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(Bloomberg) -- ServiceNow Inc. gave a fiscal-year sales outlook that fell short of expectations, saying it is focused on fueling adoption of new generative artificial intelligence products rather than generating significant revenue for those tools in the near future. The shares dropped in premarket trading.
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Subscription revenue in 2025 will be about $12.7 billion, the company said Wednesday in a statement. That’s shy of the roughly $12.9 billion anticipated by Wall Street analysts, according to data compiled by Bloomberg. Subscription revenue makes up the bulk of ServiceNow’s sales.
The Santa Clara, California-based company makes applications that help companies organize and automate their personnel and information technology operations. Like many peers, ServiceNow has spent the last two years baking generative AI features into its products. It offers a pricier subscription tier with those tools, which carry out tasks based on prompts from users. The software company is now focused on developing AI agents, which handle work without the need for assistance from human employees.
ServiceNow said it will offer more pay-as-you-go pricing in 2025 for its generative AI tools. This change, the company said, will mean “forgoing upfront incremental new subscriptions to instead drive accelerated adoption and monetize increasing usage over time.”
The shares fell more than 9% in premarket trading after closing at $1,143.63 in New York. The stock has increased 45% over the last 12 months and hit a record high earlier this week.
Shake-Up In Pricing Model
Investors have been concerned about the ways the generative AI could upend the traditional subscription-based business model for software vendors. The pricing structure change that ServiceNow announced is “significant,” and could hurt results, Adam Crisafulli, founder of industry analyst Vital Knowledge, said in an interview on CNBC.
Still, application software companies like ServiceNow are expected to benefit from this week’s announcement that a Chinese AI startup, DeepSeek, had developed lower-cost AI models that rival US competitors. Analysts have said DeepSeek’s model will help give potential customers more choices and reduce the cost of the technology.
The rapidly declining costs of using the large language models that underpin generative AI gives ServiceNow the freedom to focus on adoption by customers and protect the company’s margins, Chief Executive Officer Bill McDermott said in an interview. “We’re looking at these models being commoditized at a faster rate than anybody could have imagined,” he said.