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ServiceNow (NOW) Q3 Earnings Beat Estimates, Revenues In Line

Zacks Equity Research

ServiceNow, Inc. NOW reported third-quarter 2019 non-GAAP earnings of 99 cents per share, surpassing the Zacks Consensus Estimate of 89 cents. Further, the figure improved 44.9% on a year-over-year basis.

Revenues of $885.8 million were almost in line with the Zacks Consensus Estimate of $886 million and surged 32% from the year-ago quarter. Geographically, North America, Europe, Middle East and Africa (EMEA), and APAC & Other contributed 67%, 24%, and 9%, respectively to revenues.

Meanwhile, non-GAAP revenues (excluding impact of foreign exchange) of $899.2 million surged 34% from the year-ago quarter.

Coming to price performance, shares of ServiceNow have returned 23.6% year to date, outperforming the industry’s rally of 10.1%.

Quarter Details

Non-GAAP Subscription revenues (adjusted for constant currency) advanced 35% from the year-ago quarter to $847.6 million.

Non-GAAP Professional services and other revenues improved 11% adjusted for cc from the year-ago quarter to $51.7 million.

Total billings improved 28% on a year-over-year basis (adjusted for constant currency and constant billings duration) to $921 million.

Non-GAAP adjusted subscription billings of $869.1 million surged 29% year over year. Professional services and other billings increased 12% to $51.9 million.

ServiceNow maintained consistent renewal rate of 99% during the reported quarter. Fortune 500 companies’ clientele expansion continues to grow and came in at 75% at the end of the third quarter.

Additionally, the company completed 46 transactions that generated net new annualized contract value (ACV) exceeding $1 million. Further, the company’s total number of customers contributing more than $1 million to business reached 809 in the third quarter. The figure surged 32% on a year-over-year basis.

The ongoing digital transformation of organizations, including big private and public companies, and different levels of government agencies, have been acting as tailwinds. ServiceNow’s strength in ACV performance also remains a positive.

Product-Wise Break-Up of Top 20 New Wins

Out of top 20 new customer additions to the company’s customer base in the third quarter, 18 included adoption of three or more products.

Considering the IT domain, IT Service Management (ITSM), IT Operations Management (ITOM), IT Asset Management (ITAM) and IT Business Management (ITBM) product lines witnessed adoption by 17, 16, 10 and seven customers out of these 20 wins, respectively.

Further, the emerging products (EP) segment is comprised of Customer Service Management (CSM), HR Service Delivery (HR), Security Operations and Intelligent Apps (IA) product lines. In the reported quarter, out of the top 20 new deals, CSM, HR, Security and IA were part of seven, 10, seven and six deals, respectively.

Meanwhile, Platform Add-ons and other services, comprising Performance Analytics, Cloud Options, among others, were leveraged by all the 20 wins.

Notably, IT, EP and Platform Add-ons contributed 55%, 30% and 15%, respectively to net new ACV.

Operating Details

During the third quarter, non-GAAP gross margin came in at 81%, expanding 100 bps on a year-over-year basis.

The company’s non-GAAP operating margin was 26%, expanding 200 bps on a year-over-year basis. Further, free cash flow margin was reported at 14%, compared with the year-ago figure of 17%.

Balance Sheet & Cash Flow

As on Sep 30, 2019, ServiceNow had cash and cash equivalents and short term investments of $1.471 billion compared with $1.653 billion in the previous quarter.

During the reported quarter, cash from operations came in at $210 million compared with the prior-quarter figure of $243.7 million. The company also generated free cash flow of $121 million compared with $193.8 million reported in the prior quarter.

Guidance for Q4

For fourth-quarter 2019, non-GAAP adjusted subscription revenues are anticipated between $897 million and $902 million, indicating growth of 35% from the year-ago quarter.

Non-GAAP adjusted subscription billings are projected within the range of $$1.270-$$1.275 billion, suggesting an improvement of 33-34% from the year-ago reported figure.

Further, non-GAAP operating margin is anticipated to be 21%.

Raises View for 2019

ServiceNow revised subscription revenues and billings outlook for fiscal 2019, backed by an impressive pipeline. For full-year 2019, non-GAAP adjusted subscription revenues are now anticipated in the range of $3.302-$3.307 billion from the previous band of $3.289-$3.299 billion, suggesting growth of 36-37%.

Non-GAAP subscription billings are now anticipated to improve in the range of 32-33% year over year to $3.817-$3.822 billion, indicating an improvement over the previous band of $3.804-$3.814 billion.

However, the company reiterated the margin outlook, thanks to increasing investments. Non-GAAP subscription gross margin is expected to be 86%, while operating margin and free cash flow margin are projected to be 21% and 28%, respectively.

Growth in each of the segments has been adjusted for constant currency and constant billings duration.

Zacks Rank & Other Stocks to Consider

Currently, ServiceNow carries a Zacks Rank #2 (Buy).

Some other top-ranked stocks in the broader technology sector are Splunk Inc. SPLK, Vonage Holdings Corp. VG and Taiwan Semiconductor Manufacturing Company Ltd. TSM. Each of the stocks flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Splunk, Vonage and Taiwan Semiconductor is currently pegged at 31.2%, 5% and 10.4%, respectively.

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