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ServiceNow (NOW) Q3 Earnings Beat Estimates, Revenues Up Y/Y
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ServiceNow (NOW - Free Report) reported third-quarter 2022 adjusted earnings of $1.96 per share, which beat the Zacks Consensus Estimate by 5.95% and improved 26.5% year over year.
Our earnings estimate was pegged at $1.86 per share.
Revenues of $1.83 billion lagged the consensus mark by 1.2% but increased 21.1% year over year. After adjusting for forex, revenues of $1.93 billion jumped 27.5% year over year.
Subscription revenues improved 22.1% year over year to $1.74 billion. After adjusting for forex, subscription revenues increased 28.5% year over year to $1.83 billion, surpassing management’s guidance range of $1.750-$1.755 billion.
Professional services and other revenues increased 4.7% year over year to $89 million. After adjusting for forex, professional services and other revenues increased 12% on a year-over-year basis to $95 million.
ServiceNow, Inc. Price, Consensus and EPS Surprise
ServiceNow has been benefiting from the rising adoption of its workflows by enterprises undergoing digital transformation. The company now has 1,530 total customers with more than $1 million in annual contract value, representing 22% year-over-year growth in customers.
Customers with contract value worth $10 million grew 60% year over year in the reported quarter. The renewal rate was 98% in the reported quarter, flat year over year.
During the reported quarter, ServiceNow closed 69 transactions with more than $1 million in new annual contract value.
As of Sep 30, 2022, current remaining performance obligations (cRPO) were $5.87 billion, up 18% year over year. On a constant currency basis, cRPO increased 25%.
Remaining performance obligations, on a constant currency basis, rose 24.5% year over year to $12.1 billion after adjusting for forex.
Operating Details
In the third quarter, the non-GAAP gross margin was 82.4%, which expanded 130 basis points (bps) on a year-over-year basis.
Subscription gross margin of 86.2% expanded 120 bps year over year. Professional services and other gross margins were 7% compared with the year-ago quarter’s figure of 16.5%.
Total operating expenses, on a non-GAAP basis, were $1.03 billion in the reported quarter, up 23.1% year over year. As a percentage of revenues, operating expenses increased 90 bps on a year-over-year basis.
ServiceNow’s non-GAAP operating margin expanded 40 bps on a year-over-year basis to 26.2%.
Balance Sheet & Cash Flow
As of Sep 30, 2022, ServiceNow had cash and cash equivalents and short-term investments of $3.96 billion compared with $3.83 billion as of Jun 30, 2022.
During the reported quarter, cash from operations was $265 million compared with $433 million in the previous quarter.
ServiceNow generated a free cash flow of $103 million in the reported quarter, down from $287 million reported in the prior quarter.
Guidance
For fourth-quarter 2022, subscription revenues are projected between $1.834 billion and $1.839 billion, suggesting an improvement in the range of 20-21% year over year on a GAAP basis. At constant currency, subscription revenues are expected to grow in the 26-27% range.
cRPO is expected to grow 26% year over year on a non-GAAP basis and 20% on a GAAP basis. Unfavorable forex is expected to hurt subscription revenues by $330 million.
ServiceNow expects the non-GAAP operating margin to be 26%.
For 2022, ServiceNow expects subscription revenues to be $6.865-$6.870 billion, which suggests a rise of 23% over 2021 on a GAAP basis. At constant currency, subscription revenues are expected to grow 28.5% over 2021.
Unfavorable forex is expected to hurt subscription revenues by $290 million in 2022.
ServiceNow expects the non-GAAP subscription gross margin to be 86% and the non-GAAP operating margin to be 25%. Moreover, the non-GAAP free cash flow margin is expected to be 29%.
Zacks Rank & Stocks to Consider
Currently, ServiceNow has a Zacks Rank #3 (Hold).
ServiceNow shares have underperformed the Zacks Computer & Technology sector year to date. While NOW shares have lost 43.5%, the Computer & Technology sector decreased 34.3%.
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ServiceNow (NOW) Q3 Earnings Beat Estimates, Revenues Up Y/Y
ServiceNow (NOW - Free Report) reported third-quarter 2022 adjusted earnings of $1.96 per share, which beat the Zacks Consensus Estimate by 5.95% and improved 26.5% year over year.
