ServiceNow’s $2.2 Billion Buyback Can’t Mask the Middle East Drag

ServiceNow delivered a textbook earnings beat in the first quarter, but the market punished the stock anyway, sending shares down as much as 13% in after-hours trading. The disconnect between headline numbers and investor sentiment tells a more nuanced story about the software giant’s current trajectory.

Revenue hit $3.77 billion, topping the consensus estimate of $3.74 billion, while adjusted earnings per share of $0.97 edged past forecasts by a penny. Subscription revenue growth clocked in at 22%, a figure that would have been nearly a percentage point higher if not for geopolitical headwinds.

Geopolitics and Integration Costs Weigh on Sentiment

The Middle East conflict is leaving tangible marks on ServiceNow’s operations. Delayed sovereign cloud and on-premise contracts in the region shaved roughly 75 basis points off subscription revenue growth. CEO Bill McDermott confirmed that large customers have grown cautious about local software installations, pushing deal timelines into uncertainty.

CFO Gina Mastantuono acknowledged the company is now taking a more conservative view of closing schedules for the remainder of the year. The impact is real enough that management felt compelled to flag it publicly.

The bigger shock to the market, however, came from the margin outlook. ServiceNow closed its $7.75 billion acquisition of cybersecurity firm Armis on April 20, and the integration costs are hitting the income statement hard. The adjusted gross margin in the subscription business fell 300 basis points year-over-year to 81.5%. For the second quarter, the company projects an operating margin of 26.5% — well below the 30.1% analysts had penciled in.

The Armis deal will weigh on free cash flow margins by roughly 200 basis points for the full year and pressure operating margins by about 75 basis points. Management doesn’t expect profitability to normalize until 2027.

Should investors sell immediately? Or is it worth buying ServiceNow?

AI Ambitions and a Record Buyback

To keep investors engaged, ServiceNow is leaning heavily into its artificial intelligence story. The company raised its 2026 revenue target for AI-powered products to $1.5 billion, a 50% jump from the prior forecast of $1 billion. In the first quarter alone, it signed 16 contracts each worth more than $5 million in annual value — an 80% increase from the same period last year.

Mastantuono told CNBC that the AI portfolio is outperforming internal expectations, with the pipeline building faster than anticipated.

The company is also deploying massive amounts of capital to support its stock. ServiceNow repurchased roughly 20 million shares in the first quarter through an accelerated buyback program worth $2.2 billion — more than double the total buyback volume for all of last year. That level of repurchase activity signals management’s confidence in the company’s long-term value, even as near-term headwinds buffet the stock.

A Leaner Workforce and a Full-Year Outlook

McDermott outlined a new staffing strategy that pairs growth with efficiency. While the Armis acquisition will add employees, the total headcount is expected to remain flat through early 2027. The CEO said AI-driven productivity gains will increasingly replace the need for new hires, allowing the company to grow revenue without expanding its workforce.

For the full year, ServiceNow lifted its subscription revenue guidance to a range of $15.74 billion to $15.78 billion, up from the previous band of $15.53 billion to $15.57 billion. Remaining performance obligations stood at $12.64 billion at quarter-end, a 22.5% increase year-over-year — suggesting the underlying demand engine remains healthy.

The market’s immediate reaction suggests investors are focused on the price ServiceNow is paying for its growth, rather than the growth itself. The company will have a chance to reset that narrative on May 4, when management hosts its Financial Analyst Day in Las Vegas, with details on further AI monetization expected to take center stage.