(Bloomberg) — ServiceNow Inc. gave a fiscal-year sales outlook that fell short of expectations, saying it is focused on fueling adoption of new generative artificial intelligence products rather than generating significant revenue for those tools in the near future. The shares dropped in premarket trading.
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Subscription revenue in 2025 will be about $12.7 billion, the company said Wednesday in a statement. That’s shy of the roughly $12.9 billion anticipated by Wall Street analysts, according to data compiled by Bloomberg. Subscription revenue makes up the bulk of ServiceNow’s sales.
The Santa Clara, California-based company makes applications that help companies organize and automate their personnel and information technology operations. Like many peers, ServiceNow has spent the last two years baking generative AI features into its products. It offers a pricier subscription tier with those tools, which carry out tasks based on prompts from users. The software company is now focused on developing AI agents, which handle work without the need for assistance from human employees.
ServiceNow said it will offer more pay-as-you-go pricing in 2025 for its generative AI tools. This change, the company said, will mean “forgoing upfront incremental new subscriptions to instead drive accelerated adoption and monetize increasing usage over time.”
The shares fell more than 9% in premarket trading after closing at $1,143.63 in New York. The stock has increased 45% over the last 12 months and hit a record high earlier this week.
Shake-Up In Pricing Model
Investors have been concerned about the ways the generative AI could upend the traditional subscription-based business model for software vendors. The pricing structure change that ServiceNow announced is “significant,” and could hurt results, Adam Crisafulli, founder of industry analyst Vital Knowledge, said in an interview on CNBC.
Still, application software companies like ServiceNow are expected to benefit from this week’s announcement that a Chinese AI startup, DeepSeek, had developed lower-cost AI models that rival US competitors. Analysts have said DeepSeek’s model will help give potential customers more choices and reduce the cost of the technology.
The rapidly declining costs of using the large language models that underpin generative AI gives ServiceNow the freedom to focus on adoption by customers and protect the company’s margins, Chief Executive Officer Bill McDermott said in an interview. “We’re looking at these models being commoditized at a faster rate than anybody could have imagined,” he said.
ServiceNow executives also talked up the ways generative AI is spurring sales. New annual contract value related to the company’s AI product “stepped up meaningfully” in the fourth quarter, Chief Financial Officer Gina Mastantuono said in the statement.
The annual guidance also assumes some disruption in the business of selling to the US government because of “the change in presidential administration,” the company said. ServiceNow is a major software vendor to the federal government, with deals including one with the US Army worth as much as $432 million.
Federal Spending Concerns
The Trump administration has said it will reduce federal spending. Investors also have been concerned about the potential impact on software companies from Elon Musk’s cost-cutting effort called the Department of Government Efficiency, Kirk Materne, an analyst at Evercore ISI, wrote ahead of the results.
“DOGE loves us,” McDermott said, citing the cost-saving potential of ServiceNow’s products. He said the company has met with “high powered people in the administration” and any disruption is just a question of purchase timing.
The initial annual sales outlook “could improve over the year as economic and policy visibility improves, with help from solid bookings in 2024,” wrote Anurag Rana, an analyst at Bloomberg Intelligence.
The company also announced a $3 billion share buyback program to replace a $1.5 billion plan authorized in May 2023, which had $266 million remaining.
In the period ended Dec. 31, subscription revenue gained 21% to $2.87 billion and profit, excluding some items, was $3.67 a share. Both just missed analysts’ average estimate.
Current remaining performance obligation, a measure of near-term bookings, rose 19% to $10.3 billion. Analysts, on average, projected $10.4 billion, according to data compiled by Bloomberg. Bookings growth in the quarter was impacted by three percentage points of currency fluctuation.
ServiceNow has 2,109 customers with annual contract value above $1 million, which is up from 2,020 at the end of the previous quarter.
