Review|NOW 26Q3: Below Expectations, Deployment Needs Complicate the Outlook

Executive summary

NOW’s results fell short of expectations despite healthy channel checks. Q3 cRPO grew 21% cc, beating guidance by 100bps versus an expected beat of 150–200bps. The Q4 cRPO guide of 18.5% implies approximately 19.25% growth after adding back the quantified on-prem and T4C effects, below the ~20% bogey. Operating margin guidance of 32% was also 150bps below consensus of 33.5%. We underestimated the deployment support needed to put AI orders into production and its impact on subscription revenue and delivery costs. Despite healthy demand signals from channels, implied organic growth also fell short of expectations and points to further deceleration. Momentum in AICT and security continues to support our medium-term view. However, monetization may take longer and require more upfront investment than anticipated.

A smaller beat than expected, with several factors affecting the outlook

Q3 delivered a smaller beat than expected

• cRPO: Up 21% cc, versus 20% guidance and a bogey of 21.5–22%. The 100bps beat was roughly half early renewals and half underlying performance, leaving a 50–100bps shortfall against expectations.
• Subscription revenue: Up 20.5% cc, versus 20% guidance. Adding back the approximately 25bps deployment-related drag implies ~20.75% growth, still below Q2’s 23%. This was a modest beat; healthy demand translated into less subscription upside than we expected.
• Profitability: non-GAAP operating margin was 32.5%, above the 31% guide.

Q4 adjustments explain part of the shortfall, while organic growth slows

• cRPO bridge: 18.5% cc guidance + 25bps from a higher on-prem mix + approximately 50bps from termination-for-convenience (T4C) provisions = ~19.25%. That remains ~75bps below the ~20% bogey and ~45bps below the 19.7% consensus estimate.
• Several factors complicate the outlook. A higher on-prem mix brings forward some revenue that would otherwise remain in backlog. T4C contracts can contribute revenue but are excluded from RPO because of their cancellation provisions. Management also described a modest deployment-related cRPO impact without quantifying it. The 50bps deployment drag disclosed for Q4 subscription growth cannot simply be added to cRPO. The available quantified adjustments still leave growth below 20%.
• Organic cRPO: Excluding acquisitions, Q4 guidance implies approximately 16.75% cc growth, or about 17.25% after the T4C adjustment alone. The underlying trajectory continues to decelerate.
• Q4 subscription revenue: Growth of 21.5% cc is broadly in line with consensus and accelerates from Q3’s 20.5%. The slowdown is therefore most evident in forward cRPO, while quarterly subscription growth improves.
• FY26 subscription revenue: The midpoint increased by $15m to $15.785b, but approximately $12m comes from FX, leaving only $3m of underlying uplift after the $8m Q3 beat against the high end. As in Q2, the raise falls short of the beat.
• Margins: Q 4 non-GAAP operating margin guidance of 32% is 150bps below consensus of 33.5%, while the full-year 31.5% target is unchanged despite the Q3 margin beat. The 100bps increase in full-year free cash flow margin guidance to 36% is positive, but lower capital expenditure contributes to that improvement.

The 2027 outlook depends on deployment and revenue conversion

Management discussed an illustrative FY27 subscription-growth framework of around 18%: starting with 18.5% Q4 cRPO growth, subtracting roughly 100bps for deployment support and adding back about 50bps for T4C. Management has not issued formal FY27 guidance. The framework suggests a more measured starting point for subscription growth, with deployment support offsetting some of the near-term revenue benefit from AI demand. Upside depends on how effectively that support drives adoption, paid usage and expansion.

Management still expects operating-margin expansion, while flagging gross-margin pressure from data-center and hyperscaler investment. These infrastructure costs are separate from the FDE initiative. The investment can support a larger AI business over time, but the pace of revenue conversion and delivery efficiency will determine the near-term margin benefit.

What we underestimated: NOW’s role in AI deployment