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ServiceNow (NOW) Up 6.4% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for ServiceNow (NOW - Free Report) . Shares have added about 6.4% 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 Q2 Earnings & Revenues Surpass Estimates

ServiceNow reported second-quarter 2021 adjusted earnings of $1.42 per share, which beat the Zacks Consensus Estimate by 18.3% and improved 15.4% year over year.

Revenues of $1.41 billion surpassed the consensus mark by 3.9% and increased 31.6% year over year. After adjusting for forex, revenues of $1.36 billion surged 27.2% year over year.

Subscription revenues improved 31% year over year to $1.33 billion. After adjusting for forex, subscription revenues increased 27% year over year to $1.29 billion.

Professional services and other revenues increased 41% year over year to $79 million. After adjusting for forex, professional services and other revenues climbed 36% to $76 million.

ServiceNow has been benefiting from rising adoption of its workflows by enterprises undergoing digital transformation. The company now has 1,201 total customers with more than $1 million in annual contract value, representing 25% year-over-year growth in customers.

The company’s expanding partner base is a positive. During the reported quarter, ServiceNow announced an integration with Microsoft’s new Windows 365 solution to let users easily access Cloud PCs directly through Microsoft Teams.

Billing Details

Total billings, on a non-GAAP basis, rose 31.2% year over year to $1.42 billion. After adjusting for forex, total billings increased 26% year over year to $1.36 billion.

Subscription billings of $1.33 billion advanced 30.5% year over year. After adjusting for forex, subscription billings were $1.28 billion, up 25%.

Professional services and other billings increased 43.5% to $89 million. After adjusting for forex, professional services and other billings were $86 million, up 39%.

Operating Details

In the second quarter, non-GAAP gross margin was 85%, which contracted 200 basis points (bps) on a year-over-year basis.

Subscription gross margin of 85% contracted 200 bps year over year. Professional services and other gross margin was 17% compared with year-ago quarter’s figure of 14%.

Total operating expenses, on a non-GAAP basis, were $789 million in the reported quarter, up 33.3% year over year.

ServiceNow’s non-GAAP operating margin contracted 300 bps on a year-over-year basis to 25%.

Balance Sheet & Cash Flow

As of Jun 30, 2021, ServiceNow had cash and cash equivalents, and short-term investments of $2.98 billion compared with $3.46 billion as of Mar 31, 2021.

During the reported quarter, cash from operations was $300 million compared with $727 million in the previous quarter.

ServiceNow generated free cash flow of $268 million in the quarter, down from $627 million reported in the prior quarter.

At the end of the second quarter, remaining performance obligations (RPO) were $4.7 billion, surging 34% year over year.

Guidance

For third-quarter 2021, non-GAAP subscription billings are projected between $1.32 billion and $1.325 billion, which suggests an improvement of 23% year over year.

ServiceNow expects non-GAAP operating margin to be 23%.

For 2021, ServiceNow expects non-GAAP subscription billings to be $6.32-$6.325 billion, which suggests a rise of 27% from the year-ago reported figure.

ServiceNow continues to expect non-GAAP gross margin to be 85% and non-GAAP operating margin to be 24.5%. Moreover, non-GAAP free cash flow margin is expected to be 31%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review.

VGM Scores

Currently, ServiceNow has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. 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 upward for the stock, and the magnitude of these revisions looks promising. 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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