Immediate service Chief Executive Bill McDermott has been working to convince investors not to view his enterprise software company as a standard SaaS (software as a service) business.
McDermott has so far faced skepticism from Wall Street, which has been concerned about ServiceNow stock’s high valuation. The stock trades at a trailing P/E ratio of more than double that of some rivals, such as salesperson. As a result, ServiceNow shares are down 40% over the past year, despite consistently strong results.
But on Wednesday, McDermott got more ammunition to fight ServiceNow’s doubters.
The company reported fourth-quarter earnings on Wednesday, handily beating Wall Street’s revenue and profit growth forecasts for the ninth straight quarter. Subscription revenue for the three months ended December 31 was $3.47 billion, a year-over-year increase of 21%, and non-GAAP earnings per share were $0.92. Both figures beat consensus estimates of approximately $3.42 billion and $0.87, respectively.
The company also raised its full-year 2026 subscription revenue guidance, expecting revenue to be between $15.53 billion and $15.57 billion. That would mean growth of about 20% to 21%, well above analysts’ expectations of 18% to 18.5%.
The company reported that annual net new contracts for its suite of artificial intelligence products, Now Assist, more than doubled in the fourth quarter compared with last year.
After the news was announced, ServiceNow shares fell 4% in after-hours trading.
This may be proof that McDermott’s message – don’t confuse us with other SaaS companies – is starting to hit home.
“We don’t live in the SaaS community,” McDermott said wealth Interviewed before earnings release. “Functional SaaS and feature SaaS will be automated through ServiceNow and the language model that meets us in the workflow where business happens.” Functional SaaS companies are those that provide software to serve a wide range of work functions, such as Salesforce for sales and customer service, or Workday for human resources. Functional SaaS companies are those that take on narrow tasks, e.g. skyrocketing DropBox for meetings, or for file transfer.
McDermott said ServiceNow is becoming a central hub through which customers can access the data and software tools needed to automate the work of AI agents. “We’re the ones driving hyperscale, language models, data lakes, systems of record and now corporate security posture,” McDermott said. “All of this is happening on the ServiceNow platform.”
ServiceNow has been on an acquisition spree to bolster its artificial intelligence and security capabilities in order to fulfill McDermott’s vision. In December, it announced plans to acquire cybersecurity company Armis (the largest deal ever) and identity security company Veza for $7.75 billion. In March, the company announced a $2.85 billion acquisition of Moveworks, an AI-driven employee experience platform, a deal that closed in December.
The acquisitions have some Wall Street analysts wondering whether ServiceNow is trying to buy revenue growth. But McDermott pointed out that the latest quarterly results show that ServiceNow’s organic year-over-year growth can exceed 20%. He said each acquisition was about acquiring specific product capabilities and talent around artificial intelligence and cybersecurity: Armis provides technology to monitor IT operations in real time, Veza manages identity for humans and machines, and Moveworks handles employee experience.
McDermott pointed to what he calls ServiceNow’s “55-plus rule” performance as evidence that ServiceNow is on a different level than its competitors. The “Rule of 40” is an empirical benchmark for SaaS software that states that a healthy company’s revenue growth rate plus its profit margin or free cash flow margin should total at least 40%. The combination of ServiceNow’s 21% revenue growth and 35% free cash flow margin puts it well above that threshold. “No company in the enterprise software industry operates under Rule 55 — only ServiceNow,” he said. The company’s first-quarter guidance score was 57 points.
McDermott acknowledged a disconnect between ServiceNow’s continued strong performance and the market’s lack of enthusiasm for the stock. “There was a re-rating of P/E multiples on SaaS companies, so ServiceNow filed along with other SaaS companies, and the P/E multiples in the SaaS industry fell,” he said. “You can take a look adobeyou can look at Salesforce, you can look at Workday. “
His contention is that ServiceNow should no longer be taken seriously alongside those peers. “We’re integrating feature companies – you know, they have a feature or a tool – we’re integrating feature companies onto ServiceNow,” he said. “I’m talking hundreds of applications.”
In addition to profitability, ServiceNow also announced an expanded partnership with artificial intelligence company Anthropic. The partnership will make Anthropic’s Claude AI model the default model powering ServiceNow’s enterprise application development build agents. The partnership follows last week’s announcement of a close collaboration with OpenAI, whose models will also be integrated into ServiceNow’s products.
“The next generation of AI models will work in harmony with the most important enterprise software,” McDermott said. Anthropic CEO Dario Amodei sees “a meaningful difference between giving enterprises access to AI models and building that model into workflows where real decisions are made by enterprises around the world,” he said. He also distinguished between large language models (which he described as “nondeterministic”) and ServiceNow’s ability to also use its own workflow automation tools to provide “deterministic results.” “Businesses must have certainty in governance, security, auditability outcomes and of course ensuring smooth operations and not illusions,” he said.