ServiceNow (NOW) Q4 Earnings Top Estimates, Revenues Miss

ServiceNow, Inc. (NYSE:NOW) delivered non-GAAP earnings of 77 cents per share in fourth-quarter 2018, beating the Zacks Consensus Estimate by 13 cents. Further, the figure soared a significant 79.1% on a year-over-year basis.

Revenues of $715.4 million grew 30.3% from the year-ago quarter. The figure missed the Zacks Consensus Estimate of $717 million. Non-GAAP revenues (excluding impact of Foreign exchange) of $723.7 million surged approximately 32% from the year-ago quarter.

New contract wins; expanding global footprint and growing adoption of its wide range of application-based products drove year-over-year growth.

Moreover, the fourth-quarter performance benefited from the ongoing digital transformation and ServiceNow’s robust workflow products. Rapid adoption of ServiceNow Governance, Risk, and Compliance (“GRC”) offering aided results.

Notably, the shares of the company have gained 6.6% in the after-hours trading. This can be attributed to better-than-expected earnings.





Coming to the price performance, the stock has gained 26.9% in the past year, against the industry’s decline of 4.7%.

2018 at a Glance

For the full year, non-GAAP earnings soared 84.4% year over year to $2.49 per share. The Zacks Consensus Estimate was pegged at $2.37.

In 2018, total revenues surged almost 36% over 2017 to $2.609 billion. The Zacks Consensus Estimate was pegged at $2.61 billion.

Subscription revenues (92.8% of revenues) surged almost 39.2% to $2.421 billion. Professional services and other revenues (7.2%) grew 4.8% to 187.5 million.

ServiceNow reported non-GAAP subscription gross margin and operating margin of 83% and 20%, respectively. The respective figures expanded 100 basis points (bps) and 200 bps on a year-over-year basis. Free cash flow margin expanded 200 bps to 28% in fiscal 2018.

Quarter in Detail

Non-GAAP subscription revenues (adjusted for constant currency) surged 35% from the year-ago quarter to $673.6 million. Notably, the figure came well ahead of the higher end of management’s guided range of $664-$669 million.

Professional services and other revenues inched up 2% (adjusted for constant currency) from the year-ago quarter to $50.1 million.

Total billings grew 39% on a year-over-year basis (adjusted for constant currency and constant billings duration) to $1.02billion exceeding $1 billion value for the first time.

Non-GAAP adjusted subscription billings of $958.9 million surged 39% year over year, surpassing the higher end of the guided range of $906-$911 million. Professional services and other billings advanced 30% to $61.9 million.

ServiceNow maintained a consistent renewal rate of 98% during the reported quarter.

Expanding Customer Base

ServiceNow’s enterprise customer base exceeded 5,400 at the end of the fourth quarter.

Additionally, the company completed 51 transactions (including six new customer wins) which exceeded the annualized contract value (“ACV”) by more than $1 million. Further, it added 20 new Global 2000 (G2K) companies.

Further, the company’s total number of customers contributing more than $1 million to the business reached 678 in fiscal 2018. The figure increased 33% on a year-over-year basis.

Additionally, the company’s total number of customers contributing more than $5 million to the business reached 74, representing an increase of 54% on a year-over-year basis.

Moreover, ServiceNow witnessed significant growth in its customer base which contributes above $10 million. There were 18 such customers including three customers raking in more than $20 million. 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 fourth quarter, 13 included adoption of more than five 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 15, 16, four and 12 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 six, six, nine and nine deals, respectively.

Meanwhile, Platform Add-ons and other services, comprising Performance Analytics, Cloud Options, among others, were leveraged by 18 out of the 20 new wins.

Notably, IT, EP and Platform Add-ons contributed 58%, 31% and 11%, respectively to net new ACV.

Operating Details

During the fourth quarter, non-GAAP gross margin came in at 80%, expanding 100 bps from the year-ago quarter.

Non-GAAP sales & marketing expenses came in $260.4 million, surging almost 27% year over year. Further, non-GAAP research & development spending was $110.9 million, up 39.2% from the year-ago quarter.

The company’s non-GAAP operating margin was 21%, expanding 100 bps on a year-over-year basis. Further, free cash flow margin was reported at 34%, compared with the year-ago figure of 27%.

Balance Sheet & Cash Flow

As on Dec 31, 2018, ServiceNow had cash and cash equivalents of $1.497 billion up from $703.6 million as of Sep 30, 2018.

During the reported quarter, cash from operations came in at $289.6 million ahead of the previous quarter’s figure of $145.5 million. The company also generated free cash flow of $245.2 million compared with $111.6 reported in the third quarter.

Guidance

For first-quarter 2019, non-GAAP adjusted subscription revenues are anticipated to lie between $736 million and $741 million, representing year-over-year growth of 35-36%.

Non-GAAP adjusted subscription billings are projected to be within the range of $831-$836 million, representing year-over-year growth of 30-31%.

Further, non-GAAP operating margin is anticipated to be 16%.

For full-year 2019, adjusted subscription revenues are expected to grow 34-35% and be in the range of $3.256 billion to 3.276 billion.

Non-GAAP adjusted subscription billings are expected to grow 31-32% year over year to $3.772-$3.792 billion.

Further, non-GAAP subscription gross margin is expected to be 86%, while operating margin and free cash flow margin are projected to be 21% and 28%, respectively.

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the broader Computer and Technology sector are Marvell Technology Group Ltd. (NASDAQ:MRVL) , Cloudera (NYSE:CLDR) and MeetMe (NASDAQ:MEET) , each sporting 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 Marvell, Cloudera and MeetMe is forecastedat 9.4%, 15% and 20%, respectively.

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