ServiceNow (NOW) Up 0.3% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for ServiceNow (NOW). Shares have added about 0.3% in that time frame, underperforming the S&P 500.

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

ServiceNow Q4 Earnings Beat Estimates, Revenues Up Y/Y

ServiceNow reported fourth-quarter 2023 adjusted earnings of $3.11 per share, which beat the Zacks Consensus Estimate by 12.27% and jumped 36.4% year over year.

Revenues of $2.44 billion beat the consensus mark by 1.67% and increased 25.6% year over year. At constant currency (cc), revenues increased 24%.

Subscription revenues improved 27.2% year over year to $2.37 billion. At cc, subscription revenues increased 25.5% year over year.

Professional services and other revenues decreased 10% year over year to $72 million. At cc, professional services and other revenues declined 21.5%.

In the reported quarter, ServiceNow had 168 deals greater than $1 million in net new annual contract value (NNACV), up 33% year over year. The company had 1,897 total customers with more than $1 million in ACV at the end of the fourth quarter, which represents 15.5% year-over-year growth in customers.

In the reported quarter, ServiceNow’s generative AI products drove the largest NNACV contribution for its first full quarter of any of the new product family releases in its history, including its original Pro SKU.

During the reported quarter, ten new customers signed deals over $1 million in NNACV, including a $10 million win with a very large global financial services firm, which is ServiceNow’s largest new customer logo in history.

ServiceNow’s footprint continued to expand in the public sector with key wins, including in the United States Army, U.S. Postal Service and Australian Department of Defense Digital Delivery Group.

The renewal rate was 99% in the reported quarter, up 100 bps year over year. ITSM, ITOM and ITAM each had double-digit deals over $1 million in the reported quarter.

ServiceNow has been benefiting from the rising adoption of its workflows by enterprises undergoing digital transformation. Security and risk had a terrific quarter with 12 of the top 20 deals, out of which nine deals were more than $1 million. Customer, Employee and Creator workflows each had double-digit deals over $1 million.

At the end of the fourth quarter, the current remaining performance obligations (cRPO) were $8.6 billion, up 24% year over year and 23% at cc.

Remaining performance obligations, on a constant currency basis, rose 27.5% year over year to $18 billion.

Operating Details

In the fourth quarter, the non-GAAP gross margin was 82.4%, down 10 basis points (bps) on a year-over-year basis.

Subscription gross margin of 84.4% contracted 140 bps year over year. Professional services and other gross margins were 15.3%, up 900 bps year over year.

Total operating expenses were $1.65 billion in the reported quarter, up 20.5% year over year. As a percentage of revenues, operating expenses decreased 290 bps on a year-over-year basis.

ServiceNow’s non-GAAP operating margin expanded 300 bps on a year-over-year basis to 27.7%, driven by strong top-line growth and disciplined spending.

Balance Sheet & Cash Flow

As of Dec 31, 2023, the company had cash and cash equivalents and short-term investments of $4.88 billion compared with $4.07 billion as of Sep 30, 2023.

During the reported quarter, cash from operations was $1.61 billion compared with $311 million in the previous quarter.

ServiceNow generated a free cash flow of $1.34 billion in the reported quarter, up from $196 million reported in the prior quarter.

The company repurchased 0.4 million shares and has approximately $962 million remaining in authorization.

Guidance

For first-quarter 2024, subscription revenues are projected between $2.51 billion and $2.515 billion, suggesting an improvement in the range of 24.5-25% year over year on a GAAP basis. At cc, subscription revenues are expected to grow in the 23.5-24% range.

cRPO is expected to grow 20% year over year on both non-GAAP and GAAP basis, indicating significant strength in federal business.

ServiceNow expects non-GAAP operating margin to be 29% in the current quarter.

For 2024, the company now expects subscription revenues to be $10.555-$10.575 billion, which suggests a rise between 21.5% and 22% from 2023 on a GAAP basis. At cc, subscription revenues are expected to grow 21.5% over 2023.

ServiceNow expects the non-GAAP subscription gross margin to be 84.5% and the non-GAAP operating margin to be 29% (up from previous guidance of 26.5%). Moreover, the free cash flow margin is expected to be 31%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review.

The consensus estimate has shifted 24.11% due to these changes.

VGM Scores

Currently, ServiceNow has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

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

Outlook

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

Performance of an Industry Player

ServiceNow belongs to the Zacks Computers - IT Services industry. Another stock from the same industry, Infosys (INFY), has gained 1.1% over the past month. More than a month has passed since the company reported results for the quarter ended December 2023.

Infosys reported revenues of $4.66 billion in the last reported quarter, representing a year-over-year change of +0.1%. EPS of $0.18 for the same period compares with $0.19 a year ago.

Infosys is expected to post earnings of $0.17 per share for the current quarter, representing a year-over-year change of -5.6%. Over the last 30 days, the Zacks Consensus Estimate remained unchanged.

The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for Infosys. Also, the stock has a VGM Score of D.

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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.

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