"A gorgeous situation": ServiceNow's CEO celebrates a shrinking workforce
The software company says its own AI tools have saved more than $1 billion a year and let it hire fewer people. Its shares fell about 18% after hours anyway, on weaker guidance.
ServiceNow's CEO described a smaller workforce as a "gorgeous situation" on Wednesday, as the company reported third-quarter results that beat expectations but sent its shares sharply lower.
"Our ultimate headcount has actually slightly declined, which is a gorgeous situation," Bill McDermott, the chairman and CEO, told analysts. He said the outcome was "less people doing extraordinary things, enjoying their work much more."
The remark came after an analyst at Bernstein asked about falling headcount, particularly in sales and marketing and in research and development. Gina Mastantuono, the president and chief financial officer, said ServiceNow's own use of its AI products had generated more than $1 billion in annualized efficiency gains.
"That efficiency gains means that we're able to not hire as many people," she said.
Mastantuono said the company is still hiring where it wants to grow. The number of quota-carrying salespeople is up by double digits, she said, while sales operations headcount is "down significantly."
ServiceNow is not the first company to link AI to a smaller payroll. But few large software companies have said so this directly, on the record, and presented it as a selling point. ServiceNow sells the same technology to other companies, which makes its account of what the technology does to its own staff part of the pitch.
In after-hours trading, ServiceNow shares dropped roughly 18%, to about $123.
The results were mostly good. Revenue rose by more than 20% to $4.106 billion, above the $4.095 billion analysts expected. Adjusted operating margin was 32.5%, against a forecast of 31.2%. Current remaining performance obligations (cRPO), a measure of contracted revenue due within a year, rose by 21% to $13.65 billion, ahead of the $13.56 billion consensus. The company raised its full-year revenue and free-cash-flow outlook and its target for AI sales. Earnings per share of $1.00 missed the $1.02 estimate.
The problem was the forecast. ServiceNow guided to cRPO growth of 18.5% in the fourth quarter in constant currency. Wall Street had expected 19.8%.
Mastantuono said the gap was mostly about accounting and timing, not demand. Early renewals made up about half of the third-quarter beat, which leaves less for the fourth. Strong public-sector demand shifted the mix toward software installed on customers' own systems, which costs cRPO about a quarter of a percentage point. And the company is now booking some bundled AI delivery work as professional services instead of subscription revenue, a shift of about 25 basis points in the third quarter that she expects to reach about 50 in the fourth.
"cRPO is a very nuanced accounting metric," she said, "and it doesn't necessarily capture all of the momentum in the business."
An analyst from Morgan Stanley noted that ServiceNow has raised its AI sales target twice while backlog growth looks stable at best, and asked when AI would show up in the top line. McDermott said the business "has never been in better shape than it is right now" and that investors would see "the true acceleration" in 2027.
The company's AI contract-value target is now $1.7 billion, up from $1 billion at the start of the year and $1.5 billion in May. Management said agentic AI consumption in production is up 13-fold from a year ago.
Before the report, the stock was down about 1% for the year. If Wednesday's after-hours fall holds, ServiceNow would still be up about 50% over the past six months.
The same call put a spotlight on ServiceNow's largest acquisition. It completed its purchase of the Israeli cybersecurity company Armis in April for $7.75 billion.
McDermott called security the company's fastest-growing area and said ServiceNow is "the fastest-growing cybersecurity company at scale." He said the business has "the potential to be even bigger in a few years than all of ServiceNow is today," and that Armis, Veza and Moveworks are "way ahead of what we had anticipated." Mastantuono said security and risk products were part of 16 of the quarter's top 20 deals.
The company did not disclose any revenue or contract-value figure for Armis on Wednesday's call.
ServiceNow has been on an acquisition spree in Israel over the past year, with its most recent Israeli purchase coming in September, when it acquired Sweep, a startup that builds AI agents for companies’ go-to-market operations, in a deal estimated at hundreds of millions of dollars. The purchase was the company’s second Israeli acquisition in under two months, after ai.work in July, and followed Armis, Pyramid Analytics and Traceloop.
