A month has gone by since the last earnings report for ServiceNow (NOW). Shares have added about 9.5% 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 catalysts.
ServiceNow Q3 Earnings Beat Estimates, Revenues Up Y/Y
ServiceNow reported third-quarter 2024 adjusted earnings of $3.72 per share, which beat the Zacks Consensus Estimate by 7.51% and jumped 27.4% year over year.
Revenues of $2.797 billion beat the consensus mark by 2.04% and increased 22.2% year over year. At constant currency (cc), revenues increased 22.5% year over year to $2.637 billion.
NOW's Subscription Revenues Up Y/Y, Margin Expands
Subscription revenues improved 23% year over year, on a reported and 22.5% on a cc basis, beating the high-end of the management’s guidance by 200 basis points (bps).
Professional services and other revenues increased 13.9% year over year on a reported and 13.5% on a cc basis.
At the end of the third quarter, the current remaining performance obligations (cRPO) were $9.18 billion, up 23.5% year over year on a cc basis and 150 bps higher than management’s guidance. Remaining performance obligations, on a cc basis, rose 33% year over year to $19.5 billion.
In terms of margins, the third-quarter non-GAAP gross margin was 82.6%, up 60 bps on a year-over-year basis. Subscription gross margin was 84.9%, up 60 bps year over year. Professional services and other gross margins were 6.1% compared with 9.7% reported in the year-ago quarter.
As a percentage of revenues, operating expenses decreased 400 bps on a year-over-year basis.
ServiceNow’s non-GAAP operating margin expanded 160 bps on a year-over-year basis to 31.2%, 150 bps above management’s guidance, driven by strong top-line growth and disciplined spending.
Expanding Clientele Aids NOW's Prospects
ServiceNow had 2,020 total customers with more than $1 million in annual contract value (ACV) at the end of the reported quarter, which represents 14% year-over-year growth in customers.
In the reported quarter, NOW had 15 deals greater than $5 million in net new ACV and six deals of more than $10 million. It closed 96 deals greater than $1 million net new ACV. Number of customers contributing more than $20 million or more grew nearly 40% year over year.
Generative AI deals continued to gain traction in the reported quarter. ServiceNow had 44 new Now Assist customers spending more than $1 million in ACV, including six with more than $5 million and two with more than $10 million.
Industry-wise, the U.S. federal business saw five deals of more than $5 million and two deals of over $20 million. Net new ACV in technology, media and telecom grew more than 100% year over year, while retail and hospitality increased more than 80%.
NOW Stock Rides on Strong Partner Base
ServiceNow is extensively leveraging AI and machine learning to boost the potency of its solutions. NOW’s latest update, Xanadu, offers AI-powered, purpose-built industry solutions for domains, including telecom, media and technology, financial services and the public sector.
A strong partner base that includes Visa, Microsoft, NVIDIA, IBM, Genesys, Fujitsu, Equinix, Boomi, Siemens, Bill Canada, Zoom, Snowflake and Infosys is strengthening NOW’s AI capabilities.
The much anticipated Now Assist integration with Microsoft Copilot for Microsoft 365 is generally available with the Xanadu update.
NVIDIA and NOW are collaborating to develop out-of-the-box use cases for AI agents on the Now platform using NVIDIA NIM Agent Blueprints.
ServiceNow and Snowflake announced a Zero Copy partnership that connects enterprise-wide data to help solve mission-critical problems at scale.
Solid Liquidity Aids NOW’s Prospects
As of Sept. 30, 2024, NOW had cash and cash equivalents and short-term investments of $5.295 billion compared with $5.41 billion as of June 30, 2024. Long-term investments were $3.83 billion.
During the reported quarter, cash from operations was $671 million compared with $620 million in the previous quarter.
ServiceNow generated a free cash flow of $471 million in the reported quarter, up from $359 million reported in the prior quarter.
ServiceNow Raises Subscription Revenue Guidance
For 2024, NOW expects subscription revenues to be $10.655-$10.66 billion (up from previous guidance of $10.575-$10.585 billion), which suggests a rise of 23% from 2023 on a GAAP basis and 22.5% on a non-GAAP basis.
ServiceNow expects the non-GAAP subscription gross margin to be 84.5% and the non-GAAP operating margin to be 29.5%. Moreover, the free cash flow margin is still expected to be 31%.
For fourth-quarter 2024, subscription revenues are projected between $2.875 billion and $2.88 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 20.5% range.
cRPO is expected to grow 21.5% year over year on both non-GAAP and GAAP basis.
ServiceNow expects the non-GAAP operating margin to be 29% in the current quarter.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended downward during the past month.
The consensus estimate has shifted -8.61% due to these changes.
VGM Scores
At this time, ServiceNow has a nice Growth Score of B, 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 bottom 20% quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. 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 #2 (Buy). We expect an above average return from the stock in the next few months.
Performance of an Industry Player
ServiceNow belongs to the Zacks Computers - IT Services industry. Another stock from the same industry, CoStar Group (CSGP), has gained 4.2% over the past month. More than a month has passed since the company reported results for the quarter ended September 2024.
CoStar reported revenues of $692.6 million in the last reported quarter, representing a year-over-year change of +10.9%. EPS of $0.22 for the same period compares with $0.30 a year ago.
For the current quarter, CoStar is expected to post earnings of $0.22 per share, indicating a change of -33.3% from the year-ago quarter. The Zacks Consensus Estimate has changed +2% over the last 30 days.
CoStar has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of F.
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