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Why Is ServiceNow (NOW) Up 21.6% Since Last Earnings Report?

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It has been about a month since the last earnings report for ServiceNow (NOW - Free Report) . Shares have added about 21.6% 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 its most recent earnings report in order to get a better handle on the important catalysts.

ServiceNow Q3 Earnings Beat Estimates, Revenues Up Y/Y

ServiceNow reported third-quarter 2023 adjusted earnings of $2.92 per share, which beat the Zacks Consensus Estimate by 14.51% and jumped 49% year over year.

Revenues of $2.29 billion beat the consensus mark by 0.75% and increased 25% year over year. At constant currency (cc), revenues increased 22.5%.

Subscription revenues improved 27.2% year over year to $2.22 billion. At cc, subscription revenues increased 24.5% year over year.

Professional services and other revenues decreased 19.1% year over year to $72 million. At cc, professional services and other revenues declined 21.5%.

In the reported quarter, ServiceNow had 83 deals greater than $1 million in net new ACV, up from 69 a year ago. The company had 1,789 total customers with more than $1 million in annual contract value (ACV) at the end of the third quarter, which represents 17% year-over-year growth in customers.

ServiceNow ended third-quarter 2023 with 49 customers with more than $20 million in ACV, up 58% year over year.

The renewal rate was 98% in the reported quarter, unchanged year over year.

ServiceNow has been benefiting from the rising adoption of its workflows by enterprises undergoing digital transformation. Security and risk had a terrific quarter with ten deals of more than $1 million. Employee workflows had a stellar quarter, with seven deals over $1 million and one deal over $10 million.

Employee Pro SKU witnessed 100% growth in net new ACV on a year-over-year basis. Creator Workflows crossed $1 billion in ACV in the third quarter.

Transportation and logistics grew 100% year over year, trailed by education, which grew more than 75%.

The company inked 19 federal deals worth more than $1 million, including three deals over $10 million in the reported quarter. Federal ACV jumped 75% year over year.

At the end of the third quarter, the current remaining performance obligations (cRPO) were $7.43 billion, up 27% year over year. On a constant currency basis, cRPO increased 24%.

Remaining performance obligations, on a constant currency basis, rose 23.5% year over year to $14.1 billion.

Expanding Generative AI Portfolio to Aid Growth

ServiceNow is benefiting from strong demand for its generative AI-powered solutions. The company launched Vancouver on Sep 29 and signed four large deals within the remaining day of the third quarter (ended Sep 30).

Vancouver embeds generative AI across all workflows on the Now Platform. Notable companies to sign up with ServiceNow for generative AI include the likes of CBRE and NVIDIA.

Expanding partner base has been a key catalyst for ServiceNow. Teleperformance joined its AI Lighthouse program in October. Deloitte is expanding its partnership with the company by integrating ServiceNow’s generative AI capabilities into their leading operational services globally.

ServiceNow believes generative AI is a major growth driver. Currently, it has more than 300 customers in the pipeline from every industry, every buying center and every stage of testing.

Operating Details

In the third quarter, the non-GAAP gross margin was 81.9%, down 50 basis points (bps) on a year-over-year basis.

Subscription gross margin of 84.3% contracted 190 bps year over year. Professional services and other gross margins were 9.7%, up 190 bps year over year.

Total operating expenses were $1.56 billion in the reported quarter, up 16.5% year over year. As a percentage of revenues, operating expenses decreased 500 bps on a year-over-year basis.

ServiceNow’s non-GAAP operating margin expanded 330 bps on a year-over-year basis to 29.5%, driven by strong top-line growth and disciplined spending.

Balance Sheet & Cash Flow

As of Sep 30, 2023, the company had cash and cash equivalents and short-term investments of $4.07 billion compared with $4.75 billion as of Jun 30, 2023.

During the reported quarter, cash from operations was $311 million compared with $580 million in the previous quarter.

ServiceNow generated a free cash flow of $196 million in the reported quarter, down from $451 million reported in the prior quarter.

The company repurchased 0.5 million shares and has approximately $1.2 billion remaining in authorization.

Guidance

For fourth-quarter 2023, subscription revenues are projected between $2.320 billion and $2.325 billion, suggesting an improvement in the range of 24.5-25% year over year on a GAAP basis. At cc, subscription revenues are expected to grow in the 23-23.5% range.

cRPO is expected to grow 21% year over year on a non-GAAP basis and 20.5% on a GAAP basis.

ServiceNow expects non-GAAP operating margin to be 27.5%.

For 2023, the company now expects subscription revenues to be $8.635-$8.640 billion (up $48 million at the mid-point), which suggests a rise of 25.5% from 2022 on a GAAP basis. At cc, subscription revenues are expected to grow 25% from 2022.

ServiceNow expects the non-GAAP subscription gross margin to be 84% and the non-GAAP operating margin to be 27% (up from previous guidance of 26.5%). Moreover, the free cash flow margin is expected to be 30%.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month.

The consensus estimate has shifted 11.21% due to these changes.

VGM Scores

Currently, ServiceNow has an average Growth Score of C, a grade with the same score on the momentum front. 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 D. 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. It comes with little surprise ServiceNow has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

Performance of an Industry Player

ServiceNow is part of the Zacks Computers - IT Services industry. Over the past month, Infosys (INFY - Free Report) , a stock from the same industry, has gained 7.7%. The company reported its results for the quarter ended September 2023 more than a month ago.

Infosys reported revenues of $4.72 billion in the last reported quarter, representing a year-over-year change of +3.6%. EPS of $0.18 for the same period compares with $0.18 a year ago.

For the current quarter, Infosys is expected to post earnings of $0.18 per share, indicating a change of -5.3% from the year-ago quarter. The Zacks Consensus Estimate has changed -0.9% over the last 30 days.

The overall direction and magnitude of estimate revisions translate into a Zacks Rank #4 (Sell) for Infosys. Also, the stock has a VGM Score of D.


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