ServiceNow stock falls despite earnings beat as CEO Bill McDermott tries to get investors to stop thinking of it as a SaaS company

ServiceNow CEO Bill McDermott has been on a mission to persuade investors to stop thinking of his enterprise software company as a standard SaaS (software-as-a-service) business.

So far, McDermott has met with skepticism from the Street, which has been fixated on the lofty valuation of ServiceNow’s shares. The stock trades at a trailing price-to-earnings ratio that is more than twice that of some competitors, such as Salesforce. As a result, ServiceNow’s stock has declined 40% over the past year despite consistently strong results.

But on Wednesday, McDermott got yet more ammunition to wield against ServiceNow’s doubters.

The company reported fourth-quarter earnings that handily beat Wall Street’s top-line and bottom-line growth forecasts for a ninth consecutive quarter. Subscription revenue for the three months ended Dec. 31 was $3.47 billion—up 21% year over year—and non-GAAP earnings per share were $0.92. Both figures topped consensus estimates of roughly $3.42 billion and $0.87, respectively. 

The company also raised its full-year 2026 guidance for subscription revenue, forecasting it will make between $15.53 billion to $15.57 billion. This implies growth of roughly 20% to 21%—well above the 18% to 18.5% that analysts had expected.

The company reported that Now Assist, its AI product suite, more than doubled its net new annual contract value in Q4 compared with the prior year.

ServiceNow’s shares were down 4% in after-hours trading following the announcement.

This may be evidence that McDermott’s message—don’t lump us in with other SaaS companies—is starting to land.

“We don’t live in the SaaS neighborhood,” McDermott told Fortune in an interview ahead of the earnings release. “Functional SaaS and feature SaaS will be automated by ServiceNow and the language models that are meeting us in the middle of our workflow, where business happens.” Functional SaaS companies are those that provide software to serve a broad work function, like Salesforce for sales and customer service, or Workday for human resources. Feature SaaS companies are those that take on narrow tasks, such as Zoom for meetings, or DropBox for file transfers.

McDermott said that ServiceNow is on its way to becoming the central hub through which customers access the data and the software tools that AI agents need to automate work. “We are the one that drives the hyperscalers, the language models, the data lakes, the systems of record, and now the security profile of companies,” McDermott said. “All of this is happening on the ServiceNow platform.”

ServiceNow has been on an acquisition spree to bolster its AI and security capabilities so it can deliver on McDermott’s vision. In December, it announced plans to acquire cybersecurity firm Armis for $7.75 billion—its largest deal ever—and identity security company Veza. In March, it announced a $2.85 billion deal for Moveworks, an AI-powered employee experience platform, which closed in December.

Those acquisitions have caused some Wall Street analysts to wonder if ServiceNow was attempting to buy revenue growth. But McDermott pointed out that the latest quarterly results show that ServiceNow can grow at more than 20% year over year organically. He said that each of the acquisitions was about gaining specific product capabilities and talent around both AI and cybersecurity: Armis provides technology to monitor IT operations in real time; Veza manages identity for humans and machines; and Moveworks handles the employee experience.

As evidence that ServiceNow is in a different league than its competitors, McDermott pointed to what he calls ServiceNow’s “Rule of 55-plus” performance. The “Rule of 40” is a rule-of-thumb benchmark in SaaS software that says a healthy company’s revenue growth rate plus its profit margin or free cash flow margin should total at least 40%. ServiceNow’s combination of 21% revenue growth and 35% free cash flow margin puts it well above that threshold. “There is no company in the enterprise software industry that is operating at the Rule of 55—that’s only ServiceNow,” he said. The company’s Q1 guidance implies a score of 57.

McDermott acknowledged the disconnect between ServiceNow’s consistently strong results and the market’s lack of enthusiasm for the stock. “There is a re-rating of SaaS companies on the multiples, so ServiceNow got filed with other SaaS companies, and the multiples got dropped for the SaaS industry,” he said. “You can look at Adobe, you can look at Salesforce, you can look at Workday.”

His pitch is that ServiceNow should no longer be valued alongside those peers. “We’re consolidating the feature companies—you know, they have a feature or a tool—and we’re consolidating the function companies onto ServiceNow,” he said. “I’m talking by the hundreds of applications.”

Along with its earnings, ServiceNow announced an expanded partnership with AI company Anthropic. The partnership will see Anthropic’s Claude AI model become the default model powering ServiceNow’s Build Agent for enterprise app development. The partnership follows the announcement last week of a close collaboration with OpenAI that will also see that company’s models integrated into ServiceNow’s products.

“Next-gen AI models will work in harmony with the most important enterprise software,” McDermott said. He said Anthropic CEO Dario Amodei sees “the meaningful difference between giving enterprises access to an AI model and building that model into workflows where real decisions are made by businesses all over the world.” He also drew a distinction between large language models, which he characterized as “indeterministic,” and ServiceNow’s ability to also use its own workflow automation tools to deliver “deterministic outcomes.” “Enterprises have to have deterministic outcomes for governance, for security, for auditability, and obviously for smooth operations that don’t hallucinate,” he said.

This story was originally featured on Fortune.com