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Factors Setting the Tone for ServiceNow (NOW) in Q1 Earnings

Zacks Equity Research

ServiceNow, Inc. NOW is slated to report first-quarter 2019 results on Apr 24.

Notably, the company has beaten the Zacks Consensus Estimate for earnings in the trailing four quarters, recording an average positive surprise of 24.7%.

In the last reported quarter, the company’s earnings surpassed the Zacks Consensus Estimate but revenues missed the same. However, the figures grew considerably on a year-over-year basis.

ServiceNow is benefiting from the ongoing digital transformation and growing clout of the company’s robust workflow products.The company is leaving no stone unturned to garner new contract wins and expand global footprint, which is aiding the stock.

Coming to price performance, shares of ServiceNow have returned 34% in the past year, substantially outperforming the industry’s rally of 4.6%.

What to Expect in Q1

For first-quarter 2019, the Zacks Consensus Estimate for earnings is pegged at 54 cents, indicating a decline of approximately 3.6% from the year-ago reported figure. The consensus estimate for revenues stands at $767.2 million, suggesting an improvement of 30.2% from the year-ago reported quarter.

Management anticipates momentum in subscription offerings to continue in the to-be-reported quarter. ServiceNow anticipates non-GAAP adjusted subscription revenues to be in the range of $736 million to $741 million, suggesting year-over-year growth of 35-36%.

Moreover, non-GAAP adjusted subscription billings are projected to be within the range of $831 million to $836 million, indicating year-over-year growth of 30-31%. Meanwhile, the Zacks Consensus Estimate for non-GAAP subscription billings for the first quarter is pegged at $802 million.

Let's see how things are shaping up prior to this announcement.

Factors at Play in Q1

Growing penetration at G2K customer base is expected to drive ServiceNow’s top line. Further, it is penetrating the non-G2K customer base, focusing primarily on public and big private entities, rapidly, which has been acting as a tailwind in the to-be-reported quarter.

With an aim to improve footing in the IT service market (ITSM), ServiceNow recently updated its Now Platform “Madrid Release” with new mobile enterprise capabilities. The company claims to have infused 600 latest innovations to facilitate mobility in the workplace. With the enhancements, Now Platform is anticipated to witness incremental adoption, consequently bolstering top-line growth.

In the quarter under review, ServiceNow inked partnership agreement with Adobe ADBE. Per the terms, Now Platform and Adobe Experience Cloud solutions will be integrated to provide enhanced employee and customer experience. Additionally, ongoing alliances with Microsoft, IBM, among others, and synergies from strategic buyouts are factors expected to favor first-quarter results.

The aforementioned factors are expected to aid ServiceNow in bolstering enterprise customer base in the to-be-reported quarter, which exceeded 5,400 at the end of the fourth quarter.

However, the company faces stiff competition from the likes of Oracle and Salesforce.com in the non-ITSM market, compelling it to increase spending on sales and marketing, which is likely to limit margin expansion in the quarter under review.

Notably, management anticipates non-GAAP operating margin to be 16% in the first quarter, indicating a sequential decline of 500 basis points (bps).

ServiceNow, Inc. Price and EPS Surprise

ServiceNow, Inc. Price and EPS Surprise | ServiceNow, Inc. Quote

What the Zacks Model Says

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. Sell-rated stocks (Zacks Rank #4 or 5) are best avoided.

ServiceNow, Inc. (NOW) has a Zacks Rank #3 and Earnings ESP is -0.12%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Stocks to Consider

Here are a couple of stocks which you may consider as our model shows that these have the right combination of elements to post an earnings beat in their upcoming release:

Xilinx, Inc. XLNX has an Earnings ESP of +2.03% and a Zacks Rank #2. The company is slated to report fourth quarter fiscal 2019 earnings on Apr 24. You can see the complete list of today’s Zacks #1 Rank stocks here.

Acacia Communications, Inc. ACIA has an Earnings ESP of +5.73% and a Zacks Rank #2 stock. The company is set to report first quarter 2019 earnings on May 2.

Zacks' Top 10 Stocks for 2019

In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-holds for the year?

Who wouldn't? Our annual Top 10s have beaten the market with amazing regularity. In 2018, while the market dropped -5.2%, the portfolio scored well into double-digits overall with individual stocks rising as high as +61.5%. And from 2012-2017, while the market boomed +126.3, Zacks' Top 10s reached an even more sensational +181.9%.

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