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ServiceNow (NOW) Beats Q1 Earnings Estimates, Trims View

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ServiceNow (NOW - Free Report) reported first-quarter 2020 adjusted earnings of $1.05 per share, which beat the Zacks Consensus Estimate by 9.4% and increased 9.4% year over year.

Revenues of $1.046 billion beat the consensus mark by 2.7% and increased 33% year over year. Geographically, North America, Europe, Middle East and Africa (EMEA), and APAC & Other contributed 67%, 24% and 9% to revenues, respectively.

Moreover, non-GAAP revenues (excluding impact of foreign exchange) of $1.059 million surged 34% from the year-ago quarter’s figures.

Shares of ServiceNow have returned 14.1% year to date against the industry’s decline of 14%.

ServiceNow, Inc. Price, Consensus and EPS Surprise

 

Quarter Details

Non-GAAP Subscription revenues (adjusted for constant currency) rallied 36% from the year-ago quarter’s figure to $1.006 billion.

Non-GAAP Professional services and other revenues increased 7% (adjusted for constant currency) from the year-ago quarter’s level to $53 million.

Total billings rose 30% on a year-over-year basis (adjusted for constant currency and constant billings duration) to $1.114 billion.

Non-GAAP adjusted subscription billings of $1.065 billion surged 32% year over year. Professional services and other billings increased 2% to $49 million.

ServiceNow maintained consistent renewal rate of 97% during the reported quarter. Fortune 500 companies’ clientele expansion continues to grow and came in at almost 80% at the end of the first quarter.

Additionally, the company completed 37 transactions that generated net new annualized contract value (ACV) exceeding $1 million. Further, the company’s total number of customers contributing more than $1 million to business reached 933 in the first quarter. The figure surged 30% on a year-over-year basis.

The ongoing digital transformation of organizations and different levels of government agencies drove the company’s growth during the quarter. ServiceNow’s expanding global footprint was also a positive.

Moreover, the outbreak of COVID-19 has accelerated the need for the digital transformation of the industry, which bodes well for the NOW platform. Notably, the platform was used by customers like Lowe’s Corporation and the U.S. Department of Health and Human Services to develop applications to fight against the pandemic.

New Customer Wins

Out of top 20 new customer additions to the company’s customer base in the first quarter, 18 included adoption of three or more products. This includes companies like Merck, Humana and Siemens.

Moreover, the company witnessed strong momentum in IT products, with 16 of the top 20 deals including multiple IT products. This was driven by solid performance of business continuity and integrated risk management products.

The company’s HR products witnessed solid adoption as well, with 10 of the 20 top deals being HR Wins. Notably, the company’s HR products were deployed by Chevron and the U.S. Department of Health and Human Services during the quarter.

Additionally, the company witnessed robust traction for its Customer service management (CSM) products. It now has more than 50 CSM customers with an ACV of more than $1 million. Notably, ServiceNow also saw one of its largest deals wins ever with Japan based Murata Manufacturing.

Operating Details

In the first quarter, non-GAAP gross margin was 83%, up 300 basis points (bps) on a year-over-year basis.

Total operating expenses came in at $773.6 million during the quarter, up 25.1% from the year-ago quarter’s reported figure.

The company’s non-GAAP operating margin was 24%, up 500 bps on a year-over-year basis.

Balance Sheet & Cash Flow

As of Mar 31, 2020, ServiceNow had cash and cash equivalents and short-term investments of $1.858 billion compared with $1.691 billion as of Dec 31, 2019.

During the reported quarter, cash from operations came in at $491.6 million compared with the prior-quarter figure of $421.2 million

The company also generated free cash flow of $408.6 million compared with $342.2 million reported in the prior quarter. Further, non-GAAP free cash flow margin was 39%, up 100 bps on a year-over-year basis.

Second-Quarter Guidance

For second-quarter 2020, non-GAAP adjusted subscription revenues are anticipated between $1.008 billion and $1.013 billion, which indicates growth of 29-30% from the year-ago quarter’s figure.

Non-GAAP adjusted subscription billings are projected in the range of $976-$996 million, which suggests an increase of 20-22% from the year-ago reported figure.

Further, non-GAAP operating margin is anticipated to be 23%.

2020 Guidance

Due to uncertainties related to the coronavirus pandemic, the company has slashed its guidance for full year 2020.

For 2020, non-GAAP adjusted subscription revenues are now anticipated between $4.167 billion and $4.197 billion, which indicates growth of 23%-35% from the year-ago quarter’s reported figure. The prior non-GAAP adjusted subscription revenue guidance was between $4.21 billion and $4.23 billion.

Moreover, the current guidance midpoint for GAAP subscription revenues is $4.135 billion compared with the previous guidance midpoint of $4.230 billion.

Non-GAAP adjusted subscription billings are projected in the range of $4.664-$4.724 billion, which suggests a rise of 23-25% from the year-ago quarter’s reported figure. The previous guidance was in the range of $4.807-$4.827 billion.

The guidance midpoint for non-GAAP subscription billings is currently $4.630 billion compared with the prior guidance midpoint of $4.815 billion.

Further, non-GAAP operating margin is anticipated to be 23%.

Zacks Rank & Stocks to Consider

Currently, ServiceNow carries a Zacks Rank #3 (Hold).

Netlist, Inc. (NLST - Free Report) , Pixelworks, Inc. (PXLW - Free Report) and InterDigital, Inc. (IDCC - Free Report) are some better-ranked stocks worth considering in the broader computer and technology sector, each flaunting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Netlist, and InterDigital is pegged at 15% each, while Pixelworks is at 20%.

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