Q1 2026 Recap: Subscription Beat + FY26 Raised + Armis Closed Early + $2B ASR — Maintaining Outperform with HIGH Conviction
Key Takeaways
- Q1 subscription revenue $3.671B (+19% CC; +22% reported) above guide. CRPO +21% CC, a 100bp beat. Non-GAAP op margin 32%, 50bp above guide. FCF margin 44%. RPO $27.7B (+23.5% CC). 16 deals over $5M NNACV; 5 deals over $10M. Now Assist customers spending over $1M in ACV grew more than 130% YoY; deals over $1M grew 30% YoY. The 75bp subscription rev headwind from Middle East conflict deal delays makes the beat operationally cleaner.
- Armis acquisition closed EARLY, accelerating subscription revenue growth; Veza closed March 2. FY26 raised: subscription rev $15.735-$15.775B (+20.5-21% CC, RAISED $205M midpoint), but the raise is Armis (125bp) plus currency: ex-Armis, management says the CC guide was held, not raised. Op margin 31.5% (incl 75bp Armis headwind); FCF margin 35% (incl 200bp Armis headwind). Margin normalization 2027+ expected.
- Now Assist continues to outperform expectations: deals with 3+ Now Assist products grew nearly 70% YoY; 36 deals with 5+ products. On trajectory to exceed $1B target for 2026, and on the call the CEO lifted the AI ACV bar to $1.5B. AI Control Tower average deal sizes more than doubled QoQ. RaptorDB Pro deal volume +80% YoY. Sales CRM NNACV +5x YoY (quintupled) with deal count +80%. Employee Works (Moveworks + employee experience merged) +5x YoY growth.
- Strategic announcements around the print: AI Native packaging (entire portfolio AI native, no separate purchase); 50% of net new business from non-seat-based pricing (consumption/tokens/assets); Build Agent skills (developers from Claude Code, Cursor, Codex, Windsurf); Enterprise Service Management Foundation for mid-market expansion; Robinhood case study (70% deflection, 2,200 hours saved monthly). OpenAI native voice + text models integrated directly into ServiceNow AI platform.
- Rating: Maintaining Outperform with HIGH conviction. The stock fell 17.7% to $84.78 on April 23, its largest one-day decline since the 2012 IPO, after an analyst on the call tied the 12% after-hours drop to an unclear organic Q1 beat and a full-year raise that was all Armis and currency. We read the same print as intact: the Q2 subscription guide implies roughly 20% CC growth ex-Armis, the AI ACV target rose 50% to $1.5B, deals over $1M grew 30%, new logo ACV grew 50%, and Sales CRM grew 5x. At ~15.5x FY26E FCF the stock prices in a slowdown the subscription guide does not show. Knowledge / Financial Analyst Day May 4 in Vegas is the next major catalyst. PT range reset to Base $120 / Bull $135 / Bear $80.
