US government shutdown clouds an otherwise sunny ServiceNow forecast

Enterprise software giant lifts guidance but adds 'prudence' as federal contracts stall

ServiceNow has built some "prudence" into its earnings guidance due to the ongoing US government shutdown.

The tech vendor, which provides a service layer and AI agents on top of business applications, posted $3.4 billion in revenue for calendar Q3, up 22 percent year-on-year. Operating margin was 33.5 percent, three percentage points higher than the company's expectations.

Subscription revenue – the bulk of the SaaS player's income – outstripped analyst forecasts. ServiceNow increased its overall guidance for the full year.

But as well as the seemingly good news for investors, CFO Gina Mastantuono added a note of caution about the effects of the federal government shutdown on ServiceNow. Speaking on an analyst call, she said demand from federal agencies was strong and growing, however, the shutdown was not reflected in the results so far.

"90 days ago the government was not shut down," she said. "We absolutely have factored in a bit more prudence into this guide because – as much as I would like to say I know how to forecast when the government is going to reopen – I just don't. Procurement processes do take a bit of time."

She said the timing of government deals was the question, not whether they would take place, "because demand is healthy, strong and the opportunity for us in federal space, and more broadly state and local government, remains stronger than ever."

Questioned on why guidance on subscription revenue growth did not seem to match the current remaining performance obligations – the value of contracts signed but not recognized – overall, Mastantuono said the public sector performance was factored in.

Like most vendors in the enterprise application market, ServiceNow is peddling AI agents as the solution to the productivity puzzle. CEO Bill McDermott said that internally, 90 percent of the IT, customer service, and HR processes were now being done by agents, "not at the exclusion of people, but to make people happier."

He said "the soul-crushing stuff is done by the agent and the people are doing more and serving more capability to our customers."

Mastantuono added that the company was able to raise its bottom line guidance by half a percentage point on operating margin and two percentage points on free cash flow, not only from the demand but also from internal AI efficiencies. "We're getting to help really drive that bottom line expansion on top of the incredible top line growth," she said.

Although ServiceNow has increased its headcount, analyst firm Forrester warned that companies making job cuts because of expected AI efficiencies will start quietly rehiring staff in 2026. ®