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ServiceNow's (NOW) Q3 Earnings & Revenues Beat Estimates

ServiceNow, Inc.NOW delivered non-GAAP earnings of 68 cents per share in third-quarter 2018, beating the Zacks Consensus Estimate by 8 cents. Further, the figure surged a significant 78.9% on a year-over-year basis.

Revenues of $673.1 million grew 36.7% from the year-ago quarter. The figure came well ahead of the Zacks Consensus Estimate of $659.4 million. Non-GAAP revenues (excluding impact of Foreign exchange) of $676.2 million surged approximately 37% from the year-ago quarter.

Top-line growth was driven by contract wins, expanding global footprint and growing adoption of its wide range of application-based products by big private and public companies.

Moreover, the third-quarter results were aided by the ongoing digital transformation and ServiceNow's robust workflows

Notably, the shares of the company have gained 2.8% in the after-hours trading. This can be attributed to better-than-expected results.

Coming to the price performance, the stock has gained 33.1% on a year-to-date basis, outperforming the industry 's rally of 8.1%.

Quarter Details

Non-GAAP subscription revenues (adjusted for constant currency) surged 40% from the year-ago quarter to $629.2 million. Notably, the figure came well ahead of the higher end of management's guided range of $611-$616 million. Professional services and other revenues were up 10% (adjusted for constant currency) from the year-ago quarter to $46.9 million.

Total billings grew 31% on a year-over-year basis (adjusted for constant currency and constant billings duration) to $719 million. Subscription billings of $672.2 million surged 34% year over year, surpassing the higher end of the guided range of $649-$654 million. Professional services and other billings improved 2% to $46.8 million.

ServiceNow maintained a consistent renewal rate of 97% during thereported quarter.

Expanding Customer Base

ServiceNow's enterprise customer base exceeded 5,000 at the end of the third quarter.

Further, the company witnessed strong momentum across the government sector with U.S. government accounting for majority of its deals. Currently, the U.S. State Department represents the largest platform of the company.

Additionally, the company completed 25 transactions which exceeded the annualized contract value (ACV) more than $1 million. Further, it added 20 new Global 2000 (G2K) companies. It closed 36 contracts in the reported quarter with an ACV of more than a million.

Further, the company's total number of customers contributing more than $1 million to the business reached 614 in the third quarter. The figure increased 37% on a year-over-year basis.

Moreover, ServiceNow witnessed significant growth in its customer base which contributes above $10 million. There were 11 such customers including four Fed agencies. Notably, the figure was three times more than that of the prior-year quarter.

Product-Wise Break-Up of Top 20 New Wins

Out of top 20 new customer additions to the company's customer base in the third quarter, 18 included adoption of more than three products.

Considering the IT domain, IT Service Management ("ITSM"), IT Operations Management ("ITOM"), IT Asset Management ("ITAM") and IT Business Management ("ITBM") product lines witnessed adoption by 17, 14, five and 11 customers out of these 20 wins, respectively.

Further, the emerging products ("EP") segment is comprised of Customer Service Management ("CSM"), HR Service Delivery, Security Operations and Intelligent Apps product lines. In the reported quarter, out of the top 20 new deals, CSM, HR, Security and IA were part of seven, two, eight and 10 deals, respectively.

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

Notably, IT, EP and Platform Add-ons contributed 63%, 26% and 11%, respectively to ACV.

ServiceNow, Inc. Price, Consensus and EPS Surprise

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

Operating Details

During the third quarter, non-GAAP gross margin came in at 80%, expanding 200 basis points (bps) from the year-ago quarter.

Adjusted selling & marketing expenses came in $229.2, surging 31.9% year over year. Further, research & development spending was $99.7 million, up 33.1% from the year-ago quarter.

The company's non-GAAP operating margin was 24%, expanding 300 bps on a year-over-year basis. Further, free cash flow margin was reported at 17%.

Balance Sheet & Cash Flow

As on Sep 30, 2018, ServiceNow had cash and cash equivalents of $703.6 million down from $704.9 million as of Jun 30, 2018.

Non-GAAP cash from operations came in $145.5 million during the reported quarter. The number came ahead of the previous quarter's figure of $125.9 million. The company also generated free cash flow of $111.6 in the third quarter.

Guidance

For fourth-quarter 2018, non-GAAP subscription revenues are expected to lie between $664 million and $669 million, representing year-over-year growth of 33-34%.

Non-GAAP subscription billings are projected to be within the range of $906-$911 million.

Further, non-GAAP operating margin is anticipated to be 21%.

Management remains optimistic on new deal wins in particular from federal, state and local governments. Further, the company's strong focus toward product portfolio expansion and its strengthening relationship with U.S. Federal government are major positives.

For 2018, ServiceNow revised subscription revenues and billings outlook which are now anticipatedto be in the range of $2.384-2.389 billion and $2.793-2.798 billion, respectively.

These projections were previously pegged at $2.37-2.38 billion and $2.78-2.79 billion.

Further,non-GAAP subscription gross margin is expected to be 85%, while operating margin and free cash flow margin are projected to be 20% and 28%, respectively.

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the broader technology sector are Upland Software UPLD , Vishay Intertechnology VSH and Twilio TWLO , 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 Upland Software, Vishay Intertechnology and Twilio is currently pegged at 20%, 9.16% and 9%, 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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