Summary
ServiceNow's second quarter of fiscal 2026 delivered strong top-line growth. Revenue rose 24.0% to $3.987 billion from the prior-year quarter. Subscription revenue grew 24.5% year over year, or 23% in constant currency. RPO reached $29.0 billion as of June 30, 2026, up 21.3% from the prior-year quarter. cRPO was $13.20 billion, up 21% year over year. Current deferred revenue was $8.057 billion, up 18.5%. The company crossed $1 billion in annual contract value for ServiceNow AI in the quarter.
Demand was broad. ServiceNow reported 123 transactions over $1 million in net new ACV, growing nearly 40% year over year. It ended the quarter with 658 customers with more than $5 million in ACV, up from 533 a year earlier. At Knowledge 2026, the company launched ServiceNow Otto, a unified AI experience that combines Now Assist, Moveworks, and AI Experience. AI Control Tower added new discovery, observation, governance, security, and measurement capabilities. ServiceNow also deepened partnerships with NVIDIA, Microsoft, and AWS, and expanded its alliance with Accenture. The company also surpassed $1 billion in AWS Marketplace transactions. Management said agentic deployments of ServiceNow AI increased ninefold in just nine months. The renewal rate was 98% for the three and six months ended June 30, 2026.
GAAP profitability moved in the opposite direction. Gross profit increased 13.1% to $2.818 billion, but gross margin slipped to 70.7%, down 6.8 percentage points. Operating income dropped 54.7% to $162 million, and operating margin was 4.1%, down 7.1 percentage points. Net income fell 22.6% to $298 million. Diluted EPS was $0.29, down 21.6%. Non-GAAP results were much stronger. Non-GAAP income from operations was $1,173 million, and non-GAAP operating margin was 29.5%. Non-GAAP net income was $930 million, with non-GAAP diluted EPS of $0.90. Non-GAAP gross margin was 78%.
Cash generation declined. Operating cash flow was $587 million, down 18.0% from the prior-year quarter. Capital expenditures were $114 million, down 40.0%. Free cash flow, a non-GAAP measure, was $634 million, and free cash flow margin was 16%. For the first six months, operating cash flow was $2.257 billion, down 5.7%, while free cash flow was $2,299 million, up 14%. The company noted that higher business combination and related costs weighed on operating cash flow in the first half.
Guidance for the third quarter of 2026 calls for subscription revenues of $3,975 million to $3,980 million, up 20.5% year over year, or 20% in constant currency. cRPO growth is guided to 19.5%, or 20% in constant currency. Non-GAAP income from operations margin is guided to 31%. For the full year 2026, ServiceNow raised its subscription revenues outlook to $15,760 million to $15,780 million, up 22.5% year over year, or 21% in constant currency. Full-year non-GAAP subscription gross margin is guided to 81%, non-GAAP income from operations margin to 31.5%, and free cash flow margin to 35%. The company said strong U.S. Federal demand and a higher on-premise revenue mix accelerated some subscription revenue from the third quarter into the second quarter. It also flagged an estimated $35 million year-over-year FX headwind for third-quarter cRPO. Gross margin guidance reflects more customers using hyperscaler partnerships and faster customer AI adoption.
Risks include foreign currency fluctuations, macroeconomic and political conditions such as tariffs, inflation, and armed conflicts, interest rates, and the ability to convert RPO into revenue. ServiceNow also faces competition, cybersecurity and data protection risks, and the challenge of retaining key employees. At its Financial Analyst Day, the company set long-term targets of more than $30 billion in subscription revenues, 30% of ACV from AI, and a Rule of 60+ by 2030. It also committed to reducing stock-based compensation to less than 10% of revenue by 2029. The quarter showed solid demand and a growing AI narrative, but the GAAP profit decline and margin compression are clear watch items.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2026 | Q1 FY2026 | QoQ | Q2 FY2025 | YoY |
|---|---|---|---|---|---|
| Revenue | $3.99B | $3.77B | +5.8% | $3.21B | +24.0% |
| Gross profit | $2.82B | $2.83B | -0.4% | $2.49B | +13.1% |
| Gross margin | 70.7% | 75.1% | -4.4 pp | 77.5% | -6.8 pp |
| Research & development | $915.0M | $823.0M | +11.2% | $734.0M | +24.7% |
| Sales & marketing | $1.37B | $1.22B | +12.8% | $1.13B | +21.6% |
| General & administrative | $369.0M | $288.0M | +28.1% | $271.0M | +36.2% |
| Total operating expenses | $2.66B | $2.33B | +14.1% | $2.13B | +24.5% |
| Operating income (loss) | $162.0M | $503.0M | -67.8% | $358.0M | -54.7% |
| Operating margin | 4.1% | 13.3% | -9.3 pp | 11.1% | -7.1 pp |
| Net income (loss) | $298.0M | $469.0M | -36.5% | $385.0M | -22.6% |
| Net margin | 7.5% | 12.4% | -5.0 pp | 12.0% | -4.5 pp |
| Diluted EPS | $0.29 | $0.45 | -$0.16 | $1.84 | -$1.55 |
Risks
Gross margin fell to 70.7% for the quarter ended June 30, 2026 from 77.5% in the prior year quarter, and full subscription gross profit percentage fell to 73% from 80%, driven by growth in third-party cloud services usage and incremental amortization of acquired intangible assets. Management expects subscription gross profit percentage to decrease for the year ending December 31, 2026 compared to the year ended December 31, 2025.
