Yahoo Finance ServiceNow (NOW) Up 5.9% 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 5.9% 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 its most recent earnings report in order to get a better handle on the important drivers.
ServiceNow Q1 Earnings Beat Estimates, Revenues Up Y/Y
ServiceNow reported first-quarter 2024 adjusted earnings of $3.41 per share, which beat the Zacks Consensus Estimate by 8.25% and jumped 44% year over year.
Revenues of $2.60 billion beat the consensus mark by 0.62% and increased 24.2% year over year. At constant currency (cc), revenues increased 24% year over year to $2.597 billion.
Subscription revenues improved 24.7% year over year to $2.52 billion. At cc, subscription revenues increased 24.5% year over year, 50 basis points (bps) above the high end of the company’s guidance.
Professional services and other revenues increased 11% year over year, both on a reported and cc basis to $80 million.
At the end of the first quarter, the current remaining performance obligations (cRPO) were $8.45 billion, up 21% year over year, both on a reported and cc basis and 100 bps higher than management’s guidance. Remaining performance obligations, on a constant currency basis, rose 27% year over year to $17.7 billion.
ServiceNow had 1,933 total customers with more than $1 million in annual contract value (ACV) at the end of the reported quarter, which represents 15.5% year-over-year growth in customers.
In the reported quarter, ServiceNow had eight deals greater than $5 million in net new ACV, and four deals of more than $10 million. It closed 59 deals greater than $1 million net new ACV. Number of customers contributing more than $20 million or more grew 50% year over year.
In terms of key businesses, ITSM and ITOM were each in 16 of the top 20 deals. On a combined basis, security and risk were 11 of the top 20, while customer creator and employee workflows were in 10 of the top 20 deals.
Generative AI deals continued to gain traction with record-breaking net new ACV for Pro Plus, making it the fastest-selling product in ServiceNow’s history. Gen AI products were in seven of ServiceNow’s top 10 deals, and it closed seven deals worth more than $1 million in ACV in the reported quarter.
Industry-wise, technology, media and telecom net new ACV jumped more than 100% year over year. Education grew nearly 50% year over year, while transportation and logistics, business and consumer services and retail and hospitality also witnessed strong growth.
Operating Details
In the first quarter, the non-GAAP gross margin was 83.5%, up 70 bps on a year-over-year basis.
Subscription gross margin was 85.7%, unchanged year over year. Professional services and other gross margins were 16.3% compared with 2.8% reported in the year-ago quarter.
Total operating expenses were $1.75 billion in the reported quarter, up 15.7% year over year. As a percentage of revenues, operating expenses decreased 500 bps on a year-over-year basis.
ServiceNow’s non-GAAP operating margin expanded 410 bps on a year-over-year basis to 30.4%, 150 bps above management’s guidance, driven by strong top-line growth and disciplined spending.
Balance Sheet & Cash Flow
As of Mar 31, 2024, the company had cash and cash equivalents and short-term investments of $5.11 billion compared with $4.88 billion as of Dec 31, 2023.
During the reported quarter, cash from operations was $1.34 billion compared with $1.61 billion in the previous quarter.
ServiceNow generated a free cash flow of $1.23 billion in the reported quarter, down from $1.34 billion reported in the prior quarter.
The company repurchased 225,000 shares for $175 million and has approximately $787 million remaining in authorization.
Guidance
For second-quarter 2024, subscription revenues are projected between $2.525 billion and $2.53 billion, suggesting an improvement in the range of 21.5-22% year over year on a GAAP basis. At cc, subscription revenues are expected to grow in the 22% range.
cRPO is expected to grow 20.5% year over year on both non-GAAP and GAAP basis.
ServiceNow expects the non-GAAP operating margin to be 25% in the current quarter.
For 2024, the company now expects subscription revenues to be $10.56-$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%. Moreover, the free cash flow margin is expected to be 31%.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month.
The consensus estimate has shifted -5.63% 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 lowest 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 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.
Performance of an Industry Player
ServiceNow is part of the Zacks Computers - IT Services industry. Over the past month, Infosys (INFY), a stock from the same industry, has gained 2.3%. The company reported its results for the quarter ended March 2024 more than a month ago.
Infosys reported revenues of $4.56 billion in the last reported quarter, representing a year-over-year change of +0.2%. EPS of $0.23 for the same period compares with $0.18 a year ago.
Infosys is expected to post earnings of $0.18 per share for the current quarter, representing a year-over-year change of +5.9%. Over the last 30 days, the Zacks Consensus Estimate has changed -0.2%.
Infosys has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of D.
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