Our earnings estimate was pegged at $1.86 per share.
Revenues of $1.83 billion lagged the consensus mark by 1.2% but increased 21.1% year over year. After adjusting for forex, revenues of $1.93 billion jumped 27.5% year over year.
Subscription revenues improved 22.1% year over year to $1.74 billion. After adjusting for forex, subscription revenues increased 28.5% year over year to $1.83 billion, surpassing management’s guidance range of $1.750-$1.755 billion.
Professional services and other revenues increased 4.7% year over year to $89 million. After adjusting for forex, professional services and other revenues increased 12% on a year-over-year basis to $95 million.
ServiceNow, Inc. Price, Consensus and EPS Surprise
ServiceNow, Inc. price-consensus-eps-surprise-chart | ServiceNow, Inc. Quote
ServiceNow has been benefiting from the rising adoption of its workflows by enterprises undergoing digital transformation. The company now has 1,530 total customers with more than $1 million in annual contract value, representing 22% year-over-year growth in customers.
Customers with contract value worth $10 million grew 60% year over year in the reported quarter. The renewal rate was 98% in the reported quarter, flat year over year.
During the reported quarter, ServiceNow closed 69 transactions with more than $1 million in new annual contract value.
As of Sep 30, 2022, current remaining performance obligations (cRPO) were $5.87 billion, up 18% year over year. On a constant currency basis, cRPO increased 25%.
Remaining performance obligations, on a constant currency basis, rose 24.5% year over year to $12.1 billion after adjusting for forex.
Operating Details
In the third quarter, the non-GAAP gross margin was 82.4%, which expanded 130 basis points (bps) on a year-over-year basis.
Subscription gross margin of 86.2% expanded 120 bps year over year. Professional services and other gross margins were 7% compared with the year-ago quarter’s figure of 16.5%.
Total operating expenses, on a non-GAAP basis, were $1.03 billion in the reported quarter, up 23.1% year over year. As a percentage of revenues, operating expenses increased 90 bps on a year-over-year basis.
ServiceNow’s non-GAAP operating margin expanded 40 bps on a year-over-year basis to 26.2%.
Balance Sheet & Cash Flow
As of Sep 30, 2022, ServiceNow had cash and cash equivalents and short-term investments of $3.96 billion compared with $3.83 billion as of Jun 30, 2022.
During the reported quarter, cash from operations was $265 million compared with $433 million in the previous quarter.
ServiceNow generated a free cash flow of $103 million in the reported quarter, down from $287 million reported in the prior quarter.
Guidance
For fourth-quarter 2022, subscription revenues are projected between $1.834 billion and $1.839 billion, suggesting an improvement in the range of 20-21% year over year on a GAAP basis. At constant currency, subscription revenues are expected to grow in the 26-27% range.
cRPO is expected to grow 26% year over year on a non-GAAP basis and 20% on a GAAP basis. Unfavorable forex is expected to hurt subscription revenues by $330 million.
ServiceNow expects the non-GAAP operating margin to be 26%.
For 2022, ServiceNow expects subscription revenues to be $6.865-$6.870 billion, which suggests a rise of 23% over 2021 on a GAAP basis. At constant currency, subscription revenues are expected to grow 28.5% over 2021.
Unfavorable forex is expected to hurt subscription revenues by $290 million in 2022.
ServiceNow expects the non-GAAP subscription gross margin to be 86% and the non-GAAP operating margin to be 25%. Moreover, the non-GAAP free cash flow margin is expected to be 29%.
Zacks Rank & Stocks to Consider
Currently, ServiceNow has a Zacks Rank #3 (Hold).
ServiceNow shares have underperformed the Zacks Computer & Technology sector year to date. While NOW shares have lost 43.5%, the Computer & Technology sector decreased 34.3%.
Airbnb (ABNB - Free Report) , Super Micro Computer (SMCI - Free Report) and Blackbaud (BLKB - Free Report) are some better-ranked stocks that investors can consider in the broader sector. All three stocks have a Zacks Rank #1 (Strong Buy) and are set to report their quarterly results on Nov 1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Shares of Airbnb and Blackbaud are down 30.7% and 33.5% year to date, respectively. Super Micro is up 49.4% over the same timeframe.