The Armis Security Ltd. acquisition drove a $4.0 billion secured term loan in April 2026 and a large step-up in acquired asset amortization, with amortization of intangible assets up $153 million in cost of subscription revenues and up $41 million in sales and marketing for the quarter ended June 30, 2026. Business combination and other related costs rose to $75 million in the quarter, and the company notes continued integration of Armis into its corporate structure and intercompany relationships could cause tax rate fluctuations.
In May 2026 the company issued five series of senior unsecured notes totaling $4.0 billion with maturities from May 2028 through May 2056, and at June 30, 2026 had $2.1 billion of commercial paper outstanding at a weighted-average interest rate of 3.98%. Interest expense rose to $66 million for the quarter ended June 30, 2026 from $6 million in the prior year quarter.
The effective tax rate increased to 32% for the quarter and 31% for the six months ended June 30, 2026, versus 18% in both prior year periods, driven by the mix of earnings and losses across jurisdictions and stock-based compensation shortfalls, partly offset by a valuation allowance release on certain California deferred tax assets. The company expects the rate to keep fluctuating as Armis is integrated and notes research and development tax credit generation is expected to exceed its ability to use credits in future years.
Contract signing is heavily concentrated in the fourth quarter and, for U.S. federal government customers, in the third quarter, where the company sees a rising number of 12-month agreements tied to annual budget timing. Management states this larger mix of 12-month renewal terms will generally cause variability in RPO and cRPO in subsequent quarters until they are renewed, with RPO of $29.0 billion as of June 30, 2026.
Stock-based compensation increased 31% to $655 million for the quarter and 25% to $1,213 million for the six months ended June 30, 2026, primarily from additional grants to current and new employees plus awards granted in connection with acquisitions. Management expects stock-based compensation to keep increasing in absolute dollars for the year ending December 31, 2026 and notes it is inherently difficult to forecast due to stock price fluctuations.
Professional services and other gross loss percentage widened to 26% for the quarter ended June 30, 2026 from a gross profit percentage of 3% in the prior year quarter, and was 24% for the six months ended June 30, 2026 versus 2% in the prior year period. The deterioration is attributed to personnel-related costs and partner ecosystem spend growing faster than revenue, with management expecting the gross loss percentage to increase further for the year ending December 31, 2026.
Management states ongoing global conflicts remain highly uncertain and that if they persist or worsen, leading to greater global economic disruptions, business and results of operations could be materially impacted. Other macroeconomic events including interest rates, global inflation and tariffs have created economic uncertainty, and interest income declined 40% to $70 million in the quarter ended June 30, 2026 on lower average portfolio balances and lower interest rates.
SaaS KPIs
All quarters →Non-GAAP operating margin
Free cash flow margin
Free cash flow
Renewal rate
Current remaining performance obligations (cRPO)
Remaining performance obligations (RPO)
Non-GAAP subscription gross margin
Transactions over $1 million in net new ACV
Non-GAAP income from operations
Customers with more than $5 million in ACV
Summary, forecast, risks and KPIs are extracted from ServiceNow, Inc.'s SEC filings for Q2 FY2026 (10-Q / 10-K and the 8-K earnings release); GAAP figures in the summary are checked against the reported XBRL data. They can contain errors; the filings are authoritative. Processed Oct 2, 2026.