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Meet The 'Fastest-Growing' $1 Billion Enterprise Software Firm

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Technology investors looking for high revenue growth often find their answer in software-as-a-service companies.

ServiceNow ( NOW ) is one of the fastest-growing companies that fits that bill. ServiceNow's 2016 sales exploded 38% to $1.4 billion, and it has laid claim to being the "fastest-growing enterprise software company with more than $1 billion in revenue."

[ibdchart symbol="NOW" type="daily" size="threequarter" position="leftchart" ]It has set big goals, too. The Santa Clara, Calif.-based company plans to nearly triple its revenue to $4 billion by 2020.

"There's not another company that produces growth at our scale like we do," Frank Slootman, ServiceNow's chief executive, said in an interview. "It's a trifecta - scale, growth and free cash flow."

ServiceNow faces fierce competition, though, most notably from ( CRM ), currently the market leader in the industry known as SaaS.'s 2016 sales boomed 24% to $6.7 billion, and the San Francisco-based company is on track to hit $10 billion in revenue for the current fiscal year. It's aiming to hit $20 billion after that. has the higher profile, being oft-mentioned in industry merger activity, whether it involves Microsoft ( MSFT ), LinkedIn, Twitter ( TWTR ) or another company. It specializes in software that helps businesses organize and handle sales operations.

But ServiceNow stock has shot up 25% in 2017, while is up 18% after lagging last year.

How It Works

SaaS companies sell online subscriptions to software, rather than one-time licenses. SaaS providers have high customer renewal rates and book recurring revenue over the long term. Most sell into the so-called "enterprise market" - large companies, government agencies and other big customers.

ServiceNow has prospered by taking away the customers of BMC Software, Hewlett Packard Enterprise ( HPE ), CA Technologies ( CA ) and other "on-premise" software providers that shifted slowly to cloud-based SaaS business models.

Founded in 2004, ServiceNow developed software for information technology service management, basically IT help-desk tools for tracking internal company issues. As has expanded into marketing, customer service and e-commerce, ServiceNow has made a similar push into customer-service tools, heightening the rivalry between the two. has been an acquisition machine, spending more than $4.6 billion in 2016 alone to buy companies.

In ServiceNow's case, though, it can hit its $4 billion target by growing "organically," meaning without big acquisitions, says Alex Zukin, a Piper Jaffray analyst.

"There may be opportunities for them to enhance the breadth of their offerings with (small) tuck-in acquisitions," Zukin added.

New Markets

ServiceNow expects to reach its $4 billion revenue goal by expanding into new markets - human resources, customer service management and security, to name a few - and by landing bigger contracts while targeting the top 2,000 global companies.

ServiceNow has bought small companies like Neebula Systems, iTapp and most recently DxContinuum to acquire "talent and technology," said Slootman, who has been ServiceNow's CEO since 2011. He earlier headed Data Domain, which was sold to data storage networking giant EMC in 2009.

"Technology is not as useful without the talent," Slootman said. "We have the ability to sell, so I don't need to acquire revenue or customers. We can do that ourselves. We try to acquire small companies with promising technology before they go vertical and their revenue explodes, because then it's way more expensive (to acquire them)."

ServiceNow still garners most revenue from service management, but the 2014 Neebula acquisition provided key technology for mapping a customers' IT infrastructure in case outages or other problems occur. That's a different market, called IT operations management. ServiceNow's 2016 purchase of ITApp provided cloud management tools.

ServiceNow's operations management tools account for about 9% of subscription revenue, with that expected to grow to at least 15% by 2020.

Common Ground

Slootman says the same software tools that automate information-technology workflows and record keeping can be applied for finance, legal, procurement and other corporate departments. Like, ServiceNow is building a library of business apps that customers can download via the internet.

The name of the game for many SaaS companies is building a cloud "platform" so they can sell multiple software tools to different industries.

IBD'S TAKE:After a series of flat bases over the last 10 months, ServiceNow broke out last month and is staking out higher ground above the 90 level. ServiceNow is the eighth-ranked company in IBD's Computer Software-Enterprise Group. Tops on the list is Paycom Software (PAYC), which has a Composite Rating of 95 out of a possible 99.

"In software everyone claims to be a platform play, but in reality there are only a few that can make that claim, and ServiceNow is one of them," said Matthew Hedberg, a RBC Capital analyst in a report.

Much of ServiceNow's revenue growth has come from "cross-selling." Its sales staff aims to sell more products to existing service management customers. IBM has emerged as a key partner of ServiceNow, reselling its service management and other tools. Accenture has been a marketing partner in the government market.

Alex Zukin, an analyst at Piper Jaffray, says IBM looms as a "logical acquirer (of ServiceNow) over the longer term."

"ServiceNow's platform would be a logical extension of IBM's cloud infrastructure," Zukin said.

Possible Buyout?

In mid-2016, ServiceNow was among companies listed in a score card of possible acquisitions that leaked from a board of directors meeting. Pegasystems (PEGA) and Tableau Software (DATA) also were on Salesforce's wish list, but ServiceNow's market cap is much bigger at more than $15 billion.

ServiceNow generates hefty free cash flow, a feat that's not common among SaaS companies, and a plus for any potential acquirers. Free cash flow rose 40% to $322 million in 2016.

The company reported unadjusted earnings of 71 cents in 2016 but it's still not profitable on an adjusted basis, which includes stock-based compensation. Shares of ServiceNow ended trading Friday up 1% to 92.74, and were up another 0.5% Tuesday to close at 93.18.

ServiceNow has forecast 2017 revenue growth of 32% to $1.835 billion, at the midpoint of its guidance. Billing growth has stabilized after slowing in 2015, when the company reorganized sales. Analysts polled by Thomson Reuters are modeling 54% earnings growth to $1.08 a share in 2017.

A roadmap to ServiceNow's $4 billion revenue goal was revealed in May 2016. A month earlier, it settled patent infringement cases with BMC and HPE. Analysts expect ServiceNow to continue taking share in the service management market from BMC and others, though privately held Cherwell Software is a strong rival.

As ServiceNow expands into new markets, analysts say it could run into more competition from the likes of Atlassian (TEAM), Zendesk (ZEN) and Splunk (SPLK).

Zukin says that in many cases ServiceNow's management software can work alongside other tools. He says human resources, where Workday (WDAY) is a leading provider, is one example.

Growing Rivalry

The Salesforce rivalry, though, seems to be growing.

"Historically, ServiceNow's messaging has been that ServiceNow and can coexist in accounts. The new message seems to be that customers are increasingly taking a 'CRM model' or 'service management' platform approach," Brian Schwartz, an Oppenheimer analyst, wrote in a recent report to clients. "In other words, we believe the two platforms will increasingly be seen as future alternatives rather than running in parallel. "

ServiceNow aims to leverage its database technology to provide more problem-solving tools in handling customer-service issues. Both and ServiceNow are adding artificial intelligence to software. By embedding data analytics and "machine learning" into software, they aim to make it easier for customers to automate tasks.

ServiceNow acquired AI startup DxContinuum in January. Slootman says he plans to utilize DxContinuum's throughout ServiceNow's cloud platform. The tools will help customers build predictive models that make it easier to categorize incoming requests from company employees.

Aside from HR, customer service and security, Slootman says SeriveNow could target other areas.

"The good thing about this model is we can try things, we can be opportunistic," Slootman said. "If something works, we'll do more. But we can also back out if it doesn't. There are no life-and-death bets. We can be very agile in how we move in or out of adjacent markets."


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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