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How Should Investors Approach ServiceNow Shares Post Q3 Earnings?
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ServiceNow (NOW - Free Report) reported third-quarter 2024 adjusted earnings of $3.72 per share, which beat the Zacks Consensus Estimate by 7.51% and jumped 27.4% year over year.
NOW’s earnings beat the Zacks Consensus Estimate in all the trailing four quarters, which is commendable.
Revenues of $2.797 billion beat the consensus mark by 2.04% and increased 22.2% year over year. At constant currency (cc), revenues increased 22.5% year over year to $2.637 billion.
ServiceNow raised subscription revenue guidance for 2024, which bodes well for investors. NOW shares have appreciated 28.5% year to date (YTD), outperforming the Zacks Computer & Technology sector’s return of 25.3%.
NOW Outperforms Sector in YTD
Image Source: Zacks Investment Research
Before diving down into NOW’s investment prospects, let’s take a glance at its quarterly numbers.
NOW’s Subscription Revenues Up Y/Y, Margin Expands
Subscription revenues improved 23% year over year, on a reported and 22.5% on a cc basis, beating the high-end of the management’s guidance by 200 basis points (bps).
Professional services and other revenues increased 13.9% year over year on a reported and 13.5% on a cc basis.
At the end of the third quarter, the current remaining performance obligations (cRPO) were $9.18 billion, up 23.5% year over year on a cc basis and 150 bps higher than management’s guidance. Remaining performance obligations, on a cc basis, rose 33% year over year to $19.5 billion.
In terms of margins, the third-quarter non-GAAP gross margin was 82.6%, up 60 bps on a year-over-year basis. Subscription gross margin was 84.9%, up 60 bps year over year. Professional services and other gross margins were 6.1% compared with 9.7% reported in the year-ago quarter.
As a percentage of revenues, operating expenses decreased 400 bps on a year-over-year basis.
ServiceNow’s non-GAAP operating margin expanded 160 bps on a year-over-year basis to 31.2%, 150 bps above management’s guidance, driven by strong top-line growth and disciplined spending.
Expanding Clientele Aids NOW's Prospects
ServiceNow had 2,020 total customers with more than $1 million in annual contract value (ACV) at the end of the reported quarter, which represents 14% year-over-year growth in customers.
In the reported quarter, NOW had 15 deals greater than $5 million in net new ACV and six deals of more than $10 million. It closed 96 deals greater than $1 million net new ACV. Number of customers contributing more than $20 million or more grew nearly 40% year over year.
Generative AI deals continued to gain traction in the reported quarter. ServiceNow had 44 new Now Assist customers spending more than $1 million in ACV, including six with more than $5 million and two with more than $10 million.
Industry-wise, the U.S. federal business saw five deals of more than $5 million and two deals of over $20 million. Net new ACV in technology, media and telecom grew more than 100% year over year, while retail and hospitality increased more than 80%.
NOW Stock Rides on Strong Partner Base
ServiceNow is extensively leveraging AI and machine learning to boost the potency of its solutions. NOW’s latest update, Xanadu, offers AI-powered, purpose-built industry solutions for domains, including telecom, media and technology, financial services and the public sector.
A strong partner base that includes Visa, Microsoft (MSFT - Free Report) , NVIDIA (NVDA - Free Report) , IBM, Genesys, Fujitsu, Equinix, Boomi, Siemens, Bill Canada, Zoom, Snowflake (SNOW - Free Report) and Infosys is strengthening NOW’s AI capabilities.
The much anticipated Now Assist integration with Microsoft Copilot for Microsoft 365 is generally available with the Xanadu update.
NVIDIA and NOW are collaborating to develop out-of-the-box use cases for AI agents on the Now platform using NVIDIA NIM Agent Blueprints.
ServiceNow and Snowflake announced a Zero Copy partnership that connects enterprise-wide data to help solve mission-critical problems at scale.
Solid Liquidity Aids NOW’s Prospects
As of Sept. 30, 2024, NOW had cash and cash equivalents and short-term investments of $5.295 billion compared with $5.41 billion as of June 30, 2024. Long-term investments were $3.83 billion.
