Why Is ServiceNow (NOW) Up 8.6% Since Last Earnings Report?

It has been about a month since the last earnings report for ServiceNow (NOW). Shares have added about 8.6% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is ServiceNow due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

ServiceNow Q4 Earnings & Revenues Surpass Estimates

ServiceNow reported fourth-quarter 2021 adjusted earnings of $1.46 per share, which beat the Zacks Consensus Estimate by 2.1% and improved 24.8% year over year.

Revenues of $1.61 billion surpassed the consensus mark by 0.8% and increased 29.1% year over year. After adjusting for forex, revenues of $1.63 billion surged 30% year over year.

Subscription revenues improved 29% year over year to $1.52 billion. After adjusting for forex, subscription revenues increased 30% year over year to $1.54 billion.

Professional services and other revenues increased 38% year over year to $91 million. After adjusting for forex, professional services and other revenues climbed at the same rate on a year-over-year basis.

ServiceNow has been benefiting from the rising adoption of its workflows by enterprises undergoing digital transformation. The company now has 1,359 total customers with more than $1 million in annual contract value, representing 25.3% year-over-year growth in customers.

During the reported quarter, ServiceNow closed 135 transactions with more than $1 million in net new annual contract value, representing 52% year-over-year growth.

Billing Details

Total billings, on a non-GAAP basis, rose 33% year over year to $2.53 billion. After adjusting for forex, total billings increased 33% year over year to $2.55 billion.

Subscription billings of $2.42 billion advanced 32% year over year. After adjusting for forex, subscription billings were $2.43 billion, up 33%.

Professional services and other billings increased 43% to $113 million. After adjusting for forex, professional services and other billings climbed at the same rate on a year-over-year basis.

Operating Details

In the fourth quarter, non-GAAP gross margin was 81.1%, which contracted 40 basis points (bps) on a year-over-year basis.

Subscription gross margin of 85% contracted 10 bps year over year. Professional services and other gross margin were 15.4% compared with year-ago quarter’s figure of 16.7%.

Total operating expenses, on a non-GAAP basis, were $942 million in the reported quarter, up 26.8% year over year. As a percentage of revenues, operating expenses declined 110 bps on a year-over-year basis.

ServiceNow’s non-GAAP operating margin expanded 70 bps on a year-over-year basis to 22.7%.

Balance Sheet & Cash Flow

As of Dec 31, 2021, ServiceNow had cash and cash equivalents, and short-term investments of $3.30 billion compared with $3.03 billion as of Sep 30, 2021.

During the reported quarter, cash from operations was $844 million compared with $320 million in the previous quarter.

ServiceNow generated free cash flow of $744 million in the quarter, up from $228 million reported in the prior quarter.

At the end of the fourth quarter, remaining performance obligations or RPO were $9.7 billion, surging 34% year over year.

Guidance

For first-quarter 2022, non-GAAP subscription revenues are projected between $1.610 billion and $1.615 billion, which suggests an improvement of 25% year over year.

ServiceNow expects non-GAAP operating margin to be 25%.

For 2022, ServiceNow expects non-GAAP subscription revenues to be $7.020-$7.040 billion, which suggests a rise of 26% from the year-ago reported figure.

ServiceNow continues to expect non-GAAP gross margin to be 86% and non-GAAP operating margin to be 25%. Moreover, non-GAAP free cash flow margin is expected to be 31%.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

The consensus estimate has shifted -19.96% due to these changes.

VGM Scores

At this time, ServiceNow has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, ServiceNow has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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