ServiceNow (NOW) Beats On Q1 Earnings & Revenues, Ups '19 View

ServiceNow, Inc. (NYSE:NOW) delivered non-GAAP earnings of 67 cents per share in first-quarter 2019, surpassing the Zacks Consensus Estimate by 13 cents. Further, the figure advanced 19.6% on a year-over-year basis.

Revenues of $788.9 million grew 33.9% from the year-ago quarter. The figure came well ahead of the Zacks Consensus Estimate of $767 million. Geographically, North America, Europe, Middle East and Africa (EMEA), and APAC & Other contributed 66%, 25%, and 9%, respectively to revenues.

Meanwhile, non-GAAP revenues (excluding impact of foreign exchange) of $811.3 million surged approximately 38% from the year-ago quarter.

Management remains elated on new deal wins in particular from federal, state and local governments, which aided its stellar performance in the first quarter.

Quarter in Detail

Non-GAAP Subscription revenues (adjusted for constant currency) surged 40% from the year-ago quarter to $760.4 million.

Non-GAAP Professional services and other revenues improved 11% (adjusted for constant currency) from the year-ago quarter to $50.8 million.

Total billings grew 30% on a year-over-year basis (adjusted for constant currency and constant billings duration) to $899.5 million.

Non-GAAP adjusted subscription billings of $849.7 million surged 33% year over year. Professional services and other billings declined 2% to $49.8 million.

ServiceNow maintained consistent renewal rate of 98% during the reported quarter. The company’s enterprise customer base exceeded 5,400 at the end of the first quarter.

Additionally, the company completed 25 transactions which raked in net new annualized contract value (ACV) exceeding $1 million. Further, the company’s total number of customers contributing more than $1 million to the business reached 717 in the first quarter. The figure increased 33% on a year-over-year basis.

The ongoing digital transformation of organizations, including big private and public companies, and different levels of government agencies, have acting as tailwinds. ServiceNow’s strength in ACV performance is also a positive.

Management is particularly impressed with growing clout of the company’s solutions among U.S. federal agencies. Notably, there were six such federal customers which raked in more than $10 million in ACV.

Product-Wise Break-Up of Top 20 New Wins

Out of top 20 new customer additions to the company’s customer base in the first quarter, eight 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, 13, six and 10 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 eight, five, four and eight deals, respectively.

Meanwhile, Platform Add-ons and other services, comprising Performance Analytics, Cloud Options, among others, were leveraged by 19 out of the 20 new wins.

Notably, IT, EP and Platform Add-ons contributed 55%, 28% and 17%, respectively to net new ACV.

Operating Details

During the first quarter, non-GAAP gross margin came in at 80%,in line with the reported year-ago figure.

Non-GAAP sales & marketing expenses came in $299.3 million, surging almost 29.2% year over year. Further, non-GAAP research & development spending was $128.5 million, up 45.6% from the year-ago quarter.

The company’s non-GAAP operating margin was 19%, expanding 100 bps on a year-over-year basis. Further, free cash flow margin was reported at 40%, compared with the year-ago figure of 38%.

Balance Sheet & Cash Flow

As on Mar 31, 2019, ServiceNow had cash and cash equivalents and short term investments of $1.662 billion up from $1.498 billion as of Dec 31, 2018.

During the reported quarter, cash from operations came in at $360.8 million ahead of the prior-quarter figure of $289.6 million. The company also generated free cash flow of $313.7 million compared with $245.2 million reported in the prior quarter.

Guidance

For second-quarter 2019, non-GAAP adjusted subscription revenues are anticipated to lie between $793 million and $798 million, representing year-over-year growth of 35-36%.

Non-GAAP adjusted subscription billings are projected to be within the range of $814-$819 million, representing year-over-year growth of 32-33%.

Further, non-GAAP operating margin is anticipated to be 17%.

ServiceNow revised subscription revenues and billings outlook for fiscal 2019, driven by an impressive pipeline. For full-year 2019, non-GAAP adjusted subscription revenues are now anticipated to improve 35-36% and be in the range of $3.280-$3.295 billion, improving from the previous band of $3.256 billion to $3.276 billion.

Non-GAAP subscription billings are now anticipated to grow 32% year over year to $3.797-$3.812 billion, an improvement over the previous range of $3.772-$3.792 billion.

However, the company reiterated the margin outlook, owing to increasing investments. 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.

Growth in each of the segments has been adjusted for constant currency and constant billings duration.

Conclusion

ServiceNow not only delivered a stellar first-quarter performance but also raised fiscal 2019 outlook. The impressive pipeline is a key catalyst.

As businesses, government agencies, among others “cloudify” their infrastructure, ServiceNow platform is well positioned to gain adoption. The company recently updated its Now Platform “Madrid Release” with new mobile enterprise capabilities with an aim to facilitate mobility in the workplace.

Moreover, ServiceNow inked partnership agreement with Adobe (NASDAQ:ADBE) , by which Now Platform and Adobe Experience Cloud solutions will be integrated to provide enhanced employee and customer experience.

We believe these initiatives to strengthen the company’s offerings with new capabilities will drive adoption and consequently aid top-line growth in the forthcoming quarters.

However, in order to explore the global public sector market, the company is investing heavily in sales organization. Moreover, expenses pertaining to the opening of two new data centers in Osaka and Tokyo, aimed at expanding presence in Japan, are likely to limit margin expansion in the near term.

Zacks Rank and Stocks to Consider

ServiceNow carries a Zacks Rank #3 (Hold).

A couple of better-ranked stocks in the broader technology sector are Synopsys, Inc. (NASDAQ:SNPS) and Pegasystems Inc. (NASDAQ:PEGA) , both 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 Synopsys and Pegasystems is pegged at 10% and 8%, respectively.

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