Results vs. Consensus
| Metric | Q1 Actual | Consensus | Beat/Miss | Magnitude |
|---|---|---|---|---|
| Subscription Revenue | $3.671B (+19% CC) | $3.652B | Beat | +$19M / +0.5% |
| CRPO Growth | +21% CC | +20% (guide) | Beat | +100bp |
| RPO | $27.7B (+23.5% CC) | n/a | Strong | +23.5% CC YoY |
| Op Margin (non-GAAP) | 32% | 31.5% (guide) | Beat | +50bp |
| FCF Margin | 44% | n/a | Down YoY | -400bp YoY |
| Deals >$5M NNACV | 16 | n/a | Strong | nearly +80% YoY |
| Deals >$10M NNACV | 5 | n/a | Strong | n/a |
| Now Assist Customers $1M+ ACV | +130% YoY | n/a | Strong | n/a |
| New Logo ACV Growth | +50% YoY | n/a | Accelerating | n/a |
| Renewal Rate (incl Moveworks) | 97% | n/a | Strong | -100bp vs Q4's 98% |
YoY View
| Metric | Q1 2026 | Q1 2025 | YoY |
|---|---|---|---|
| Subscription Revenue | $3.671B | $3.005B | +22% / +19% CC |
| RPO | $27.7B | $22.1B | +25% / +23.5% CC |
| CRPO | $12.64B | $10.31B | +22.5% / +21% CC |
| Op Margin | 32% | 31% | +100bp |
| FCF Margin | 44% | 48% | -400bp |
| Customers >$5M ACV | 630 | n/a | ~+22% |
| Sales CRM NNACV | +5x YoY | n/a | Quintupled |
QoQ View
| Metric | Q1 2026 | Q4 2025 | QoQ |
|---|---|---|---|
| Subscription Revenue | $3.671B | $3.466B | +5.9% |
| Op Margin | 32% | 31% | +100bp |
| FCF Margin | 44% | 57% | -1300bp (Q4 seasonality) |
| RPO | $27.7B | $28.2B | -1.7% (Q1 seasonality) |
| Deals >$1M NNACV | n/a | 244 | Q1 seasonality |
| AI Control Tower Avg Deal Size | +2x QoQ | n/a | Doubled |
Revenue Assessment
Subscription +19% CC growth against Q4's +19.5% held up through a ~75bp Middle East headwind. Net new business broad-based: technology workflows (33 deals >$1M; 5 over $5M); CRM/industry (16 deals >$1M); core business (12 deals >$1M); creative workflows (11 deals >$1M). Industries: T&L NNACV +280% YoY; Financial Services +65%; Energy +45%. US public sector outperformed Q1 with 10 deals >$1M. New logo ACV +50% YoY accelerated. Largest new logo deal ever: $15M+ — material customer-base expansion.
Margin Assessment
Op margin 32% beat by 50bp on AI OpEx efficiencies. The Armis acquisition adds 75bp headwind in FY26 (margin normalization 2027+). Subscription gross margin 81.5% (84.5% in Q1 2025) reflects continued data center investments. FCF margin 44% Q1 (strong post-Q4 collections); FY26 guide 35% (incl 200bp Armis headwind). The trade-off: ServiceNow accepts Armis headwinds of ~75bp to FY26 operating margin and ~200bp to FCF margin for the strategic acquisition + multi-year revenue acceleration. Against FY25's 31% and 35%, the new guides are still +50bp and flat.
FCF + Capital Return Assessment
Q1 FCF margin 44% (48% in Q1 2025). Q1 repurchases were about 20.1M shares for $2.2B: 18.5M through the $2B ASR plus 1.6M in the open market for $225M, which management called double all of 2025. That is roughly $110 a share, bought in a quarter when the stock closed between $99.41 and $150.90; the April 23 close of $84.78 sits below that whole range. $4.2B of authorization remains. With Armis closed on April 20, the pace of buybacks from here is the open question.
Segment / Workflow Performance
Technology Workflows: Continuing Strength + AI Cross-Sell
Technology workflows: 33 deals >$1M, 5 over $5M. ServiceOps + ITAM in 17 of top 20; security/risk in 15 of top 20. Now Assist deals with 3+ products grew nearly 70% YoY; 36 deals with 5+ products.
CRM & Industry: Sales CRM +5x YoY (Quintupled)
CRM/industry in 16 of top 20 deals; 16 over $1M. Sales CRM NNACV +5x YoY; deal count +80% YoY. Strength came from CPQ and sales and order management, the AI-native front office.
Assessment: CRM is the multi-quarter accelerating wedge. The 5x growth signals legacy displacement story scaling rapidly.
Now Assist + AI Control Tower: Toward $1B 2026, Now $1.5B
Now Assist: 36 deals with 5+ Now Assist products; deals with 3+ products grew nearly 70% YoY. AI Control Tower average deal size more than doubled QoQ — hockey stick continuing. On trajectory to exceed $1B for 2026.
