ServiceNow (NOW) Gains Despite Wider-than-Expected Loss In Q1

ServiceNow Inc (NYSE:NOW) reported earnings of 24 cents per share in first-quarter 2017, surging 166.7% from the year-ago quarter. Including stock-based compensation, the company reported loss of 18 cents per share, which was wider than the Zacks Consensus Estimate of a loss of 16 cents.

Revenues of almost $424 million surged 38.6% year over year and easily surpassed the Zacks Consensus Estimate of $409 million. This was also outdid management’s guided range of 33–34% year-over-year growth, which reflected a range of $406–$411 million.

Shares were up almost 6% in pre-market trading. ServiceNow has gained 26.4% as compared with the Zacks IT Services industry’s return of 6.5% on a year-to-date basis.

Quarter Details

Subscription revenues (90.2% of total revenue) surged 43.1% from the year-ago quarter to $382.7 million. Revenues were forecasted between $366 and $370 million, representing 37–38% year-over-year growth.

Professional services and other revenues increased 7.5% to $41.3 million. Revenues were expected to grow 4–7% to $40–$41 million.

Total billings surged 37% year over year to $517.5 million. This was substantially better than management’s guided range of 30–31% year-over-year growth.

Subscription billings of $466.2 million represented 41% year-over-year growth, while Professional services and other billings increased 13% to $51.2 million. Both were much better than management’s guidance.

During the quarter, ServiceNow won 28 new deals greater than $1 million in net new annualized contract value (ACV), and 26 net new Global 2K customers. Renewal rate was 97% in the reported quarter.

Management stated 93% of all customers now license more than one product and 47% of the quarter’s net new ACV came outside of ITSM compared with 33% from the year-ago quarter.

Adjusted gross margin (including stock-based compensation) expanded 330 basis points (bps) year over year to 73.4%. The expansion was primarily driven by 120 bps growth in subscription gross margin.

Operating expenses, as percentage of revenues declined 620 bps to 80.5%, primarily due to lower sales & marketing, research & development, and general & administrative expenses, which declined 190, 170 and 260 bps, respectively.

As a result, operating loss (including stock-based compensation) narrowed to $37.6 million as compared with loss of almost $51 million reported in the year-ago quarter.

ServiceNow generated free cash flow of $154.2 million (37% of revenues) as compared with $111.2 million (29% of revenues) in the fourth quarter.

Guidance

For second-quarter 2017, total revenue is expected to grow 37–39% year over year in the range of $469–$474 million. Subscription revenues are forecasted between $409 and $413 million, representing 41–42% year-over-year growth. Professional services and other revenues are expected to grow 18–20% to $60–$61 million.

Total billings are anticipated to grow 36–37% year over year in the range $509–$514 million.

Subscription billings are projected between $460 million and $464 million, representing 38–39% year-over-year growth. Professional services and other billings expected to grow 16–19% in the range of $49–$50 million.

Operating margin is anticipated to be 11%.

For full-year 2017, total revenue is forecasted between $1.886 and $1.906 billion (up from previous guidance of $1.820 and $1.850 billion), representing 36–37% year-over-year growth. Subscription revenues are expected to grow 39–40%, while Professional services and other revenues to grow 14–17%.

Total billings are anticipated between $2.272 billion and $2.292 billion (up from $2.165 billion and $2.195 billion), representing 34–36% year-over-year growth. Subscription billings are expected to grow 37–38% year over year, while Professional services and other billings to grow 16–18%.

Subscription and Professional services & other gross margin are forecasted to be 84% and 15% (down from 20%), respectively. Total gross margin is anticipated to be 77%, while operating margin is still pegged at 16%.

Zacks Rank & Key Picks

ServiceNow currently carries a Zacks Rank #3 (Hold). CSRA (NYSE:CSRA) , Amdocs (NASDAQ:DOX) and Inovalon Holdings (NASDAQ:INOV) , all carrying a Zacks Rank #2 (Buy) are better-ranked stocks in the sector. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Long-term earnings growth rate for CSRA, Amdocs and Inovalon are pegged at 10%, 7.5% and 17.7%, respectively.

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