ServiceNow's AI ambitions come with a $9 billion balance-sheet reversal
The enterprise software giant has moved from a net cash position of $8.6 billion to net debt in just nine months, after spending more than $9 billion on acquisitions. Rising cloud expenses and interest costs are adding to the financial burden of its push into AI and cybersecurity.
For years, ServiceNow maintained a substantial net cash position while funding its operations with cash generated by its business. That financial profile is changing rapidly. The Santa Clara-based software company has spent more than $9 billion on acquisitions in the first nine months of 2026, issued billions of dollars in new debt and seen the cost of delivering its subscription services rise much faster than revenue.
The figures in its third-quarter filing offer a more complicated picture of the costs of its expansion into cybersecurity, identity management and AI. While subscription revenue continues to grow at a healthy pace, acquisitions and rising infrastructure expenses are weighing on reported margins, while the company's reliance on debt financing has increased substantially.
The most striking change has come on the balance sheet. ServiceNow spent $9.17 billion in cash on business combinations during the first nine months of the year, net of cash acquired. The spending was dominated by two large transactions: the approximately $7.6 billion acquisition of cybersecurity company Armis, completed in April, and the roughly $1.2 billion purchase of identity security firm Veza in March. Five additional unnamed acquisitions accounted for another $612 million. ServiceNow acquired four Israeli startups besides Armis in 2026, including Sweep, Traceloop, ai.work, and Pyramid Analytics.
The acquisitions represent a significant departure from the company's previous financial profile. At the end of 2025, ServiceNow had $10.05 billion in cash and marketable securities against $1.49 billion in debt, leaving it with a net cash position of approximately $8.56 billion. By September 30, 2026, its cash and marketable securities had fallen to $6.96 billion, while total debt had climbed to $7.52 billion. The result was a net debt position of approximately $563 million, a swing of more than $9.1 billion in nine months.
To finance the acquisitions, ServiceNow borrowed $4 billion through a senior unsecured term loan in April, before repaying it the following month with proceeds from a $4 billion bond issuance. The company also established a commercial paper program and had $2.1 billion outstanding under it at the end of September. Its total debt consisted of $5.44 billion in long-term borrowings and $2.09 billion in short-term commercial paper.
The change is already visible in the company's financing costs. Interest expense reached $81 million in the third quarter, compared with just $6 million a year earlier. At the same time, interest income fell to $69 million from $115 million, reflecting lower average investment balances and lower interest rates. ServiceNow consequently moved from net interest income of $109 million in the third quarter of 2025 to a net interest expense of $12 million in the latest quarter.
The pressure is not limited to the financing side of the business. ServiceNow's subscription cost of revenue increased 58% year over year to $1.054 billion in the third quarter, considerably faster than the 21% growth in subscription revenue, which reached $3.99 billion. As a result, GAAP subscription gross margin fell to 73.5% from 80% a year earlier.
The company's filing identifies several reasons for the increase. Personnel-related expenses, including stock-based compensation and overhead, rose by $112 million in the quarter. Depreciation and other costs associated with expanding data center capacity increased by $56 million, while expenses tied to contractual commitments with third-party cloud providers climbed by $79 million. Amortization of acquired intangible assets added another $119 million to costs.
The company expects subscription costs to continue rising as it serves more customers, supports greater usage of its platform and expands its use of public cloud services. It also pointed to the growing expense of supporting customers in regulated markets, where data residency requirements can add to infrastructure costs. For the full year, ServiceNow expects subscription gross margin to decline compared with 2025, citing increased use of third-party cloud services and the amortization of acquired intangible assets.
These pressures are particularly relevant as ServiceNow seeks to position itself as a major platform for enterprise AI. Its acquisitions of Armis and Veza are intended to strengthen its cybersecurity and identity offerings, while the broader strategy requires investment in infrastructure and product development. The filings, however, do not attribute the latest increase in subscription costs directly to AI workloads. Instead, they point to a combination of higher staffing costs, cloud commitments, infrastructure expansion and acquisition-related amortization.
The gap between ServiceNow's GAAP and non-GAAP results has also widened. GAAP net income fell 44.8% year over year to $277 million in the third quarter, while operating income declined 32.7% to $385 million. On a non-GAAP basis, however, net income reached $1.039 billion, compared with $992 million a year earlier.
The $762 million difference between the two net income figures reflects the adjustments ServiceNow makes to its non-GAAP results. These include $633 million in stock-based compensation, $198 million in amortization of acquired intangible assets, $35 million in business-combination-related costs and $87 million in severance expenses, among other adjustments. The company argues that these exclusions provide a clearer view of its underlying operating performance, but the scale of the adjustments highlights how different its reported profitability looks under the two accounting measures.
The company is also restructuring its workforce as it seeks to improve efficiency. ServiceNow recorded $167 million in severance and related costs during the first nine months of 2026, more than three times the $53 million recorded in the same period a year earlier. In its filing, the company linked some workforce optimization initiatives to AI-driven efficiencies and investment in talent in strategic areas.
That restructuring has coincided with a substantial new compensation package for senior executives. On October 26, two days before the company reported its third-quarter results, ServiceNow's board compensation committee approved restricted stock unit awards with a combined target value of approximately $126.6 million for five senior executives. CEO Bill McDermott is set to receive an award with a target value of $50 million, while President and Chief Product Officer Amit Zavery was allocated $25 million. The awards are scheduled to vest in stages through the end of 2029, provided the executives remain with the company.
The grants are intended to retain senior leadership during what the company described as an exceptionally competitive period for enterprise technology talent. They are time-based awards tied to continued employment, rather than a new set of performance targets linked to non-GAAP operating measures.
ServiceNow also made no share repurchases during the third quarter, despite having approximately $4.2 billion remaining under its authorized buyback program. That followed $225 million in open-market repurchases during the first nine months of the year and a separate $2 billion accelerated share repurchase transaction completed in the first quarter. The filing does not explain the decision to pause open-market purchases during the latest quarter.