Employee Works + Moveworks: 5x YoY
Employee Works (Moveworks + employee experience merged) launched mid-Q1; already 5x YoY growth. Closed many $1M+ deals in launch quarter. The former Moveworks CEO now runs the combined business. Available in Teams, Slack and any browser, for nearly 200M employees so far.
Key Topics & Management Commentary
Overall Management Tone: McDermott characteristically assertive on multi-quarter compounder thesis. Direct addressing of "noise" + "speculation" + responding to peer-cohort underperformance with operational facts. Mastantuono crisp on numbers + the Armis-driven margin trade-off. Multiple new strategic moves: Armis early close, Employee Works, AI Native packaging, consumption-based pricing.
1. Armis Acquisition Closed Early — Subscription Acceleration
"I'm thrilled to announce the early close of our acquisition of Armis, which would significantly expand our TAM and accelerate our subscription revenue growth. While we expect some near-term headwinds to margins as we integrate the business this year, strong AI efficiencies internally from now on now and our underlying platform leverage will normalize our operating and free cash flow margin expansion trajectory in 2027 and beyond." — Gina Mastantuono, President & CFO
Assessment: Armis early close is positive surprise. 125bp FY26 subscription rev contribution. Margin headwind expected but normalizing 2027+.
2. Now Assist Customers Spending $1M+ Grew 130% YoY
"The number of customers spending $1 million plus grew over 130% year-over-year. Deals over $1 million grew more than 30% year-on-year in Q1." — Bill McDermott, Chairman & CEO
Assessment: The release ties the 130% to Now Assist customers spending over $1M in ACV, so it measures AI attach at the top of the base, not total customer growth. The company-wide read on large customers is the 630 customers above $5M in ACV, up about 22% YoY.
3. Sales CRM NNACV Quintupled YoY
"Our sales CRM NNACV grew more than 5x year-over-year. That's quintupled with deal count growing over 80% year-over-year." — Bill McDermott, Chairman & CEO
Assessment: CRM disruption thesis at scale. A multi-quarter ramp toward a large standalone CRM business inside ServiceNow.
4. Employee Works Launch (Moveworks + Employee Experience)
"Now has merged with our employee experience business and rebranded as employee works. So Bob the former CEO of Moveworks, now runs the whole show there, and that business grew 5x year-over-year." — Bill McDermott, Chairman & CEO
Assessment: Employee Works is the AI-native front door for ~200M employees globally. Multi-quarter scaling vector.
5. AI Native Packaging — Entire Portfolio
"This is a deliberate break from sidecar AI. We're not bolting intelligence onto disconnected systems. We're combining context with execution on a single platform." — Bill McDermott, Chairman & CEO
Assessment: AI Native packaging means AI, data, security, governance built into every product/package. Removes the "AI sidecar" upsell motion in favor of unified value.
6. 50% Net New Business from Non-Seat-Based Pricing
"You'll be happy to note that 50% of net new business now comes from a non-seat-based pricing model, including tokens and other assets, such as infrastructure, hardware, and connectors. Our hybrid pricing model gives customers the best of both worlds, predictable, foundational seat licenses combined with usage-based scalability." — Bill McDermott, Chairman & CEO
Assessment: Hybrid pricing model maturing — addresses the seat-compression bear concern by structurally adding consumption-based monetization on top.
7. Build Agent Skills — Developer Ecosystem Expansion
"Build agent, which gives us developer openness another meaningful unlock developers can build from any integrated developer environment, Claude code, cursor, Codex, Windset and deploy them directly to ServiceNow. This expands the addressable builder community significantly." — Bill McDermott, Chairman & CEO
Assessment: Developer ecosystem expansion strategic. Lower friction for AI agent creation → more agents on ServiceNow platform → more governance/orchestration revenue.
8. Robinhood Case Study: 70% Deflection
Robinhood is deflecting 70% of employee requests before human intervention; eliminated 2,200 hours of manual effort monthly. Management gave it as an early example for the Enterprise Service Management Foundation's mid-market push.
Assessment: A quantified customer outcome for the mid-market motion, with deployment in weeks rather than months.
