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ServiceNow (NOW) Up 10% Since Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for ServiceNow, Inc. (NOW - Free Report) . Shares have added about 10% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is NOW 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 drivers.

Recent Earnings

ServiceNow delivered non-GAAP earnings of 56 cents per share in first-quarter 2018. The figure comfortably surpassed the Zacks Consensus Estimate of 37 cents and increased 80.6% on a year-over-year basis.

The company reported revenues registered a year-over-year jump of 37.4% to $589.2 million and came well ahead of the Zacks Consensus Estimate of $573 million. Non-GAAP revenues (excluding impact of Foreign exchange) came at $563.8 million, up 32% from the year-ago quarter.

Management remains motivated on the robust adoption of its wide range of application based products by big private and public companies aided its stellar performance in the first quarter. Notably, big private and public companies now constitute 38% of the company’s customer base which pay over a million dollar per year. Further, the company continues to capitalize on the emerging EMEA region.

Subscription revenues surged 34% (adjusted for constant currency) from the year-ago quarter to $520.1 million, surpassing the higher end of management’s guided range of $507-$512 million. Professional services and other revenues increased 6% (adjusted for constant currency) to $43.8 million.

Total billings surged 27% year over year (adjusted for constant currency and constant billings duration) to $661.7 million. Subscription billings of $612.9 million witnessed 28% year-over-year growth, exceeding the higher end of management’s guided range of $600–$604 million. Professional services and other billings surged 23% to $48.9 million. Growth in each of the segments has been adjusted for constant currency and constant billings duration.

Management stated that the digital transformation that organizations are going through has been aiding growth. ServiceNow’s strength in ACV performance and favorable exchange rate movement are other tailwinds.

ServiceNow added 12 new Global 2000 (G2K) companies. It closed 21 contracts in the quarter with an annualized contract value (ACV) of more than a million.

The company has around 536 customers, contributing more than $1 million to the business, this figure increased 43% on a year-over-year basis. ServiceNow’s 52 customers generate more than $5 million a year, reflecting growth of 108% on a year-over-year basis.

Information Technology Service Management (“ITSM”) was part of 20 out of the top 21 deals struck during the quarter. Further, out of top 20 deals, 16 comprised adoption of around more than three products.

In the non-ITSM HR segment, CSM products posted strong results. In the quarter, $1 million of new ACV was garnered by three new deal wins in Customer Service Management and six new deal wins of HR Service Delivery, individually. The company continues to invest heavily in platform and emerging product services.

The company is focused on its emerging Security Operations segment. Strategic security alliance between ServiceNow Security Operations and Tenable Cyber Exposure Platform enhanced the cyber risk management methods incorporated by government organizations and enterprises.

Moreover, Non-GAAP gross margin was 80% while non-GAAP operating margin was 18%. Free cash flow margin was reported at 38%.

Guidance

For second-quarter 2018, non-GAAP subscription revenues adjusted for constant currency, are forecast between $548 and $553 million, representing 36-37% year-over-year growth.

Non-GAAP subscription billings adjusted for constant currency and constant billings durations are expected grow 28-29% year over year to $584-$588 million. Non-GAAP operating margin is anticipated to be 16%.

ServiceNow revised subscription revenues and billings outlook for fiscal 2018, expecting the first-quarter momentum to sustain. For full-year 2018, non-GAAP subscription revenues are now expected to grow 34-35% and be in the range of $2.34-2.35 billion, raised from previous band of $2.31-$2.33 billion.

Non-GAAP subscription billings are now anticipated to grow 30% year over year to $2.76-2.77 billion, an improvement over the earlier range of $2.74-$2.76 billion.

However, the company reiterated the margin outlook. Non-GAAP Subscription gross margin is expected to be 85%, while operating margin and free cash flow margin are projected to be 20% and 27%, respectively.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been six revisions higher for the current quarter compared to five lower. In the past month, the consensus estimate has shifted downward by 45.7% due to these changes.

ServiceNow, Inc. Price and Consensus

VGM Scores

At this time, NOW has a strong Growth Score of A, though it is lagging a bit on the momentum front with a B. However, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is more suitable for growth investors than momentum investors.

Outlook

Estimates have been trending upward for the stock and the magnitude of these revisions looks promising. Interestingly, NOW has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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