ServiceNow CFO Says Customers Are 'Not Asking At All' For Outcome Pricing As AI Target Rises To $1.7 Billion
Management defended its mix of per-seat and usage-based pricing and raised its year-end AI contract goal for the second time this year.
ServiceNow President and CFO Gina Mastantuono said on the company's third-quarter earnings call Wednesday that customers are "not asking at all for outcome pricing," while CEO Bill McDermott raised the year-end target for AI annual contract value to $1.7 billion plus.
Hybrid pricing, defended
ServiceNow, which makes cloud software that automates and manages workflows and governs AI, sells mainly through subscriptions. An analyst at Deutsche Bank asked whether customers are pushing it toward outcome- or value-based pricing, the model some AI-native software companies use.
Mastantuono said customers are "very focused and quite happy with the hybrid model that we have today and are not asking at all for outcome pricing." If that changed, she said, "we'd be ready and waiting for that."
McDermott said customers like the predictability of seat-based pricing for budgeting. Once they are live, he said, "the token economics take off," giving the company a chance to raise revenue per user by a factor of 5X.
A target raised twice
McDermott said the company began the year with a $1 billion AI target for year end, lifted it to $1.5 billion at its Financial Analyst Day in May, and is now going to $1.7 billion plus. He said he has challenged the team to beat that. AI net new annual contract value grew 65% year over year in the third quarter, he said.
He also said agentic AI consumption in production is up 13x year over year so far this year, and that consumption of Action Fabric assists is up 500% month over month. Action Fabric is the layer through which outside tools such as ChatGPT call into ServiceNow. The company announced an expanded partnership with OpenAI on Wednesday, starting with a ServiceNow plug-in for ChatGPT.
Subscription revenue was $3.988 billion, up 20.5% in constant currency, Mastantuono said, 50 basis points (half a percentage point) above the high end of guidance. Seeking Alpha reported the company raised its full-year free cash flow margin target to 36%.
The AI cannibalization debate
An analyst at William Blair asked whether AI cannibalizes or adds to software companies' business. McDermott said AI business cases show a "10x improvement over anything that we've seen before."
Amit Zavery, ServiceNow's president, chief product officer and chief operating officer, said customers typically start with one or two use cases, then expand usage as much as 3x to 4x. They are re-upping licenses, he said, with higher token allotments.
The stock fell after hours on the guidance, an analyst from Wolfe Research noted on the call. Mastantuono pointed to early renewals pulled into the third quarter and a higher mix of on-premises public-sector deals as pressures on fourth-quarter current remaining performance obligations growth, guided at 18.5% in constant currency.
For the fourth quarter, ServiceNow guided to subscription revenue of $4.245 billion to $4.255 billion, which Mastantuono said would be 21.5% growth in constant currency.
Sources
- Earnings Snapshot: ServiceNow tops Q3 sales at $4.11B; boosts full-year FCF target to 36% | Seeking Alpha — seekingalpha.com
- ServiceNow Stock Falls After Subscription Sales Forecast Matches Estimates - Bloomberg — Bloomberg
- ServiceNow’s stock slides as earnings miss clouds a raised AI outlook — MarketWatch
- ServiceNow shares plummet in extended trading on mixed Q3 results — CNBC
- Q3 earnings round-up: Chipotle, Jersey Mike's, ServiceNow — Yahoo Finance