9. OpenAI Native Voice + Text Integration
"OpenAI native voice and text models are integrated directly into the ServiceNow AI platform, and they're using us as a gateway into the enterprise." — Bill McDermott, Chairman & CEO
Assessment: OpenAI partnership deepening. ServiceNow becomes the enterprise gateway for OpenAI models — distribution + monetization synergy.
10. Knowledge / Financial Analyst Day May 4 Setup
"To say we're excited for knowledge and Financial Analyst Day on May 4 in Las Vegas would be an understatement. We have a lot to share with you. And the Board of Directors are very proud to ServiceNow in the way it's performing." — Bill McDermott, Chairman & CEO
Assessment: FAD May 4 is next major catalyst. Multi-year framework + new product launches + 2027+ guidance expected.
Guidance & Outlook
| Metric | FY26 New Guide | FY26 Prior (Q4) | Change |
|---|---|---|---|
| Subscription Revenue | $15.735-$15.775B | $15.53-$15.57B | Raised $205M midpoint |
| Subscription Growth (CC) | +20.5-21% | +19.5-20% | Raised 100bp (incl 125bp Armis) |
| Armis Contribution | +125bp | n/a (not yet closed) | Incremental |
| Subscription Gross Margin | 81.5% | 82% | -50bp (incl ~25bp Armis) |
| Op Margin | 31.5% | 32% | -50bp (75bp Armis headwind) |
| FCF Margin | 35% | 36% | -100bp (200bp Armis headwind) |
Q2 2026 Guide
| Metric | Q2 Guide |
|---|---|
| Subscription Revenue | $3.815-$3.820B (+21-21.5% CC; incl 125bp Armis) |
| CRPO Growth | +19.5% CC (incl 125bp Armis) |
| Op Margin | 26.5% (incl 125bp Armis headwind) |
Analyst Q&A Highlights
Organic Growth and the After-Hours Drop
Q: "The stock is down 12% after hours. So something is not getting through to investors. ... I think investors are wondering whether it really was the Q1 beat on an organic basis. And then for the full year, outside of adding Armis and currency, the full year number doesn't really move at all."
— Keith Weiss, Morgan Stanley
A: "So they had very, very, very tiny contribution, which is why we're not calling it out. So we would have beat regardless. ... So you can see that, yes, we didn't increase the revenue guide, excluding Armis, but we didn't take it down either despite some ongoing conflict."
— Gina Mastantuono, President & CFO
Assessment: The answer settles Q1 (Veza and Pyramid were too small to matter) and confirms the full-year point: ex-Armis, the guide was held, not raised. That composition is what the stock sold the next day. The defense, that the company rarely raises after its smallest quarter and held the guide through a war, is fair. The organic growth bridge is now FAD's job.
Middle East On-Prem Deferrals
Q: "Can you double click on what exactly you saw during Q1 amidst the Iran war? ... And then just finally, do you think that these would snap back relatively quickly if the conflict is resolved here during Q2?"
— Mark Murphy, JPMorgan
A: "And Mark, I would just add, right, that we kept the full year guide. We didn't reduce it for any potential conflict, right? So it's a few on-prem deals that slipped in the quarter, and you know on-prem as a larger impact to revenue."
— Gina Mastantuono, President & CFO
Assessment: Sovereign-cloud deals in the region book as on-prem revenue, recognized all at once, so a slip moves a quarter's growth more than a hosted deal would. Management said a couple of the slipped deals had already closed in Q2. The roughly 75bp hit is timing, not demand.
AI Target Lifted From $1B to $1.5B
Q: "Just going forward under the new methodology. Is it simple and straightforward? Or do you have to make some new assumptions?"
— Mark Murphy, JPMorgan
A: "We had a goal to be $1 billion on our AI commit this year, as you know. And I think we might have understated that a little bit. We're already talking about $1.5 billion now, and it's on a run."
— Bill McDermott, Chairman & CEO
Assessment: The CEO pulled the headline forward from FAD. The CFO added that the methodology is unchanged and still counts only the incremental AI contribution, so the 50% lift is not a redefinition. It is the strongest single data point on the call, and the next session's selling looked past it.