During the reported quarter, cash from operations was $671 million compared with $620 million in the previous quarter.
ServiceNow generated a free cash flow of $471 million in the reported quarter, up from $359 million reported in the prior quarter.
ServiceNow Raises Subscription Revenue Guidance
For 2024, NOW expects subscription revenues to be $10.655-$10.66 billion (up from previous guidance of $10.575-$10.585 billion), which suggests a rise of 23% from 2023 on a GAAP basis and 22.5% on a non-GAAP basis.
ServiceNow expects the non-GAAP subscription gross margin to be 84.5% and the non-GAAP operating margin to be 29.5%. Moreover, the free cash flow margin is still expected to be 31%.
For fourth-quarter 2024, subscription revenues are projected between $2.875 billion and $2.88 billion, suggesting an improvement in the range of 21.5-22% year over year on a GAAP basis. At cc, subscription revenues are expected to grow in the 20.5% range.
cRPO is expected to grow 21.5% year over year on both non-GAAP and GAAP basis.
ServiceNow expects the non-GAAP operating margin to be 29% in the current quarter.
NOW Shares: Buy, Hold or Sell?
NOW stock is overvalued, as the Value Score of F suggests.
In terms of the forward 12-month Price/Sales ratio, NOW is trading at 14.72X, higher than its median of 13.55X and the sector’s 6.14X.
Price/Sales Ratio (F12M)
Image Source: Zacks Investment Research
ServiceNow’s robust GenAI portfolio and strong partner base are expected to drive its clientele, thereby boosting subscription revenues.
However, stretched valuation, persistent inflation, stiff competition, and a challenging macroeconomic environment are near-term concerns. A rise in expenses due to growing headcount is expected to keep margins under pressure in the near term. These factors make the stock a risky bet.
ServiceNow currently has a Zacks Rank #4 (Sell), suggesting that it may be wise to stay away from the stock for the time being.
Image: Bigstock
How Should Investors Approach ServiceNow Shares Post Q3 Earnings?
ServiceNow (NOW - Free Report) reported third-quarter 2024 adjusted earnings of $3.72 per share, which beat the Zacks Consensus Estimate by 7.51% and jumped 27.4% year over year.
NOW’s earnings beat the Zacks Consensus Estimate in all the trailing four quarters, which is commendable.
Find the latest EPS estimates and surprises on Zacks Earnings Calendar.
Revenues of $2.797 billion beat the consensus mark by 2.04% and increased 22.2% year over year. At constant currency (cc), revenues increased 22.5% year over year to $2.637 billion.
ServiceNow, Inc. Price and Consensus
ServiceNow, Inc. price-consensus-chart | ServiceNow, Inc. Quote
ServiceNow raised subscription revenue guidance for 2024, which bodes well for investors. NOW shares have appreciated 28.5% year to date (YTD), outperforming the Zacks Computer & Technology sector’s return of 25.3%.
NOW Outperforms Sector in YTD
Image Source: Zacks Investment Research
Before diving down into NOW’s investment prospects, let’s take a glance at its quarterly numbers.
NOW’s Subscription Revenues Up Y/Y, Margin Expands
Subscription revenues improved 23% year over year, on a reported and 22.5% on a cc basis, beating the high-end of the management’s guidance by 200 basis points (bps).
Professional services and other revenues increased 13.9% year over year on a reported and 13.5% on a cc basis.
At the end of the third quarter, the current remaining performance obligations (cRPO) were $9.18 billion, up 23.5% year over year on a cc basis and 150 bps higher than management’s guidance. Remaining performance obligations, on a cc basis, rose 33% year over year to $19.5 billion.
In terms of margins, the third-quarter non-GAAP gross margin was 82.6%, up 60 bps on a year-over-year basis. Subscription gross margin was 84.9%, up 60 bps year over year. Professional services and other gross margins were 6.1% compared with 9.7% reported in the year-ago quarter.
As a percentage of revenues, operating expenses decreased 400 bps on a year-over-year basis.
