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ServiceNow (NOW) Beats Q3 Earnings on Expanded Product Line

ServiceNow NOW reported non-GAAP earnings of 38 cents per share in third-quarter 2017. The figure surpassed the Zacks Consensus Estimate of 32 cents per share and increased 18.8% on a year-over-year basis.

Non-GAAP revenues of $491.4 million surged 37% year over year. Management had guided 36–37% year-over-year growth in revenues to the range of $485–$490 million.

Management noted that the company’s expanding range of application based products witnessed huge adoption, which backed its impressive performance.

Shares of ServiceNow have gained 67.6% year to date, significantly outperforming the industry’s 32.1% rally.

Quarter Details

Subscription revenues surged 41% (adjusted for constant currency) from the year-ago quarter to $449.5 million. Professional services and other revenues increased 8% (adjusted for constant currency) to $41.9 million.

Total billings surged 34% year over year (adjusted for constant currency and constant billings duration) to $543 million. Subscription billings of $497.4 million witnessed 37% year-over-year growth, while Professional services and other billings increased 10% to $45.6 million. Growth in each of the segments has been adjusted for constant currency and constant billings duration.

Management stated that the digital transformation phase that organizations are going through has been aiding growth. ServiceNow’s global presence and strong partnerships are other tailwinds. Notably, per management, each geographical segment that the company caters to outperformed expectations in the third quarter.

The company’s customer centric approach is evident from the addition of 35 new names to its customer base during the quarter. ServiceNow currently caters to more than 40% of the Global 2000 (G2K) companies. It closed 22 contracts in the quarter with an annualized contract value (ACV) of more than a million.

Notably, Information Technology Service Management (ITSM) was part of 17 out of the top 20 deals struck during the quarter. In the non-ITSM HR segment, employee services experience product was included in three of the top 20 deals and it has already been adopted by 119 G2K companies.

Customer Service Management solutions has already won deals worth more than $2 million. Management is positive about the updates related to machine learning that will be available in the company’s upcoming release of its business process automation platform, Kingston. Moreover, the security operations product line struck its first deal above $1 million during the quarter.

Additionally, the company announced the acquisition of Telepathy, a design firm. The combination is anticipated to enhance enterprise mobile experience. The announcement of the acquisition of SkyGiraffe on the day of the third-quarter earnings release is another positive.

ServiceNow, Inc. Price, Consensus and EPS Surprise

ServiceNow, Inc. Price, Consensus and EPS Surprise | ServiceNow, Inc. Quote

Margins and Balance Sheet

Non-GAAP gross margin was 78% and non-GAAP operating margin was 20%.

The company recorded free cash flow of $95.1 million in the third quarter compared with $92.9 million in the second quarter.

Guidance

For fourth-quarter 2017, non-GAAP total revenue is expected to grow 34-35% year over year to the range of $517-$522 million. Of this, Subscription revenues are forecast between $473 and $478 million, representing 37-39% year-over-year growth. Professional services and other revenues are expected to grow 7% to $44 million.

Total non-GAAP billings are anticipated to grow 29-30% (adjusted for constant currency and constant billings duration) year over year and be in the $692-$697 million range.

Non-GAAP subscription billings and non-GAAP subscription billings adjusted for constant currency and constant billings durations are expected grow 33-34% year over year to $645-$650 million. Non-GAAP professional services and other billings are expected to decline 8% (adjusted for constant currency) to $47 million.

Non-GAAP operating margin is anticipated to be 17%.

For full-year 2017, total non-GAAP revenue is forecast between $1.911 and $1.916 billion (up from previous guidance of $1.903 and $1.913 billion), representing 37-38% (adjusted for constant currency) year-over-year growth. Of this, subscription revenues are expected to grow 41%, while Professional services and other revenues are anticipated to grow 12%.

Non-GAAP total billings are anticipated between $2.270 billion and $2.275 billion representing 34-35% year-over-year growth. Of this, subscription billings are expected to grow 37-38% year over year, while Professional services and other billings are expected to grow 7%.

Non-GAAP Subscription and Professional services & other gross margin are expected to be 85% and 16%, respectively. Total non-GAAP gross margin and non-GAAP operating margin guidance was maintained at 78% and 16%, respectively.

Zacks Rank and Key Picks

ServiceNow currently has a Zacks Rank #3 (Hold).

Better-ranked stocks in the broader technology space include Micron Technology, Inc. MU, NVIDIA Corporation NVDA and Vishay Intertechnology, Inc. VSH, all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The long-term earnings growth rate for Micron, NVIDIA and Vishay Intertechnology is projected to be 10%, 11.2% and 20.6%, respectively.

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