Is AI Spend Squeezing the Core?
Q: "What I wanted to ask you about is the risk that customers start to negotiate you down on the more classic purpose ServiceNow ... in order to essentially free up budget or some of the new products."
— Gabriela Borges, Goldman Sachs
A: "So no, we're not getting negotiated down on the core. Actually, we're redoubling our focus on it because that system of record for IT, where we started and founded the company has now become more important than ever."
— Bill McDermott, Chairman & CEO
Assessment: The categorical denial is backed by a 97% renewal rate and 630 customers above $5M in ACV. It is also the claim the seat-compression bear case will test every quarter from here.
Armis Margin Drag: "Goes Down to 0"
Q: "Maybe what gives you the confidence to be that prudent in the guide? And then just any -- maybe a little bit more specificity on the headwinds from the CRPO dynamics with Armis?"
— Alex Zukin, Wolfe Research
A: "It's 50 basis points, but here's the commitment, okay? By the end of the year, it goes down to 0. That's because of the efficiency we're driving in the company and the great platform that we have."
— Bill McDermott, Chairman & CEO
Assessment: The release puts the Armis drag at ~75bp on FY26 operating margin and ~125bp on Q2, so the CEO's 50bp appears to be a different measure. "Goes down to 0" by year-end is the gradeable part. On cRPO, the CFO said Armis's termination-for-convenience contracts keep part of its contract value out of the metric.
What They're NOT Saying
- Veza revenue contribution (closed March 2; called "very, very, very tiny")
- Armis 2027+ revenue trajectory
- FY27 specific guidance (reserved for FAD)
- Sales CRM specific revenue contribution
- AI Control Tower standalone ACV vs Now Assist
- Federal Q1 detailed impact
- Middle East deal delay specific value
Market Reaction
- Pre-print close (April 22): $103.07; YTD -32.7% vs. S&P 500 +4.3%; trailing 12M -32.8%; trailing 30 days -7.1%; 52-week closing range $83.00-$208.94, with the low set April 10. About 19x FY26E FCF on market cap.
- After-hours: sharply lower. An analyst told management during the Q&A that the stock was down 12% after hours.
- April 23 session: opened at $87.25 (-15.3% gap), traded $83.58-$90.02, and closed at $84.78, -17.7% (-$18.29) on 84.1M shares, 4.3x the 30-day average, while the S&P 500 fell 0.4%. It was the largest one-day decline since the June 2012 IPO; the prior record was -15.7% on January 28, 2016. The close sits 2.1% above the April 10 closing low of $83.00, at about 15.5x FY26E FCF.
The tape sold the composition of the beat-and-raise, not its size. The $205M FY26 raise is Armis plus currency, so the guide ex-Armis was held rather than raised, and management said so on the call. The Q2 cRPO guide of +19.5% CC includes ~125bp of Armis, which implies roughly 18% ex-Armis against Q1's 21%. Add a Q2 operating margin guide of 26.5% and a 200bp Armis hit to FY26 FCF margin, and a stock already down a third YTD read the print as an organic slowdown paid for with M&A. We read the subscription line differently: ex-Armis, the Q2 guide implies roughly 20% CC against Q1's 19%, which absorbed a ~75bp Middle East headwind. The cRPO step-down is the real question, and FAD on May 4 is where management has promised the growth and margin bridge.
Street Perspective
Debate: Armis Margin Drag — Worth the Strategic Trade?
Bull view: 125bp subscription rev acceleration + multi-year security platform completion + 2027+ margin normalization. Worth the 75-200bp FY26 margin headwind.
Bear view: Two M&A integrations (Veza + Armis) simultaneously create execution risk; margin drag could extend beyond 2026.
Our take: Bull stronger. NOW track record on integrations is good; multi-year strategic value outweighs near-term margin compression.
