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ServiceNow (NOW) Tops Q2 Earnings & Revenues, Hikes '18 View

ServiceNow, Inc.NOW delivered non-GAAP earnings of 49 cents per share in second-quarter 2018, surpassing the Zacks Consensus Estimate by 6 cents. Further, the figure surged a whopping 122.7% on a year-over-year basis.

Revenues of $631.1 million grew 40.8% from the year-ago quarter. The figure came well ahead of the Zacks Consensus Estimate of $619.7 million. Non-GAAP revenues (excluding impact of Foreign exchange) of $615.5 million surged approximately 34% 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, which aided its stellar performance in the second quarter.

The ongoing digital transformation of organizations, including big private and public companies as well as different levels of government agencies, have been aiding growth. ServiceNow's strength in ACV performance is also a positive.

Management also remains elated on growing influence of its Governance, Risk, and Compliance ("GRC") offering.

Shares of ServiceNow have gained 41.0% year to date, significantly outperforming the industry 's rally of 18.5%. The outperformance can be primarily attributed to efforts in diversifying end markets and focus on developing non-IT related products.

Quarter Details

Non-GAAP subscription revenues surged 42% (adjusted for constant currency) from the year-ago quarter to $571.0 million, comfortably outpacing the higher end of management's guided range of $548-$553 million. Professional services and other revenues declined2% (adjusted for constant currency) from the year-ago quarter to $44.5 million.

Total billings advanced 30% year over year (adjusted for constant currency and constant billings duration) to $648.9 million. Subscription billings of $601.2 million witnessed 32% year-over-year growth, exceeding the higher end of management's guided range of $584-$588 million. Professional services and other billings grew 11% to $47.7 million. Growth in each of the segments has been adjusted for constant currency and constant billings duration.

ServiceNow maintained a consistent renewal rate as high as 98% as compared with first-quarter.

Classification of Customer Base on ACV

ServiceNow added 21 new Global 2000 (G2K) companies. It closed 33 contracts in the quarter with an annualized contract value (ACV) of more than a million.

The company has 575 customers, contributing more than $1 million to the business, this figure increased 47% on a year-over-year basis. ServiceNow's 58 customers generate more than $5 million a year, reflecting growth of 100% on a year-over-year basis.

In fact, management noted that the largest customer is doing business in excess of $25 million, leveraging IT and HR Service Delivery solutions to accelerate digital transformation, and enhance employee experiences.

Product-Wise Break-Up of Top 20 New Wins

ServiceNow reported a considerably diversified break-up of the new 20 deal wins in the second quarter. Out of top 20 new deals, 18 included adoption of more than three products.

Considering the IT domain, Information Technology Service Management ("ITSM") was part of 18of the top 20 deals struck during the quarter. The company is focused on enhancing its IT Operations Management offering. ITOM was part of 16 of the top 20 deals.

The traction witnessed by ITOM deserves a special mention and highlights the company's focus in the related space.

Moreover, in the non-IT segment, the company continues to invest in platform and emerging products.

The emerging products ("EP") comprise Customer Service Management ("CSM"), HR Service Delivery, Security Operations and Intelligent Appsofferings. In the quarter, out of the top 20 new deals, CSM, HR, Security and IA were part of seven, five, seven and eight deals, respectively.

Meanwhile, Platform Add-ons and other services, comprising Performance Analytics, Cloud Options, among others, were leveraged by 19 of the top 20 new deal wins.

Notably, IT, EP and Platform Add-ons contributed 63%, 27% and 10%, respectively to ACV.

Margins

Non-GAAP gross margin came in at 80% while non-GAAP operating margin was 17%. Free cash flow margin was reported at 24%.

Balance Sheet & Cash Flow

As on Jun 30, 2018, ServiceNow had cash and cash equivalents of $704.9 million up from $682.9 million in the previous quarter.

Non-GAAP cash from operations cash flow came in at $110.2 million during the quarter. Free cash flow was $151.8 million.

ServiceNow, Inc. Price, Consensus and EPS Surprise

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

Guidance

For third-quarter 2018, non-GAAP subscription revenues adjusted for constant currency are forecast between $611 million and $616 million, representing year-over-year growth of 36-37%.

Non-GAAP subscription billings adjusted for constant currency and constant billings durations are expected grow 30-31% year over year to $649-$654 million.

Non-GAAP operating margin is anticipated to be 21%.

Management remains optimistic on new deal wins in particular from federal, state and local governments. The company anticipates the third quarter to be a notable renewal period considering adoption of ServiceNow platform from federal governments.

ServiceNow revised subscription revenues and billings outlook for fiscal 2018, driven by an impressive pipeline. Further, it anticipates the second-quarter momentum to sustain, consequently aiding the outlook. For full-year 2018, non-GAAP subscription revenues are now expected to grow 36-37% and be in the range of $2.37-2.38 billion, raised from previous band of $2.34-2.35 billion.

Non-GAAP subscription billings are now anticipated to grow 30% year over year to $2.78-2.79 billion, an improvement over the previous range of $2.76-2.77 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.

Growth in each of the segments has been adjusted for constant currency and constant billings duration.

We may note that, the Zacks Consensus Estimate for total revenues for the third quarter and fiscal 2018 are pegged at $664.2 million and $2.6 billion, respectively.

Conclusion

ServiceNow not only delivered a stellar second-quarter performance, but also raised fiscal 2018 outlook. The impressive pipeline is a key catalyst.

The company is seeing potential across the public sector which constitutes less than 10% in revenues. In order to explore the global public sector market, the company is investing heavily in its sales organization.

ServiceNow acquired Parlo, an artificial intelligence ("AI") and natural language understanding ("NLU") workforce solution, in an all-cash transaction, in the second quarter. The buyout is expected to aid ServiceNow to enhance Intelligence Apps offerings, among other services.

As businesses, government agencies, among others "cloudify" their infrastructure, ServiceNow platform holds promise. Exploring new markets on the back of diversified portfolio is expected to drive momentum going ahead.

Zacks Rank and Stocks to Consider

ServiceNow carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector are Mellanox MLNX , Microsoft MSFT and Intel INTC , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Mellanox, Microsoft and Intel have a long-term earnings growth rate of 15%, 12.3% and 8.4%, respectively.

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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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