ServiceNow shares fell sharply after the company flagged geopolitical disruptions and a weaker margin outlook, dampening investor sentiment despite stronger-than-expected revenue and upbeat projections for its artificial intelligence business.

The stock dropped more than 14% as the enterprise software firm said the ongoing conflict in the Middle East had delayed key deal closures, weighing on subscription revenue growth during the quarter.

Revenue growth remains strong but faces headwinds

ServiceNow reported quarterly revenue growth of 22% year-on-year, with net income rising slightly to $469 million, or 45 cents per share, compared with $460 million, or 44 cents per share, a year earlier.

Subscription revenue came in at $3.67 billion, narrowly ahead of the $3.65 billion expected by FactSet.

However, the company noted that geopolitical disruptions impacted performance.

The company said in its release that subscription revenue growth during the quarter “saw an approximately 75 basis point headwind from delayed closings of several large on-premise deals in the Middle East, due to the ongoing conflict in the region.”

Outlook raised but caution persists

Despite the near-term disruptions, ServiceNow raised its full-year forecast for fiscal 2026 subscription revenue to a range of $15.74 billion to $15.78 billion, up from its prior outlook of $15.53 billion to $15.57 billion.

“Our full-year guidance reflects a prudent assessment right now of the geopolitical environment,” CFO Gina Mastantuono told CNBC.

“I definitely took a little bit of incremental conservatism because of the ongoing conflict in the Middle East and its potential impact on deal timing.”

The company also highlighted strong momentum in artificial intelligence, with CEO Bill McDermott projecting $1.5 billion in AI revenue for 2026, up from a previous estimate of $1 billion.

He told MarketWatch that the updated outlook could be conservative.

Margin concerns weigh on sentiment

Investor focus, however, shifted to margins.

ServiceNow now expects a 31.5% full-year adjusted operating margin, down from its earlier target of 32%.

The company’s second-quarter margin forecast of 26.5% also fell short of Wall Street expectations of 30.1%, according to Benchmark analyst Yi Fu Lee, who suggested the gap may be linked to integration costs from recent acquisitions.

The weaker margin outlook overshadowed the company’s otherwise solid results and AI growth narrative, triggering a broader sell-off in software stocks.

Peer pressure adds to sector jitters

Shares of Salesforce fell more than 5% following the results, reflecting broader concerns about growth and profitability in the sector.

Meanwhile, IBM also reported slowing revenue growth in its software division, sending its shares lower and reinforcing investor concerns about competitive pressures from AI tools.

“While one might think that ServiceNow and other software stocks are already pricing in some deceleration amidst the severe selloff, investors are jittery due to AI disruption fears and volatility,” said analysts at J.P.Morgan.

The combined impact of geopolitical uncertainty, margin pressure, and evolving AI dynamics is keeping investors cautious, even as companies continue to post solid top-line growth.

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