Debate: Sales CRM 5x Growth Sustainability
Bull view: Legacy CRM displacement multi-quarter trajectory + AI-native value proposition compelling; the Sales CRM ramp has years to run.
Bear view: Salesforce + Microsoft Dynamics + Oracle defending share aggressively; 5x growth off small base may not sustain at higher base.
Our take: Lean bull. ServiceNow's platform + AI-native architecture + workflow context create durable competitive position.
Debate: Organic Slowdown or Armis Optics?
Bull view: Ex-Armis, the Q2 subscription guide implies roughly 20% CC, above Q1's 19%, which absorbed a ~75bp Middle East on-prem headwind. Management held the full-year guide ex-Armis through a war, says some slipped deals already closed in Q2, and lifted the AI ACV target 50% to $1.5B.
Bear view: The forward indicator is slowing: the Q2 cRPO guide of +19.5% CC includes ~125bp of Armis, roughly 18% ex-Armis against Q1's 21%. A $205M raise that is all Armis and currency, a 35% FY26 FCF margin guide, and SBC at 15% of revenue let the bear case say growth is now bought.
Our take: Lean bull. A Q2 cRPO guide roughly three points below Q1's actual ex-Armis (about 1.75 points guide to guide) needs an explanation, and FAD on May 4 is where management has promised the growth, margin and SBC bridge. But one guide in a war-disrupted on-prem quarter is thin evidence of a structural slowdown, and at ~15.5x FY26E FCF the price already assumes one.
Model Update Needed
| Item | Prior | New |
|---|---|---|
| FY26 Subscription | $15.55B (Q4 guide) | $15.75B (Q1 raised) |
| FY26 Op Margin | 32% | 31.5% |
| FY26 FCF Margin | 36% | 35% |
| FY27 Subscription | $18.8B | ~$19.0B (incl full-year Armis) |
| FY27 Op Margin | 33% | 33-34% (normalization) |
Valuation: At the $84.78 close, market cap is about $88B on the 1.04B diluted shares guided for FY26, against ~$5.7B of FY26E FCF (the 35% margin guide on ~$16.2B of revenue): about 15.5x, versus about 19x at the $103.07 pre-print close. The March 31 balance sheet held $7.9B of cash and investments against $1.5B of debt, before the April 20 Armis close. PT range reset to Base $120 / Bull $135 / Bear $80, roughly 22x / 25x / 15x FY26E FCF on market cap. From the $84.78 close: base +42%; bull +59%; bear -6%. Up/down ~7:1, highly asymmetric.
Thesis Scorecard
| Thesis Point | Status |
|---|---|
| Bull #1: Durable +20% subscription growth | On track (+19% CC through a ~75bp headwind; FY26 guide +20.5-21%) |
| Bull #2: Op margin + FCF margin expansion long-term | Deferred (FY26 guides cut on Armis; normalization 2027+) |
| Bull #3: Now Assist toward $1B 2026 | Strongly Confirmed (target lifted to $1.5B; $1M+ customers +130%) |
| Bull #4: Sales CRM disruption | Newly Strongly Confirmed (+5x YoY) |
| Bull #5: AI security via Veza + Armis | Confirmed (Armis closed early) |
| Bull #6: $1M+ customer expansion | Confirmed (630 customers >$5M ACV, ~+22% YoY) |
| Bull #7: Hybrid pricing addresses seat compression | Confirmed (50% non-seat) |
| Bear #1: Armis/Veza integration risk | Managed |
| Bear #2: Margin compression 2026 | Partly (guides cut 50-100bp on Armis; op margin still +50bp YoY) |
| Bear #3: Premium valuation | De-rating materialized (-17.7%; ~15.5x FY26E FCF) |
Action: Maintaining Outperform with HIGH conviction. The market sold a beat-and-raise 17.7% because the raise was bought. We think it is pricing an organic slowdown that the Q2 subscription guide does not show, at ~15.5x FY26E FCF. FAD May 4 is the next major catalyst. PT range Base $120 / Bull $135 / Bear $80; up/down ~7:1.