Equity Research · Earnings Update
ServiceNow, Inc. (NOW)
Summary and key takeaways
ServiceNow reported Q2 2026 subscription revenue of $3.88 billion, up 24.5% (23% in constant currency), total revenue of $3.99 billion, and non-GAAP EPS of $0.90 against a $0.86 consensus. Current remaining performance obligations grew 21% to $13.2 billion. Underneath the beat, GAAP operating margin fell to 4% from 11% a year earlier, as $655 million of stock-based compensation, $219 million of acquisition amortization and $137 million of deal and severance costs separated GAAP from the 29.5% non-GAAP margin. Guidance implies Q3 subscription growth slowing to 20.5%. The stock fell −3.69% on July 23, in a session that also sold software broadly. It has since risen +42.60% to $131.11.
Results snapshot
| Metric | This quarter | Change / comparison |
|---|---|---|
| Subscription revenue | $3.88B | +24.5% (+23% constant currency) |
| Total revenue | $3.99B | +24%; consensus $3.93B |
| GAAP operating income | $162M | Margin 4% vs 11% ($358M) a year ago |
| Non-GAAP operating margin | 29.5% | — |
| GAAP / non-GAAP diluted EPS | $0.29 / $0.90 | GAAP $0.37 a year ago; non-GAAP consensus $0.86 |
| Current RPO | $13.20B | +21%; total RPO $29.0B, +21% |
| Customers over $5M ACV | 658 | 123 deals over $1M net new ACV |
| Free cash flow | $634M | 16% margin; operating cash flow $587M |
| Share repurchases | $2.23B | Six months to June 30 |
Analysis
The gap between GAAP and non-GAAP profit is the quarter’s real story. It is not a rounding difference — it is the difference between a 4% and a 29.5% operating margin. Most of it is recurring: stock-based compensation alone was $655 million, four times GAAP operating income. The acquisition amortization and deal costs are newer, and they come from the acquisitions that also lifted goodwill and intangibles from $1.5 billion to $4.7 billion during 2025.
Figure 1 · Operating income bridge
Four adjustments turn a $162M GAAP profit into $1.17B of non-GAAP profit
Q2 2026, $ millions. GAAP income from operations plus the adjustments listed in ServiceNow’s own GAAP-to-non-GAAP reconciliation equals non-GAAP operating income of $1,173 million. Source: Q2 2026 earnings release.
One definitional point is worth knowing before quoting the cash number. ServiceNow’s free cash flow ($634 million) came in above operating cash flow ($587 million), because its definition adds back $161 million of business-combination and related cash costs before subtracting $114 million of capex. That is disclosed and legitimate, but it means reported free cash flow excludes a real cash cost of the acquisitions.
Guidance
- Q3 2026 subscription revenue of $3,975–3,980 million, up 20.5%; current RPO growth of 20% in constant currency; operating margin 31% (non-GAAP)
- Full-year 2026 subscription revenue raised to $15,760–15,780 million, up 22.5%; subscription gross margin 81%; operating margin 31.5%; free cash flow margin 35% (all non-GAAP)
What the rebuilt model says
I rebuilt the rebuilt three-statement model (.xlsx) on September 10. Growth now starts at 22%, the full-year guide with professional services held roughly flat. Capex is calibrated to FY2025’s actual 6.5% of revenue. D&A actuals no longer include deferred-commission amortization, which the previous version counted, overstating EBITDA. Margins stay GAAP, because the model forecasts GAAP statements. The security page’s published assumptions are updated to match. $ millions:
| $ millions | FY2025A | FY2026E | FY2027E | FY2028E | FY2029E | FY2030E |
|---|---|---|---|---|---|---|
| Revenue | 13,278 | 16,199 | 19,277 | 22,554 | 26,163 | 30,087 |
| GAAP operating income | 1,824 | 2,430 | 2,892 | 3,383 | 3,924 | 4,513 |
| GAAP operating margin | 13.7% | 15.0% | 15.0% | 15.0% | 15.0% | 15.0% |
| Net income | 1,748 | 2,294 | 2,663 | 3,056 | 3,489 | 3,960 |
FY2026E revenue and GAAP operating income at three first-year growth rates bracketing the guide:
| FY2026E growth | FY2026E revenue | FY2026E GAAP operating income |
|---|---|---|
| 20% | $15.93B | $2.39B |
| 22% | $16.20B | $2.43B |
| 24% | $16.46B | $2.47B |
Assumptions, stated plainly. The model applies a 15% GAAP operating margin (78% gross, 40% SG&A, 23% R&D) to every forecast year. That is well above Q2’s 4%, which carried acquisition costs I assume fade, and far below management’s 31.5% non-GAAP guide, which excludes stock compensation. Growth after FY2026E steps down to 15% by FY2030E — my assumption. Senior notes are folded into other long-term liabilities. I do not publish a forecast cash figure or a valuation from this workbook; forecast financing is a plug.
Updated investment thesis
NOW is a Core holding at 2.30% of the book and +54.68% on my cost. In Q1 I wrote that a strong print doesn’t guarantee a strong reaction if guidance reads as decelerating. Q2 repeated the pattern: a beat, a raised full-year guide, and a Q3 guide implying 20.5% subscription growth, down from 24.5%.
No position change. The +42.60% rally since the print says the market has moved on from the deceleration worry. My own attention is on the GAAP margin: the acquisitions that are adding growth are also adding cost below the non-GAAP line, and I want to see that gap narrow.
Risks to this position
- Deceleration: guidance steps subscription growth from 24.5% in Q2 to 20.5% in Q3, and current RPO growth to 20%.
- Earnings quality: GAAP operating margin of 4% against 29.5% non-GAAP; stock compensation of $655 million a quarter is a real cost to shareholders.
- Acquisition integration: amortization and deal costs are rising, and the company’s free-cash-flow definition adds back deal-related cash costs.
- Valuation: after a +42.60% move since late July, the stock prices in the re-acceleration the guide does not yet show.
Sources & references
- ServiceNow Reports Second Quarter 2026 Financial Results (SEC Exhibit 99.1), July 22, 2026
- ServiceNow (NOW) Q2 Earnings: How Key Metrics Compare to Wall Street Estimates — Zacks via Yahoo Finance (consensus)
- Price action: July 22 (before the print) and July 23 (after it) News writeups
- Price data: Massive Market Data daily closes