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ServiceNow (NOW) Q3 Earnings Beat Estimates, Raises '20 View

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ServiceNow (NOW - Free Report) reported third-quarter 2020 adjusted earnings of $1.21 per share, which beat the Zacks Consensus Estimate by 17.48% and improved 22.2% year over year.

Revenues of $1.15 billion surpassed the consensus mark by 3.75% and increased 30% year over year. After adjusting for forex, revenues of $1.137 billion surged 28% year over year.

Subscription revenues surged 31% year over year to $1.091 billion. After adjusting for forex, subscription revenues jumped 29% year over year to $1.077 billion.

Professional services and other revenues increased 19% year over year to $61 million. After adjusting for forex, professional services and other revenues climbed 17% to $60 million.

ServiceNow is benefiting from rising adoption of its workflows from enterprises undergoing digital transformation.

Following impressive third-quarter results and increasing adoption of its solutions and solid pipeline, ServiceNow raised 2020 guidance for subscription revenues, billings, operating margin and free cash flow margin.

ServiceNow, Inc. Price, Consensus and EPS Surprise

ServiceNow, Inc. Price, Consensus and EPS Surprise

ServiceNow, Inc. price-consensus-eps-surprise-chart | ServiceNow, Inc. Quote

Billing Details

Total billings on a non-GAAP basis rose 25% year over year to $1.139 billion. After adjusting for forex, total billings increased 23% year over year to $1.126 billion.

Subscription billings of $1.081 billion increased 25% year over year. After adjusting for forex, subscription billings were $1.069 billion, up 24%.

Professional services and other billings increased 13% to $58 million. After adjusting for forex, professional services and other billings were $57 million, up 12%.

Expanding Customer Base Remains Noteworthy

ServiceNow’s safe-workplace application suite and dashboard that have been downloaded by more than 800 organizations worldwide including Raymond James, Standard & Poor's, and Rutgers University. Notably, Rutgers University is utilizing Safe Workplace apps for health screening, room reservations and contact tracing to “ensure a safe and secure environment for all students and faculty.”

Moreover, ServiceNow announced a new integration with Uber for Business to help their employees feel safe when commuting to and from work as soon as it’s safe to reopen.

In the quarter under review, ServiceNow completed 41 transactions with more than $1 million in net new annual contract value (ACV).

Currently, this Zacks Rank #2 (Buy) company has 1,012 total customers with more than $1 million in ACV, up 25% year over year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

ServiceNow’s consistent renewal rate of 98% reflects the resilience of the business as the Now platform remains a mission-critical part of its customer’s operations.

The company closed the largest deal ever with more than $40 million in ACV. On the heels of solid momentum of Now platform, the company raised full-year guidance.

Notably, all of the company’s top 20 deals included three or more products. ITSM (or IT Service Management) Pro led 16 of the 17 ITSM deals included in the top 20 deals. Further, 18 of the top 20 deals also included ITOM (or IT Operations Management).

ServiceNow marked its largest federal quarter with nine federal customers over $10 million in ACV.

Deal wins include Mount Sinai, the federal Defense Information Systems Agency, the US Air Force, US Army and the US Department of Veteran Affairs, the US Senate and Federal Claims Court and the Department of Veteran Affairs.

In fact, ServiceNow has been named a Leader in the 2020 Gartner Magic Quadrant for IT Risk Management. The company was evaluated for its Governance, Risk, and Compliance (“GRC”) platform.

Additionally, 13 of the top 20 deals included customer service management (CSM) wins, reflecting growing momentum in its business, out of which eight deals were greater than $1 million.

Markedly, ServiceNow CSM solution is already helping video conferencing giant, Zoom Video (ZM - Free Report) to update its customer service operations. Zoom Video is also utilizing ServiceNow’s AIOps capabilities to enable its new Hardware as a Service (HaaS) business model.

During the reported quarter, ServiceNow expanded partnership with Microsoft (MSFT - Free Report) to provide employees with enhanced digital experiences. At Microsoft Ignite 2020, the company rolled out new workflows inbuilt with Microsoft Teams to improve employee productivity with faster case resolution and seamless self-service.

The company also collaborated with Cisco’s (CSCO - Free Report) DNA Spaces to improve its Contact Tracing app to create a safer return to workplace environment amid the coronavirus pandemic.

Further, ServiceNow announced the expansion of its partnership with Deloitte to help customers boost their HR Service Delivery (HRSD) efforts and provide enhanced digital experiences to employees.

Operating Details

In the third quarter, non-GAAP gross margin was 82%, up 100 basis points (bps) on a year-over-year basis. Subscription gross margin was flat year over year at 86%. Professional services and other gross margin was 19% compared with year ago figure of 1%.

Total operating expenses on a non-GAAP basis came in at $648.8 million in the reported quarter, up 31.7% year over year.

ServiceNow’s non-GAAP operating margin was 26%, flat on a year-over-year basis. Notably, management had anticipated non-GAAP operating margin to be 22%. Better-than-expected performance was driven by robust growth in subscription revenues and lower expenses related to coronavirus.

Balance Sheet & Cash Flow

As of Sep 30, 2020, ServiceNow had cash and cash equivalents and short-term investments of $2.95 billion compared with $2.34 billion as of Jun 30, 2020.

During the reported quarter, cash from operations was $241.5 million, compared with $368.1 million reported in the previous quarter.

ServiceNow generated free cash flow of $216.3 million, up 78.3% year over year. Further, free cash flow margin was 19%, up 500 bps on a year-over-year basis.

At the end of the third quarter, remaining performance obligations were $7.3 billion, surging 31% year over year and up 28% after adjusting for forex.

Q4 Guidance

For fourth-quarter 2020, non-GAAP adjusted subscription revenues are anticipated between $1.141 billion and $1.146 billion (adjusted for constant currency), which indicates growth of 27% year over year.

Non-GAAP adjusted subscription billings are projected between $1.612 billion and $1.632 billion, which suggests an increase of 24-26% year over year.

Further, ServiceNow expects non-GAAP operating margin to be 21%.

Markedly, ServiceNow anticipates marketing spend shift from the third quarter into the fourth quarter and incremental investments into pipeline generating activities to limit margin expansion.

2020 Guidance

For 2020, ServiceNow revised guidance. The company now projects non-GAAP adjusted subscription revenues between $4.251 billion and $4.256 billion, suggesting growth of 31% over 2019. Earlier guided range was $4.210 billion-$4.225 billion.

Non-GAAP adjusted subscription billings are projected to be $4.780-$4.800 billion, which suggests a rise of 26-27% from the year-ago reported figure, prior range being $4.660-$4.700 billion. After adjusting for forex and fluctuations in billings duration, subscription billings are expected between $4.779 billion and $4.799 billion, indicating year-over-year growth of 26-27%.

Further, ServiceNow expects non-GAAP subscription margin to be 86% and non-GAAP operating margin to be 24.5% (up from previous guidance of 24%).

Moreover, non-GAAP free cash flow margin is expected to be 31.5% (up from previous guidance of 29.5%).

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