ServiceNow’s non-GAAP operating margin expanded 160 bps on a year-over-year basis to 31.2%, 150 bps above management’s guidance, driven by strong top-line growth and disciplined spending.
Expanding Clientele Aids NOW's Prospects
ServiceNow had 2,020 total customers with more than $1 million in annual contract value (ACV) at the end of the reported quarter, which represents 14% year-over-year growth in customers.
In the reported quarter, NOW had 15 deals greater than $5 million in net new ACV and six deals of more than $10 million. It closed 96 deals greater than $1 million net new ACV. Number of customers contributing more than $20 million or more grew nearly 40% year over year.
Generative AI deals continued to gain traction in the reported quarter. ServiceNow had 44 new Now Assist customers spending more than $1 million in ACV, including six with more than $5 million and two with more than $10 million.
Industry-wise, the U.S. federal business saw five deals of more than $5 million and two deals of over $20 million. Net new ACV in technology, media and telecom grew more than 100% year over year, while retail and hospitality increased more than 80%.
NOW Stock Rides on Strong Partner Base
ServiceNow is extensively leveraging AI and machine learning to boost the potency of its solutions. NOW’s latest update, Xanadu, offers AI-powered, purpose-built industry solutions for domains, including telecom, media and technology, financial services and the public sector.
A strong partner base that includes Visa, Microsoft (MSFT - Free Report) , NVIDIA (NVDA - Free Report) , IBM, Genesys, Fujitsu, Equinix, Boomi, Siemens, Bill Canada, Zoom, Snowflake (SNOW - Free Report) and Infosys is strengthening NOW’s AI capabilities.
The much anticipated Now Assist integration with Microsoft Copilot for Microsoft 365 is generally available with the Xanadu update.
NVIDIA and NOW are collaborating to develop out-of-the-box use cases for AI agents on the Now platform using NVIDIA NIM Agent Blueprints.
ServiceNow and Snowflake announced a Zero Copy partnership that connects enterprise-wide data to help solve mission-critical problems at scale.
Solid Liquidity Aids NOW’s Prospects
As of Sept. 30, 2024, NOW had cash and cash equivalents and short-term investments of $5.295 billion compared with $5.41 billion as of June 30, 2024. Long-term investments were $3.83 billion.
During the reported quarter, cash from operations was $671 million compared with $620 million in the previous quarter.
ServiceNow generated a free cash flow of $471 million in the reported quarter, up from $359 million reported in the prior quarter.
ServiceNow Raises Subscription Revenue Guidance
For 2024, NOW expects subscription revenues to be $10.655-$10.66 billion (up from previous guidance of $10.575-$10.585 billion), which suggests a rise of 23% from 2023 on a GAAP basis and 22.5% on a non-GAAP basis.
ServiceNow expects the non-GAAP subscription gross margin to be 84.5% and the non-GAAP operating margin to be 29.5%. Moreover, the free cash flow margin is still expected to be 31%.
For fourth-quarter 2024, subscription revenues are projected between $2.875 billion and $2.88 billion, suggesting an improvement in the range of 21.5-22% year over year on a GAAP basis. At cc, subscription revenues are expected to grow in the 20.5% range.
cRPO is expected to grow 21.5% year over year on both non-GAAP and GAAP basis.
ServiceNow expects the non-GAAP operating margin to be 29% in the current quarter.
NOW Shares: Buy, Hold or Sell?
NOW stock is overvalued, as the Value Score of F suggests.
In terms of the forward 12-month Price/Sales ratio, NOW is trading at 14.72X, higher than its median of 13.55X and the sector’s 6.14X.
Price/Sales Ratio (F12M)
Image Source: Zacks Investment Research
ServiceNow’s robust GenAI portfolio and strong partner base are expected to drive its clientele, thereby boosting subscription revenues.
However, stretched valuation, persistent inflation, stiff competition, and a challenging macroeconomic environment are near-term concerns. A rise in expenses due to growing headcount is expected to keep margins under pressure in the near term. These factors make the stock a risky bet.
ServiceNow currently has a Zacks Rank #4 (Sell), suggesting that it may be wise to stay away from the stock for the time being.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.