recover and that the split will position the company favorably in the eyes of retail and institutional investors who may see the split as a forward-looking signal of anticipated appreciation. The decision to execute the split in early December, after the Q3 earnings release but before the 2026 outlook period begins, demonstrates strategic choreography in capital allocation messaging.

Narrative Positioning Ahead of 2026#

The stock split, combined with the guidance raise and the articulation of a $1 billion AI ACV target by 2026, collectively constitute a narrative positioning that NOW is preparing the market for a multi-year inflection in the company's growth rate and competitive positioning. The stock split lowers the nominal share price precisely at a moment when the company is signaling to the market that earnings growth and revenue acceleration should drive the stock price higher; this creates a favorable mechanical dynamic wherein a lower share price at the moment of split announcement can appreciate robustly without reaching the psychological barriers that might have deterred retail participation at higher nominal prices. For management, the split also serves as a signal of confidence to employees and to the market more broadly that the company's leadership team believes in the sustainability of current and future earnings power.

In the context of enterprise software, which has experienced significant valuation volatility and skepticism in recent quarters, a stock split is a relatively low-risk signal of management confidence that costs the company nothing materially but that signals to stakeholders that leadership believes the company's growth trajectory is sustainable and that the share price is likely to appreciate in the years ahead. The split announcement, when combined with the concrete AI monetization metrics disclosed in the earnings, creates a compelling narrative for retail investors to participate in ServiceNow's multi-year growth opportunity. When examined holistically, the stock split should be interpreted not as a cosmetic capital structure change but as a deliberate messaging strategy to broaden NOW's investor base ahead of the critical 2026 execution period.

Outlook#

Guidance Execution and 2026 Inflection#

The guidance raise announced in the third quarter positions NOW for a critical test in 2026: can the company achieve the $1 billion AI ACV target, accelerate overall subscription revenue growth to high-teen or low-20-percent growth rates, and demonstrate that the partnership strategy articulated in the preceding weeks is translating into genuine incremental customer acquisition and expansion? The Q4 2025 guidance of $3.42 billion to $3.43 billion in subscription revenue, if achieved, would represent high-single-digit sequential growth and suggests a moderation in the sequential growth rate relative to Q3; this is not unusual heading into a calendar year-end, where spending patterns often decelerate, but it also means that management is not projecting a dramatic sequential acceleration into the final quarter of 2025. The modest Q4 guidance should therefore be interpreted as management's attempt to set realistic expectations rather than as evidence of a slowdown in the underlying business momentum.

The true test of NOW's growth thesis will come in 2026, when the company will be expected to demonstrate that the AI ACV expansion, the partnership channel, and the Pro Plus pricing model are combining to drive overall subscription revenue growth toward the mid-20-percent range or higher. If 2026 subscription revenue growth remains in the high-teen range or decelerates further, the market may conclude that the AI monetization narrative has been oversold and that the company's growth trajectory is more dependent on maintaining market share in a mature ITSM market than on capturing genuine new growth opportunities. Conversely, if NOW achieves the AI ACV target and demonstrates that overall subscription revenue growth is re-accelerating, the multiple compression concerns that have plagued the stock in 2025 may begin to reverse, and the stock split may prove to be impeccably timed from a capital allocation perspective.

Competitive Dynamics and Valuation Normalization#

The earnings beat and guidance raise have positioned NOW favorably relative to competitive alternatives in the enterprise workflow automation space, but the company remains vulnerable to competitive pressure from larger, diversified software vendors such as Salesforce and Oracle, which have resource advantages and can bundle workflow automation with adjacent enterprise functions such as CRM, enterprise resource planning, and supply chain management. The fact that NOW is winning competitive deals and expanding CRPO despite the presence of these larger competitors suggests that customers value the company's specialization and depth in workflow automation and AI-powered IT operations, but this competitive moat is not invulnerable to erosion if larger competitors make meaningful investments in their own AI-powered workflow capabilities. The competitive pressure from Oracle's AI initiatives and Salesforce's integration strategy underscores the urgency with which NOW must execute its growth roadmap.

The valuation multiple that the market is willing to assign to NOW will ultimately depend on whether investors believe the company can sustain high-teen or 20-percent-plus subscription revenue growth over a multi-year horizon while also expanding operating margins. The third quarter provided evidence that the company is moving in the right direction on both metrics, but the sample size is still relatively small, and skeptics can reasonably argue that one quarter of beat-and-raise is insufficient evidence to reverse the narrative of growth deceleration and valuation pressure that has dominated the NOW story in 2024 and 2025. The coming quarters will be instrumental in testing whether the growth inflection is real and durable or merely a temporary respite from longer-term headwinds in the enterprise software market.