ServiceNow's performance exceeded expectations... but due to delays in Middle Eastern contracts, the stock price plummeted 12% after hours.

Services Now ($NOW), although it delivered a first-quarter earnings report that exceeded market expectations, was hit by geopolitical uncertainties in the Middle East, causing the stock to plunge in after-hours trading. Explanations that the aftereffects of prolonged warfare surrounding Iran have delayed some major contracts in the Middle East—thereby putting pressure on subscription revenue—shook investor sentiment.

The company’s adjusted earnings per share (EPS) for the first quarter (EPS) was $0.97, beating the market expectation of $0.96. Revenue rose 22% year over year to $3.77 billion, slightly above the market forecast of $3.74 billion. Measured in Korean won, the scale is approximately 5.5819 trillion KRW. Net profit was $469 million, up from $460 million a year earlier.

Delayed Middle East contracts shake subscription revenue

However, core subscription revenue was affected by geopolitical risk. CEO (CEO) Bill McDermott (Bill McDermott) said on the earnings call that the end of “multiple large local deployment contracts” in the Middle East has been delayed, creating a headwind of about 75 basis points (1bp=0.01 percentage points). The reason is the prolonged conflict surrounding Iran.

McDermott specifically explained that some Middle Eastern state-owned and government customers prefer non-cloud, self-built “local deployment” approaches. Because such contracts recognize revenue in a lump sum when signed, any postponement or cancellation is immediately reflected in performance. He said, “If Middle East business slows down or gets canceled, it will have an immediate impact.”

That said, the company believes the worst phase has passed. McDermott revealed that the situation in the Middle East has “somewhat normalized” compared with earlier, and customers are also restarting discussions about resuming business. In fact, first-quarter subscription revenue was $3.67 billion, slightly above the market expectation of $3.65 billion. In Korean won, it was about 5.4347 trillion KRW.

Raised full-year performance guidance

Services Now provided second-quarter subscription revenue guidance, ranging from $3.815 billion to $3.82 billion. This beat the market consensus expectation of $3.75 billion. The full-year subscription revenue outlook was also raised from the prior $15.53 billion to $15.57 billion to $15.74 billion to $15.78 billion.

Chief Financial Officer (CFO) Gina Mastantuono (Gina Mastantuono) said the annual outlook was the result of “an outcome of a cautious assessment of the geopolitical environment.” This was interpreted to mean that although the underlying performance is solid, the impact of external shocks—including Middle East uncertainties—has not been fully ruled out.

The company said it repurchased about 20 million shares of treasury stock in the first quarter. This figure is more than double the total planned buyback for fiscal 2025. In the prior quarter, the company had additionally approved $5 billion for stock repurchases. Moreover, remaining performance obligations (RPO) were $12.64 billion, exceeding the market expectation of $12.56 billion. There were 16 transactions with an annual contract value (ACV) of more than $5 million, an 80% year-over-year increase.

Despite AI optimism, the stock fell by more than 12%

Investors’ concerns about “Middle East risks” and worries over artificial intelligence (AI) that are weighing on the entire software industry were more sensitive than the stronger-than-expected earnings performance. Services Now’s stock fell by more than 12% in after-hours trading. The cumulative decline since the start of the year has already exceeded 32%.

In recent times, the software industry has faced pressure amid fears that AI may erode the business models of traditional software companies. In response, Services Now chose to position AI as a positive breakthrough. The company will act as an autonomous AI agent integration management “control tower,” serving as a core value of its platform.

McDermott said that in the first quarter, the number of large customers spending more than $1 million per year on the Now Assist AI product suite increased by 130%. He emphasized that customers trust the Services Now platform, and that the company’s ability to connect various AI models, cloud, data sources, and software systems is becoming an “AI control tower for business innovation.”

He said, “As new technologies create both opportunities and risks at the same time, based on the engineering capabilities we have built up over the past 20 years and our deep understanding of business context, we can coordinate and protect the agent-based enterprise environment.” He added, “AI’s growth momentum has exceeded the company’s internal expectations and once again confirms that Services Now is one of the fastest-growing enterprise software companies.”

Expanding Google partnership · Completing the acquisition of Armis

This week, Services Now also announced an expansion of its partnership with Google Cloud. In addition, the acquisition of cybersecurity startup Armis—valued at up to $7.75 billion (about 11.4747 trillion KRW)—was completed faster than expected.

The earnings report shows that Services Now continues to demonstrate strong resilience in both core business growth momentum and its AI expansion strategy. However, as long as geopolitical risks and the industry reshuffling prompted by AI continue, stock price volatility may be difficult to fade away easily in the short term.

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