It has been about a month since the last earnings report for ServiceNow (NOW). Shares have added about 11.4% in that time frame, outperforming 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 the most recent earnings report in order to get a better handle on the important catalysts.
ServiceNow Beats Q2 Earnings Estimates, Raises '20 View
ServiceNow reported second-quarter 2020 adjusted earnings of $1.23 per share, which beat the Zacks Consensus Estimate by 20.6% and surged 73.2% year over year.
Revenues of $1.07 billion beat the consensus mark by 2.3% and increased 28.4% year over year. After adjusting for forex, revenues of $1.08 billion surged 30% year over year.
Subscription revenues soared 30% year over year to $1.02 billion. After adjusting for forex, subscription revenues jumped 32% year over year.
Professional services and other revenues increased 4.5% year over year to $55.3 million. After adjusting for forex, professional services and other revenues climbed 6%.
Following impressive second-quarter results and strengthening adoption of its solutions, ServiceNow raised its 2020 guidance for subscription revenues, billings and gross margin as well as operating margin.
Total billings on a non-GAAP basis rose 24% year over year to $1.08 billion. After adjusting for forex, total billings increased 26% year over year to $1.09 billion.
Subscription billings of $1.02 billion increased 25% year over year. After adjusting for forex, subscription billings were $1.03 billion, up 26%.
Professional services and other billings increased 13% to $61 million. After adjusting for forex, professional services and other billings were $61.7 million, up 14%.
Customer Base Details
Notably, in May, ServiceNow launched its safe-workplace application suite and dashboard that have been downloaded by more than 550 organizations worldwide including Uber, Coca-Cola European Partners and Bank United.
In the quarter under review, ServiceNow completed 40 transactions with more than $1 million, including two transactions over $10 million, in net new annual contract value (ACV).
Currently, the company has 964 total customers with more than $1 million in ACV, up 26% year over year.
ServiceNow’s consistent renewal rate of 97% reflects the resilience of the business as the Now platform remains a mission-critical part of its customer’s operations.
Markedly, the company closed five deals worth more than $1 million from verticals, including oil and gas, transportation and health care, which are most affected by the coronavirus. The company also won a large security deal with a U.S.-based multinational hotel chain. The hotel industry has been one of the most impacted sectors.
Notably, 18 of the company’s top 20 deals included three or more products. ITSM Pro led eight of the 10 ITSM deals and was included in 17 of the top 20 deals. Further, 15 of the top 20 deals also included security.
ServiceNow completed its largest risk deal in its history with Providence Health & Services, which has 51 hospitals, 121,000 employees and 800 non-acute facilities.
Notable companies that selected the Now platform in the second quarter include JPMorgan, the U.S. State Department, Fiserv, State of Montana and Disney.
ServiceNow closed the largest IT business management and DevOps deal in its history with JPMorgan in the reported quarter.
The company’s HR business now has more than 750 customers. In the reported quarter, ServiceNow had eight deals that were greater than $1 million.
Markedly, Goldman Sachs, which has been an ITSM customer for a long-time, selected ServiceNow’s HR solution in the reported quarter.
Additionally, the company has more than 50 customers with ACV of $1 million that reflects growing momentum in its customer service management (CSM) business.
For instance, ServiceNow CSM solution is helping Zoom Video update its customer service operations. Zoom Video is also using ServiceNow’s AIOps capabilities to enable its new hardware as a service business model.
In the second quarter, non-GAAP gross margin was 82.9%, up 240 basis points (bps) on a year-over-year basis. Subscription gross margin expanded 90 bps year over year to 86.7%.
Non-GAAP sales & marketing and general & administrative expenses as percentage of revenues declined 650 bps and 70 bps year over year to 32.4% and 6.6%, respectively.
However, non-GAAP research & development expenses as a percentage of revenues grew 40 bps to 16.3%.
Total operating expenses on a non-GAAP basis came in at $592.7 million in the reported quarter, up 14.3% year over year. As a percentage of revenues, operating expenses fell 680 bps year over year.
ServiceNow’s non-GAAP operating margin was 27.5%, up 920 bps on a year-over-year basis. The solid expansion was driven by robust subscription revenues and lower expenses related to coronavirus.
Balance Sheet & Cash Flow
As of Jun 30, 2020, ServiceNow had cash and cash equivalents and short-term investments of $2.34 billion compared with $1.86 billion as of Mar 31, 2020.
During the reported quarter, cash from operations came in at $368.1 million, up 51% year over year.
ServiceNow generated free cash flow of $259.3 million, up 33.8% year over year. Further, free cash flow margin was 24.2%, up 100 bps on a year-over-year basis.
At the end of the second quarter, remaining performance obligations were roughly $7 billion, up 31% year over year after adjusted for forex.
ServiceNow appointed Kevin Haverty as chief revenue officer and Lara Caimi as chief customer and partner officer, effective immediately.
Moreover, ServiceNow announced that David Schneider, president of Global Customer Operations, is retiring. Effective immediately, Schneider will step down from his role and serve as President Emeritus until his retirement at year end.
For third-quarter 2020, non-GAAP adjusted subscription revenues are anticipated between $1.055 billion and $1.060 billion, which indicates growth of 26-27% year over year.
Non-GAAP adjusted subscription billings are projected between $995 million and $1.015 billion, which suggests an increase of 15-17% year over year. After adjusting for forex and fluctuations in billings duration, subscription billings are expected in the range of $1-$1.02 billion, indicating 16-18% year-over-year growth.
Further, ServiceNow expects non-GAAP operating margin to be 22%.
Markedly, ServiceNow expects coronavirus-related headwinds to impact third-quarter 2020 results. The company assumes uncertainty around new business, renewal timing or billings terms, particularly with customers in industries like transportation, hospitality, retail and energy that are highly affected by coronavirus. These industries comprise 20% of the company’s business.
Moreover, ServiceNow anticipates these economic conditions to persist throughout the remainder of the year.
For 2020, non-GAAP adjusted subscription revenues are anticipated between $4.210 billion and $4.225 billion, suggesting growth of 29-30% over 2019. Favorable forex is expected to add $25 million in revenues.
Non-GAAP adjusted subscription billings are projected in the range of $4.660-$4.700 billion, which suggests a rise of 23-24% from the year-ago reported figure. After adjusting for forex and fluctuations in billings duration, subscription billings are expected in the range of $4.70-$4.74 billion, indicating 24-25% year-over-year growth.
Further, ServiceNow expects non-GAAP subscription margin to be 86% and non-GAAP operating margin to be 24% (up from previous guidance of 23%).
Moreover, non-GAAP free cash flow margin is expected to be 29.5%.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -35.44% due to these changes.
Currently, ServiceNow has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. Following the exact same course, 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.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, ServiceNow has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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