ServiceNow Surpasses Earnings Expectations and Raises Revenue Guidance

ServiceNow NOW announced adjusted earnings of $3.72 per share for the third quarter of 2024, surpassing the Zacks Consensus Estimate by 7.51% and representing a notable 27.4% increase compared to the previous year.

Notably, NOW has outperformed the Zacks Consensus Estimate consistently over the last four quarters.

Check out the latest EPS estimates and surprises on Zacks Earnings Calendar.

Revenues reached $2.797 billion, beating estimates by 2.04% and marking a 22.2% rise year over year. When adjusted for constant currency (cc), revenues increased by 22.5% year over year, amounting to $2.637 billion.

ServiceNow’s Financial Performance Overview

ServiceNow, Inc. price-consensus-chart | ServiceNow, Inc. Quote

In a positive sign for investors, ServiceNow raised its subscription revenue guidance for 2024. Consequently, NOW shares have climbed 28.5% year to date (YTD), outpacing the Zacks Computer & Technology sector’s increase of 25.3%.

ServiceNow Outshines Sector Performance

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Before going deeper into NOW’s investment outlook, let’s examine its quarterly financial results.

Strong Growth in Subscription Revenues and Improved Margins

Subscription revenues increased by 23% year over year, achieving 22.5% growth on a constant currency basis, and exceeding management’s highest guidance by 200 basis points (bps).

Professional services and other revenues also rose, gaining 13.9% year over year on a reported basis and 13.5% on a constant currency basis.

By the end of the third quarter, current remaining performance obligations (cRPO) stood at $9.18 billion, reflecting a 23.5% year-over-year increase (on a constant currency basis) and being 150 bps above management’s guidance. Total remaining performance obligations increased by 33% year over year, totaling $19.5 billion, when adjusted for constant currency.

Regarding margins, the third-quarter non-GAAP gross margin reached 82.6%, up 60 bps compared to last year. The subscription gross margin was 84.9%, and the professional services gross margin declined to 6.1% from 9.7% a year earlier.

Operating expenses, as a percentage of revenues, decreased by 400 bps year over year.

ServiceNow’s non-GAAP operating margin also improved by 160 bps year over year to 31.2%, exceeding management’s expectations by 150 bps, driven by robust revenue growth and careful spending.

Growing Client Base Enhances ServiceNow’s Prospects

At the end of the quarter, ServiceNow had 2,020 customers with annual contracts exceeding $1 million (ACV), a 14% increase year over year in customer count.

During this period, the company secured 15 deals above $5 million in net new ACV and closed six deals exceeding $10 million. In total, it completed 96 contracts with net new ACV over $1 million, while the number of customers contributing over $20 million increased by nearly 40% year over year.

Deals involving Generative AI saw increased interest, as 44 new Now Assist clients were acquired, with six spending above $5 million and two exceeding $10 million in ACV.

Specific to industry, the U.S. federal sector witnessed five deals over $5 million and two exceeding $20 million. Net new ACV in technology, media, and telecom expanded by over 100% year over year, while retail and hospitality grew by more than 80%.

ServiceNow’s Strong Partnerships Bolster Potential

The company leverages artificial intelligence (AI) and machine learning to enhance its solutions, with its latest update, Xanadu, providing AI-driven industry-specific solutions in sectors such as telecom, media, financial services, and the public sector.

A strong network of partners, including Visa, Microsoft MSFT, NVIDIA NVDA, IBM, Genesys, Fujitsu, Equinix, Boomi, Siemens, Bill Canada, Zoom, Snowflake SNOW, and Infosys, further enhances NOW’s AI capabilities.

The integration of Now Assist with Microsoft Copilot for Microsoft 365 is now widely available through the Xanadu update.

Additionally, NVIDIA and ServiceNow collaborate to generate out-of-the-box AI agent applications on the Now platform, utilizing NVIDIA NIM Agent Blueprints.

Moreover, ServiceNow and Snowflake introduced a Zero Copy partnership that streamlines access to enterprise-wide data, addressing critical operational challenges on a large scale.

Solid Cash Position Supports Future Growth

As of September 30, 2024, NOW’s cash and short-term investments totaled $5.295 billion, a slight drop from $5.41 billion on June 30, 2024. Long-term investments were recorded at $3.83 billion.

In the most recent quarter, cash flow from operations hit $671 million, up from $620 million in the prior quarter.

ServiceNow generated a free cash flow of $471 million during this quarter, an increase from $359 million in the previous quarter.

Revised Subscription Revenue Guidance for 2024

For the full year 2024, NOW anticipates subscription revenues between $10.655 billion and $10.66 billion, an upgrade from its previous guidance of $10.575 billion to $10.585 billion. This indicates a 23% increase from 2023 on a GAAP basis and 22.5% on a non-GAAP basis.

ServiceNow projects the non-GAAP subscription gross margin will be around 84.5% with a non-GAAP operating margin of 29.5%. The free cash flow margin is still anticipated to hold at 31%.

For the fourth quarter of 2024, subscription revenues are estimated to fall between $2.875 billion and $2.88 billion, reflecting a 21.5-22% improvement year over year on a GAAP basis, with constant currency subscription revenue growth expected at around 20.5%.

The cRPO is projected to grow by 21.5% year over year on both GAAP and non-GAAP bases.

Management anticipates a non-GAAP operating margin of 29% for the current quarter.

Investment Outlook: Buy, Hold, or Sell?

Currently, NOW stock appears overvalued, indicated by its Value Score of F.

NOW’s Price/Sales ratio for the next 12 months stands at 14.72X, which exceeds its median of 13.55X and the sector’s average of 6.14X.

Price/Sales Ratio (F12M)

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ServiceNow’s strong Generative AI offerings and its extensive partner network are expected to drive customer growth and subscription revenue. Nonetheless, concerns such as high valuation, ongoing inflation, fierce competition, and a challenging overall economy pose risks in the near term. An expected rise in operating expenses due to an expanding workforce may also put pressure on margins. These factors suggest that investing in the stock carries certain risks.

ServiceNow currently holds a Zacks Rank #4 (Sell), indicating caution for potential investors.

You can find the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.